Troubled banks categorised, new deposits, loans barred for weakest

As part of efforts to promote financial stability and maintain public confidence in the banking system, the Bangladesh Bank has introduced a new framework that classifies troubled banks into four categories based on their non-performing loans (NPLs) and Capital to Risk (Weighted) Assets Ratio (CRAR).

Under the Prompt Corrective Action (PCA) Framework, banks exceeding 14% NPLs and falling below a 5% CRAR for 24 consecutive months, placed in Category 4, will not be able to accept any new deposits or extend new loans without prior approval from the central bank.

Banks with a CRAR exceeding 10% and NPLs remaining below 8% for at least six straight months will be placed in Category 1 and cannot pay cash dividends to their shareholders, according to a central bank circular issued yesterday. These banks, however, may distribute stock dividends with the prior approval of the central bank.

Banks with a capital ratio below 10% and non-performing loans exceeding 8% for 12 consecutive months will fall under Category 2.

These banks will be prohibited from distributing dividends to raise retained earnings, and the permissible growth rate for their operational costs is capped at 5% of the previous year's expenses.

Category 3 encompasses banks with a capital ratio below 8% and non-performing loans exceeding 11%.

These banks are prohibited from engaging in any new transactions with related parties without prior approval from the central bank. They are also not allowed to open new branches, sub-branches, or subsidiaries, either domestically or overseas, without the central bank's consent.

Additionally, they are restricted from increasing their investment in existing subsidiaries, either domestically or overseas. Finally, banks in this category are only permitted to engage in capital expenditures related to automation or technological development.

Banks will be categorised based on their 2024 audited financial reports, and the framework will take effect in May 2025.

A central bank official pointed out that anonymous loans, liquidity crunch, high NPLs, and family influence in the appointment of directors have put the banking sector in a crisis.

Additionally, a lack of good governance hampers the proper functioning of banks. To get out of this situation, the measures have been taken in line with the instructions of the International Monetary Fund, he added.

The IMF has asked Bangladesh to undertake extensive policy reforms as part of the conditions for the $4.7 billion loan approved for the country.

The circular states that the Bangladesh Bank can exclude any bank from the framework once it achieves normal conditions and maintains that status for four consecutive quarters.

A managing director of a private bank, wishing not to be named, told TBS that the banking sector is facing a multi-pronged crisis. Fictitious loans, liquidity crunches, high default rates, and nepotistic board appointments have plagued the sector, prompting most banks to borrow capital to stay afloat.

Furthermore, weak governance practices have hindered effective bank management.

In the circular, the central bank has underscored the critical importance of early action to prevent adverse and systemic impacts of troubled banks on the banking system and the broader economy.

The circular also emphasised the need for prompt corrective action, as shutting down a bank is a costly and disruptive process. This is precisely the reason behind the introduction of the framework.