The capital base of Bangladesh's banking sector is much weaker than in peer countries -- a situation that not only highlights its frailty but also the heightened vulnerability amid the coronavirus pandemic.
Capital adequacy ratio (CAR) is the reflection of all financial indicators of banks, including the ratio of defaulted loans, the capability of keeping provisioning against regular and classified loans and the actual situation of corporate governance.
The CAR is a measurement of a bank's available capital expressed as a percentage of risk-weighted credit exposures.
Banks in Bangladesh maintained the CAR at 11.60 per cent last year, way less than 17 per cent in Pakistan, 16.5 per cent in Sri Lanka and 15.1 per cent in India.
This means the banking sector is weaker than the lenders in neighbouring nations. But banks would be in a better position to tackle the ongoing economic fallout brought on by the coronavirus pandemic if they could manage a strong capital base.
"Capital adequacy is the topmost component of the CAMELS rating for banks. And this reflects the overall financial health of lenders," said Salehuddin Ahmed, a former governor of the Bangladesh Bank.
CAMELS -- which stands for capital adequacy, asset quality, management, earnings, liquidity and sensitivity -- is a recognised international rating system used to rate financial institutions as per six factors represented by its acronym.
The high volume of defaulted loans is the main reason behind the lower CAR in Bangladesh, according to Ahmed.
Banks have to keep a large amount of provisioning against the defaulted loans that ultimately hit the capital base. This has also tarnished the image of the sector among foreigners and the lenders of the outside world will show reluctance in doing business with local banks as well, he said.
The BB took initiatives to implement the Basel III guidelines by 2019 as part of its effort to bolster the banks' capital base.
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the global financial crisis of 2007-09 to improve regulations, supervisions and risk management within the banking sector.
As per a roadmap unveiled by the BB in 2014, banks were supposed to push up the minimum CAR to 12.5 per cent by December 2019 from 10 per cent then.
Of the 58 banks, 43 met the standard by the deadline. As of December, the CAR of foreign banks was 24.45 per cent, private banks' 13.62 per cent and state banks' 4.99 per cent, data from the central bank showed.
State-run banks are largely responsible for the lower CAR in the banking sector.
"This is not the real picture of the CAR as the indicator would have worsened further if banks had followed the rules and regulations on loan classification and provisioning properly," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
Defaulted loans had not increased too much in the banking sector last year because of the central bank's relaxed rescheduling facility and special permission given to regularise defaulted loans, he said.
Banks have widened the capital base on the back of the relaxed loan rescheduling policy, which allowed defaulters to reschedule classified loans with a down payment of 2 per cent of the outstanding amount instead of existing 10-50 per cent.
The central bank also allowed banks to reschedule a large amount of defaulted loans by granting special permissions on a case-to-case basis.
Last year, a record Tk 52,770 crore was rescheduled. Of them, Tk 13,284 crore has turned sour again, BB data showed.
This means nearly one-fourth of the rescheduled loans slipped into the bad category again.
Defaulted loans stood at Tk 94,313 crore at the end of 2019, up 0.42 per cent year-on-year.
Banks should now start preparing to improve the capital base as there will be an uncertainty in the days ahead due to the twists and turns of the pandemic, said Mansur, also a former official of the International Monetary Fund.
"The financial health of banks will deteriorate in the coming days if the economy faces more storms," he ADDED.
The weak CAR has indicated that the financial health of the banking sector in the neighbouring countries is stronger than Bangladesh, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
"The CAR would have been 15-16 per cent if the state banks could maintain the requirement as per the Basel III guidelines," he added.