16 banks at risk of capital shortfall if top 3 borrowers default

• At end of September 2022, in the pre-shock scenario, 11 out of 61 scheduled banks could not maintain CRAR
• The remaining 50 banks were considered for the analysis of that quarter
• Thus, a total of 27 banks, out of the 61 banks, will not be able to maintain CRAR if the top three borrowers of each bank default

Sixteen banks will fail to maintain the minimum required Capital to Risk-weighted Assets Ratio (CRAR) in case the top three borrowers of each bank default, according to the Bangladesh Bank's Financial Stability Assessment Report for the period of July-September last year.

The Capital to Risk (Weighted) Assets Ratio (CRAR) is the ratio of a bank's capital to its risk-weighted assets and current liabilities.

According to the central bank report, at the end of September 2022, in the pre-shock scenario, 11 out of 61 scheduled banks could not maintain the minimum regulatory requirement of 10% CRAR. The remaining 50 banks were considered for the analysis of that quarter.

Thus, a total of 27 banks, out of the 61 banks, will not be able to maintain CRAR if the top three borrowers of each bank default.

When asked about this, Arfan Ali, former managing director of Bank Asia, told The Business Standard that many banks have given large loans to a small number of individuals or institutions. In some cases, a large portion of bank loans gets stuck among a few borrowers. 

So, if these people or institutions default, the banks will be in trouble. That is why banks have to spread out their loans in smaller amounts to reduce risks, he added.

The central bank's Financial Stability Department (FSD) conducts stress testing on scheduled banks on a quarterly basis to identify their resilience under different plausible adverse scenarios. Credit, Market and Combined Shocks of banks have been seen in this test.

The aftershock Capital to Risk-weighted Assets Ratio (CRAR) is compared with the minimum regulatory requirement of 10% in line with the Basel III capital framework. 

This hypothetical test is a useful risk management tool for instructing banks to ensure safety measures in respect of capital maintenance and liquidity management against any probable adverse economic and financial condition.

In the case of credit shock, the central bank says, If non-performing loans (NPLs) increased by 3% of every bank, then six banks would fail to maintain the minimum required CRAR. However, if the Forced Sale Value (FSV) of Mortgaged Collateral declined by 10%, then no bank would fail to maintain this ratio.

In the case of Market Shock, the report says, If the deposit interest rate increased by 1%, then two banks would fail to maintain the minimum CRAR.

In the case of Combined Shock, this test evaluates the performance of a bank by aggregating the results of different credit shocks, exchange rate shocks, equity price shocks, and interest rate shocks. 

In the event of combined shock (except default of top large borrowers and increase in NPLs of the highest outstanding sector), 13 banks would fail to maintain the minimum required CRAR.

According to the report, Pre-Shock CRAR decreased by 14 basis points in the September quarter, compared to the previous quarter. The ratio was 11.15% in June, which stood at 11.01% in September.

A bank-wise review showed that the state-owned banks could not maintain the minimum required CRAR in this quarter as in other quarters. In September, their ratio decreased by 25 basis points to 6.18% compared to June.

Private banks have managed to keep the required CRAR, but the ratio has declined compared to June. 

Also, Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank and Probashi Kallyan Bank – these three specialised banks could not maintain the CRAR, on the contrary, their deficit increased. Their CRAR declined from -35.77% in the April-June quarter to -37.27% in the July-September quarter.

However, the required CRAR of foreign commercial banks has increased to 30.36% from 26.44% in June.