• Saturday, Aug 15, 2020
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Banks in Bangladesh maintain lowest capital than other South Asian nations

  • Published at 05:00 pm July 5th, 2020

The capital adequacy ratio (CAR) of the banking industry stood at 11.6% at the end of December 2019, which was 10.5% year ago

Banking sector in Bangladesh has maintained the lowest capital adequacy ratio (CAR) than other South Asian countries-India, Pakistan and Sri Lanka– says the Bangladesh Bank’s Financial Stability Report, 2019.

The stability report says the capital adequacy ratio (CAR) of the banking industry stood at 11.6% at the end of December 2019, which was 10.5% a year earlier.

The country’s banking sector maintained the lowest CAR in 2019 compared with neighboring countries (India, Pakistan and Sri Lanka), says the report unveiled by the Bangladesh Bank (BB) on June 29.

Last year, the banking industry in Bangladesh maintained 11.6% CAR, while neighboring India maintained 15.1% CAR; Pakistan maintained 17.0% CAR and Sri Lanka maintained 16.5% CAR.

Low capital adequacy ratio is the direct consequence of the banks’ default loans as the banks had to keep their provisioning against default loans, says former Finance Adviser to a Caretaker government AB Mirza Azizul Islam. 

According to the BB data, default loans stood at Tk94,313 crore at the end of 2019.

 He also has said foreign investors usually monitor the ratio of required capital and default loans of banks before investing in any country. Low capital adequacy ratio discourages them from investing.

According to the BB 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 of December of 2019, the CAR of foreign banks was 24.45%, private banks at 13.62% and state-owned banks were at 4.99%, as per the central bank data. 

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, says Zahid Hussain, former lead economist of the World Bank Bangladesh office.

Only 10 banks out of 60 in the country hold 63% of all non-performing loans (NPLs) in Bangladesh, says a Bangladesh Bank (BB) recent report.

Of the 10 banks, four are state owned commercial banks, two state owned specialized banks, three private commercial banks, and one foreign commercial bank. 

The report, however, did not mention the names of the banks. 

Among the banks, top five held 45.8% of NPLs, it added.

The report also mentioned that the NPL concentration remained high, with 28% of the NPLs in the trade and commerce sector, though the sector received only 21.9% of the total loans.

The report also said the high gross NPL ratio of 19.7% in the shipbuilding and ship breaking sectors remained another major concern.

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