20 banks’ capital shortfall jumps Tk1.18 lakh crore in Dec – in just three months

Infograph: TBS

Highlights:

• Bank capital shortfall surged to Tk1.72 trillion by December
• Non-performing loans hit 20.2% of total loans
• Thirteen banks have Tk109,318 crore in provision shortfalls
• Major banks like Janata and Krishi face biggest deficits
• Poor investments, hidden losses worsened sector's fragile condition

Due to a sharp increase in non-performing loans in the banking sector, the capital shortfall of 20 banks rose to Tk1,71,789 crore in December 2024 – in just three months, according to a  central bank report.

Compared to the previous September quarter's Tk53,253 crore shortfall, the overall shortfall increased by Tk118,534 crore in the December quarter, during which four more banks fell into capital shortfall, the Capital Conservation Buffer of Banks under Basel III report said.

At the end of December 2023, 10 private and public banks faced capital shortfall, amounting to Tk39,655 crore.

The Bangladesh Bank report states that the aggregate CRAR of the banking sector stood at 3.08% at the end of December, down from 6.86% at the end of September 2024.

Under international banking regulations, financial institutions are required to maintain a minimum level of preserved capital. In Bangladesh, as per the Basel III guidelines, each bank must hold capital equivalent to 10% of its risk-weighted assets or Tk500 crore, whichever is higher. Failure to meet this requirement places a bank in a state of capital shortfall.

This capital is reserved from both the initial investment of bank entrepreneurs and profits. A bank suffering from a capital shortfall is not allowed to pay dividends to its shareholders. Moreover, foreign banks often assess the capital strength of local banks before engaging in business with them.

Among the worst-affected institutions, Janata Bank, a state-owned bank, reported the highest capital shortfall at Tk52,890 crore. Bangladesh Krishi Bank followed with Tk18,188 crore. First Security Islami Bank recorded a shortfall of Tk13,991 crore, while Islami Bank Bangladesh Limited faced a deficit of Tk12,885 crore. National Bank's capital shortfall stood at Tk7,798 crore.

Mohammad Nurul Amin, former managing director of Meghna Bank Limited, told TBS that the rise in non-performing loans has led to an increase in provision shortfalls. As a result, many banks have been unable to maintain the required provisions from their profits, which has further deepened their capital shortfall.

"The banks now facing fresh capital deficits had been carrying these losses for a long time. However, since they were favoured by the previous government, these issues had been kept hidden. Now, this information is coming to light," he explained.

According to him, a growing capital shortfall means a reduced capacity for banks to issue loans. It signifies a decline in their financial base. If these banks continue to fail in maintaining their provisions, they will be unable to pay dividends and will gradually lose customers.

He added that capital shortfalls will also damage the reputation of the banks, and their credit ratings will deteriorate. Foreign banks, in particular, will exercise caution when dealing with them, and in some cases, the margin requirement for letters of credit (LCs) may increase.

Dr Birupaksha Paul, former chief economist at Bangladesh Bank and professor of Economics at the State University of New York at Cortland, told TBS that the rise in capital shortfall among banks is a result of their poor investment decisions.

He said the current state of capital shortfalls reflects the fragile condition of these banks, and without capital injection, their survival is unlikely. According to him, "most of these banks are effectively in the ICU."

Dr Paul added that due to the capital shortfall, banks will not be able to pay profits to shareholders, their credit quality will deteriorate, there will be no scope for new investments, and the sector will move steadily toward progressive collapse.

Non-performing loans (NPLs) in Bangladesh surged by Tk1.34 lakh crore in the last six months of 2024, reaching a total of Tk3.45 lakh crore by December. This new figure means that defaulted loans now account for 20.2% of the entire banking sector's total loan portfolio.

In addition, by the end of December last year, 13 banks had accumulated a combined provision shortfall of Tk109,318 crore against their bad loans. These shortfalls have increased the amount of risk-weighted assets held by the banks, leading to a fresh wave of capital deficits across the sector.

A senior official from the relevant department of Bangladesh Bank stated that the capital shortfall reported at the end of December is likely to increase further in the March 2025 report. This is because the central bank has tightened its provisioning requirements from March.

Previously, loans under the "SMA" (Special Mention Account) category required 1% provisioning. From March onwards, the required provisioning for these accounts has been raised to 5%.

Asked what steps banks could take to recover, the official said that banks must recover defaulted loans and inject new capital. However, if the central bank offers provision deferral facilities, the extent of the shortfall may reduce to some extent.

He added that the central bank may allow some banks conditional access to such deferral benefits. Some banks are expected to recover by making profits within a set timeframe. Those that fail to recover might face mergers.

Meanwhile, the managing director of a private bank, speaking to TBS on condition of anonymity, remarked that while several banks have seen an increase in capital shortfalls, this does not reflect the condition of the entire sector. A number of banks have performed strongly, with some recording profits exceeding Tk1,000 crore, along with healthy deposit growth.