Higher NPLs weaken CRAR in Bangladesh

The capital-to-risk weighted asset ratio (CRAR) of Bangladesh's banking sector stands in a lower position than those of India, Pakistan and Sri Lanka due to higher volume of classified loans, particularly in the public sector banks here.
According to the experts and bankers, CRAR of the country's banking sector under the Basel-III standard will be completely different, if the CRAR of three specialised banks (SBs) is deducted from that of all banks.
These observations came during a roundtable titled 'Basel-III: Preparation of Banks in Bangladesh', held at Bangladesh Institute of Bank Management (BIBM) in the capital on Thursday. S A Chowdhury, Professor A K Gangopadhya Chair of BIBM, presided over the programme.
Among the SAARC countries, Pakistan maintains the highest level of CRAR at 17.9 per cent in 2015, following Sri Lanka, India and Bangladesh at 14.2 per cent, 12.7 per cent and 10.8 per cent respectively.
It was revealed in a paper titled 'Basel-III: Preparation of Banks in Bangladesh', presented by Professor and Director (RD&C) of BIBM Prashanta Kumar Banerjee.
"We are lagging behind other SAARC countries, and have more scopes to raise capital," Dr. Banerjee noted.
The capital adequacy of the country's entire banking sector recorded a minor decline in 2014 and 2015, compared with those of the previous years, as evident from the CRAR.
Both the private commercial banks (PCBs) and the foreign commercial banks (FCBs) were successful in maintaining their required CRAR, the paper mentioned.
"But that of the state-owned commercial banks (SoCBs) was a cause of concern for the regulator, as this category showed an overall declining trend in capital adequacy, particularly after 2013, and it continued until 2015."
The paper also said the main reason behind this decline was the inclusion of BASIC Bank Limited in the SoCBs' category, which earlier belonged to the SBs' group.
"Because of several loan scams, non-performing loans (NPL) of these public banks have increased significantly, raising their provisioning requirement and decreasing CRAR."
In 2015, CRAR of the SBs was in negative territory with 31.95 per cent, which is quite alarming, the paper noted.
Capital base of the country's banking sector also weakened slightly in the second quarter (Q2) of 2016, mainly due to higher NPLs.
The amount of classified loans in the banking sector jumped by nearly 28 per cent to Tk 657.31 billion as on September 30, from Tk 513.71 billion as on December 2015. It was Tk 547.08 billion in September 2015.
Under Basel-III calculation, the overall CRAR of all banks came down to 10.34 per cent in Q2 of this calendar year from 10.62 per cent in Q1, according to the Bangladesh Bank's (BB) latest statistics.
Five SoCBs, out of six, two PCBs, out of 39, and two SBs were on the list of the banks facing capital shortfall during Q2.
"The nine banks, out of 56, have faced capital shortfall, mainly due to the higher volume of their NPLs," a senior BB official told the FE.
Bangladesh started implementing Basel-III in calculation of CRAR of all banks from Q1 of 2015 for ensuring stability in the banking sector.
Under the roadmap for implementation of Basel-III framework, the banks will have to maintain 10.625 per cent CRAR in 2016, which was 10 per cent in 2015.
The banks will have to maintain 11.25 per cent CRAR in 2017, and 11.875 per cent in 2018. Finally in 2019, it will reach the desired level of 12.50 per cent, according to the roadmap.
"The banks will have to do business in line with the international standards," BB Senior Deputy Governor Abu Hena Mohd. Razee Hassan said while inaugurating the discussion.
Senior banker S A Chowdhury suggested the policymakers to run the SoCBs by forming subsidiaries for separating public functions and commercial operations to improve their financial health.
Muhammad Yasin Ali, Supernumerary Professor of BIBM, advised the bankers to maintain the ethics properly while sanctioning loans that will in turn reduce their NPLs and improve capital base.
Among others, BIBM Director General Dr. Toufic Ahmed Chowdhury, and BB general managers S. M. Rabiul Hassan and Abu Farah Md. Naser and joint directors Dipti Rani Hazra and Aminur Rahman Chowdhury also spoke on the occasion.
[email protected]