Staff Reporter :
Bangladesh’s banking sector has witnessed a significant deterioration in capital adequacy, with the Tier-1 capital to risk-weighted assets ratio (CRAR) falling sharply to 0.48 per cent in the second half of 2024 – well below the regulatory requirement of 6 per cent.
The figures were disclosed in the Bangladesh Systemic Risk Report (BSRR), released by the central bank on Wednesday. The CRAR is a key indicator used to assess a bank’s capacity to absorb financial shocks and meet its obligations, offering regulators insight into the risk of bank failures.
A senior official at Bangladesh Bank stated that many non-performing loans (NPLs), previously concealed under the former administration, are now being exposed. The rise in NPLs has inflated banks’ risk-weighted assets, negatively impacting both Tier-1 and Tier-2 capital.
Tier-1 capital, which includes common equity, disclosed reserves, and retained earnings, represents a bank’s core financial strength and is essential for daily operations.
Owing to the surge in non-performing loans, the capital shortfall of 20 banks soared to Tk 1,71,789 crore by the end of December 2024, marking a dramatic increase from Tk 53,253 crore in September – a jump of Tk 1,18,534 crore in just three months. The December quarter also saw four additional banks fall into capital shortfall.
According to the central bank, the overall CRAR – including both Tier-1 and Tier-2 capital – dropped to 3.08 per cent at the end of December, down from 6.86 per cent in the previous quarter.
The BSRR also highlights a sharp rise in the banking sector’s gross NPL ratio, which has exerted significant downward pressure on profitability.
This has occurred despite an improvement in indicators such as Return on Assets (ROA) and Return on Equity (ROE).
Provision maintenance stood at 50.75 per cent at the end of December 2024, reflecting the sector’s ongoing struggle to adequately cover loan losses.
The report noted an increase in bank lending to the government during the review period, while credit extended to non-bank depository corporations (NBDCs) declined. Meanwhile, annual growth in bank lending to both commercial and residential housing sectors accelerated, a trend also reflected in housing finance provided by depository finance companies (FCs).
Bank lending to other sectors also showed consistent growth, although NBDCs experienced a contraction in credit volume. Cross-border claims by banks decreased significantly during the same period.
Additionally, the assets-to-nominal GDP ratios for both domestic and foreign banks increased as of end-December, while that of FCs continued a downward trajectory.
The BSRR further revealed a steep decline in the banking sector’s leverage ratio – calculated as Tier-1 capital to total exposure under Basel III. A similar drop was observed in the leverage ratio (capital to assets) of finance companies, underscoring a broader weakening in financial resilience.
The findings of the report point to mounting systemic vulnerabilities in the banking sector, driven largely by the accumulation of distressed assets and insufficient capital buffers – factors that may pose heightened risks to financial stability in the near term.
