25 banks face credit risk

Star (August 28, 2011)

Twenty-five of 48 banks operating in Bangladesh may slip into trouble in maintaining adequate capital if top three borrowers were defaulted, according to a recent stress test carried out by the central bank.
The test result has worried the regulator, Bangladesh Bank, as the capital adequacy ratio (CAR) of these 25 banks would fall by at least 2 percentage points from required 9 percent of their capital if these three borrowers get defaulted.
And if top 10 borrowers were defaulted, the CAR would come down by almost half to 4.83 percent of the entire banking industry.
In this backdrop, the BB recommends that the banks diversify their 'too much' concentration of loan portfolio to many small borrowers. But bankers found it difficult, as Bangladesh is an oligopolistic economy (dominated by a small number of participants).
“Banks always try to diversify their loan portfolio. But all the industries except garment and textile are concentrated among few businessmen…it's an oligopoly,” said a senior official working in a foreign commercial bank.
The stress test found the foreign banks' concentration of their loans to top 10 large borrowers more than the local banks. If seven top borrowers become defaulted, the foreign banks' CAR would go down to almost half to 8.96 percent from present 16.38 percent.
The idea of stress test is new in Bangladesh. The BB started carrying out stress tests of banks late last year to determine whether they are able to withstand various shocks. The recent global financial crisis has brought the issue of stress test of financial institutions, particularly banks, in the limelight.
The BB carried out the stress test on the data given by the banks as of end-March 2011.
The banks engage in credit risk and when such risk is concentrated in a single borrower or a group of related borrowers, the risk of default loans by such large borrowers weakens the capability of the banks.
However, bankers denied the BB allegation that they are not trying to diversify their loan portfolio.
“Many credit facilities to large borrowers are syndicated or otherwise shared by two or more banks, to reduce risks for a single lender,” said a chief executive officer of a private commercial bank.
He referred the trend of syndication, which is on the rise due to increasing participation by the private banks.
The banker said they are following the regulations of the BB in terms of single lending cap, which is 15 percent for funded and 35 percent for non-funded credit facilities. Term loan is a funded credit to be paid in instalments for a fixed period and non-funded is a loan given against letter of credit or letter of guarantor.