Rising NPLs limit banks’ credit capacity: Bangladesh Bank

Bangladesh's banking sector is grappling with a steep rise in non-performing loans (NPLs), sluggish credit growth, and capital shortfalls, severely constraining banks' ability to extend new credit, according to Bangladesh Bank's latest quarterly report.

The report highlights that, as of December 2024, total NPLs soared by 21.33% in the second quarter to reach a record TK3.45 lakh crore, up from TK2.85 lakh crore in the first quarter of FY25.

BB attributed this alarming rise to several factors including non-renewal of existing loans, poor repayment performance of previously rescheduled loans, and the implementation of a revised overdue loan classification system from 30 September 2024.

Under the new rules, the threshold for fixed-term loan overdue status was reduced from six months to three months, leading to a jump in classified loans.

After the fall of the Awami League government in August last year, the country has seen disruptions in law and order, leading to a continuous decline in private sector credit growth.

The private sector credit growth in Bangladesh fell to 6.82 % in February, hitting its lowest in 21 years, according to available data.

The situation is particularly dire among state-owned commercial banks, whose NPL ratio reached 42.83% at the end of second quarter of FY25, up from 40.35% in the preceding quarter.

To address the situation, the central bank has initiated a series of structural and policy reforms aimed at improving governance, financial discipline, and risk management.

Measures include the restructuring of boards at 11 underperforming banks, formation of task forces for asset quality review, and the establishment of asset management companies for distressed assets.

BB has also drafted a Bank Resolution Ordinance to empower the regulator in handling bank insolvencies and capital risks.

However, Syed Mahbubur Rahman, Managing Director & CEO of Mutual Trust Bank Limited (MTB), told TBS that banks' lending capacity will shrink further as they are facing a liquidity crisis on one hand, and on the other, the funds disbursed as loans in previous investments are not being recovered.

He said the volume of non-performing loans in the banking sector is already high and is likely to increase further over the next year. This is because, starting from the June quarter of this year, loan classification rules are becoming stricter—resulting in a further rise in defaulted loans.

Tight monetary policy to rein in inflation

Against the backdrop of high inflation, BB maintained a contractionary monetary stance in Q2FY25. The policy rate was raised by 50 basis points—from 9.50% to 10.00%—effective 27 October 2024, to curb demand-side inflationary pressures.

As a result, interbank borrowing costs surged, with the call money rate rising from 9.14% in September 2024 to 10.07% in December 2024. This tightening of monetary conditions has further contributed to reduced credit availability in the market.

Bank profitability and capital buffers shrinking

The capital adequacy of the banking sector also took a sharp hit. The overall Capital to Risk Weighted Assets Ratio (CRAR) declined to 3.08% in Q2FY25 – well below the Basel-III minimum requirement – down from 6.86% in Q1FY25. State-owned commercial banks were once again the main contributors to this deterioration.

Profitability metrics mirrored this trend. The sector's return on assets (ROA) and return on equity (ROE) dropped to 0.38% and 7.42% respectively at the end of Q1FY25, compared to 0.41% and 7.46% a year earlier.

Despite the challenging environment, the banking sector saw a modest recovery in deposit growth during Q2FY25. Year-on-year deposits grew by 7.47%, while quarter-on-quarter growth stood at 3.12%.

This improvement, BB notes, reflects a renewed public confidence in the sector following targeted stabilisation efforts.

External sector sees positive turnaround

The country's overall balance of payments (BoP) turned to a surplus of $1.0 billion in Q2FY25, reversing a $1.5 billion deficit in Q1FY25. This turnaround was driven by a strong financial account surplus of $1.4 billion and a current account surplus of $140 million, supported by robust export and remittance inflows.