Bangladesh’s banking sector is facing a potential economic disaster as insufficient capital reserves in banks are failing to cover mounting default loans, raising concerns of a larger financial crisis. Experts warn that the current situation, if left unaddressed, could lead to widespread instability in the banking sector and beyond, impacting the entire economy.
The rising tide of default loans in Bangladesh is severely affecting the ability of banks to maintain their risk-weighted assets, which is critical to ensuring their financial health and stability. S M Mizanur Rahman, Secretary General of the Bangladesh Jubo Arthonitibid Forum, raised this concern in a recent interview with Daily Industry, highlighting the growing vulnerability of the banking sector.
At the core of the problem is the failure of many banks to maintain the required Capital to Risk-Weighted Asset Ratio (CRAR), which acts as a buffer against potential losses from bad loans. The rapid increase in non-performing loans (NPLs) has stretched these capital reserves thin, leaving banks vulnerable to significant financial shocks. As more banks report capital shortfalls, there is growing concern about their ability to absorb losses or even continue operations without substantial intervention.
“If banks cannot maintain sufficient capital reserves, they may not survive the next economic shock, and that could lead to a systemic crisis,” warned Rahman. “Without enough capital, banks are unable to cover loan defaults, which weakens their ability to lend and could cause liquidity problems throughout the financial system”, S M Mizanur Rahman added.
The ramifications of this banking crisis extend far beyond the banks themselves. As banks struggle to recover from mounting bad debts, their capacity to lend to businesses and consumers is severely constrained. This reduces access to credit, which could stifle economic growth, increase unemployment, and diminish consumer spending-key drivers of the national economy. The ongoing financial instability in the banking sector is compounded by political uncertainties and a scarcity of foreign currency, which has strained the ability of banks to manage international transactions and import necessary goods and services. With declining confidence in the banking sector, investors are becoming increasingly wary, which could lead to reduced foreign investment and a loss of trust in the financial system.Economic experts are urging the government and regulatory authorities to intervene and strengthen banking regulations to prevent further deterioration. They recommend measures such as tightening lending standards, improving loan recovery processes, and implementing more stringent capital reserve requirements to ensure banks can weather future shocks.
If the government fails to address the growing crisis, the banking sector could face a full-blown collapse, with far-reaching consequences for businesses, workers, and consumers alike. The banking system’s failure to maintain adequate capital reserves could set off a chain reaction that disrupts the broader economy, making it crucial for immediate action to be taken.
Experts have raised serious concerns about the stability of Bangladesh’s banking sector, warning that the failure of several banks to maintain sufficient capital reserves could lead to an inability to absorb losses or withstand financial shocks, potentially triggering a larger crisis.
Actually, the Capital to Risk-Weighted Asset Ratio (CRAR) is a crucial regulatory requirement for banks, ensuring they hold enough capital to cover potential risks. However, a growing number of banks have failed to meet this requirement, with financial instability and a surge in default loans threatening their operational viability. Experts warn that if this trend continues, banks may find themselves unable to withstand further shocks, leading to widespread disruptions in the banking system.
“If banks are unable to maintain the required capital reserves, they risk becoming insolvent in the event of large-scale defaults or economic downturns,” said one industry expert. “The failure to absorb losses could cause a domino effect, resulting in a larger crisis within the banking sector.”
The lack of adequate capital reserves could undermine public confidence in the financial system, making it more difficult for banks to attract investors or secure funding. Moreover, as banks become increasingly financially strained, they may be forced to limit credit, which could have a negative impact on businesses and the broader economy.
With the banking sector already facing significant challenges, including a high level of non-performing loans, experts are calling for urgent reforms to strengthen the financial stability of banks. Immediate attention is needed to address the root causes of financial instability, including poor loan recovery practices and inefficient banking regulations.
The government and regulatory authorities are now under pressure to intervene and take steps to ensure that the banking sector remains resilient in the face of mounting risks. If left unaddressed, experts warn, the consequences could be severe, potentially leading to a banking crisis with far-reaching economic consequences.
The banking sector in Bangladesh is facing a growing crisis, as insufficient capital reserves to cover defaulted loans are threatening to trigger a larger financial meltdown. Experts warn that many banks are now at risk of becoming insolvent, unable to absorb losses or withstand potential financial shocks, which could have severe consequences for the entire financial system.
The core issue stems from the failure of several banks to maintain adequate capital reserves, a requirement designed to protect against the risk of loan defaults. With the rising number of non-performing loans, banks are struggling to meet the necessary Capital to Risk-Weighted Asset Ratio (CRAR). When these reserves fall short, it means banks cannot cover the risks posed by bad loans, leaving them vulnerable to financial instability.
“Without sufficient capital reserves, banks become exposed to significant risks. If the situation continues, it could lead to a crisis of confidence in the banking system, with far-reaching economic implications,” said a senior financial analyst. “When banks are unable to absorb loan losses, it weakens the entire financial infrastructure, making it harder for businesses and consumers to access credit.”
The crisis is exacerbated by a growing trend of default loans, with borrowers failing to repay on time, putting additional pressure on the already strained capital reserves. As these bad loans continue to mount, banks are finding it increasingly difficult to maintain profitability, which in turn impacts their ability to lend to other sectors of the economy.
In response to the escalating crisis, financial experts are calling for urgent reforms in banking regulations to address the root causes of the problem. This includes improving loan recovery mechanisms, tightening oversight on risky lending practices, and ensuring that banks maintain stronger capital buffers to weather future economic shocks.
If the issue is not addressed promptly, experts warn that the banking sector could face a full-blown crisis, resulting in a loss of investor confidence, a reduction in available credit, and potential bank closures. The broader economy would also be significantly impacted, as businesses would struggle to secure financing and consumer spending could be curtailed.
With the banking sector already under strain, government intervention is increasingly being seen as crucial to restoring financial stability. Without immediate action to shore up capital reserves and prevent further loan defaults, the risk of a larger crisis looms over the sector, with potentially devastating effects on the economy at large.
Skyrocketing Default Loans Threaten Banks’ Financial Stability: The rising tide of default loans in Bangladesh is severely affecting the ability of banks to maintain their risk-weighted assets, which is critical to ensuring their financial health and stability. S M Mizanur Rahman, Secretary General of the Bangladesh Jubo Arthonitibid Forum, raised this concern in a recent interview with Daily Industry, highlighting the growing vulnerability of the banking sector.
According to Rahman, at least 16 banks-an increase of five compared to previous years-have failed to meet the mandatory Capital to Risk-Weighted Asset Ratio (CRAR), a key regulatory requirement for banks to maintain adequate capital reserves. This shortfall is primarily attributed to the escalating financial instability within these institutions, which has been further compounded by the burden of mounting default loans.
Rahman pointed out that the default loan crisis has reached alarming levels, destabilizing the banking sector and posing serious risks to the economy. He argued that the financial woes of the banking sector are the result of rampant looting of banking funds under the leadership of the Sheikh Hasina-led Awami League government over the past 17 years. According to Rahman, the mismanagement and misuse of bank resources during this period have led to widespread financial instability, undermining public trust in the system.
“The banks are in deep crisis due to their inability to recover defaulted loans, and now, they are unable to meet the required CRAR, which could have far-reaching consequences,” Rahman stated. The failure to maintain sufficient capital reserves could lead to a situation where banks are unable to absorb losses or withstand financial shocks, potentially triggering a larger crisis within the banking sector.
The skyrocketing default loans have been a longstanding issue in Bangladesh, but the recent surge in the number of banks unable to maintain CRAR is a troubling sign of how deep-rooted and pervasive the problem has become. As the banking sector faces increasing pressure, experts are calling for urgent reforms to address the crisis and restore stability.
If the situation is not addressed soon, it could have serious implications not only for the banking sector but for the broader economy, as banks play a crucial role in supporting businesses, loans, and investments. The government’s response to this crisis will be crucial in determining the future stability of Bangladesh’s financial system.
16 banks fail to meet mandatory capital reserves: At least 16 banks in Bangladesh have failed to maintain the required Capital to Risk-Weighted Asset Ratio (CRAR) in the September quarter of 2024, raising serious concerns about the financial stability of the banking sector. This marks an increase of five banks compared to the previous quarter, signaling deeper challenges for the industry. The sector-wide CRAR has dropped below 7%, well below the regulatory minimum of 10% and the lowest average in 15 years, according to a recent report from Bangladesh Bank.
CRAR is a crucial measure of a bank’s financial stability, comparing its capital to risk-weighted assets to ensure it can absorb potential losses and protect depositors. A drop in CRAR indicates that banks are at greater risk of insolvency if significant losses arise, especially from non-performing loans (NPLs), which have been rising rapidly.
The banking sector’s aggregate CRAR stood at just 6.86% at the end of the September quarter, down from 10.64% in June 2024. This marks a sharp decline in just three months, with at least 16 of the country’s 61 banks failing to meet the required 10% minimum, up from 11 in June. A senior central bank official explained, “With the rise in classified loans during the September quarter, we had to set aside more provisions, increasing the risk-weighted assets in the banking sector. This worsened accumulated losses and reduced capital, creating the poorest CRAR situation since 2010.”
As of September 2024, classified loans-those that are unlikely to be recovered-accounted for 17% of total loans, totaling Tk 2.85 lakh crore. By December, this proportion is expected to rise to 20%. Alarmingly, around 82% of these classified loans fall into the worst-case Bad and Loss category, requiring banks to set aside full provisions (100%) to cover potential losses.
The decline in CRAR is also reflected in the banking sector’s Tier-1 capital ratio, which stood at 4.13% in the September quarter, well below the regulatory minimum of 6%. The situation is most dire among state-owned commercial banks, which saw their CRAR turn negative (-2.48%) by the end of the September quarter, down from 5.44% in the previous quarter. Specialized development banks also reported the lowest CRAR at -42.20%.
Foreign commercial banks, however, showed a much stronger position with the highest CRAR at 43.67%, which highlights the disparity in capital adequacy across different types of banks.
The central bank official expressed concerns about a further decline in CRAR in December, noting that the rise in NPLs and the provision requirements for those loans will likely exacerbate the sector’s financial instability. The report also revealed that the banking sector held Tk 1.07 lakh crore in regulatory capital, falling short by Tk 53,255 crore from the Tk 1.61 lakh crore minimum required by the end of September.
Sheikh Mohammad Maroof, Managing Director of Dhaka Bank, emphasized that the declining sector-wide average is primarily driven by increasing capital deficits in state-owned and specialized development banks. Additionally, several problem banks have started acknowledging their losses, further eroding their capital.
Maroof warned, “When the CRAR drops significantly within a quarter, it creates trust issues with foreign parties. On top of that, Moody’s recently downgraded our rating, which will increase trade costs with foreign banks and may reduce our loan limits. The banking sector’s poor image will also impact the inflow of new foreign direct investment (FDI) into the country.”
Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank, noted that a decrease in CRAR directly impacts banks’ lending capacity and operational activity. To counter this, Rahman called for measures to strengthen governance in banks facing capital shortfalls, including recapitalization efforts, a stronger focus on recovering classified loans, and enhancing profitability.
As the banking sector continues to face mounting challenges, the government and regulators must act swiftly to address the underlying issues. Without significant reforms, the banking system’s vulnerability could lead to broader economic instability, affecting not just banks, but businesses and consumers across the country.
Banks’ lending and operational capability squeezed: Meanwhile, many banks in Bangladesh are facing severe liquidity constraints, with their lending and operational capabilities increasingly squeezed. The combination of mounting capital shortfalls and an urgent need to maintain sufficient cash reserves to meet Eid demands is putting significant pressure on the country’s banking sector.
With the festive season fast approaching, banks are required to ensure they have enough liquidity to pay out workers’ wages, bonuses, and meet the increased demand for cash withdrawals. However, many banks are struggling to maintain the necessary cash reserves, impacting their ability to lend to businesses and consumers and potentially leading to a larger financial crisis.
Experts warn that the shortage of funds is exacerbated by the growing amount of non-performing loans (NPLs) in the banking sector, which have drained resources and reduced the banks’ lending capacity. As a result, banks are finding it increasingly difficult to meet both their regulatory capital requirements and the financial needs of customers, especially in the lead-up to Eid.
“The lack of liquidity is limiting the ability of banks to lend to businesses and individuals during this critical period. This is further compounded by the rise in bad loans, which has decreased banks’ overall financial strength,” said a senior banking official.
As many banks struggle with cash management ahead of Eid, the situation is beginning to affect day-to-day operations. Small businesses, in particular, are facing difficulties accessing the necessary funds to keep their operations running smoothly. The strain on the banking sector is also causing concerns about the long-term stability of financial institutions in Bangladesh. To prevent further disruption and ensure financial stability, experts are urging the government and central bank to intervene with timely measures to ensure banks have the necessary liquidity to manage the increased demand for cash. Without swift action, the liquidity crunch could deepen, resulting in a slowdown in economic activities and reduced consumer confidence as the country prepares for the Eid celebrations.
