Now banks face severe capital erosion

The banking sector suffered a capital shortfall of more than Tk34,000 crore at the end of 2021, exposing the stress on capital buffer since the central bank pulled out of policy relaxation.  

The latest data, revealed on Thursday by the Bangladesh Bank, showed the banking sector experienced severe capital erosion last year, mainly attributed to rising default loans. 

The capital adequacy ratio, which refers to bank's risk-weighted credit exposures, declined to 11.08% at the end of December 2021 from 11.64% at the same period of the previous year, according to data from the Bangladesh Bank. 

The minimum requirement for maintaining capital adequacy ratio is 10% as per Basel III  – an internationally agreed set of measures developed for banks.

Some 10 banks, including  five state-owned and two specialised and three private ones, failed to maintain enough capital on reserve to ensure that they can absorb a certain amount of loss. 

As of December 2021, the capital shortfall of the banks stood at Tk34,639 crore – state-owned banks account for 91.67% of it. In September last year, the shortfall of 11 banks amounted to Tk27,918, meaning that the capital shortfall increased by a little over 24% in the span of three months.

At the end of December 2020, the shortfall of the 10 banks was Tk28,951 crore. So, the shortfall rose by Tk5,687 crore in one year.

Among private commercial banks, 23 banks saw a decline in capital adequacy ratio at the end of the last year.

Default loans had started to shoot up from September last year and increased by Tk14,539 crore in the past year as the loan moratorium facility was partially lifted. 

High default loans require maintaining a high provision, which puts pressure on the capital base of banks. 

The provision shortfall rose three times to Tk22,573 crore over last year. 

Syed Mahbubur Rahman, managing director at Mutual Trust Bank Limited, told The Business Standard that banks have a low capital base, which is not a good sign. The number of default loans might go up in days to come because the central bank has ended the loan moratorium facility.

If default loans see a further rise, banks need to maintain more provisioning, which will impact their capital, he added.

"We have to keep default loans in check to come out of this situation. At the same time, banks need to increase their income," Mahbubur noted.

The banks that suffered capital erosion are Sonali Bank, Agrani Bank, BASIC Bank, Rupali Bank, Janata, ICB Islamic Bank, Bangladesh Commerce Bank, National Bank, Krishi Bank and Rajshahi Krishi Unnayan Bank.

Among the private commercial banks, National bank experienced a serious capital erosion owing to loan anomalies and conflicts among board directors. 

The capital adequacy ratio of the bank declined to 9% at the end of December 2021 from 13.34% in the same period of the preceding year, which was below the Basel-III requirement, according to Bangladesh Bank data. 

The bank saw a capital shortfall of Tk456 crore for the first time in recent times.  The provision shortfall of the bank stood at above Tk3,000 crore at the end of December last year. 

The default loan of the bank was 13.45% during the time, which led to erosion of its other financial indicators.

Former Adviser to the Caretaker Government Mirza Azizul Islam said, "Such a high capital shorfall is in no way acceptable. Offering defaulters so many facilities is the main reason behind it."

He suggested taking legal action against the defaulters.

Fromer Bangladesh Bank governor Salehuddin Ahmed said banks have no special initiative to recover default loans and they are not worried about it. 

The central bank needs to give strong instructions for realising the loans, he added.