Top borrowers’ default risk big concern for banks: BB

The risk of having top borrowers default and non-performing loans (NPL) increase has become the major concerns for the banks, says the Bangladesh Bank (BB).

Even if three top borrowers of each bank default, then 15 banks will fail to maintain the minimum required capital to risk weighted assets ratio (CRAR), also known as capital adequacy ratio, says a BB report.

The report titled “Financial Stability Assessment Report (Jan-Mar 2022),” which shows the results of an analysis of stress tests and resilience of the banking sector, was released on Wednesday.

It said that the banking sector demonstrated a reasonable level of resilience under different stress scenarios during the January-March review quarter.

During the quarter, stress tests on banks revealed that credit risks remained the most dominant risk factor for banks under different levels of shock scenarios. An increase in NPLs and defaulting of top borrowers would have major adverse impacts on the sector’s capital adequacy.

The stress test evaluates the banks’ performance by aggregating the results of different credit shocks, exchange rate shocks, equity price shocks and interest rate shocks, said the report.

In the event of a combined shock (excluding top large borrowers and exposure in the highest sector), 13 banks will fall below the minimum regulatory capital requirement, the report noted.

It said that the banking sector experienced a mixed performance in the review quarter as asset growth continued and profitability improved while the gross NPL ratio rose.

The stress test also showed that if NPLs, the other big concern for banks, increased by 3 per cent, then six banks will fail to maintain the minimum required CRAR of 10 per cent.

Besides if 3 per cent of the performing loan of the highest outstanding sector directly downgrades to bad or loss category, then two banks will fall below the minimum regulatory requirement, said the report.

The gross NPL ratio of the banking sector increased to 8.53 per cent in the review quarter, compared to 7.93 per cent at the end of December 2021.

Meanwhile, the demand has risen to increase the deposit interest rate because of high inflation and if that happens, banks will not be facing any trouble.

The report mentioned that if the deposit interest rate increases by 1 per cent, no bank will fail to maintain the minimum required CRAR.

The CRAR or capital adequacy ratio is the ratio of a bank’s capital to its risk. Regulators track a bank’s CRAR to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirements at the same time.