Weak vs strong banks: How banking chain is snapped

Infograph: TBS

A growing number of financially sound banks have quietly curtailed business dealings with weaker lenders, disrupting the country's banking ecosystem and exposing a widening confidence crisis in a sector grappling with severe capital shortages and persistent financial stress.

Industry insiders and bankers told The Business Standard that many well-capitalised banks have unofficially stopped extending exposure to weaker institutions through interbank lending, money market transactions and payment-sharing arrangements in an effort to protect their own depositors from contagion risks.

Infograph: TBS

The growing reluctance to transact with troubled lenders has already begun affecting customers. In recent weeks, some customers of weaker banks have reported difficulties withdrawing cash from ATMs operated by other banks, while concerns have also emerged over the reliability of payment instruments issued by financially distressed institutions.

The situation intensified amid heavy withdrawals from ATM booths by customers of Islami Bank Bangladesh, following unrest surrounding the bank that has increasingly taken on political overtones. Bankers said the pressure was compounded by limited cash supplies from the central bank and delays in the issuance of new currency notes.

In this situation, strong banks have barred customers of weak banks from withdrawing cash from their ATM booths to limit pressure.

Sharing his expertise, a customer of a private bank said he was unable to withdraw cash from several ATM booths in the Mohammadpur area of Dhaka about a week ago. 

He later attempted to use an ATM operated by Eastern Bank but was informed that cards issued by several banks were not being accepted. 

This is not an isolated incident. The Business Standard found several cases where Visa cardholders of troubled banks faced issues withdrawing cash from other banks' ATMs.

However, Eastern Bank Managing Director Hassan O Rashid, denied that cardholders from other banks were experiencing withdrawal problems at his bank's ATMs.

"This cannot be true, since all bank cardholders can withdraw up to Tk5,000 per transaction, regardless of whether they belong to a weak bank or a strong bank. We do not differentiate here at all," he said.

A managing director of a leading private commercial bank, speaking on condition of anonymity, said some stronger banks had become increasingly cautious about allowing customers of weaker institutions to access their ATM networks.

"A lot of cash has been withdrawn from Islami Bank's ATMs in recent times," he said. "At the same time, some banks are facing liquidity pressure, and stronger banks do not want that pressure to spill over into their own ATM networks."

For example, he said that if an Islami Bank customer cannot withdraw cash from that lender's ATM, they will then try using a stronger bank's ATM.

Interbank trust deteriorates

Bankers say the growing separation reflects a broader loss of confidence within the banking system.

"I heard that one bank is not accepting the credit and debit cards of another bank, which is a serious fallout from the Islami Bank crisis," said Ahsan H Mansur, former governor of Bangladesh Bank.

"It is very bad news for the banking industry because it reflects distrust among banks. This problem is self-inflicted, as the Islami Bank crisis is not economic but purely political."

Mashrur Arefin, chairman of the Association of Bankers, Bangladesh (ABB), said stronger banks had long avoided taking unnecessary exposure to institutions with significant capital deficiencies.

"If a bank lacks adequate capital, why should we risk depositors' money by lending to it? One banking risk should not be replaced with another," he said.

"We avoid interbank transactions with them. This is not new. Good banks have always preferred dealing with good banks. These weak banks were not suddenly weakened; they have had problems for years."

Arefin argued that Bangladesh's banking sector has become overcrowded and that a smaller number of strong banks would be sufficient to serve the economy.

"Even if 20 to 25 banks are weak, the larger and stronger banks still operate among themselves. In reality, Bangladesh probably only needs about 12 to 15 strong banks," he said.

Capital shortfalls expose vulnerabilities

According to Bangladesh Bank data, only 26 private commercial banks met the minimum capital adequacy requirement of 12.5% at the end of December 2025.

The banks are: Bank Asia, Bengal, BRAC, Citizens, City, Community, DBBL, Dhaka, Eastern, Jamuna, Meghna, Mercantile, Midland, Modhumoti, MTB, NCC, NRB, ONE, Prime, Pubali, SBAC, Shahjalal Islami, Shimanto, Southeast, Trust and Uttara.

The capital-to-risk weighted assets ratio (CRAR) for the banking industry fell to negative 2.64% during the period, compared with 17.2% in India, 20.8% in Pakistan and 19.4% in Sri Lanka, according to central bank figures.

The combined capital shortfall of 20 banks stood at Tk2.78 lakh crore at the end of the December quarter.

Bankers say these weaknesses have forced stronger institutions to reassess risks associated with routine interbank activities.

One senior banking executive explained that ATM withdrawals create direct exposure between banks because the bank dispensing the cash must later be reimbursed by the cardholder's bank.

"For banks that are toxic or have huge provisioning shortfalls and other issues, this exposure becomes a problem," he said.

The executive argued that customers are often unaware of the risks associated with dealing with financially weak institutions.

"Strong banks are deciding not to take exposure to weak banks, but customers are unknowingly taking that exposure every day," he said.

He warned that payment risks now extend beyond ATM services to broader commercial transactions.

"Suppose a garment company banks with a troubled institution. Even if the company wants to pay its supplier, there is uncertainty about whether the bank will be able to process the payment. Nobody wants to say this openly."

Concerns over payment instruments

Bankers also raised concerns about the reliability of pay orders and other banking instruments issued by financially distressed institutions.

One senior executive said banks have traditionally accepted such instruments on the assumption that they are fully backed by funds and will be honoured through the clearing system.

"Now we have reached a situation where some banks are unable to honour these obligations," he said.

He cited cases in which liquidity shortages could delay the encashment of fixed deposits or disrupt the settlement of pay orders issued by weaker banks.

The executive added that trust in payment instruments increasingly depends on the financial strength of the issuing institution.

"If you came to me with a pay order from a strong bank and needed cash urgently, I would probably advance the money because I trust that instrument. I would not do that for many other banks," he said.

Official figures may understate stress

Several bankers also questioned whether official measures of asset quality fully capture the scale of problems in the sector.

One executive noted that international lenders and development finance institutions typically look beyond reported non-performing loan (NPL) ratios when assessing banks.

They often include overdue, rescheduled and restructured loans in their internal assessments, even when such loans are not classified as non-performing under local regulations.

As a result, a bank reporting an NPL ratio of 14% may face a significantly higher problem-loan ratio under international risk assessments, he said.

The executive further warned that weak banks continue attracting deposits by offering substantially higher interest rates than stronger institutions, creating risks for depositors if financial conditions deteriorate further.

Recovery requires more than recapitalisation

Another senior banker said recapitalisation alone would not be sufficient to restore the health of troubled banks.

"A bank that got into trouble cannot simply continue operating exactly as before," he said.

He noted that rescue packages in advanced economies are usually accompanied by stringent governance reforms and greater transparency requirements.

While Bangladesh Bank has provided liquidity support to prevent systemic disruptions, he argued that emergency funding addresses only immediate pressures and does not resolve underlying weaknesses.

"This is an extremely difficult challenge because the government does not have unlimited resources to recapitalise all these banks. Some institutions simply cannot be rescued easily," he said.

The banker also stressed the need for stronger disclosure requirements, arguing that information on rescheduled loans is often not presented clearly in financial statements.

He further expressed concern over proposals by bank owners to relax governance provisions under banking laws, including changes to family ownership definitions, board tenures and the role of independent directors.

"We are waiting to see how the government responds to these proposals," he said.