BB’s early warning tools to check banks’ health

Staff Correspondent: The central bank has introduced a mechanism to promote financial stability and maintain public confidence in the financial system, offering both challenges and opportunities.
It introduced a Prompt Corrective Action (PCA) Framework on Tuesday by dividing the banks into four categories based on their respective financial health to identify problems early and before the problems become acute, says a circular issued by Bangladesh Bank.
The new framework will be effective from March 31, 2025 based on the annual audited financial statements for the period ending on December 31, 2024.
Syed Mahbubur Rahman, Managing Director and CEO of the Mutual Trust Bank (MTB), termed it a good move as it would help improve governance in the banking industry, but said there are also challenges as the partner banks abroad might feel it discouraging and would wonder which banks would go to the worse category.
He, however, said there are opportunities too as the banks would be careful about improving the parameters. The banks failing to comply with the defined action framework may opt for merging with the stronger ones.
The four parameters are: Capital to Risk Assets Ratio or CRAR including 2.5 per cent CCB (Capital Conservation Buffer) (12.5 per cent), Tier 1 capital ratio (6 per cent), CET1 capital ratio (4.5 per cent) and Net NPL (net of interest suspense and actual provisions).
For example, under the CRAR between 10 and 12.5 per cent, banks will be treated as Category 1 while category 2 will have the CRAR between 8.0 per cent and less than 10 per cent, category 3 from 5.0 per cent to less than 8.0 per cent, and category 4 will be less than 5.0 per cent.
The BB circular says: “Early action is critical to prevent adverse impact or systemic adverse impact of problem bank/banks in the banking system, and economic disruption. In addition, closing a bank company is a costly and painful process”.
Under the PCA Framework, the banks concerned shall have to carry out a schedule of corrective actions directed by the central bank based on selected parameter indicators.