Despite much debate and criticism surrounding Bangladesh’s banking sector, there has been notable progress in one area—the formal implementation of Basel III.
Regardless of how thoroughly it has been applied in practice or what its tangible outcomes are, it can at least be stated with confidence that, on paper, Bangladesh Bank has managed to implement Basel III in the banking sector.
According to Basel III guidelines, banks are required to maintain a capital-to-risk-weighted-assets ratio (CRAR) between 10 percent and 12.5 percent, and failure to meet this standard is often grounds for censure. However, the reality is that compliance with Basel III requirements is quite difficult—nearly impossible—for banks in developing countries like Bangladesh.
This is because the capital adequacy framework prescribed under Basel III is largely designed for the banking environment of developed nations. In these countries, banking activities are no longer confined to simple deposit collection and lending. The scope of operations has expanded significantly.
Banks now engage in asset management, mergers and acquisitions, bond issuance, portfolio management, and many other financial services. Our banking sector, however, still operates in a traditional model, largely restricted to collecting deposits and issuing loans.
A significant disparity exists in how credit risk is managed and non-performing loans (NPLs) are resolved. The risk management systems employed in developed economies and their strategies for handling NPLs are hardly followed in Bangladesh.
Consequently, applying policies designed for developed nations to our banking sector results in two problems: (1) compliance becomes burdensome, and (2) the core issues of our banking system remain unresolved.
Many may find it amusing when ordinary individuals discuss high-level international standards like Basel III. However, having worked in risk management divisions of banks in both developed and developing countries, I have witnessed the contrasts firsthand. For those who remain sceptical, let me offer a few concrete examples:
Suppose a developed-country bank issues loans worth Tk 1,000 crore, with 70 percent (Tk 700 crore) of it backed by standby letters of credit (SBLCs) issued by other banks, financial institutions, or insurance companies as additional collateral.
In developed economies, including Latin American countries, it is common to secure loans using SBLCs. In this case, the 70 percent portion would be considered low-risk, while the remaining 30 percent (Tk 300 crore) would be treated as high-risk. Therefore, the capital requirement would only be calculated based on the Tk 300 crore in high-risk exposure.
In contrast, a Bangladeshi bank issuing the same amount of loan—even if some real estate is used as collateral—would not have the benefit of securing most of it through SBLCs. Thus, the entire Tk 1,000 crore would be treated as high-risk assets, and capital adequacy would be calculated accordingly.
Similarly, there are vast differences in how credit risk is managed. Particularly in the treatment of NPLs, the gap is glaring. In developed countries, loans are not categorised as substandard, doubtful, or bad debts as is done in Bangladesh.
When a loan begins to show signs of distress, it is immediately shifted from the general portfolio to a special monitoring or early warning account, and aggressive efforts are made to recover the funds.
During this period, interest accrued is never recognised as profit. If the loan remains unresolved beyond a certain point, it is entirely written off, reducing profit but eliminating the need for further provisioning. This keeps the bank’s risk-weighted assets in check and ensures adequate capital.
The key question now is: How can we resolve this capital shortfall?
Despite different banking systems in developed and developing economies, Basel III has been adopted globally, and implementation is underway in Bangladesh as well. One of its core requirements is maintaining a capital-to-risk-weighted-assets ratio between 10 percent and 12.5 percent.
However, in Bangladesh, this ratio has dropped to a dangerously low 3.08 percent. This needs urgent correction. Given the prevailing circumstances in our banking sector, maintaining adequate capital is extremely difficult, almost impossible.
The idea of increasing capital may feel overwhelming to many, but it must be done, however challenging. There is no alternative. While the task is tough—almost Herculean—it is not entirely impossible.
Through some effective and unconventional reforms, the problem can be significantly alleviated. Explaining the exact measures and their implementation would require a much more detailed discussion. I have outlined some of these steps briefly in earlier articles, so I’ll refrain from repetition here.
The bottom line is this: the capital shortfall in the banking sector is a critical issue that cannot be prolonged. It threatens the very existence of affected banks, poses risks to the entire financial system, and could ultimately harm the national economy.
Therefore, it is expected that Bangladesh Bank and the Ministry of Finance will act swiftly and decisively to address this growing crisis.
The author is a certified anti-money laundering specialist and banker in Toronto, Canada. He can be reached at [email protected].
