Capital injection not the solution for scam-tainted banks

THE loan scams of two state owned banks have put the country’s banking sector into a tangle of mistrust even after two years for which nine banks including the scam-tainted Sonali and BASIC are suffering from a capital shortfall. A report of this daily said nine banks have failed to come up with the required funds against their risk-weighted assets (RWA) thus pushing the country’s banking system into a quagmire of bankruptcy. When the country is being run by an undemocratic regime, the huge capital shortfall, originating from the swindling of public money, is a threat to the public banks solvency. If the incumbent government fails to address the present crisis in the banking sector, we fear it will paralyze the country’s economy and deteriorate socio-political stability.
The daily said the capital shortfall of these banks, as on June 30 this year, stood at Tk 1200 crore pushing the banking sector to a combined capital shortfall of about Tk 848 crore. According to Bangladesh Bank data the nine banks are Sonali Bank, Rupali Bank, BASIC Bank, Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank, Bangladesh Commerce Bank, Premier Bank, and ICB Islami Bank. In December last, the banks had a combined surplus capital of Tk 3,355 crore. A central bank official said the problematic banks are badly managed and the shrinking capital of the banks sparked concerns over their stability and long-term profitability. These banks need to fill the capital gap immediately; otherwise, it will have a potential impact on their lending and future risk aversion.
According to BB statistics, the capital shortfall of BASIC Bank stood at Tk 1,675 crore as on June, whereas, it was only Tk 647 crore in December last. The BASIC Bank is facing a huge capital deficit due to irregularities in the distribution of loans over the last several years. The state-owned Sonali Bank is also suffering from acute liquidity crisis and the capital shortfall stood at Tk 1,511 crore. As on June 30, the combined RWA of the banking sector stood at Tk 5,96,650 crore and the banks were required to set aside Tk 64,522 crore capital against the RWA. The banks had been able to maintain Tk 63,694 crore capital against the RWA as on June 30, showing an overall capital deficit of Tk 848 crore in the sector.
Underlying the impact of the loan scam as the main reason behind the capital shortfall, economists stressed on careful loan sanctioning to avoid high levels of RWA, which may damage their long-term profitability.
Without depending on government or blaming the government, what is right should be done by the authorities directly responsible must discharge their responsibility. It is necessary to recapitalize the public banks to bring them back to normal business as their activities are being hampered badly due to capital shortfall. Though fresh capital injection is not the only solution, the banks’ boards must be decorated with efficient and honest dynamic leadership. Only professionalism and a prudent credit risk management policy can play a major role to improve the financial health of the public banks.