63% of classified loans concentrated in 10 'inactive' banks

A staggering 63.28% of classified loans among the 61 banks operating in the country are concentrated within just 10 banks, according to a report published by Bangladesh Bank.

The report also pointed out that a total of 29 banks would fail to maintain the minimum required capital to risk-weighted asset ratio (CRAR) if its top borrowers defaulted.

The Quarterly Financial Stability report, which made a ranking of the banks according to highest to lowest classified loans (loans that are in danger of default), is based on data till September 2023. 

The central bank in its report said that though there was a decline in classified loans from the previous quarter (Apr-June 2023), the concentration of loans among the top 5 and top 10 banks is still a concern for the overall banking industry.

As per the report, a slight decrease in the concentration of classified loans was seen among the listed top 5 and top 10 banks compared to the previous quarter (Apr-June 2023), with reductions of 2.85 and 1.65 percentage points respectively.

At the end of September 2023, the top 5 banks classified loan concentrations were 45.12%.

According to the published report, the proportion of Bad and Loss (B/L) category loans within total classified loans surged to 87.72% at the end of September 2023, marking a significant increase from 80.67% in the previous quarter.

The Bad and Loss category is the worst category of classified loans.

The central bank's data states that the total classified loan figure stands at Tk1.55 lakh crore, constituting 9.93% of the total outstanding loans as of September 2023.

Ahsan H Mansur, executive director at the Policy Research Institute (PRI), told The Business Standard, "Basically these 10 banks have become inactive. They don't have money to pay the depositors and have classified loans of more than Tk98,000 crore."

"Apart from these classified loans, loans amounting to Tk1 lakh crore have been rescheduled in the banking sector," he added.

Commenting that the government should think seriously about what to do with the troubled banks, the economist said, "Currently there are many obstacles including political influence in merging banks. Besides, the process in which the central bank is doing the merger is also not correct. There is no transparency here."

In a meeting on 4 March with leaders of Bangladesh Association of Banks (BAB) Bangladesh Bank Governor Abdur Rouf Talukder shared the plan to go for forced merger of at least 10 banks by January next year as part of its road map to reduce default loans and ensure corporate governance in the banking sector.

The Bangladesh Bank identified eight local banks falling within the "red zone" in the health index, which was formulated using six distinct ratios derived from the CAMELS rating system: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk.

The eight banks were – Padma, BASIC, National, Janata, Agrani, Rupali and AB Bank.

29 banks face capital shortfall if top 3 borrowers default

According to the report, if the top three borrowers of every bank were to default, a total of 29 banks would fail to meet the minimum required capital to risk-weighted asset ratio (CRAR).

The report further stated that 10 out of 61 scheduled banks already struggled to maintain the minimum regulatory requirement of a 10% CRAR by end of September 2023. If the top three borrowers of the rest of the banks also defaulted, 19 more banks would face the same challenges.

The stress test assesses a bank's performance by combining the results of different credit shocks and market shocks. In case of combined shock (except default of top large borrowers and increase in non-performing loans [NPLs] of the highest outstanding sector), 13 banks would fail to maintain the minimum required CRAR, said the report.