Chapter 3

The Banking Sector

3.1 Interest Rate Spread
The interest rate spread (IRS) is widely used as a parameter of bank profitability, intermediation cost, and the degree of efficiency of the banking sector. The IRS shows the additional cost of borrowing that bank takes on to perform intermediation activities between borrowers and fund lenders. The market structure plays an important role in determining IRS. From a bank's perspective, IRS is a premium for the risk that the bank undertakes. Besides, it compensates for loan default, but also for the risk related to cost of funding. Banks usually borrow short term funds from depositors and invest in long term loans. Therefore, IRS for banks covers both spot and future cost of funds. It may change depending on prediction of future short term interest rate. The country’s banking structure is segmented with SCBs and PCBs holding 33.1 percent and 51.4 percent of total assets respectively. The financial system was also repressed in the 1970s and early 1980s in the presence of interest rate and credit ceilings. As part of economic reform programs, credit and other restrictions were phased out from the late 1980s. Within the structure, high IRS resulted from a number of factors including state control of lending, absence of risk management practices, accumulation of bad loans due to political interference on commercial lending decisions, and limited technical skills particularly in the arena of risk management.
Figure 3.1.1: Lending and Deposit Rates and IRS

Source: Statistics Department, Bangladesh Bank

Figure 3.1.1 shows the weighted average deposit (WADR) and lending (WALR) rates and the spread (IRS) of all banks from end June 2001 to end September 2008. The IRS, as measured by the difference between weighted average lending and deposit rates of commercial banks, shows a generally declining trend since June 2001 except for few deviations. The spread between lending and deposits rate declined by 1.6 percentage points while deposit rates increased by 0.1
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percentage points and lending rates decreased by 1.4 percentage points respectively between June 2001 to September 2008 resulting from persistent efforts of BB to encourage the banks to reduce IRS to reasonable level to facilitate investment and growth. Figure 3.1.2 shows the IRS of different groups of banks. Since September 2005, the FCBs maintained the highest spread almost all the time while the spread of SCBs was higher than PCBs until March 2008. The IRS of SBs is the lowest among the groups.
Figure 3.1.2: IRS of Different Bank Groups

Source: Statistics Department, Bangladesh Bank

The spread between 91-day T-bill rate and 10-year Bangladesh Government Treasury Bond (BGTB) is shown in Figure 3.1.3 and the spread between the call money rate (the rate at which the banks borrow from each other) and 10-year BGTB is shown in Figure 3.1.4. It is evident that from June 2004 the spread between 91-day T-bill rate and 10-year BGTB reduced and reached its lowest point in September 2005. The spread started to decline again since March 2007 and became flatter than previous trend implying that the spread has been declining at a declining rate. Similar changes are noticed for the spread between the call money rate and 10-year BGTB except for a rising tendency in June 2008 (Figure 3.1.4).
Figure 3.1.3: IRS between 91-day T. bill and 10-year BGTB
6.00 5.00 4.00 3.00 2.00

Figure 3.1.4: IRS between Call Money Rate and 10-Year BGTB

8 6 4 2 0

June,05

June,06

June,07

Sept,06

Sept,07

Mar, 08

Jun.,08

Sept.'08

Dec,05

Dec,06

Dec,07

Dec.'08

Mar,05

Mar,06

Mar,07

-2 -4 -6

1.00 0.00

Source: Bangladesh Bank Quarterly, various issues, Bangladesh Bank

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The IRS in the banking sector of major South Asian countries shows that Sri Lanka has the highest spread followed by Pakistan, Bangladesh, and India (Table 3.1.1).
Table 3.1.1: Lending and Deposits Rates and IRS in South Asian Countries
(percent) Weighted average Lending rate Deposit rate 12.34 7.17 12.00-12.50 8.00-9.00 13.34 5.85 19.31 11.74 Spread 5.17 4.00-3.50 7.49 7.57

Bangladesh India* Pakistan Sri Lanka*
Note: * Data refer to January 2009.

Source: websites of respective central banks.

3.2 Earnings and Profitability
Interest Income and Assets

A comparison of total interest income and total assets by bank groups shows that PCBs have highest interest income-asset ratio followed by FCBs. However, total interest income and total assets of SBs and SCBs fluctuated between periods (Figure 3.2.1).
Figure-3.2.1 :Total Interest Income/Total Assets (percent) 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 7.00 6.00 5.00 SCBs SBs PCBs FCBs 4.00 3.00 2.00 1.00 0.00 SCBs SBs PCBs FCBs Figure-3.2.2:Total Interest Expenditure/Total Assets (percent)

Source: Department of Off-site Supervision, Bangladesh Bank

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Interest Expenditure and Assets

A similar picture is seen for interest expenses of the banks. In December 2008, interest expenditure-asset ratio of PCBs was highest followed by FCBs, SCBs and SBs (Figure 3.2.2). At the end of June 2008, the ratio was highest for SBs. The major expenditure category of banks is expenditure on deposits.
Non interest Income and Assets

The bank group wise scenario of non-interest income as a share of total assets is given in Table 3.2.1. In December 2008, the ratio was highest for FCBs compared with other groups showing greater importance of non-interest income as income source for FCBs. The ratio was also higher for PCBs than for SCBs and SBs.
Table 3.2.1: Ratio of Non-Interest Income and Total Assets

Banks SCBs SBs PCBs FCBs

December, 08
2.90 0.85 3.07 3.62

June, 08
1.44 0.86 1.67 1.82

December, 07 2.4 0.8 3.1 3.8

(percent) June, 07 December, 06 June,06 1.1 2.0 0.9 0.8 0.6 0.7 1.5 2.8 1.1 2.0 4.1 1.8

Source: Department of Off-site Supervision, Bangladesh Bank

Non interest Expenditure and Assets

In the case of non-interest expenditure to total asset ratio, FCBs and PCBs had the highest ratio in December 2008 (Table 3.2.2). In June 2008, the ratio was highest for SBs followed by FCBs, PCBs, and SCBs.
Table 3.2.2: Ratio of Non-Interest Expenditure and Total Assets (percent) December, 08 June, 08 December, 07 June, 07 December, 06 June,06 0.79 1.76 0.71 1.59 1.57 0.78 2.02 1.24 1.94 1.27 1.36 1.92 1.00 2.11 0.82 2.13 2.10 1.02 1.17 2.19 0.99 2.14 2.28 1.19

Banks SCBs SBs PCBs FCBs

Source: Department of Off-site Supervision, Bangladesh Bank

Return on Assets

For earning profit, the banks add value to inputs and deliver outputs. A straightforward measure of bank profitability is the net after-tax profit per unit of assets, or return on assets (ROA). This measure shows how well a bank is being managed by conveying how much profit the bank earns per unit of assets. Table 3.2.3 shows that ROA for FCBs is much higher than those of PCBs, SCBs, and SBs. The ROA for PCBs was, however, better than those of SCBs and SBs.
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Table 3.2.3: Return on Assets of Banks (percent)
Banks SCBs SBs PCBs FCBs December, 08
0.70% -0.17% 1.37% 2.94%

June, 08
0.59% -0.61% 1.61% 3.11%

December, 07 0.0% -0.3% 1.3% 3.1%

June, 07 December, 06 0.0% 0.0% 0.7% 0.9% 1.2% 1.0% 2.5% 2.8%

June,06 0.0% 0.5% 1.0% 2.6%

Source: Department of Off-site Supervision, Bangladesh Bank

Return on Equity (ROE)

It is important for the shareholders to know the return on their invested equity in a bank. A useful summery of this information is provided by net after tax profit per unit of bank equity capital known as return on equity (ROE). During December 2008, ROE for SCBs was highest followed by FCBs and PCBs, while it was negative for SBs (Table 3.2.4). 9
Table 3.2.4: Return on Equity of Banks
(percent)

Banks SCBs SBs PCBs FCBs

December, 08
22.52% -2.01% 16.37% 17.75%

June, 08
22.19% -14.59% 21.01% 19.85%

December, 07 0.0% -3.4% 16.6% 20.4%

June, 07 0.0% -2.1% 16.5% 13.2%

December, 06 0.0% -2.1% 10.2% 14.4%

June,06 0.0% -12.3% 10.8% 13.2%

Source: Department of Off-site Supervision, Bangladesh Bank

The recent trend shows that ROA of the banking sector in Bangladesh is higher than that of India (Table 3.2.5). The trend is similar for ROE (Table 3.2.6).10
Table 3.2.5: Return on Assets in Selected Asian Countries (Percent) Year 2002 2003 2004 2005 2006 2007 2008 Bangladesh 0.5 0.5 0.7 0.8 0.8 0.9 1.19 India 0.8 1.0 1.1 0.9 0.9 0.9 1.0 Pakistan 0.9 1.8 1.9 2.8 3.1 3.0 N.A

Note: Figures for India and Pakistan refer to March, 2008 and September, 2007 respectively. Source: Global Financial Stability Report, October, 2008

Note that SCBs reported zero figures for both ROA and ROE for 2007 set administratively despite huge provision shortfall. However, the figures became positive for both ROA and ROE following signing of MoU and issuing of shares in favor of the government.
10

9

The figures for Pakistan refer profit before tax.

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Table 3.2.6: Return on Equity in Selected Asian Countries (Percen Year Bangladesh India Pakistan 2002 11.6 15.3 21.1 2003 9.8 18.8 35.4 2004 13.0 20.8 30.5 2005 12.4 13.3 38.2 2006 14.1 12.7 38.2 2007 13.8 N.A 30.1 2008 15.98 N.A NA
\

Note: Latest figures for India and Pakistan refer to March and September respectively. N.A refers to not available. Source: Global Financial Stability Report, October, 2008

3.3 Non-Performing Loans
The banking sector in Bangladesh passed through significant changes in terms of structure and policies especially since the 1990s. After independence, Bangladesh accumulated huge amount of non-performing loans (NPLs) due to various reasons e.g., politically motivated credit disbursement and build up of bad loans in state owned enterprises (SOEs) due to corruption, inefficient management, and low technical skills. Besides, the persistence of relatively high interest rates contributed to increase in NPLs in the country. Figure 3.3.1 shows that the large entry of new banks during the late 1990s did not worsen the NPL situation while increasing bank-asset ratio contributed to lower NPL. The two ratios follow somewhat opposite trends suggesting that it is important for the banks to increase their assets to reduce the NPL problem.
Figure 3.3.1: Classified Loan-Total Loan and Asset-Bank Ratios

Source: Banking Regulation and Policy Department, Bangladesh Bank

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Among the classified loans, bad/loss loans constitute about 81.1 percent. The total classified loan ratio declined markedly from 41.0 percent in 1999 to 10.8 percent in December 2008 (Table 3.3.1). In December 2008, the sub-standard category of loans as a percent of total classified loans declined to 9.4 percent, while doubtful loans increased from 7.5 percent in December 2007 to 9.4 percent in December 2008. Table 3.3.1: Status of Classified Loans Year TCL as % of Sub-standard Doubtful loans TL loans as % as % of TCL of TCL 1999 41.11 5.26 8.27 2000 34.92 4.37 6.62 2001 31.49 5.60 5.87 2002 28.10 8.65 5.27 2003 22.13 10.24 8.75 2004 17.63 7.20 6.60 2005 13.55 8.66 6.96 2006 13.15 13.13 7.15 2007 13.23 9.75 7.51 2008 10.79 9.43 9.42 Note: TL=Total loan, TCL=Total classified loan.
Source: Banking Regulation and Policy Department, Bangladesh Bank

Bad/loss loans as % of TCL 86.47 89.01 88.53 86.06 80.97 86.19 84.37 79.72 82.74 81.14

The gross classified loan in total loan outstanding stood at 10.8 percent in December 2008, which was 12.3 percent at the end of September 2008. The classified loans outstanding of SCBs and SBs were 25.4 percent and 25.5 percent respectively in December 2008 compared with 29.3 percent and 26.2 in September 2008. The classified loan outstanding of PCBs declined to 4.9 percent in December 2008 from 5.4 percent over the previous quarter. For the FCBs, classified loan was 1.9 percent in December 2008 rising from 1.6 percent over the previous quarter. Both SCBs and SBs are burdened with large amount of NPL loans (Table 3.3.3). Among the SBs, BSRS has the highest NPL (44.1 percent) followed by RAKUB (34.5 percent), BSB (32.9 percent) and BKB (28.2 percent), while among the SCBs, Sonali Bank Limited has the highest percentage of NPL (33.3 percent) followed by Rupali Bank Limited (32.5 percent), Agrani Bank Limited (24.6 percent) and Janata Bank Limited (10.9 percent). All the PCBs have nonperforming loans below 10 percent except for ICB Islamic Bank Limited (80.7 percent), BCBL (28.1 percent). All FCBs have non-performing loans below 4 percent.

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Figure 3.3.2: Classified Loan Outstanding by Bank Group

Source: Banking Regulation and Policy Department, Bangladesh Bank

Table 3.3.2 shows the trend of classified loans out of new loans for all groups of banks. The flow of new classified loans declined because of adoption of measures both by the banks and BB (including appointment of private recovery agents, paying commission to lawyers, incentives to bank staff and real estate brokers, establishment of Money Loan Court in 2003, and strengthening of BB’s supervisory role) to improve the NPL situation. Table 3.3.2 : Year-wise Loan Disbursement and Their Classified Status in September 2008 Loans of Loans of Loans of Loans of Loans of Loans of Loans of Bank pre-2003 2003 2004 2005 2006 2007 2008 Group % of % of % of % of % of % of % of classified classified classified classified classified classified classified loans loans loans loans loans loans loans SCBs 46.9 37.23 33.76 35.62 20.57 9.14 1.25 PCBs 20.54 12.31 12.19 9.46 6.23 3.39 0.95 FCBs 1.21 6.58 3.55 35.62 20.57 9.14 1.25 SBs 22.51 55.93 43.25 12.29 9.4 0.02 1.86 Source: Department of Off-site Supervision, Bangladesh Bank Table 3.3.3 shows that both SCBs and SBs have large amount of NPLs compared with PCBs and FCBs. However, signs of improvement can be seen for most categories of loans in December 2008 over December 2007 for all types of banks.

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Table 3.3.3: Share of Classified Loan in Total Loan by Bank and Loan Type (percent) Loan Bank type December 08 December 07 category % increase/decrease
Continuous loan SCBs PCBs FBs SBs TOTAL Demand loan SCBs PCBs FBs SBs TOTAL Term loan up to 5 years SCBs PCBs FBs SBs TOTAL Term loan over 5 years SCBs PCBs FBs SBs TOTAL Short term agri loan and micro credit SCBs PCBs FBs SBs TOTAL 21.66 4.85 2.59 14.47 8.98 18.11 3.13 2.13 10.98 7.32 31.91 6.26 1.41 31.55 9.37 31.28 2.94 0.18 32.97 14.63 46.64 0.69 0.00 28.48 33.62 25.07 5.90 1.46 17.41 11.00 24.03 3.16 0.91 10.13 9.19 41.28 5.84 2.02 33.23 10.62 32.99 4.27 0.17 40.25 18.55 51.25 0.79 0.00 30.08 36.76 -13.60 -17.80 77.40 -16.89 -18.36 -24.64 -0.95 134.07 8.39 -20.35 -22.70 7.19 -30.20 -5.06 -11.77 -5.18 -31.15 5.88 -18.09 -21.13 -9.00 -12.66 0.00 -5.32 -8.54

Source: Banking Regulation and Policy Department, Bangladesh Bank In Bangladesh, a major concern for the monetary authority is the adverse effect on bank balance sheets arising out of high NPLs of the banks. Along with other measures, Bangladesh needs to strengthen asset management companies to quicken recovery and improve efficiency in the banking sector. The BB’s recent directives to the banks to take precaution while extending loans to high risk sectors and prioritize loans to productive sectors in conjunction with the government’s enactment of laws prohibiting loan defaulters to take part in elections at local and national levels and similar other measures would help to further improve the NPL situation in the country.

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3.4 Default Risks: Loan Loss Provisions
As a part of the process of upgrading policies on loan classification and provisioning to the international level, measures have been taken to strengthen credit discipline and simplify the process of loan classification. In this context, Banking Regulation and Policy Department (BRPD) of the Bangladesh Bank has revised policies on loan classification and provisioning.11
Basis for Loan Classification

According to the revised guidelines, all loans and advances would be grouped into four categories for the purpose of classification: (i) continuous loan; (ii) demand loan; (iii) fixed term loan; and (iv) short term agricultural and micro credit. The basis for loan classification would be based on both objectives and qualitative criteria.
Objective Criteria

Any continuous loan if not repaid/renewed within the fixed expiry date for repayment will be treated as past due/overdue from the day following the expiry date. This loan will be classified as sub-standard if it remains past due/overdue for six months or beyond but less than nine months, as doubtful in case of nine months or beyond but less than 12 months, and as bad-debt in case of 12 months or beyond. Any demand loan if not repaid/rescheduled within the fixed expiry date for repayment will be treated as past due/overdue from the day following the expiry date. This loan will be classified as sub-standard if it remains past due/overdue for six months or beyond but not over nine months from the date of claim by the bank or from the date of creation of the forced loan. Likewise, the loan will be classified as doubtful and bad/loss if it remains past due/overdue for nine months or beyond but not over 12 months, and for 12 months and beyond respectively. In case any installment or part of installment of a fixed term loan is not repaid within the due date, the amount of unpaid installment will be termed as defaulted installment. The short term agricultural and micro credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the irregular status continues, the credit will be classified as substandard after a period of 12 months, as doubtful after a period of 36 months and as bad debt after a period of 60 months from the stipulated due date as per the loan agreement. All unclassified loans other than special mention account (SMA) will be treated as standard. A continuous credit, demand loan or a term loan which will remain overdue for a period of 90 days or more, will be put into the SMA. This will help banks to look at accounts with potential problems in a focused manner and it will capture early warning signals for accounts showing first sign of weakness. Loans in the SMA will have to be reported to the Credit Information Bureau (CIB) of the Bangladesh Bank. Loans in the SMA, however, will not be treated as defaulted loan for the purpose of the Bank Company Act 1991.

11

See, website http://www.bangladeshbank.org.bd/

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Qualitative Judgment

If any uncertainty or doubt arises in respect of recovery of any continuous loan, demand loan or fixed term loan, the loan will be classified on the basis of qualitative judgment whether it becomes classifiable or not on the basis of objective criteria. If changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities declines or if the recovery of the loan becomes uncertain due to any other unfavorable situation, the loan will be classified on the basis of qualitative judgment. If any loan is illogically or repeatedly re-scheduled or the norms of re-scheduling are violated or instances of frequently exceeding the loan-limit are noticed or legal action is lodged for recovery of the loan or the loan is extended without the approval of the proper authority, it will be classified on the basis of qualitative judgment. Despite the probability of any loan being affected by the above factors or any other reason, if possibility exists for change of the existing conditions through proper steps, the loan will be classified as sub-standard on the basis of qualitative judgment. But, even if after resorting to proper steps, there remains uncertainty over total recovery of the loan, it will be classified as doubtful and even after exerting all out efforts, there is no chance of recovery, it will be classified as bad debt on the basis of qualitative judgment. The concerned bank will classify the loans on the basis of qualitative judgment and can declassify if qualitative improvement occurs. But if any loan is classified by the Inspection Team of the Bangladesh Bank, this specific loan can be declassified with the approval of the Board of Directors of the bank. However, before placing such cases to the Board, the CEO and concerned branch manager shall certify that the conditions for declassification have been fulfilled.
Maintenance of Provision

In view of encouraging SME financing, the requirement of general provision has been reduced from 2 percent to 1 percent on unclassified amount for small enterprise financing by banks and NBFIs. However, the requirement of maintaining general provision for other sectors and provision against all classified loans including short-term agricultural and micro credit remained unchanged The information on loan outstanding along with required and actual provisions is given in Table 3.6.1 while information on surplus/shortfall of actual provision by broad category of banks is given in Table 3.6.2. In line with the long-existing trend, the data show that actual provision fell short of required provision for all but FCB during December 2007-March 2008 indicating lack of efficiency in fund management especially in disbursing and recovering loans, sustained pressure of non-performing loans (NPLs) in all commercial banks (except FCBs) including state-owned specialized banks (SBs). After March 2008, actual provisioning scenario for SCBs has reversed. The actual provision remained higher than required provision for SCBs during June-December 2008 mainly because of intensified recovery drive and rescheduling of overdue loans under the new management of the state-owned banks. This was supported by the Election Commission's requirement of non-defaulter status of potential candidates in national and local elections. For FCBs, the amount of actual provision remained higher than required provision throughout the
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whole period. It is noteworthy to mention that while the shortfall in the provisions for all PCBs is improving, the shortfall for SBs remained high during the whole period (June 2007-December 2008).
Table 3.4.1: Loan Loss Provision of Banks
(In billion Taka) Jun 07 Total outstanding All banks SCBs PCBs FCBs SBs Required provision All banks SCBs PCBs FCBs SBs Actual provision All banks SCBs PCBs FCBs SBs 96.6 57.5 26.3 3.5 9.3 98.3 57.4 28.4 3.7 8.9 97.1 56.5 28.2 3.8 8.6 103.5 56.2 34.2 4.4 8.6 131.2 82.2 35.2 4.7 9.1 133.3 80.7 40.0 4.6 8.0 126.2 75.6 37.0 5.0 8.6 120.4 68.3 33.4 2.6 16.1 124.9 69.7 36.0 2.9 16.3 127.2 71.4 35.0 3.5 17.3 134.1 74.0 38.8 3.8 17.4 141.8 80.3 40.0 4.1 17.3 145.7 79.4 44.6 4.3 17.4 136.1 73.1 41.3 4.6 17.0 1,597.1 499.4 854.1 118.5 125.1 1,655.9 502.5 903.5 123.7 126.2 1,710.4 461.8 982.6 136.0 130.1 1,812.3 473.8 1,060.4 147.2 130.9 1,920.4 461.4 1,164.2 152.6 142.1 2,032.2 488.9 1,243.4 156.2 143.7 2,083.6 501.8 1,284.2 151.0 146.7 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08

Source: Bangladesh Regulation and Policy Department, Bangladesh Bank.

Note: Surplus is indicated by '+' and deficit by ' -'.

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Table 3.4.2: Surplus/Shortfall in Loan Loss Provision of Banks
Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 (In billion Taka) Sep 08 Dec 08

All banks SCBs PCBs FCBs SBs All banks SCBs PCBs FCBs

-23.8 -10.7 -7.1 0.9 -6.8 -19.8 -15.7 -21.3 34.2

-26.6 -12.3 -7.7 0.8 -7.4 -21.3 -17.7 -21.2 27.3

-30.1 -14.9 -6.8 0.3 -8.7 -23.7 -20.9 -19.5 9.4 -50.5

-30.6 -17.8 -4.6 0.6 -8.7 -22.8 -24.1 -12.0 15.1 -50.2

-10.6 1.9 -4.8 0.6 -8.3 -7.5 2.3 -12.1 14.1 -47.7

-12.4 1.3 -4.6 0.3 -9.4 -8.5 1.7 -10.3 5.9 -54.3

-9.9 2.4 -4.3 0.4 -8.4 -7.3 3.3 -10.4 7.7 -49.3

Provision surplus / shortfall (% of required)

SBs -42.3 -45.6 Note: Surplus is indicated by '+' and deficit by ' -'. Source: BRPD, Bangladesh Bank.

The data indicate that there was more than 21 percent shortfall of required provision for PCBs in June 2007 which came down to 10.4 percent in December 2008. The shortfall of required provisions for SBs, however, continued its deteriorating trend and stood at more than 49 percent in December 2008 warranting massive restructuring and reforms of SBs to bring efficiency in their current lackluster and inefficient financial management (Table 3.6.2 and Figure 3.6.1).

3.5 Capital Adequacy
The overall capital situation of the banks improved in December 2008. The capital of all banks stood at Tk. 205.8 billion in December 2008 as compared with Tk. 123.4 billion in December 2007 and Tk. 76.1 billion during the end of 2006. The year-end capital position in 2008 witnessed an increase of 66.8 percent as compared with 62.0 percent in the preceding year. Grouped by ownership, total capital (unadjusted) of SCBs, PCBs, SBs and FCBs stood at Tk. 32.0 billion, Tk. 141.4 billion, Tk. (-) 9.2 billion, and Tk. 41.5 billion respectively in December 2008 as compared with Tk. (-) 29.1 billion for SCBs, Tk.16.2 billion for SBs, Tk.101.7 billion for PCBs, and Tk.34.5 billion for FCBs in December 2007 (Figure 3.5.1). Out of total capital for all banks, 73.4 percent was maintained as core capital in December 2008 which was 71.8 percent in December 2007. The amount of core capital in December 2008 was 47.7 percent higher than the requirement (5.0 percent of the risk weighted asset). Disaggregated figures show that actual core capital was 79.5 percent and 318.4 percent higher than the required core capitals for PCBs and FCBs respectively. This shows high concentration in Tier I capital for PCBs and FCBs. In the case of SCBs and SBs, the actual level of core capital was 26.2 percent and 254.9 percent lower than their required levels.

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Figure 3.5.1: Capital Position by Bank Types

Source: Department of Off-site Supervision, Bangladesh Bank

Figure 3.5.2: Tier I and 5 percent Risk Weighted Asset of PCBs

Source: Department of Off-site Supervision, Bangladesh Bank

Regulatory Capital Requirement

While total amount of capital stood at Tk. 32.0 billion in December 2008 for SCBs, after adjusting the provision shortfall and cumulative losses, the adjusted capital was Tk. 31.9 billion and capital shortage reached Tk. 14.2 billion according to the regulatory requirement. The SBs had a total capital amount of Tk. (-) 9.2 billion after partial adjustment of provision shortfall and cumulative losses and adjusted capital stood at Tk. (-) 20.1 billion and capital shortage reached Tk. 31.8 billion in December 2008. The PCBs as a group witnessed a surplus position in adjusted capital (Tk. 133.3 billion) after adjusting the provision shortfall, cumulative loss, and regulatory requirement. As a group, the PCBs registered a rapid growth in capital position in 2008. During end 2008, capital share of PCBs in total capital of all banks stood at 68.7 percent compared with 82.4 percent in end 2007. Nonetheless, most of the capital increase is attributed to increase in Tier I capital. Figure 3.5.2 shows the Tier I capital position of PCBs compared with 5 percent risk weighted assets. Under the present risk-sensitive regulatory regime, the position of Tier I capital suggests that banks in Bangladesh have the ability to absorb losses adequately, if such circumstances arise.
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