71% of classified loans concentrated in 10 banks till June quarter
By June 2024, banking sector’s total classified loans hit Tk2.11 lakh crore, or 12.56% of outstanding loans
Around 70.58% of the classified loans in the country's 61 state-owned and private banks are concentrated in just 10 banks, according to a Bangladesh Bank report, published yesterday.
The report highlighted that if the top borrowers of these banks were to default, 29 banks would fail to meet the minimum required Capital to Risk (Weighted) Assets Ratio (CRAR).
The central bank's report for the June quarter revealed that the concentration of classified loans among the top five and top 10 banks increased by 2.89 percentage points and 2.79 percentage points, respectively, compared to the previous (March) quarter. By the end of June 2024, the top five banks held 54.03% of the classified loans.
"The gradual rise in classified loan concentration among the top five and the top 10 banks is a concern for the overall banking industry," the report said.
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Zahid Hussain, former lead economist at the World Bank's Dhaka office, told TBS that the classified loan figures in the central bank's report represent the bare minimum estimates, and the actual situation is likely worse.
The economist said the true condition of the banking sector will become clear in the June 2025 stability report.
He explained, "The central bank's new rules for classifying loans will take effect next April, leading to the creation of more classified loans, which are currently being reported as regular. Additionally, the banks' provision shortfalls will also become more apparent."
When asked if the central bank's actions to address the banking sector's issues are sufficient, Zahid said the current measures are like first aid, aimed at preventing the situation from worsening.
The main solutions have not yet been implemented and will require more time, he said, emphasising that these should begin only after a full assessment of the banks' overall condition.
The BB report revealed that while the share of Bad and Loss loans in total classified loans declined in the June 2024 quarter, it still accounts for the largest portion.
The Bad and Loss category held 79.42% of total classified loans, while Substandard loans made up 17.39% and Doubtful loans represented 3.19%. The Bad and Loss category is considered the worst classification of loans.
According to Bangladesh Bank's data, the total classified loans amounted to Tk2.11 lakh crore, or 12.56% of total outstanding loans, at the end of June 2024.
By the end of September 2024, total classified loans increased to Tk2.85 lakh crore, which represents nearly 17% of the country's outstanding loans, estimated at around Tk16.83 lakh crore.
29 banks face capital shortfall if top 3 borrowers default
Twenty-nine banks would fail to maintain the minimum required Capital to Risk-Weighted Asset Ratio (CRAR) if their top three borrowers default, according to the report.
The report highlights that 11 out of 61 scheduled banks failed to meet the CRAR minimum of 10% at the end of June 2024. If the top three borrowers of the remaining banks defaulted, 18 more banks would be at risk.
"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 NPLs of the highest outstanding sector), 12 banks would fail to maintain the minimum required CRAR," said the report.
The provision shortfall among banks has worsened due to rising default loans, with 10 banks reporting a combined deficit of Tk31,549 crore as of June this year, according to Bangladesh Bank data.
The affected banks include National Bank, BASIC Bank, Agrani Bank, Rupali Bank, Bangladesh Commerce Bank, Dhaka Bank, Standard Bank, Bangladesh Development Bank, IFIC Bank, and Southeast Bank.
Among them, four are state-owned banks and six are private.
Provision shortfalls occur due to high levels of non-performing loans. An increase in the provision shortfall leads to a decrease in the bank's net profit, which in turn results in reduced dividends for shareholders.
