10 banks' capital shortfall hits Tk39,655cr in Dec quarter

The capital shortfall of 10 private and public banks in the country rose to Tk39,655 crore at the end of December 2023, according to the Disclosures on Risk-Based Capital Adequacy (Basel III) report of the banks.

Bankers said the widening capital deficit is due to an increase in risk-based assets, driven by a rise in defaulted loans. The actual deficit is much higher than reported because many banks get deferral advantages against provisioning, otherwise, the capital shortfall would be significantly greater, they said.

As per international rules, banks are bound to preserve capital. According to the Basel III policy, lenders in Bangladesh need 10% of their risk-weighted assets, or Tk500 crore, whichever is higher, in preserved capital. If a bank fails to maintain the amount, it is considered to be in a capital shortfall.

A portion of the investment from bank entrepreneurs and that from profits are reserved as capital. A bank with a capital shortfall cannot pay dividends to its shareholders. In addition, foreign banks take into account the capital situation of local banks before doing business with them.

In December, the central bank published a report on 14 banks' capital shortfalls for the September quarter, which amounted to Tk37,506 crore, but it did not publish a shortfall report for the December quarter.

TBS reviewed the audit reports of the country's scheduled banks and found that the capital shortfall in 10 public and private banks increased by Tk2,392 crore by the end of the December quarter of 2023 compared to the previous quarter.

However, the overall shortfall in the banking sector will be lower as many banks hold more capital than the minimum requirement.

The 10 banks are state-owned Janata, Agrani, Rupali, BASIC, Bangladesh Krishi, and Rajshahi Krishi Unnayan Bank, along with private banks Bangladesh Commerce Bank, ICB Bank, National Bank, and Padma Bank.

A senior central bank official told TBS that as defaulted loans and provision deficits increase, the capital deficit will also rise. The capital crisis has emerged due to the gradual deterioration of financial indicators in the country's banks.

He said, "The actual capital shortfall of some privileged banks would be higher. Currently, a dozen banks have deferral advantage to reduce the provision shortfall, which amounts to more than Tk40,000 crore. If 50% of their deferrals are added to the capital requirement, the shortfall will increase by about Tk20,000 crore."

He further noted that the capital deficit will continue to grow in March 2024, as defaulted loans have significantly increased in this quarter.

The central bank has not yet disclosed the total amount of defaulted loans across all banks as of March 2024. However, an undisclosed report indicates that defaulted loans at state-owned banks have risen significantly.

According to the report, defaulted loans at six state-owned banks increased by 73.20% to Tk85,870 crore by the end of March 2024, up from Tk49,576 crore in March 2022.

Bangladesh Krishi Bank faces the most severe shortage, with a capital deficit of Tk15,740 crore as of the end of December.

Janata Bank's audit report indicates a capital shortfall of Tk2,750 crore at the end of December 2023, with a capital requirement of 6.75% for their risk-weighted assets.

The report also states that Janata Bank has received a provision deferral facility of Tk15,346 crore from the Bangladesh Bank. If this benefit were withdrawn, their capital shortfall would rise to -12.62%.

The scenario in the majority of banks benefiting from the deferral facility provided by the central bank mirrors that of Janata Bank.

Syed Mahbubur Rahman, managing director at Mutual Trust Bank, told TBS, "There are two ways to reduce the capital shortfall. First, banks need to focus on collecting their non-performing loans. If NPLs are reduced, the provision requirement will decrease, thereby reducing the capital shortfall.

"Second, entrepreneurial managers need to inject new capital. The new capital will directly reduce the deficit."