Banks’ capital base lowest in S Asia

The banking sector in Bangladesh has maintained the lowest capital adequacy ratio (CAR) of its South Asian peers, according to the Bangladesh Bank’s Financial Stability Report 2020.

The report that came out on Wednesday said the country’s CAR is much lower than that of India, Pakistan and Sri Lanka.

Last year, the banking industry maintained an 11.6 per cent capital to risk assets ratio, while neighboring India 15.8 per cent; Pakistan 18.6 per cent and Sri Lanka 16.5 per cent.

However, the CAR in the country remained unchanged in 2020 as in the previous year. As per the report, an improved capital position of private commercial bank and foreign banks helped keep an overall CAR of the industry steady during the period.

An increased income from the government securities along with a very small change in required specific provisions due to temporary relaxation in loan classification policy resulted in higher net income which, in turn, increased the capital base of private commercial banks and foreign banks despite a decrease in interest income from loans, the report mentioned.

The capital position of the state-owned banks and specialised banks deteriorated further and stayed below the minimum regulatory standard.

A low capital adequacy ratio is the direct consequence of the banks’ default loans as the banks had to keep their provisioning against such loans, said former Finance Adviser to a caretaker government AB Mirza Azizul Islam.

At the end of March this year, the defaulted loans of the banking sector stood at Tk 95,085.35 crore, which was 8.07% of the total outstanding loans in the sector, according to the latest data from the Bangladesh Bank.

Foreign investors usually monitor the ratio of required capital and default loans before investing in any country, Azizul said, adding that a low capital adequacy ratio discourages the investors from making investment.

According to the BB guidelines, banks have to maintain a minimum capital adequacy ratio -- 12.50 per cent of their total capital reserve -- to cover risk exposure by 2019 in line with the BASEL III requirement.

But the country’s banking industry has failed to fulfill the requirement.

The capital adequacy ratio in the overall banking sector was not bad at all, but the state-run banks and some new banks were not performing well owing to their high amount of non-performing loans, says Zahid Hussain, former lead economist of the World Bank Bangladesh office.