Dhaka, Bangladesh (BBN)- The central bank has issued a guideline allowing the commercial banks to raise their capital through issuing subordinated debt to meet the Basel-II requirement, officials said Sunday.
Under the new regulations, the banks can raise their capital through issuing such debt instrument, generally known as subordinated bond, instead of issuing right and bonus shares.
Subordinated debt is a ‘hybrid (debt and equity)’ financial instrument which is treated as a component of capital, the central bank officials said.
"We've allowed the banks to issue the debt instrument to meet their capital shortfall in line with the Basel-II requirement," a senior official of the Bangladesh Bank (BB) said, adding that the banks will be able to increase their capital with low cost through issuing such debt instrument.
"The subordinated debt may be traded in the stock exchanges like IBBL Mudaraba Perpetual Bond," the BB official said, adding that the central bank has already given permission to two commercial banks for issuing such debt instrument on case to case basis.
The central bank issued a circular in this connection Sunday asking the chief executives of all scheduled banks to follow the instructions properly for issuing the debt instrument.
The subordinated debt will replace perpetual subordinated debt as a component of regulatory capital, which will be treated as a supplementary capital, generally known as tier-2 or additional supplementary capital, generally known as tier-3, according to the circular.
The subordinated debt eligible to be considered as tier-2 capital must have a maturity period of more than five years and tier-3 capital at least two years.
The subordinated debt may be convertible to equity subject to approval of the central bank and Securities and Exchange Commission (SEC) where necessary.
"We've asked the banks to follow the guidelines to ensure transparency and uniformity in raising subordinated debt as well as for inclusion in regulatory capital," another BB official said.
He also said prior approval of the central bank is needed to issue and repay subordinated debt.
"The scheduled banks should have capital plan approved by their board of directors. To attain the capital plan, the banks may issue subordinated debt to qualify as regulatory capital," the BB said in its guidelines.
"Normally both risk and return of the debt instrument are higher than other ones," a senior official of a foreign commercial bank said, adding that the banks may rise their capital through issuing such bonds.
The total amount of subordinated debt shall be disclosed in the balance sheet under the head 'subordinated debt' in the nature of long-term borrowing, according to the guidelines.
A bank would be eligible to issue subordinated debt which has composite CAMELS rating at least two and the BB rating grade at least two as mentioned in the guidelines on risk-based capital adequacy for banks (RBCA).
The Basel-II accord came into effect in Bangladesh on January 1 this year alongside the Basel-I to consolidate capital base of the banks.
The banks are now allowed to follow both Basel-II and Basel-I frameworks for 2009 to calculate their capital adequacy, the BB officials said, adding that the banks will have to implement the Basel-II framework from January 2010.
"This year is a trial period for the banks for improving their efficiencies to implement the Basel-II accord from the next year (2010)," the BB official noted.
The new Basel accord has been prepared on the basis of three pillars: minimum capital requirement, supervisory review process and market discipline.
Three types of risks -- credit risk, market risk and operational risk -- have to be considered under the minimum capital requirement.
The central bank has already increased the amount of the required minimum capital for commercial banks to 10 per cent of their risk-weighted assets from 9.0 per cent to consolidate its capital base aiming to implement the Basel-II framework.
Bangladesh is now following Basel-I for the banks' capital adequacy requirement. Risk-based capital ratio was 8.0 per cent when it was first adopted in 1996. Later in 2002, the ratio was increased to 9.0 per cent.
BBN/SS/SI/AD-19October09-1:03 am (BST)