Sajjadur Rahman

Banks now have to maintain a higher capital -- at 10 percent of their risk-weighted assets -- from July 1 in line with a directive that came as a Basel II requirement.

Risk-weighted capital asset ratio (RWCAR), which is an important cushion to protect depositors or other lenders against unexpected shocks, was 9 percent till June 30 this year.

“The deadline for minimum capital adequacy ratio requirements is September 30 though banks will start maintaining the new capital standard from July 1,” said Jahangir Alam, executive director, banking regulations and policy department of the central bank.

The Bangladesh Bank (BB) analyses the banks' capital position on a quarterly basis and accordingly, it will assess the RWCAR at the end of September, said Alam.

In line with Basel II framework, the banks are required to hold capital for different classes of assets, based on a credit risk criterion.

The RWCAR or capital adequacy ratio determines the capacity of a bank in terms of meeting the time liabilities and other risks, such as credit risks and operational risks. Banking regulators in most countries define and monitor the ratio to maintain confidence in the banking system.

Inquiries, however, show that some banks, particularly state-owned and third generation private ones, are not strong enough to meet their capital adequacy requirements in their present situation.

According to BB officials, three state-owned commercial banks, five private commercial banks (PCBs) and two specialised banks owned by the government ran short of capital to meet the target of 9 percent set by the central bank.

“These banks will face difficulties in meeting the new capital requirement,” said another BB official, requesting not to be named.

However, no foreign banks have any such shortfall, he said.

The BB officials said many banks at the time of profit distribution did not take the risk factor into consideration. On the other hand, some banks distributed more dividends to their shareholders than the profit they made. As a result, they could not preserve the required amount of capital.

According to BB decision, the banks that will fail to maintain the minimum capital requirement will face regulatory actions including a downgrade in their ratings.

Even, the noncompliant banks will not be able to open any branch or exchange house abroad and also face restrictions in opening new branches at home.

The state banks' shortfall in maintaining the minimum capital may be addressed by issuing bonds by the government.

Bangladesh entered the Basel II regime, the latest version of risk-based capital standards set for banks worldwide, on January 1 2010.

News: The Daily Star/ Bangladesh/ July-02-2011