The banking sector is facing acute capital shortfall as the growing non-performing loans are forcing them to keep a large amount of provision, which ultimately is weakening their capital base.
According to the Bangladesh Bank data, seven state-run banks, four private commercial banks and one foreign bank had a combined capital shortfall of Tk17,658.83cr as of September last year.
The twelve banks are Sonali Bank, Agrani Bank, Rupali Bank, Basic Bank, Janata Bank, Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank, Bangladesh Commerce Bank, ICB Islamic Bank, AB Bank, Community Bank Bangladesh and National Bank of Pakistan, according to data.
According to Bangladesh Bank guidelines on risk-based capital adequacy, banks have to maintain a minimum capital adequacy ratio (CAR) — which is a bank’s capital reserve to cover their risk exposure — of 12.50% by 2019, in line with the BASEL III requirement.
As September of 2019, banks’ capital adequacy ratio (CAR), which determines the adequacy of banks’ capital in keeping with their risk exposure, stood at 11.65%, down from 11.74% three months earlier, the data said.
During July to September quarter of 2019, the capital shortfall of the banking sector rose by Tk1,657.34 crore, compared to the previous quarter.
They collectively faced a capital shortfall of Tk16,001.49 crore during April to June quarter, according to BB data.
The country’s banking sector failed to maintain CAR as per the roadmap set by the central bank for implementation of Basel III in the concluding year, said a high official of the central bank.
According to the latest data, Bangladesh Krishi Bank has the highest capital shortfall at Tk9,078.41crore, followed by Sonali Bank at Tk2056.18crore, ICB Islami Bank at Tk1,591.04crore, Janata Bank at Tk933.34crore,Agrani Bank at Tk787.79crore, Rajshahi Krishi Unnayan Bank at Tk700.51crore, Bangladesh Commerce Bank at Tk691.14crore, AB Bank at Tk651.55crore, Basic Bank at Tk561.60crore, Rupali Bank at Tk545.86crore, Community Bank Bangladesh at Tk2.70crore and National Bank of Pakistan at Tk58.71crore.
The central bank high official also said that these banks would face problems in conducting business with foreign banks unless they increased their capital adequacy ratio.
Overall capital adequacy ratio (CAR) in the overall banking sector was not bad at all but the state run banks and some new banks capital adequacy ratio was not good owing to their high amount of non-performing loans, said Zahid Hussain, former lead economist of World Bank Bangladesh office.
Capital shortfall was the direct consequence of the bank’s default loans as the banks had to keep their provisioning against default loans, AB Mirza Azizul Islam, a former finance adviser to a caretaker government, said.
Mirza adds: “Foreign businesspeople usually monitor the ratio of required capital and default loans of scheduled banks before investing. Such capital shortfalls will discourage them from investing.”
The non-performing loans (NPLs) rose by Tk22,376.91 crore during January to September of the concluding year, according to Bangladesh Bank data.
The NPLs account for 11.99% of the total outstanding loans in banks, up from 10.30% in December 2018.
In the last 10 years, the government has supplied a total of Tk17,521 crore in capitalization to ailing state banks with budgetary allocation since fiscal year 2009-10.
Economists have raised concerns about the practice of recapitalizing state-owned banks with budgetary allocations, saying that the trend will not help improve these banks’ health. Rather, it will encourage loan defaults, they think.
“The amount of capital shortfall of Bangladesh Krishi Bank did not happen overnight. This has been happening since 1991,” says Mohammad Ismail, chairman of Bangladesh Krishi Bank which has the highest capital shortfall.
He says 82% of their loans go to farmers, which they lend at a 9% rate of interest.
“Moreover, many of our loans have been rescheduled due to natural disasters. During the Sidr cyclone, the government waived many of our debts. So we have no liability for the capital shortfall of this bank,” Ismail adds.
