Originally posted in The Daily Star on 13 December 2022
11 banks suffer capital shortfall
Eleven banks in Bangladesh collectively faced a capital shortfall of Tk 32,606 crore in September, which highlighted their fragile health caused by years of irregularities.
The banks are Bangladesh Krishi Bank, Agrani Bank, Rupali, Janata, Sonali, Rajshahi Krishi Unnayan Bank, BASIC Bank, National Bank, ICB Islamic Bank, Bangladesh Commerce Bank, and Padma Bank.
For all latest news, follow The Daily Star’s Google News channel.
Corruption perpetrated at the banks is mainly responsible for the large capital shortfall.
As of September, Bangladesh Krishi Bank had the highest amount of shortfall of Tk 13,491 crore among the 11 lenders, data from the Bangladesh Bank showed.
State-run Agrani’s shortfall stood at Tk 2,851 crore. It was Tk 2,390 crore for state-run Rupali and Tk 2,300 crore for another government-owned Janata bank.
This led analysts to call on the central bank to take immediate measures to address the problem as such a situation sends a negative signal to the international community and local businesspeople that the banking sector is weakening.
Foreign banks usually look at the capital base of a lender before doing any business with it.
“The large capital shortfall gives a negative signal to foreign banks. So, the country’s image is taking a hit,” said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
He blamed financial corruption and the higher ratio of classified loans for the shortfall.
The amount of default loans in the banking sector increased substantially in September, the latest for which the data is available, bringing a negative impact on the capital base in the sector.
Default loans at 60 banks operating in Bangladesh surged to a record Tk 134,396 crore in September, accounting for 9.36 per cent of the total outstanding loans of Tk 1,436,200 crore in the banking system. A year earlier, the ratio was 8.12 per cent.
Banks have to set aside a large amount of provisioning against the defaulted loans, hitting their capital base ultimately.
The capital base also eroded in September compared to December last year as the capital adequacy ratio (CAR) shrank to 11.01 per cent in contrast to 11.08 per cent.
The CAR, also known as the capital-to-risk-weighted assets ratio, measures a bank’s financial strength by using its capital and assets. It is used to protect depositors and promote the stability and efficiency of financial systems around the world.
The capital base of the banking industry in Bangladesh is also weaker than its peer countries in South Asia, according to BB’s Financial Stability Report.
In 2021, banks in Pakistan maintained a capital adequacy ratio of 18.7 per cent, while it was 16.5 per cent in Sri Lanka, and 16.6 per cent in India.
“If a bank faces a capital shortfall, its capacity to absorb shocks erodes,” said Mansur, also a former official of the International Monetary Fund.
“The central bank should take immediate measures to strengthen the capital base of the banks.”
Fahmida Khatun, executive director of the Centre for Policy Dialogue, pointed out that the central bank had earlier injected a large amount of capital into the banks, but the initiative did not work properly.
“A lack of corporate governance is the main problem for the capital shortfall. If scams continue unabated, the capital shortfall position will not improve,” she said.
In order to strengthen the capital base, the BB took initiatives to implement the Basel III guidelines by 2019.
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the global financial crisis of 2007-09 to improve regulations, supervision, and risk management within the banking sector.
As per a roadmap unveiled by the BB in 2014, banks were supposed to raise the minimum CAR to 12.5 per cent by December 2019 from 10 per cent then. But the sector has fallen short of hitting the goal.