Keep a close eye on banks’ health
The struggles in the banking sector, stemming from a weakened capital base after years of unchecked irregularities during the Awami League's tenure, continue to attract attention. According to data from Bangladesh Bank, the capital-to-risk weighted asset ratio (CRAR)—which measures a bank's capital relative to its risk-weighted assets—fell to just 3.08 percent across the sector at the end of 2024. This is significantly below the 10 percent minimum required under the Basel III framework, down from 6.86 percent recorded three months earlier and 10.64 percent recorded in June 2023.
While some banks continue to maintain healthy capital buffers, there is a stark divide within the industry with a number of banks facing alarming shortfalls. For example, at the end of December, state-run banks recorded a CRAR of negative 8.42 percent, Islamic banks stood at negative 4.95 percent, and specialised banks at negative 41.02 percent. In contrast, private commercial banks posted a CRAR of 10.98 percent, while foreign banks reported a robust 42.09 percent.
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According to industry insiders, these capital shortfalls could jeopardise the stability of the entire financial sector. Moreover, investors and depositors are likely to lose confidence in the affected banks. As a result, the credit ratings of these institutions could be downgraded, making it more difficult and costly for them to raise funds and improve their financial positions.
It is also worth noting that several banks failed to finalise their annual financial statements by the April 30 deadline. Bangladesh Bank has applied to the finance ministry for a one-month extension on behalf of these banks. In the past, banks were granted various regulatory forbearances, including deferrals on provisioning requirements during the finalisation of annual statements. However, this time the banking regulator has not provided any such relief. Furthermore, in March this year, the central bank tightened the dividend policy for banks, barring those that availed of deferral facilities to meet provisioning requirements from paying dividends from 2024 onwards.
The ongoing instability in the sector is a direct legacy of the Awami League government's negligence and the corruption it allowed within the sector. This includes permitting banks to defer provisioning requirements, implementing a lax dividend policy, and other regulatory shortcomings. Therefore, although delayed, it is encouraging to see that the central bank has taken measures that, though painful, were long overdue. In the past, we have seen how weak and problematic banks have used such regulatory forbearance to hide capital shortfalls. Rather than continuing to provide the same facility that failed to improve the banks' health and worsened banking discipline, the central bank would be better off exploring other measures to improve overall stability in the sector.
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