Written by The Banking Post
Bangladesh’s banking sector is reeling under a capital shortfall of Tk 1.71 lakh crore, or about $15.5 billion, as of late 2024, raising alarm over financial stability and foreign confidence in local banks.
The system-wide Capital to Risk Weighted Asset Ratio (CRAR) has slumped to 3.08 percent—far below the 12.5 percent regulatory requirement—mainly due to undercapitalised state-owned lenders.
Analysts say the crisis stems from thin capital buffers, high levels of classified loans, politically influenced lending, weak governance and an over-reliance on traditional instruments. The problem has been aggravated by non-performing loans (NPLs), which officially stood at 20 percent at the end of 2024 but are widely believed to be much higher when rescheduled and written-off loans are included.
“Political and board-level interference in lending has allowed influential defaulters to avoid accountability, directly eroding bank capital,” one senior banker said.
Unplanned expansion, heavy dependence on branch banking, and dividend payouts despite poor performance have further squeezed profitability. Meanwhile, banks have done little to diversify their capital sources, relying mostly on plain subordinated bonds. Their failure to issue more sophisticated market-based instruments reflects weak investor confidence in balance sheets and governance.
Regional contrasts
Neighbouring countries highlight how stronger regulation and effective Basel III compliance can bolster stability. India maintains a capital adequacy ratio of around 15.5 percent, backed by active bond markets and regulatory oversight. The Maldives posts a CAR above 20 percent, while Malaysia stands at 17.8 percent with an NPL ratio of only 1.5 percent.
By contrast, Bangladesh’s state-owned banks still depend on taxpayers for capital injections, a practice seen as unsustainable.
Reforms underway
The government has initiated mergers, recovery plans, capital injections and risk-based supervision by the Bangladesh Bank. But experts warn more needs to be done.
To restore resilience, regulators must enforce Basel III standards more rigorously, ensure all banks meet minimum CAR requirements, and strengthen capital markets. The Bangladesh Securities and Exchange Commission (BSEC) also has a role to play in improving transparency, enabling efficient bond issuances and rights offerings to help banks raise funds.
Governance reforms are equally critical. Stronger boards, advanced risk management, and technology-driven models to assess asset quality could bring banks closer to global best practices.
Without decisive action, analysts warn, the capital crunch could deepen, undermining public trust and posing long-term risks to financial stability.
The writer is the managing director of IDLC Investments Limited
