The government is going to introduce a risk-weighted capital adequacy system for the commercial banks replacing the' existing liability -based adequacy system, a move welcomed by the banks.

The move initiated by the Bangladesh Bank and approved by the Finance Ministry this week is aimed at removing the structural weakness in the banking sector now due to the continued slide in the quality of banks' assets.

Under the new system, banks will be required to maintain eight per cent of

their risk-weighted assets as capital adequacy, according to official sources.

The major variables which will determine the risk are: cash in hand and in banks excepting banks abroad, money at call and at short notice, foreign currency balances held, export and other foreign bills, foreign investment, Import and inland bills, and advances.

The main objective of maintaining capital adequacy is to minimise risk of the banks during crisis period. But. the central bank now

views that the existing liability-based system does not hinge the banks against such situation.

The central bank is expected to notify the scheduled banks about the new system by next week and they will have to implement it within two months of notification. the sources said.

Those banks which will face problems in implementing the new system will be given two years' time to acquire capital adequacy.

Under the existing system. a scheduled bank has to maintain a minimum six per cent of its demand and time liabilities, or Taka 20 crore, in case of banks registered in Bangladesh and taka 10 crore in case of banks registered outside the country, whichever is more as capital adequacy.

The demand liabilities include current account, call deposit and 11 per cent of savings account while time deposit liabilities consist of 89 per cent of savings account and term deposit.

In modern banking system. this rule regarding capital adequacy has been aban-- doned in both developed and developing countries. The Switzerland-based Bank for International Settlement (BIS), an international regulatory for banks, recommended introduction of risk-weighted capital adequacy and a minimum of eight per cent of

risk-weighted assets as capital adequacy, said a Bangladesh Bank source.

To give legality to the new risk-based capital adequacy, the central bank, with prior approval of the government has arranged legal coverage under Article 6 (13) Ka of Bangladesh Bank Company (amendment) Law, 1995.

Earlier, Finance Minister Saifur Rahman in his letter on March 9. 1994 to the Managing Director, International Monetary Fund (IMF), had mentioned about introduction of the new system of capital adequacy. Different international organisations like the IMF. the World Bank and Financial Sector Reform Project (FSRP) members had also repeatedly recommended introduction of riskbased capital adequacy system.

A Bangladesh Bank committee examined the new system and recommended it for adoption before sending it to the Banking Division of the Finance Ministry for approval.

Under the new system, according to Bangladesh Bank, risk of both on and off-balance sheet items will be reflected, which will help analyse the risk of bank's credits and advances as well as of borrowers.

If the loans are provided against guarantees, the risk of the guarantor will also be considered in the risk management.

Meanwhile, bankers have

welcomed it as a positive move.

Kazi Abdul Mazid, Managing Director of National Bank Ltd, said in his immediate reaction. “This will be good for the banking sector as a whole as it will give more flexibility to the banks in handling their resources. Under the existing system, bank's growth are restricted. But under the new system the banks will be able to grow with prudent risk management."

Managing Director of a nationalised commercial bank said on condition of anonymity. "this system would be very helpful for the banking sector if quality of assets are accurately assessed.”

A risk analyst of a foreign bank said, "Government sector loans will be risk-weighted which will contribute towards increasing the capita] base of the nationalised banks and will enhance their international acceptability which is important for an emerging economy."

However, another banker in the private sector pointed out that the banks will primarily face problems in determining the risk as there is shortage of qualified risk-ana-iyats.

Meanwhile, a source in Bangladesh Bank said the government is thinking to train some bank officials on this management under the forthcoming Commercial Banks Restructuring Project