Banks' capital shortfall - a threat to stability

The capital adequacy position of Bangladesh's banking sector is now in a highly vulnerable condition, with a negative score. Such a negative indicator undoubtedly signifies deterioration in financial and economic stability. The Capital to Risk-Weighted Assets Ratio (CRAR) of the banking sector is currently negative 2.64 per cent, whereas it should be at least 10 per cent, excluding the 1.5 per cent Capital Conservation Buffer (CCB). This substantial gap reflects the severe capital shortfall prevailing in the banking sector.
Due to the significant scale of non-performing and defaulted loans in the banking sector, the ratio deteriorated substantially. Though in 2023, the score was reported at more than 11 per cent, it did not fully reflect the underlying weaknesses of the banking sector. Such window dressing hindered the disclosure of the actual financial condition. In 2024, the score also fell below 10 per cent. By 2025, the true extent of the problem came to light.
As per Basel III, Bangladesh has effectively failed to maintain the minimum capital adequacy standard. Although the NPL ratio has reduced, it does not necessarily reflect the true strength of the loan portfolio. Rather, substantial progress has been shown in reducing the NPL ratio through special and regular rescheduling and restructuring. It remains uncertain whether these loans will continue to remain regular after the expiry of the sanctioned moratorium periods.
Therefore, hiding the weaknesses is not a solution for improvement. Reforms and the enforcement of stronger supervision with a firm regulatory stance are essential to stabilize the condition. India, Pakistan, and Sri Lanka are maintaining CRAR levels ranging from 17 per cent to 20 per cent, which is considered a healthy standard. Though the Bangladesh Government is trying its best to facilitate banks, including providing support of approximately Tk. 40 thousand crore, the scenario is unlikely to change without imposing regulatory targets regarding CRAR on all banks.
Moreover, banks enjoying deferrals for the mitigation of capital shortfalls should be placed under intensive supervision by the central bank so that the required standards can be achieved within a targeted timeframe.

Kawsik Azad Pronoy
A banker & economic analyst