Capital shortfall plagues 9 banks

Nine out of 57 banks have failed to meet minimum capital needs, indicating that they require further recapitalisation through the use of taxpayers’ money.

Latest Bangladesh Bank data showed that these nine banks, including trouble-hit Farmers Bank, faced a capital shortfall of Tk 17,700 crore as of September this year, up by over Tk 5,000 crore a quarter ago.

State-owned banks usually face capital shortfalls in Bangladesh but this time a private one, Farmers Bank, got listed for four years of lacklustre performance since its inception.

Eight state banks had a capital shortfall of Tk 12,683 crore at the end of June this year despite the government’s injection of Tk 2,000 crore this fiscal year.

Economists underscored that the BB should take immediate measures to address the problem as such a situation sent a negative message to the international community and local businesspeople that the banking sector was deteriorating.

Dr Salehuddin Ahmed, a former BB governor, said capital was the principal pillar of a banks’ financial health and customers’ confidence also depend on it.

“Confidence of the international community on our banking sector will gradually erode if such a trend continues in the days to come,” he said.

Ahsan H Mansur, executive director of Policy Research Institute, said a strong banking sector capable of maintaining sufficient capital strengthens depositors’ confidence.

“A good number of banks continue to fail in maintaining their required capital for long. These banks may face liquidation if the country falls under a major financial risk,” he said.

Mansur also asked the central bank to arrange an immediate one-to-one meeting with these troubled banks and instructing them to fulfil their capital needs in the shortest possible time.  The central bank can also set a roadmap for banks facing a capital crunch on ways to strengthen their capital base, Mansur noted.

No private commercial bank with a capital shortfall should be allowed to run, he said adding that the BB should press Farmers Bank’s board of directors to inject more funds to meet capital needs.

Scam-hit Farmers Bank faced a capital shortfall for the first time due to massive financial scams that weakened its capital base. A growing number of nonperforming loans forced the bank to keep aside a large amount as provision.

The other lenders which faced a capital shortfall are Bangladesh Krishi Bank (BKB), Sonali, BASIC, Rupali, Janata, Rajshahi Krishi Unnayan Bank, Bangladesh Commerce Bank and ICB Islamic Bank.

As per the Basel III framework, state-run BKB, Sonali and BASIC are facing the highest capital shortfall.

The overall capital adequacy ratio (CAR) against the risk-weighted assets in the banking sector stood at 10.65 percent as of September, down from 10.86 percent three months back.

A number of banks went for risky financing which fuelled a rise in their risk-weighted assets and weakened their capital base, affecting the entire banking sector, a BB official told The Daily Star yesterday. CAR was at 10.80 percent as of December 31, 2016.

Banks have to keep at least 10 percent capital against their risk-weighted assets in line with the Basel III framework.

According to the latest BB data, CAR of Sonali stood at 3.26 percent as of September, Rupali 6.45 percent, Janata 7.01 percent, Bangladesh Commerce 6.02 percent, and Farmers 8.54 percent.

Four banks that registered a negative CAR are BASIC (11.10 percent), ICB Islamic (110.46 percent), BKB (41.78 percent) and Rajshahi Krishi Unnayan (6.57 percent).

Ahmed said the growing number of default loans was one of the major reasons for the shrinking capacity of banks to maintain the required capital.

He said a majority of the nine banks continued to face irregularities and financial fraudulence as they have not taken effective measures to bring credit discipline and to establish corporate governance