BB raises banks’ leverage ratio 

The Bangladesh Bank has raised the lending limit of banks in proportion to their Tier 1 capital or core capital. 

In a circular on Wednesday, the central bank directed banks to get prepared in 2022 to increase their leverage ratio. And from 2023, the lenders will have to increase their leverage ratio by 0.25% per year to take the ratio to 4% in 2026. 

According to Basel III, the ratio of Tier-1 capital to debt is called the leverage ratio. At present, the ratio of total debt to Tier-1 capital is 3%.

Officials at the central bank said banks must increase their capital and then their lending capacity will go up. Such a directive has been issued to enhance the capacity of banks to strengthen the country's economic recovery during the Covid-19 pandemic, they added.

Bankers say in order to increase the leverage ratio, the capital of banks has to be increased or off-balance sheet debt must be reduced.

Off-balance sheet loans are risky loans or non-funded loans such as letters of credits (LCs) and various types of bank guarantees which are known as contingent liability.

An official at a private bank said, "LC is a non-funded loan. This means even if a customer does not pay, a bank will pay the LC's liability. That means the bank does not have the customer's money in advance. This is a risky activity. But here is good profit. Excluding this type of loan also increases the leverage ratio."

He added that raising banks' capital is a complex process. Basically, capital can be raised through the issuance of right shares or giving stock dividends to shareholders. Equity can also be increased with retained earnings. Tier-1 capital is calculated mainly with paid-up capital and retained earnings.

To increase capital, the official said, banks will have to pay stock dividends to shareholders with lower cash dividends in the coming years.

Central bank officials say if the leverage ratio rises, banks' capital will increase. This will also increase the risk tolerance of banks against unforeseen losses. Again, the import cost of banks in foreign trade will be reduced.

Safiul Alam Khan Chowdhury, managing director and chief executive officer of Pubali Bank, told The Business Standard, "The implementation of this directive will increase the capital strength of banks. It will also increase their investment capacity."

The central bank's financial Stability Report 2020 said, although all the banking groups experienced a downward trend in leverage ratios, the banking sector, as a whole, maintained a leverage ratio well above the regulatory minimum requirement led mainly by high leverage ratios of private commercial banks and foreign commercial banks. 

This indicates a better resilience of the banking sector to withstand probable systemic risks in future. However, the weaker capital base of state-owned commercial banks remains a concern from financial stability's perspective, it added.

The report said, the banking sector maintained a leverage ratio of 4.2% at the end of December 2020 against the regulatory minimum requirement of 3%, which is 0.4 percentage point lower than 4.6% maintained at end-December 2019. 

Most importantly, all the banking groups experienced declines in leverage ratios with respect to those of end-December 2019. Foreign banks maintained the highest leverage ratio of 12.7% followed by private banks of 5.5% in the review year, it added. 

According to the report, state-owned banks' leverage ratio was on the downward trend which stood at 0.6% compared to 1.2% recorded at end-December 2019; the ratio remained well below the minimum requirement at the end of the review period.