In the last three years, state-owned commercial banks (SCB) saw a sharp rise in default loans. And now they think they can drastically cut back on loans that have gone sour.
Last week they submitted their magic turnaround plan to the finance ministry soon after the finance minister, AHM Mostafa Kamal, late last month told them to improve their health because he said he will not give them any more capital support.
Their whole ballgame depends on a policy that allows long-term loan rescheduling by paying only a token 2 percent down payment instead of the regular practice of 10-15 percent.
But critics say that such an action plan is not likely to work for long unless a total restructuring of the banks is undertaken – from management, to efficiency to political interference.
The finance minister was supposed to hold a meeting on Wednesday with the managing directors and chairmen of four state-owned banks to discuss their action plans, but the meeting was postponed. The meeting will be held next week, according to ministry source.
"The new rescheduling policy will help the banks reduce default loans only temporarily," said Salehuddin Ahmed, a former Bangladesh Bank governor.
He doubts whether mere rescheduling will work in the long run.
The banks will have to go for a massive loan recovery drive and ensure quality loans in the future to improve their capital base, he said.
The four state-owned banks – Sonali, Janata, Rupali and Agrani – have projected that as soured loans will be rescheduled, they will be able to halve their default loans in the next three years.
But critics say that much of the rescheduling will be artificial, and will only push today's problems into the future. And so the immediate brightening of the banks' health will not ensure a shining tomorrow.
Meantime, the recent rescheduling of default loans has already helped two state-owned banks – Janata and Agrani - to reduce their capital shortfall, while the situation has worsened for Sonali and Rupali.
The capital shortfall of Janata and Agrani declined by 72 percent to Tk 1,657 crore in June from Tk 5,942 crore in March.
Total shortfall of Sonali and Rupali increased 8 fold to Tk 1,167 crore in June.
The capital adequacy ratio, which measures a bank's capacity to mitigate risk, remained below 9 percent in June for all four banks. This is far below the regulatory requirement of 12.50 percent for this year as per Basel III.
Basel III is an international regulatory accord that was introduced to improve the risk management of banks.
In the new action plan the banks forecast that they will take the capital adequacy ratio above 10 percent in the next three years.
The capital adequacy ratio of Sonali and Rupali deteriorated from March to June because of an increase in shortfall amount.
The ratio declined to 8.43 percent for Sonali Bank in June from 10.03 percent in March.
The ratio of Rupali bank deteriorated to 8.73 percent in June from 9.32 percent in March.
Janata bank, which lost capital most in the last two years due to several scams, saw significant improvement in capital base in June, thanks to provision staggering and reduction in default loan.
The central bank's data show that the capital adequacy ratio of Janata improved to 7.76 percent in June from 0.26 percent in March.
The capita base of Agrani Bank improved to 8.85 percent in June from 7.20 percent in March.