BB mulls easing rules for subordinated debt

The central bank considers relaxing the rating conditions for banks to introduce subordinated term debt to raise capital in line with a Basel II requirement, said Bangladesh Bank officials.
The relaxed rules will be made available soon, they said.
Subordinated debt comes in the form of debt instruments such as bonds, debentures and loans, rather than in the form of stock.
“Several applications for issuing the debt are pending with us, but most do not fulfil the required rating criteria,” a senior Bangladesh Bank (BB) official told The Daily Star. “We are thinking about relaxing the rules.”
Earlier in October 2009, the BB permitted the banks to raise capital through debt instruments, particularly with subordinated debt, instead of issuing only rights and bonus shares, following demands from the banks.
Prime Bank is the only bank that has issued the debt instrument even though it has been four months since the BB issued the guidelines.
A bank, which has composite CAMELS rating 2, BB Rating Grade 2 and entity (bank) rating 2, is eligible to issue subordinated debt, according to the criteria.
The CAMELS rating indicates performances of banks in Capital, Asset, Management, Earning, Liquidity and Sensitivity.
Several banks including Mercantile, BRAC and state-owned Janata have applied to BB to issue subordinated debt, said officials from the banks and the BB.
Subordinated debt is referred to as subordinate because debt providers (lenders) have a subordinate status in relationship to the normal debt. It is also known as subordinated loan, bond, debenture or junior debt that carries a lower-priority claim on the issuer's income or assets than that of other debt. It is called term debt because it has a fixed maturity period.
Such a debt has been designed to help the banks boost their capital base in line with the requirements of Basel II, a core guideline for banks in capital adequacy and risk management. The debt instrument is widespread in developed countries.
Bangladesh entered the era of Basel II implementation with the onset of 2010. A bank has to raise its capital to Tk 400 crore, of which paid-up capital must be Tk 200 crore, by the middle of next year.
With the launch of the subordinated debt, the banks' costs of capital will come down significantly, said the BB officials.
The issuance of rights and bonus shares burdens the banks because of a high tax, in addition to a reduction in their earnings per share.
The interest rate for the debt instrument is expected to be more than 12 percent, which is the current rate for savings certificates.
The banks will have to seek approval from the central bank to issue and repay the debt. In case of listed banks, they will have to take an additional approval from the Securities and Exchange Commission (SEC).
The scheduled banks should have a capital plan approved by their boards of directors. The banks may issue a subordinated debt instrument to qualify as regulatory capital to get the capital plan.
The subordinated debt, eligible to be considered Tier-2 capital, must have a maturity period of more than five years. Investment in the instrument is not a deposit, nor insured by the Deposit Insurance Scheme of the central bank.
The debt may also be convertible into equity, subject to approval from the central bank and SEC. The instrument should be rated and cannot be eligible as collateral for a loan made by the issuing bank.
Foreign banks operating in Bangladesh may also raise capital with approval from the central bank in the form of subordinated debt in foreign currency and in the form of foreign currency borrowings from the head office.

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