Scam-hit BASIC Bank’s “- 0.66%” capital adequacy ratio may sound too technical; but what it means for depositors is that the bank is not capable of returning their money at this moment.
Capital adequacy ratio (CAR) measures the soundness of a bank and reflects the level of protection its depositors enjoy. It is a measure of the amount of a bank’s core capital expressed as a percentage of its risk-weighted asset.
Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
The central bank’s idea of an ideal CAR is 11% and the international standard is 10%. Clearly, the state-run BASIC Bank is nowhere near the level considered sound by the country’s banking watchdog.
In recent years, the state-owned specialised bank has seen its capital completely eaten away by excess unrealised losses – mostly classified loans – leaving it insolvent.
In layman’s terms, this insolvency means that if all the depositors are to ask the bank to return their money right now, the bank will not be able to do it.
In that case, the government will have to pump in a substantial amount of money into the bank’s veins, to bail it out of the crisis and secure the deposits, bankers said.
As on December 2013, the total deposits at the bank stood at Tk13,449 crore, of which 12,797 or 95% are in fixed deposits.
According to professionals, this percentage is unprecedented in the country’s banking sector.
Among different kinds, fixed deposits carry the highest rate of return. A 95% fixed deposit ratio means that BASIC’s cost of capital is way above any other scheduled bank in the country.
Generally, a bank’s income is the difference between the rate at which it accepts deposits and the higher rate at which it gives out loans.
In December 2013, BASIC’s capital adequacy stood at “-1.66%.” In its latest annual report too, the bank said it had “negative capital.”
Interestingly, it put up satisfactory capital adequacy in 2011 and 2012, registering figures of 10.13% and 10.05% respectively, according to the Bangladesh Bank.
Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system.
The negative value demonstrated that the risk-adjusted capital of the bank is below zero, making the bank insolvent despite having enough liquidity to prevent a bank run, according to banking sector analyst.
“The negative capital adequacy ratio puts the depositors at massive risk unless the government bails out the bank,” said Md Moniruzzaman, a former banker.
“The problem is that depositors in Bangladesh are not familiar with credit ratings and do not keep money judging which bank would be able to provide the best security to their money,” he said.
He also said: “If the government takes a step backwards and lets a bank fail, then depositors would start valuing a bank based on its financial statement.”
On Thursday, the Bank and Financial Institution Division of the Finance Ministry placed its report and Bangladesh Bank’s data on BASIC Bank before the parliamentary standing committee on public undertakings.
M Aslam Alam, secretary of the bank division, told the Dhaka Tribune: “BASIC Bank has run without monitoring for a long time. But it has now been brought under strong monitoring. So, the capital adequacy ratio will increase in the coming days.”
He also said: “Sonali Bank is now on the right track after struggling with the Hall-Mark scam. Internal auditing and monitoring are strong now... BASIC Bank’s financial conditions will be good again if it can maintain local standards.”
In 2013, the central bank at first put a 10% loan-growth ceiling for BASIC which was later increased to 20.63% upon its request.
But the troubled bank failed to keep it within the stipulated limits; eventually registering a 25.26% growth in December last year.
Subsequently, the central bank, as per the Bank Company Act, enforced a penalty of Tk10.02 crore on BASIC.
The bank, however, maintains that its loan growth in 2013 was 18.5% percent, and has appealed for the withdrawal of the fine.
The poor financial performance has also hit the bank from another side. The Credit Rating Agency of Bangladesh (CRAB) recently downgraded the ailing bank’s rating, which means that it needed a financial lifeline and carried a very high credit risk.
The bank’s non-performing loans at the end of May 2014 was over Tk4,157 crore while its 2013 annual losses after taxes stood at Tk53.1 crore.
Former banker Mamunur Rashid said: “The figures of BASIC Bank’s classified loans are not drawing the true picture of its financial health, which would get even worse when all the defaulted loans are shown in its balance sheet.”
On July 7, the government formed a new board of directors for the Bank in the wake of Bangladesh Bank investigations detecting massive financial irregularities involving around Tk4,500 crore of loans between 2009 and 2013.
Two months ago, the bank’s managing director Kazi Faqurul Islam was fired for presiding over the period of serious irregularities.
