In the September quarter of 2024, at least 16 banks – an increase of five from the previous quarter – failed to maintain the mandatory Capital to Risk-Weighted Asset Ratio (CRAR), a key indicator of financial stability. This decline has resulted in the sector-wide CRAR dropping below 7%, well below the 10% minimum required by regulations, marking the lowest average in 15 years.
The CRAR is a crucial measure that compares a bank’s capital to its risk-weighted assets, ensuring the institution can absorb potential losses and safeguard depositors. According to a report by Bangladesh Bank, the aggregate CRAR for the banking sector stood at 6.86% at the end of September 2024, a significant drop from 10.64% in June 2024.
In line with central bank regulations, banks must maintain a minimum CRAR of 10%. However, by the end of September, 16 of the country’s 61 banks failed to meet this requirement, an increase from the 11 non-compliant banks reported in June.
A senior central bank official attributed the decline to the rise in classified loans, which forced banks to set aside additional provisions, thus increasing risk-weighted assets. This, in turn, worsened accumulated losses and eroded capital. The official remarked, “We have not witnessed such a poor CRAR situation since 2010.”
Key Statistics:
- Classified Loans: As of September 2024, classified loans accounted for 17% of the total banking sector loans, amounting to Tk 2.85 lakh crore. By December, this figure is expected to rise to 20%.
- Bad and Loss Category: Approximately 82% of the banking sector’s total classified loans fall under the worst-case “Bad and Loss” category, requiring banks to maintain a 100% provision.
- Tier-1 Capital Ratio: The banking sector’s Tier-1 capital ratio stood at 4.13% in the September quarter, which is below the regulatory minimum requirement of 6%.
Performance by Bank Type:
| Bank Type | CRAR (%) |
|---|---|
| Foreign Commercial Banks | 43.67% |
| Specialised Development Banks | -42.20% |
| State-Owned Commercial Banks | -2.48% |
State-owned commercial banks saw a sharp decline in CRAR, turning negative at -2.48% in September 2024, down from 5.44% in the previous quarter.
Impact of Decline in CRAR:
The decrease in CRAR raises concerns about the health of the banking sector, with potential consequences for capital mobilisation and lending activities. According to the central bank official, there are fears that the CRAR could decline further in December, as non-performing loans (NPLs) and provision requirements increased during the quarter, without boosting capital or profitability.
As of September 2024, the banking sector’s regulatory capital stood at Tk 1.07 lakh crore, falling short of the required Tk 1.61 lakh crore by Tk 53,255 crore.
Industry Reactions:
Sheikh Mohammad Maroof, Managing Director of Dhaka Bank, explained that the sector-wide decline in CRAR is largely due to increasing capital deficits in state-owned commercial banks and specialised development banks. He noted that some problem banks have started acknowledging their losses, further weakening their capital.
The decline in CRAR has also raised concerns among foreign investors. Maroof warned, “When the CRAR drops significantly within a quarter, it creates trust issues with foreign parties. Additionally, Moody’s recent downgrade of our credit rating could increase trade costs with foreign banks, reduce loan limits, and negatively impact the inflow of foreign direct investment (FDI) into the country.”
Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank, emphasised that a reduced CRAR limits banks’ ability to lend and hampers their operational activities. To address these issues, he called for recapitalisation, stronger efforts to recover classified loans, and a greater focus on improving profitability.
The significant decline in the CRAR across the banking sector reflects ongoing financial instability, largely driven by an increase in non-performing loans and capital shortfalls. To ensure the long-term stability of the sector, experts are advocating for stronger governance, recapitalisation efforts, and a focus on recovering classified loans.