Defaults on loans by top three large borrowers of the banks would result in failure of 20 banks in maintaining minimum capital adequacy, according to the Bangladesh Bank’s financial stability assessment report released on Tuesday.
‘The significant amount of loans concentrated to a few borrowers and considerable level of NPLs to some banks and FIs could pose risk to the overall financial stability,’ the report said.
‘Moreover, the impact of coronavirus attack is another potential threat to the stability of the financial system,’ it said, adding that the aftermath of the attack might instigate the materialisation of moderate or severe shock scenarios which were usually less likely to happen in a normal situation.
The different policy initiatives as well as incentive measures so far taken by the central bank and the government may prevent or mitigate systemic risk to cope with COVID-19 pandemic in the upcoming days, the report said.
The BB conducts quarterly stress tests on banks and non-bank financial institutions to ascertain their resilience under different plausible shock scenarios and prepares the report.
While preparing the report the central bank applied different shocks on 48 out of 58 banks that maintained minimum capital to risk-weighted assets ratio (CRAR) at the December-end last year. The rest 10 banks had CRAR below the BB requirement and were not considered for applying stress.
Of the 48 banks, five banks’ CRAR was within the range of 10-12.5 per cent, 21 banks’ CRAR was between 12.5 per cent to 15 per cent and the rest 22 banks’ CRAR was above or equivalent to 15 per cent.
Now, banks are supposed to maintain 10 per cent CRAR as per the regulatory requirement.
As per the BB report, the capital adequacy of the banking system would decrease to 10.10 per cent from existing 11.57 per cent while 20 out of 48 banks would likely become noncompliant with maintaining minimum capital adequacy in case of bank-wise default of the three largest individual or group borrowers.
‘Moreover, additional 12 banks would fail to comply with the minimum capital requirement with capital conservation buffer if the credit quality of top three borrowers deteriorated to bad or loss grade,’ the BB’s report said.
The report also showed that the CRAR of the banks would drop to 8.58 per cent if seven large borrowers of respective banks turned into defaulters and the CRAR would plunge to 7.69 per cent if 10 large borrowers of respective banks turned into defaulters.
Maintaining CRAR, also known as capital adequacy ratio (CAR), is obligatory for the banks and financial institutions to protect depositors and promote the stability and efficiency of the financial system, BB officials said.
Any bank or its depositors may fall into trouble unless the required minimum CRAR is maintained by the bank, they said.
On the non-bank financial institutions, stress test, prepared based on the data as of December last year, results showed that only four out of 33 (except two NBFIs which were facing financial difficulties) were positioned in green zone and 19 in yellow zone and rest 10 in the red zone.
Overall, a majority of the NBFIs would remain resilient in the appearance of different shock scenarios, the financial stability assessment report said.
The report also showed that the banks’ net profit increased by 87.6 per cent in the calendar year to Tk 7,580 crore from Tk 4,040 crore in the previous year due mainly to the easy loan rescheduling and loan write-off policy offered by the central bank to the defaulters.
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