Special Correspondent
In a troubling development for the financial sector, 16 banks have failed to meet the required capital standards set by the central bank, Bangladesh Bank. This shortfall comes at a time when the amount of risk-based assets in the banking sector is increasing, driven largely by a surge in defaulted loans and other financial irregularities. As a result, the requirement for capital preservation has risen, but many banks are struggling to comply with the regulations.
According to the latest report for the March quarter, several public and private sector banks have failed to preserve the necessary capital against their risk-based assets. The central bank's outlook on these banks is bleak, as the action plans they have submitted to address their capital deficiencies have proven ineffective in the short and medium term. In response, Bangladesh Bank is expected to issue new directives urging these banks to take urgent measures to rectify their capital situations.
The growing amount of risk-based assets is a significant concern, primarily attributed to the increase in defaulted loans. However, experts believe that the reported capital deficits of these banks are likely underestimates. Many banks have utilized deferral facilities for saving provisions, masking the true extent of their financial weakness. This deficiency in capital not only reveals underlying weaknesses but also erodes customer trust and complicates dealings with international banks.
A Bangladesh Bank official, speaking anonymously, criticized the conventional nature of the action plans submitted by the banks. These plans, which are required every three months, have not produced satisfactory results, highlighting the need for more innovative and effective strategies.
As per Bangladesh Bank's regulations, scheduled banks must maintain a Minimum Reserve Capital (MCR) and a Capital Conservation Buffer (CCB) of 10 percent and 2.5 percent of their total risk-based assets, respectively. Additionally, the Basel-3 framework requires banks to maintain a minimum leverage ratio (LR) of 3 percent, which is set to gradually increase to 4 percent by 2026. The central bank has instructed banks to achieve a minimum leverage ratio of 3.5 percent by the end of 2024.
Despite these requirements, the March quarter report reveals that 16 banks have failed to meet these standards. The list includes five state-owned banks, two specialized banks, and nine private sector banks:
State-Owned Banks: Janata Bank, Agrani Bank, Rupali Bank, Basic Bank, Bangladesh Krishi Bank
Specialized Banks: RajshahiKrishi Development Bank, National Bank
Private Sector Banks: Padma Bank, Sonali Bank, Islami Bank Bangladesh, First Security Islami Bank, AB Bank, IFIC Bank, United Commercial Bank, NRB Commercial Bank, Union Bank
Among these, the first eight banks have not met MCR, CCB, and LR requirements. The remaining nine banks have fallen short in varying combinations of MCR, CCB, and LR.
In response to the central bank's directives, many of the affected banks have outlined action plans to address their capital shortfall. Seven out of the eight banks that failed on all fronts have proposed measures including reducing operating expenses, lowering default loan rates, enhancing recovery efforts, increasing profits through revenue growth, issuing common shares, and merging with other banks. For instance, Padma Bank has announced a merger with Exim Bank.
A recent monitoring report by the Offsite Supervision Department of Bangladesh Bank has unveiled concerning trends regarding the capital health of several banks. The report, which scrutinizes the action plans submitted by these banks to address their capital deficiencies, highlights that the proposed measures are proving ineffective in both the short and medium terms.
The report criticizes the banks for their repetitive and conventional responses to Bangladesh Bank's directives. Despite continuous capital deficits over multiple quarters, the banks have consistently submitted similar or traditional plans that have failed to show any significant improvement in their financial conditions. This lack of progress indicates that the steps taken are not translating into tangible improvements.
A major concern outlined in the report is the persistent use of deferral benefits by government and some private banks. These banks are reportedly leveraging deferral options provided by Bangladesh Bank to manage their provision deficits and maintain minimum capital levels. This practice masks the true extent of their capital deficiencies, thereby distorting their financial statements.
The monitoring report further reveals that despite the long-standing capital shortfalls, the banks' actions remain largely unchanged, with no effective strategy in place to resolve the underlying issues. This stagnation in addressing capital deficits exacerbates the already deteriorating financial situation of these institutions.
In response to the ongoing crisis, Bangladesh Bank has taken proactive measures by signing Memorandums of Understanding (MoUs) with several banks displaying weak financial indicators. These MoUs are part of a broader strategy to prevent further deterioration of the bank's financial health and protect the interests of depositors.
Under these agreements, the banks have been assigned specific targets to achieve over the next three years (2023-2025). The objectives outlined in the MoUs are aimed at enhancing the banks' financial stability and improving their capital positions. However, the effectiveness of these measures remains to be seen, given the historical ineffectiveness of previous action plans.
.png "Halim-&-Firni")
