Eleven private commercial banks recently announced to raise Tk6,100 crore by issuing perpetual and subordinated bonds, two financial instruments that are becoming popular in the banking sector, to strengthen their risk-weighted capital base.
The banks are AB Bank, Bank Asia, Dhaka Bank, Islami Bank, Mercantile Bank, Pubali Bank, Shahjalal Islami Bank, IFIC Bank, Jamuna Bank, NCC Bank, and NRBC Bank.
Emranul Huq, managing director and chief executive officer of Dhaka Bank, told The Business Standard they would invest heavily in a number of sectors over the next five years.
He said bad debts were likely to increase due to the Covid-19 pandemic impacts, which would reduce the capital adequacy ratio (CAR).
The capital raised through bonds to strengthen the capital-to-risk weighted-asset ratio (CRAR) is widely known as the CAR.
"That is why we are strengthening capital by issuing bonds as per the Basel III requirement. This is because our lending or investment capacity will reduce if the CAR goes down," he explained.
He said the Bangladesh Bank had fixed the interest rate on bonds at 6-10% at present.
"Although this rate is higher than that of the deposit, it will not create much problem for us," he added.
According to Basel III regulations, banks were supposed to maintain a minimum CAR of 12.5% by 2019.
The CAR is used to protect depositors.
The industry's average CAR stood at 11.64% at the end of December last year, according to the Bangladesh Bank data.
Previously, stock dividends and rights issues were used for raising core capital or paid-up capital.
But the Bangladesh Bank recently issued a dividend policy, requiring a higher capital base for a higher dividend. As a result, most banks are not capable of declaring higher dividends in line with the capital requirement.
Moreover, in the new dividend policy, banks are required to maintain at least 15% CAR to announce the highest 30% dividends.
Only 12 banks maintained 15% CAR until December last year. Some of them are likely to drop from the level as default loans have been assumed to rise significantly this year because of the post-pandemic effects, say industry insiders.
In this situation, banks are preferring bonds as the third option to raise capital.
Such bonds are being sold through private placements by taking approval from the Bangladesh Securities and Exchange Commission (BSEC).
According to the Bank Company Act, if banks fail to maintain regulatory capital requirements, the central bank can suspend fresh deposit collection and fresh lending or impose a financial penalty.
The BSEC in July last year decided that all perpetual bonds must be tradable on the main boards of the local bourses.
After that, in March this year, the Bangladesh Bank and the BSEC at a meeting decided that perpetual bonds issued must be listed on the stock exchanges within 30 days of their subscription closure.
In May, the BSEC decided that the issuers of perpetual bonds must float 10% of the bond units through public offerings.
The managing director of Dhaka Bank said perpetual bonds cannot be liquidated before 10 years. "Moreover, many investors choose this as it is risk-free. It will be better for us if bond transactions begin."