Monday | 7 October 2024 | Reg No- 06
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Monday | 7 October 2024 | Epaper
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PCA framework for banking sectors reforms a right initiative

Published : Sunday, 7 April, 2024 at 12:00 AM  Count : 3002
Md Abdul Mannan
The Prompt Corrective Action (PCA) framework is adapted by Bangladesh Bank (BB) with the objective of enabling regulatory/supervisory intervention at an appropriate time to address the problems of financially weak & mismanaged banks. As per BBs latest directives, under the PCA framework weak bank and its board of directors has to carry out prescribed corrective actions to restore the banks deteriorated financial and operational conditions to a normal state within specified timeframe. The PCA framework will be effective from 31st March, 2025 based on audited financial ended on 31st December, 2024.   

PCA framework is designed to evaluate banks on the basis of selected parameters: Capital to Risk Assets Ratio (CRAR), Tier-1 capital ratio, Common Equity Tier 1 (CET1) capital ratio, and Net Non-Performing Loan (NPL) ratio and Corporate Governance. Based on above parameters BB will categorize the banks as 1, 2, 3 or 4.

Under the Capital to Risks Weighted Assets Ratio (CRAR) including capital conservation buffer between 10 and 12.5 per cent of the banks will be category 1 banks while category 2 will include between 8.0 per cent and less than 10 per cent of the banks, category 3 will include 5.0 per cent to less than 8.0 per cent, and category 4 will include less than 5.0 per cent of the banks.

Tier 1 Capital ratio between 6 and 5.5 per cent of the banks will be category 1 banks while category 2 will include between 4.5 per cent and less than 5.5 per cent of the banks, category 3 will include 3.0 per cent to less than 4.5 per cent, and category 4 will include less than 3.0 per cent of the banks.

Besides, the CET1 Capital ratio between 4.5 and 3.5 per cent of the banks will be category 1 banks while category 2 will include between 2.5 per cent and less than 3.5 per cent of the banks, category 3 will include 1.5 per cent to less than 2.5 per cent, and category 4 will include less than 1.5 per cent of the banks.

Banks with Net NPL (net of interest suspense & actual provision) ratio between 5.0 per cent and 8.0 per cent will be treated as category-1 while category 2 will include banks with Net NPL between above 8.0 per cent and 11 percent, category 3 will include banks with above 11 per cent to 14 per cent, and category 4 will include banks above 14 per cent Net NPL.

BB will impose supervisory/regulatory intervention under PCA framework based on other parameters are Liquidity & Corporate governance- if banks fail to maintain minimum required liquidity ratios- CRR (Cash Reserve, LCR (Liquidity Coverage Ratio) and NSFR (Net Stable Funding Ratio) and also lack of corporate governance, poor risk management practices or market related issues such as significant dealing loss, failure to pay off-balance sheet obligations, repeated non-compliance, fraud/forgeries, and finding of unsound and unsafe activities of the board of directors and so on.

If banks fall under PCA frame work, Directives of Bangladesh Bank (DOBB) will be issued for the improvement of the banks financial and operational conditions within one year. If banks fail to comply with the DOBB, BB may initiate penal measures such as superseding the board, removing the directors or Managing Director/CEO, changes in senior management and finally compulsory merger/amalgamation of week bank with any other bank. Introducing PCA framework a groundbreaking move of central bank to reform banking sector but, are we ready enough to implement PCA within such a shortest stipulated time.    

At present banking sector of Bangladesh faces the challenges, with the relentless battle against default loans. Non-performing loans in the countrys banking sector shot up by BDT 250.00 billion in 2023. According to Bangladesh Bank data, default loans rushed to BDT 1456.33 billion at the end of December 2023 from BDT 1206.56 billion at the end of December 2022 and BDT 1032.73 billion in the same period in 2021. The total loan disbursed was BDT 16,176.88 billion at the end of December 2023, and 9% of them were classified. Out of total non-performing loan, BDT 1267.82 billion, or 87% fall into bad loans, which seems to be not recoverable. At the end of September 2023, the amount of loan rescheduling at banks stood at BDT 2170 billion. The total distressed asset in the countrys banking sector grasped to BDT 3,626 billion which is seems to be 23% of countrys total loan. Loans that were unclassified by court orders is not included in the list. Distressed assets should be comprised classified, rescheduled loans, restructured, written-off loans and loans that were unclassified by court order. Apart from that a notable amount of distressed loan is under carpet of banking sector.

Moreover, complying the conditions of the International Monetary Fund (IMF), BB is going to cut overdue time for term loan, which may increase non-performing loans around BDT 800 billion. This step will increase NPL & provision. Besides, the central bank already reduced the write-off time of bad loans to two years from three years to cleanse banks balance sheets which may reduce profitability, but it will support to manage the toxic assets of the bank.

To arrest this trend of NPL numerous remedies have been proposed, from the establishment of a Banking Commission to the creation of an Asset Management Company. However, these initiatives have failed to stem the tide of default loans. Proactive non-performing loan (NPL) management as well as effective legal framework is required to solve the problem.

Moreover, formation of Asset Management Company (AMC) & updated guidelines for merger/amalgamation is yet to be finalized. Injecting more equity in banking sector is obstacle by present sluggish capital market scenario.    

 
Since banking sector is going to transform into PCA frame work, banks need to enhance their capacity & operational efficiency including strong core risk management system, robust NPL management, true & fair financial reporting & ensure corporate governance.

In this context, implementation of PCA framework needs more time otherwise two or more early or premature merger may create panic & lose confidence in banking sector.  

The writer is an Executive Vice President & Head of Credit of the SBAC Bank PLC



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