Agrani Bank has sought sovereign guarantee worth Tk 20 billion to maintain its required risk-based capital adequacy, officials have said.
In a recent letter to the Ministry of Finance, the state-run bank said it has adequate liquid money, thus it does not need cash from the government.
As taking capital in cash format by government banks fuels public outcry, the bank thus wants to avoid the method.
The financial institutions division (FID) under the ministry is now working on the proposal.
According to the letter written by Agrani Bank managing director Mohammad Shams-Ul Islam, banks need to maintain an additional capital conservation buffer to comply with the Basel-III Guidelines.
While calculating capital adequacy, it said, they have to minus the revaluation reserve, deferred tax assets and intangible assets.
Mr Islam wrote that while following these instructions, the risk-based capital of banks found to be much lower than required.
He suggested that the government, as the owner of the bank, issue guarantee, not cash, to strengthen its capital adequacy.
However, FID officials said until now sovereign guarantee is not included as regulatory capital in the Basel-III Guidelines.
The Basel-III Guidelines has to be amended to incorporate sovereign guarantee as material as a capital substance, they told the FE.
"If the government wants to provide cash, it will have to make an allocation in budget," Mr Islam wrote, noting that the procedure takes a long time.
As Agrani Bank needs to meet its capital requirement immediately, sovereign guarantee is a better option, he argued.
Capital shortfall indicates weakness in the financial base of banks, Mr Islam said. "Such a message creates problems as far as international banking activities are concerned."
He thinks Agrani Bank faces big financial losses by providing loans at lower than cost of funds under government instruction.
Mr Islam cited examples that the bank received bond at 7.0 per cent interest rate against Tk 31.82 billion loans to the Bangladesh Petroleum Corporation.
It also received bond at 5.0 per cent rate against loans to the Bangladesh Jute Mills Corporation, he said.
From the bonds against the two loans, the bank will incur a staggering loss of around Tk 11 billion, the top executive mentioned.
Without such losses, Mr Islam said, its financial base would have been rather strong.
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