Capital base of Bangladeshi banks lowest in South Asia
Bangladeshi banks emerged as the most fragile against shocks from risky assets compared to other countries in the South Asian region at the end of 2024, as large volumes of long-buried toxic loans surfaced after last August's political changeover.
As the hidden losses surfaced, the safety reserves of banks were eroded, taking the capital adequacy ratio far below the required level.
For all latest news, follow The Daily Star's Google News channel. The Capital to Risk-Weighted Asset Ratio (CRAR), the main measure of how much cushion banks hold against risky assets, fell to just 3.08 percent at the end of 2024, according to Bangladesh Bank's latest Financial Stability Report.
By contrast, the ratio was 16.7 percent in India as of September last year, while it was 18.4 percent in Sri Lanka and 20.6 percent in Pakistan at the end of 2024. Smaller economies such as Nepal, Bhutan, and Afghanistan also reported levels well above 10 percent.
Smaller economies such as Nepal, Bhutan, and Afghanistan also reported levels well above 10 percent.
Non-bank financial institutions (NBFIs) are in even worse shape. Their bad loan ratio rose from 31.55 percent to 33.83 percent in 2024, while their CRAR turned negative at –6.46 percent.
The Capital to Risk-Weighted Asset Ratio, the main measure of how much cushion banks hold against risky assets, fell to just 3.08 percent at the end of 2024, according to BB's Financial Stability Report.
In simple terms, CRAR indicates how much capital a financial institution has compared to the risks it has taken on through lending. A high CRAR means the bank has enough of a safety net to withstand shocks and meet its obligations. A low CRAR means it is vulnerable to collapse if borrowers default. The minimum requirement under the Basel III rules is 10 percent, plus an additional 2.5 percent buffer. Bangladesh is nowhere close.
Bangladesh's banking sector has long maintained lower capital adequacy than its neighbours, averaging around 11 percent. But the ratio saw a steep slide of over 8.5 percentage points from 11.64 percent a year earlier at the end of December 2024.
Veteran banker Anis A Khan said the weakness is structural.
"The initial capital requirement for setting up a bank was very low," he said, noting that the amount was only Tk 3 crore for first-generation banks. With deposits and loan demand growing much faster, banks could not keep pace by issuing new shares or paying out dividends.
"Thanks to the low capital base, banks will not be able to lend. The low ratio indicates that their deposits were wiped out, and they cannot fulfil the central bank's guidelines and cannot function well," added Khan, also a former chairman of the Association of Bankers Bangladesh (ABB).
According to the central bank, the default of large borrowers posed the most severe risk to capital adequacy, followed by collateral devaluation.
By December 2024, only 42 banks still met CRAR requirements. These compliant banks retained 59 percent of total assets and 57 percent of total liabilities of the banking sector.
In contrast, non-compliant banks held 41 percent of the sector's total assets and 43 percent of total liabilities, marking a 2 percentage point excess of liabilities over assets in this segment.
Only foreign banks kept their ratios well above the regulatory threshold. Conventional private banks hovered just above the line.
The significant deterioration of capital adequacy happened in state-run banks and shariah-based private banks.
Banks are required to maintain buffer capital of 2.50 percent of total risk-weighted assets in addition to the minimum regulatory capital requirement of 10 percent under the Basel III framework.
Against this requirement, the banking industry of Bangladesh failed, as the buffer capital stood at 1.64 percent at the end of December 2024.
The aggregate CRAR of Islamic banks dropped from 12.71 percent in 2023 to –4.95 percent in 2024, largely because of steep losses in seven banks.
Stress tests by Bangladesh Bank show the system remains fragile. A default by the two largest borrowers in the country would have the most damaging impact on the sector's resilience.
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