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Bangladesh’s banking industry posted the lowest capital adequacy ratio (CAR) compared to its South Asian peers yet again in 2021, a trend that has continued for at least five years, reveals the central bank’s Financial Stability Report 2021.
The CAR is a measure of how much capital a bank has available, reported as a percentage of a bank’s risk-weighted credit exposures. This report – published on Monday – mentions that the local banks’ CAR is much lower than neighbours India, Pakistan and
Sri Lanka.
Banks that have high amounts of non-performing loans, lack of corporate governance and low capacity of keeping provision against defaulted loans are behind the low CAR of Bangladesh, industry insiders told The Business Post.
The banks in Bangladesh maintained an 11.08 per cent CAR in 2021, while neighboring India maintained 16.6 per cent, Pakistan 16.7 per cent, and Sri Lanka 16.5 per cent. This trend has been continuing for years.
In 2017, local banks maintained 10.8 per cent CAR, while India posted 13.9 per cent, Pakistan 15.8 per cent, and Sri Lanka 15.2 per cent.
Capital base slightly improves in 2021
Banks’ capital base in Bangladesh slightly improved in 2021 when compared year-on-year. The central bank report said the high regulatory capital position of foreign commercial banks and private commercial banks helped to keep overall CAR of the industry steady last year.
The latest central bank report further mentions that relatively higher earnings under non-interest income, along with temporary relaxation in loan classification, is behind the slight improvement in CAR.
Meanwhile, the required special provision policy resulted in higher net income, which in turn increased the capital base of private commercial banks and foreign commercial banks.
The capital base of state-run commercial banks and specialised banks deteriorated further and stayed below the minimum regulatory standard, as per the central bank report.
The CAR of local banks is lowest in South Asia, but it is above the regulatory minimum capital requirement of 10 per cent, and it provided support to the resilience of the banking sector, the Financial Stability Report 2021
pointed out.
Bangladesh Bank officials said the capital base of Bangladesh’s banking sector is improving, however the CAR of state-run banks is not so good due to their high amount of bad loans and weak corporate governance.
At the end of December of last year, capital shortfall in 10 banks stood at Tk 34,559.91 crore.
The banks are – Bangladesh Krishi Bank, Janata Bank, Agrani Bank, Sonali Bank, Rupali Bank, BASIC Bank, Rajshahi Krishi Unnayan Bank, ICB Islami Bank, Bangladesh Commerce Bank and National Bank.
Every year, at least 10 banks, including the seven state-run banks, face capital shortfall due to their weak financial indicators. Though the government usually allocates funds from the budget to meet the state-run banks’ capital shortfall, this has remained halted since the last two years.
Former managing director of state-run Agrani Bank Shams Ul Islam said, “The capital shortfall is a cancer for the state-run banks and it is true that the deficit could not be reduced.
“But, state-run banks are providing 34 government services to the people without any cost. In addition, there are many loans stacked in the government institutions, which is why those banks are facing capital shortfall.”
Zahid Hussain, former lead economist of the World Bank Dhaka Office, said “Foreign investors usually monitor the ratio of required capital and default loans before investing in any country. But the low CAR discourages the investors from making
investments.
Banks in Bangladesh had set a target of maintaining a capital adequacy ratio of 12.50 per cent to cover risk exposure in line with the BASEL III requirement by 2019. But the country’s banking industry has failed to fulfill the requirement.
