Banks' capacity to protect depositors and promote financial stability is waning, according to a quarterly Bangladesh Bank (BB) report released last week. The report shows risk-weighted capital asset ratio (RWCAR), which is an important cushion against unexpected shocks, shrunk to 7.91 percent in June 2010 for all banks, from 11.68 percent in the same period a year ago. The present ratio is much lower than the minimum regulatory requirements of 10 percent under Basel II capital adequacy framework. 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.

Simply put, a bank's capital is the backing for potential losses that protects the bank's depositors or other lenders. Banking regulators in most countries define and monitor the ratio to maintain confidence in the banking system. Local bankers blamed the rise in risky investments on infrastructure constraints, particularly the gas crisis that has turned many lending bad. A foreign banker linked the current risky situation to a dramatic credit expansion without a corresponding increase in capital. “Banks' money borrowed by industries, which are not getting gas connections for months, became risks for those banks,” said Touhidul Alam Khan, executive vice president, corporate banking division of Prime Bank.

Latest BB data shows the RWCAR for all banks came down to 7.91 percent in June 2010 from 11.68 percent in the same month of 2009. The ratio was 11.67 percent in December 2009. State-owned commercial and specialised banks are in the worst condition in maintaining the capital ratio. For state-owned commercial banks the RWCAR has gone down to 5.67 percent in June 2010 from over 9 percent six months ago. It was negative 2.56 percent for specialised banks. The ratio for private commercial banks (PCBs) stood at 8.69 percent in June 2010, down from over 12 percent a year ago. It was 10.38 percent for PCBs in June 2004.

Although the ratio for foreign commercial banks (FCBs) still remains well above the minimum regulatory requirements, it went down to 16.71 percent at the end of June 2010 from 28.13 percent six months ago and 28.26 percent a year ago. “Any credit expansion without the corresponding rise in capital will increase the risk,” said a senior banker. He said banks' volume of lending has increased without supporting the adequate capital requirement. “The gas crisis cannot be the only reason. It has been a problem for the past few years and banks were lending considering the issue,” said the banker requesting anonymity.

Monzur Hossain, a research fellow of Bangladesh Institute of Development Studies, said: “Banks should strengthen the credit risk management, which is yet to get momentum."

News: Sajjadur Rahman/The Daily Star/Bangladesh/06 Feb 2011