Four more banks plunge in capital shortfall

The capital shortfall of the country's banking sector continued to rise in the June quarter, with four more banks joining the list amid mounting non-performing loans (NPLs).

The four banks are locally owned Bengal Commercial Bank and Citizen Bank, and foreign-owned Habib Bank and the National Bank of Pakistan.

According to data from the Bangladesh Bank, the shortfall widened to Tk33,732 crore at the end of the April-June quarter. The shortfall stood at Tk33,575 crore with 11 banks at the end of the previous quarter.

According to central bank data, seven out of nine state-owned and specialised banks – Sonali, Janata, Agrani, Rupali, BASIC, Bangladesh Krishi, and Rajshahi Krishi Development Bank – faced a Tk28,473 crore shortfall at the end of June. 

Besides, six private banks – including Bangladesh Commerce Bank, ICB Bank, National Bank and Padma Bank – have a capital shortfall of Tk5,185 crore.

According to central bank data, Bangladesh Krishi Bank had the highest capital shortfall. Shortfalls in state-owned Agrani and BASIC banks increased slightly in the June quarter, while shortfalls in Janata, Sonali and Rupali banks were on the decline. 

Syed Mahbubur Rahman, managing director at Mutual Trust Bank, told TBS, "There are two ways to reduce the capital shortfall. First, the banks have to focus on collecting their non-performing loans. If the NPLs are reduced, the pressure on the provisions will be reduced. As a result, the capital shortfall will be reduced."

"Second, the entrepreneurial managers will have to inject fresh capital. The new capital will actually reduce the shortfall."

As per international rules, banks are bound to preserve capital. According to the "Basel-3" policy, lenders in Bangladesh need 10% of their risk-weighted assets, or Tk400 crore, whichever is higher, in preserved capital. If a bank fails to maintain the prescribed amount, it is considered to be in a capital shortfall.

A portion of the investment from bank entrepreneurs and that from profits are reserved as capital. A bank with a capital shortfall cannot pay dividends to its shareholders. In addition, foreign banks take into account the capital situation of local banks before doing business with them.

Data from the Bangladesh Bank also shows that the Capital Adequacy Ratio, or Capital to Risk (Weighted) Assets Ratio (CRAR), in the banking sector fell from 11.23% in March to 11.19% in June. It was 11.83% in December.

The CRAR is an indicator of how well a bank can meet its obligations. The ratio compares capital to risk-weighted assets and is watched by regulators to determine a bank's risk of failure. It's used to protect depositors and promote the stability and efficiency of financial systems around the world.

According to the central bank, the surplus capital of the banking sector decreased by Tk1,611 crore to Tk12,762 crore in June compared to March. The surplus capital was Tk21,798 crore at the end of December. Apart from the banks in capital shortfall, only a few banks saw a surge in their surplus capital.

A senior central bank official said the total amount of non-performing loans was being understated due to the large number of NPLs being rescheduled by many banks. However, the loans could not be reclassified as regular due to the unavailability of the rescheduling facility in the March and June quarters.

"As a result, the defaulted loans in the banking sector increased to over Tk1.5 lakh crore at the end of June. And when defaulted loan increases, provision has to be kept, which leads banks to face capital shortfalls, he told TBS.

"However, in the June quarter, banks reported an increase in their net profit, and their provisioning capacity also increased. So the capital shortfall did not increase much."

At the end of the June quarter, the banking sector's defaulted loans increased to 10.11% of the total outstanding loans, compared to 8.80% in the previous quarter.