Off-balance sheet exposures to cost 1pc of banks' profit

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Siddique Islam
The Bangladesh Bank (BB) has asked the commercial banks to maintain 1.0 per cent general provision against off-balance sheet financing that will come into effect from December 31 next.
Under the new rules, the banks will have to keep more funds for provisioning against the off-balance sheet exposures like letter of credit (LC) against import from their profits.
"We have taken the measures to help the banks reduce their financial risks as well as strengthen their capital base," a BB senior official told the FE while explaining the main objective of the new provisions.
Bankers, however, said the measures will have a negative impact on profitability reducing their capacity of offering dividends to the shareholders.
"Banks announce their dividends after maintaining all the provisioning in line with the central bank rules and regulations. It will certainly affect dividend offer," a chief executive of a commercial bank told the FE.
The central bank issued a circular in this connection Tuesday and instructed the chief executives of all scheduled banks to maintain the general provision against off-balance sheet finance in line with the directives.
"It is observed that a considerable amount of off-balance-sheet exposures is being converted into funded facilities and part of it becomes overdue and classified, which needs to be taken care of," the central bank said in its circular.
"…Banks are advised to maintain 1.0 per cent general provision against off-balance sheet exposures in addition to the existing provisioning arrangement and this general provision will be treated as supplementary capital (Tier-2)," it added.
For the purpose of supervision, capital will be categorised into two tiers: Tier-1 is treated as a core capital comprising the highest quality capital elements like paid-up capital and reserve.
The Tier-2 is supplementary capital representing other elements, which fall short of some of the characteristics of the core capital but contribute to the overall strengthen of a bank.
The amount of off-balance sheet exposures and required provision, actual provision against the same has to be shown in a separate sheet and submitted along with the classified loan (CL) statement on quarterly basis, according to the circular.
"We have introduced such provisions in line with the Basel-II framework," another BB official said, adding that the framework allows provisioning against off-balance sheet financing.
The central bank is planning to implement the Basel-II framework for banking companies from early 2009 in line with the global standard.
The Basel accord has been prepared on the basis of three pillars: minimum capital requirement, supervisory review process and market discipline.