Most of the government banks are not capable of handling any kind of financial crisis. They do not have the capital adequacy required by international standards, according to the central bank's data.
The data shows that these banks also failed to take advantage of the fact that there was no additional cost pressure for provisions as loan classification was closed last year.
A report titled "Capital Adequacy of Banks Under Basel III," obtained from sources at the Bangladesh Bank that contains the data, highlights the capital adequacy ratio (CAR) of banks at the end of 2020.
Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. It is the third instalment of the Basel Accords.
The government banks with capital shortfall are – Agrani Bank, BASIC Bank, Janata Bank, Rupali Bank, Sonali Bank, Bangladesh Krishi Bank, and Rajshahi Krishi Unnayan Bank. The two government banks with adequate capital are – Bangladesh Development Bank and Probashi Kallyan Bank.
Capital adequacy ratio is considered as a measure of the safety of the depositors, the stability of the bank and the efficiency of financial management. The higher the capital adequacy ratio of a bank, the stronger its ability to cope with economic disasters.
According to the central bank's report, seven out of nine government commercial and specialised banks do not have sufficient capital stipulated by Basel-III to deal with risk. There are rather large deficits. According to Basel III, a global, voluntary regulatory framework on bank capital adequacy, the ratio is 10.5%.
Commenting on the capital adequacy, former president of the Association of Bankers, Bangladesh Nurul Amin told The Business Standard that, "As the defaulted loans of the government banks are high, a lot of money is spent on the provisioning against these loans.
"On the other hand, these banks have an attitude that they will have the government by their side during any crisis as these are government institutions. In case of capital deficit, the government provides capital to these banks. All in all, these banks do not worry much about capital adequacy."
At the end of December 2020, the defaulted loans of government commercial and specialised banks stood at Tk42,000 crore and Tk4,000 crore respectively, which is 21% and 13% of their total disbursed loans, respectively. Last year, the default rate in the overall banking sector was 7.66%.
An analysis of the Bangladesh Bank's report shows that private banks are more capable of dealing with risks than the public sector banks. By the international standards, only three of the private banks have deficiency in capital adequacy. These are – Bangladesh Commerce Bank, ICB Islamic Bank and Padma Bank.
Meanwhile, two foreign banks – Standard Chartered and HSBC Bank – are at the top in terms of capital adequacy. They are followed by domestically owned Islami Bank Bangladesh Ltd.
At the end of 2019, the overall capital adequacy ratio in the banking sector was 11.6%, which remained unchanged at the end of 2020. In other words, the overall capital adequacy situation of the banking sector has not improved in the last one year.
Regarding the unchanged situation, Nurul Amin said, "Since the debt classification was closed throughout the last year, there was no additional cost behind the provisioning. Moreover, the banks took repay installments from those who were able to pay that. So, the situation was the same as before."
However, the loan classification has resumed since the beginning of this year so the real picture will emerge by the end of the January-March quarter, opined Nurul Amin.