Tuesday, November 25, 2008

Bank capital against risk rises

Mainly driven by three state-owned commercial banks (SCBs) that issued shares in favour of the government on their asset-liability position as on June 30, 2007, Bangladesh Bank (BB) said in its quarterly report.

The capital ratio is the percentage of a bank's capital to its risk-weighted assets. The capital requirement is a bank regulation, which sets a framework on how banks and depository institutions must handle their capital.

The RWCAR is defined as the ratio of capital covering core and supplementary capital to risk-weighted assets of the banks. As per BB requirements, the banks are required to maintain RWCAR at a minimum of 10 percent, with core capital (paid-up capital and statutory reserve) no less than 5 percent.

According to BB regulations on the weight of capital adequacy ratio, cash and government bonds have a zero percent risk weighting, and 20 percent for balances with private financial institutions, bilateral trade and export credits have a 50 percent risk weighting. All other types of assets (loans to private customers) have a 100 percent risk weighting.

RWCAR is the major indicator to gauze the health of the banking sector. An increase in the ratio means gaining higher capacity to weather any systemic shock in the banking sector.

RWCAR remained significantly above the regulatory requirement of 10 percent only for foreign commercial banks (FCBs) and marginally higher for private commercial banks (PCBs).

Still, SCBs lack the regulatory requirement despite a magical improvement in its RWCAR in June. The ratio position for SCBs rose to 6.3 percent in June 2008 from a negative 7.1 percent in December 2007.

The SCBs showed negative RWCAR for the last few years which turned positive in June 2008 after a memorandum of understanding (MoU) was signed between the three SCBs (Sonali, Janata and Agrani banks) and the government.

Following the MoU, the SCBs issued shares in favour of the government on their asset-liability position as on June 30, 2007.

It is considered that the banks have created goodwill equivalent to their accumulated loss as per international financial principles. The goodwill is treated as an intangible asset, which is shown in valuation adjustment accounts of individual banks and would be amortised by profit in a given period.

“We have been given time until 2011 to amortise the liability by making profit,” said Syed Abu Naser Bukhtear Ahmed, managing director and chief executive officer of state-owned Agrani Bank Limited.

On the other hand, the specialised banks (SBs) showed positive RWCAR in the previous years, which turned negative in June 2008 since the cumulative losses of Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank are now shown in the negative retained earnings.

The losses were earlier shown as cumulative loss, which did not influence the ratio. The change in the accounting process of SBs has been introduced to ensure consistency with accounting procedures of other banks, according to the BB quarterly report.

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