POLICY ON CAPITAL ADEQUACY OF BANKS
New arrangements for assessing the capital adequacy of
banks on the basis of Risk –weighted Assets replacing the
capital-to-liabilities approach were introduced vide BRPD
Circular No. 1dated 08.01.1996.
The revised policy on capital adequacy takes account of
different degrees of credit risk and covers both on-balance
sheet and off-balance sheet transactions. Schedule banks
need to compliance with the capital adequacy guidelines
of BPRD regarding
1.Tier-1 and Tier-2
2.Minimum Capital Standard
3.Risk Weighted Assets; 4. Implementation
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1.Tier-1 and Tier-2 Capital of Banks
• Tier-1 Capital:
Tier-1 capital is the core capital that comprises the
highest quality capital elements. It should comprise
the following:
-Paid up Capital
-Non-repayable Share premium account
-Statutory Reserve
-General Reserve
-Retained Earnings
-Minority interest in Subsidiaries
-Non-Cumulative irredeemable Preference Shares
-Dividend Equalization Account
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Tier-2 Capital
Tier-2 capital is the supplementary capital
represents other elements which fall short of
some of the characteristics of the core capital but
contribute to the overall strength of a bank.
Components of tier-2 capital are as under:
• General provision maintained against unclassified
loans
• Assets Revaluation Reserves
• All other Preference Shares
• Perpetual Subordinated debt
• Exchange Equalization A/C
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2.Minimum Capital Standards
Basel-2 Accord
Basel 2 is the new capital accord signed in June
2004 at Bank for International Settlement located
at Basel, Switzerland.
Basel 2 is based on three pillars: capital adequacy,
supervisory review and market discipline. It is
basically concerned with financial health of the
banks worldwide. The focus in Basel 2 is the risk
determination and quantification of credit risk,
market risk and operational risk faced by banks.
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2.Minimum Capital Standards (con,t)
With a view to strengthening the capital base of banks
and making them prepare for the implementation of
Basel-II accord, banks are required to maintain
minimum capital to risk weighted assets ratio at 10%
of which core capital will not be less than 5% effective
from December 31, 2007.
However, minimum capital requirements as required
under Article 13 of Banking Companies Act, 1991 for all
banks has been raised to Tk.400 crore of which the
paid up capital shall be minimum Tk.200 crore. Banks
having capital shortfall will have to meet the shortfall
by august 11, 2011.
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3. Risk-weighted Assets
Both balance sheet assets and off- balance sheet
exposures are to be weighted according to their
relative risk. Presently, there are 4 (four) categories of
risk weights ⎯ 0,20,50 and 100percent.
For the purpose of assessing capital adequacy, weights
for particular items are given in the following slides.
-Off -balance sheet transactions to be converted into
balance sheet equivalents for the purpose of assessing
capital adequacy before assigning a risk weight are
shown in section 10(a). Four categories of credit
equivalents of 0,20,50 &100 percent will apply.
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RISK WEIGHTS APPLICABLE FOR BALANCE-SHEET
ITEMS
Items Particulars Risk Weights
1.Cash in hand and a) Bangladesh Bank notes 0%
with banks (except b) Government notes and coins 0%
banks abroad) c) Balances with Bangladesh
Bank 0%
d) Balances with Sonali Bank as
agent of Bangladesh Bank 0%
e) Balances with Deposit Money
Banks including Sonali Bank 0%
f) Balances with Other Financial
Institutions (OFIs) -Public 0%
g) Balances with Other Financial
Institutions (OFIs)- Private 20%
2.Money at call and a) Deposit Money Banks (DMB) 0%
short notice b) Other Financial Institutions
(OFIs) –Public 0%
c) Other Financial Institutions
(OFIs)-Private 20%
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RISK WEIGHTS APPLICABLE FOR BALANCE-SHEET
ITEMS(Con’t)
Items Particulars Risk Weights
3. Foreign currency a) Foreign currency notes in
balances held hand 0%
b) Balances with banks abroad 0%
c) Foreign currency clearing
account balances with
Bangladesh Bank 0%
d) Bilateral trade credits 50%
e) Wage Earners' (WES)
accounts 0%
4. Export and Other a) Export bills 50%
Foreign Bills b) Other foreign bills 50%
5. Foreign Investment a) Organization of Economic Co-
operation and Development
(OECD) countries 20%
b) Other countries 50%
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RISK WEIGHTS APPLICABLE FOR BALANCE-SHEET
ITEMS(Con’t)
Items Particulars Risk Weights
6. Import and Inland a) Government
Bills 1) Ministry of Food 0%
2) President's Office, Prime
Minister's office, Parliament,
Judiciary& Non -Food Ministries 0%
3) Autonomous & Semi
Autonomous Bodies 20%
b) Other Financial Institutions
1) Other Financial Institutions-
Public 20%
2) Other Financial Institutions-
Private 20%
c) Major Non-financial Public
Enterprises 50%
d) Other Non-Financial Public
Enterprises 50%
e) Local Authorities 20%
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g) Deposit Money Banks 20%
4.Implementation
Banks are advised to assess their capital position
on half-yearly basis i.e., on 30 June and
31December each year and report the same
to the Off-site Supervision Department of
Bangladesh
Bank within one month from the end of
respective half-year. Banks are also advised to
contact Banking Regulation and Policy
Department (BRPD) of Bangladesh Bank in
case of any clarification.
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CREDIT CONVERSION FACTORS FOR SELECTED OFF-
BALANCE SHEET ITEMS
Instruments Credit
Conversion
Factors
1. Direct credit substitutes, including financial guarantees, standby
letters of credit serving as guarantees and bills endorsed under bill
endorsement lines (but which are not accepted by, or have the prior
endorsement of another bank). 100%
2. Sale and repurchase agreements, forward assets purchases and
placement of forward deposits. 100%
3. Transaction related contingent items including performance bonds,
bid bonds, warranties and stand by letter of credit related to a
particular transaction, 50%
4. All note issuance facilities and revolving under-writing facilities;
other commitments (e.g. formal-standby facilities) with a residual
maturity exceeding one year. 50%
5. Short-term self-liquidating trade related contingencies (such as
documentary letters of credit and other trade financing transactions). 20%
6. Commitments with a residual maturity not exceeding one year, or
which
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can be cancelled or revoked at any time (e.g. un-drawn
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overdraft and credit card facilities). 0%
Policy on Loan Classification and Provisioning
1.Categories of Loan:
All loans and advances will be grouped into
4(four) categories for the purpose of
classification, namely
(a)Continuous Loan
(b)Demand Loan
(c)Fixed Term Loan and
(d)Short-term Agricultural and Micro Credit.
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a)Continuous Loan
Continuous Loan is the loan Accounts in which
transactions may be made within certain limit and
have an expiry date for full adjustment will be treated
as Continuous Loans. Examples are: CC,OD etc.
Any Continuous Loan if not repaid/renewed within the
fixed expiry date for repayment will be treated as past
due/overdue from the following day of the expiry date.
This loan will be classified as Sub-standard if it remains
past due/overdue for 6 months or beyond but less
than 9 months, as `Doubtful' if for 9 months or beyond
but less than 12 months and as `Bad-Debt' if for
12months or beyond.
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Demand Loan
b)Demand Loan: The loans that become repayable on demand by the
bank will be treated as Demand Loans. If any contingent or any
other liabilities are turned to forced loans (i.e. without any prior
approval as regular loan) those too will be treated as Demand
Loans. Such as: Forced Loan against Imported Merchandise(LIM),
Foreign Bill Purchase (FBP), and Income Based Payment( IBP )etc.
Any Demand Loan if not repaid/rescheduled within the fixed expiry
date for repayment will be treated as past due/overdue from the
following day of the expiry date. This Loan will be classified as Sub-
standard if it remains past due/overdue for 6 months or beyond but
not over 9 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 remains past due/overdue
for 9 months or beyond but not over 12 months and for 12 months
and beyond respectively
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c) Fixed Term Loan:
The loans, which are repayable within a specific time period under a
specific repayment schedule will be treated as Fixed Term Loans.
In case any installment(s) or part of installment(s) of a Fixed Term Loan
is not repaid within the due date, the amount of unpaid
installment(s) will be termed as `defaulted installment'.
In case of Fixed Term Loans, which are repayable within maximum five
years of time: -
If the amount of `defaulted installment' is equal to or more than the
amount of installment(s) due within 6 months, the entire loan will
be classified as ``Sub-standard''. If the amount of 'defaulted
installment' is equal to or more than the amount of installment(s)
due within 12 months, the entire loan will be classified as
''Doubtful. If the amount of 'defaulted installment' is equal to or
more than the amount of installment(s) due within 18 months, the
entire loan will be classified as ''Bad -Loss.''
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Fixed Term Loans(Con’t)
In case of Fixed Term Loans, which are repayable in more
than five years of time: -
(a)If the amount of `defaulted installment' is equal to or
more than the amount of installment(s) due within 12
months, the entire loan will be classified as 'Sub-
standard.‘
(b) If the amount of `defaulted installment ' is equal to or
more than the amount of installment(s) due within 18
months, the entire loan will be classified as 'Doubtful'.
(c)If the amount of 'defaulted installment 'is equal to or
more than the amount ofinstallment(s) due within 24
months, the entire loan will be classified as 'Bad-Debt'
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d)The Short-Term Agricultural and Micro-Credit
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 said 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 loan agreement
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Summary
Particulars Overdue Substandar Doubtful Bad debt
d
Continuous Loan Not Paid in due Overdue for Overdue for Overdue 12+
date 6<9 9<12
Demand Loan NP in due date Do Do Do
Fixed term Loan- Default DO Within12M Due in 18M
Installment
FT load-5Yrs+ Default 12 Months 18Months 24 Months
Short term NP in due date After12M After 36 M 60M
agricultural and considered
Micro Credit Irregular
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Accounting of the interest of classified loans:
• If any loan or advance is classified as ‘Sub-standard’ and ‘Doubtful’, interest
accrued on such loan will be credited to Interest Suspense Account, instead of
crediting the same to Income Account. In case of rescheduled loans the unrealized
interest, if any, will be credited to Interest Suspense Account, instead of crediting
the same to Income Account.
• As soon as any loan or advance is classified as ‘Bad Debt’, charging of interest in
the same account will cease. In case of filing a law-suit for recovery of such loan,
interest for the period till filing of the suit can be charged in the loan account in
order to file the same for the amount of principal plus interest. But interest thus
charged in the loan account has to be preserved in the ‘Interest Suspense ‘
account. If any interest is charged in any ‘Bad-Debt’ account for any other special
reason, the same will be preserved in the ‘Interest Suspense’ account.
• If classified loan or part of it is recovered i.e., real deposit is effected in the loan
account, first the interest charged and not charged is to be recovered from the
said deposit and the principal to be adjusted afterwards.
• Interest accrued on “Special Mention Account (SMA)” will be credited to Interest
Suspense Account, instead of crediting the same to Income Account.
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Maintenance of Provision
Banks will be required to maintain General Provision in the following
way:
• @ 1% against all unclassified loans (other than- (i) loans under
Consumer Financing, (ii) loans against shares etc. and (iii) Special
Mention Account.)
• @ 5% on the unclassified amount for Consumer Financing whereas
it has to be maintained @ 2% on the unclassified amount for (i)
Housing Finance and (ii) Loans for Professionals to set up business
under Consumer Financing Scheme.
• @ 2% against unclassified amount of any kind of funded loan
disbursed to stock dealers enlisted with Stock Exchange, separate
subsidiary company established by a bank company for dealing
business in share brokerage and merchant banking and any other
company or institution or individual for dealing such business.
• @ 5% on the outstanding amount of loans kept in the ‘Special
Mention Account’ after netting off the amount of Interest
Suspense.
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Maintenance of Provision
• Banks will maintain provision at the following rates in respect of
classified Continuous, Demand and Fixed Term Loans:
• Sub-standard 20%
• Doubtful 50%
• Bad/Loss 100%
• Provision in respect of Short-term Agricultural and Micro-Credits is
to be maintained at the following rates:
• All credits except ‘Bad/Loss'(i.e. ‘Doubtful’, ‘Sub-standard’,
irregular and regular credit accounts): 5%
• ‘Bad/Loss’: 100%
• Banks are required to maintain general provision against Off-
balance sheet exposures in the following manner:
• @ 0.5% provision effective from December 31, 2007 and
• @ 1% provision effective from December 31, 2008
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