Banks' higher paid-up capital and Basel II
Sunday, 2 September 2007
SOME amendments to the Banking Company Act of 1991 that are expected to be made effective soon through the promulgation of an ordinance by the President, among others, do propose to increase the existing paid up capital of banking institutions from Tk 1.0 billion to Tk. 2.0 billion. Such a large increase, according to a report published in this daily last Friday, in the paid up capital of banks would be made in line with the Basel-II capital accord. The accord aims at creating an international standard that banking regulators can use while framing regulations about how much capital the banks would need to meet their operational and financial risks successfully. The Basel-II, to be precise, has been devised out of the notion that the banks should have larger amount of capital to face the greater risks they are exposed to and thereby safeguard their solvency and overall financial stability. Some countries have already adopted the Basel-II accord and Bangladesh is expected to do the same in the early part of 2009.
The public sector banks do not have any problem with paid-up capital though they are bedevilled by other problems such as huge non-performing loans, operational inefficiency etc. But the majority of the private banks are yet to meet even the central bank's earlier directive to increase their respective paid-up capital to Tk. 1.0 billion. It may not be that easy for a large number of private banks to mobilise such a huge amount of money from the sponsors and general shareholders within next 16 to 18 months. The banking sector which is having a bad time in recent months because of the declining demand for funds from the investors and other entrepreneurs has a huge amount of excess liquidity, according to an estimate, nearly Tk 150 billion. The deteriorating price- situation and the combined effect of the anti-corruption drive and actions against the tax dodgers have made the situation difficult for the banks. The recent floods have made the situation worse for them.
The requirement for raising the paid-up capital would surely create some volatility in the banking sector. The situation would demand some merger and acquisition (M&A) activity, which is an almost unknown subject until now to most local financial institutions, including commercial banks. The central bank a few months back had put in place the M&A guidelines for banks and financial institutions. Though the guidelines need to be fine-tuned, the banks are free to try the same if they face any problem with raising their paid-up capital or meeting other needs. However, traditionally, the owners and sponsors of any financial or commercial entity in this part of the world being too much protective of their own interests are, by nature, opposed to the idea of merger. The sponsors of banks might not be psychologically ready to avail themselves of the M&A tool to meet the higher paid-up capital need. However, the situation might force them to opt for the same which is a widely practised method in the developed world. There are still a few private commercial banks which are yet to come out of the woods, so far as their financial health is concerned. As soon as the Banking Company Act is amended asking the banks to raise their paid-up capital to Tk. 2.0 billion, these banks without wasting anymore time should explore the possibility of merging with some stronger banks and thus help the country's banking sector become healthy and stable.
The public sector banks do not have any problem with paid-up capital though they are bedevilled by other problems such as huge non-performing loans, operational inefficiency etc. But the majority of the private banks are yet to meet even the central bank's earlier directive to increase their respective paid-up capital to Tk. 1.0 billion. It may not be that easy for a large number of private banks to mobilise such a huge amount of money from the sponsors and general shareholders within next 16 to 18 months. The banking sector which is having a bad time in recent months because of the declining demand for funds from the investors and other entrepreneurs has a huge amount of excess liquidity, according to an estimate, nearly Tk 150 billion. The deteriorating price- situation and the combined effect of the anti-corruption drive and actions against the tax dodgers have made the situation difficult for the banks. The recent floods have made the situation worse for them.
The requirement for raising the paid-up capital would surely create some volatility in the banking sector. The situation would demand some merger and acquisition (M&A) activity, which is an almost unknown subject until now to most local financial institutions, including commercial banks. The central bank a few months back had put in place the M&A guidelines for banks and financial institutions. Though the guidelines need to be fine-tuned, the banks are free to try the same if they face any problem with raising their paid-up capital or meeting other needs. However, traditionally, the owners and sponsors of any financial or commercial entity in this part of the world being too much protective of their own interests are, by nature, opposed to the idea of merger. The sponsors of banks might not be psychologically ready to avail themselves of the M&A tool to meet the higher paid-up capital need. However, the situation might force them to opt for the same which is a widely practised method in the developed world. There are still a few private commercial banks which are yet to come out of the woods, so far as their financial health is concerned. As soon as the Banking Company Act is amended asking the banks to raise their paid-up capital to Tk. 2.0 billion, these banks without wasting anymore time should explore the possibility of merging with some stronger banks and thus help the country's banking sector become healthy and stable.