At the end of 2024, Bangladesh’s banking sector plunged into a deep crisis, ranking as the most vulnerable in South Asia compared to other countries in the region.

Following the political transition in August last year, long-hidden default loans and accumulated losses came to light, severely weakening the banks’ financial health.

According to the Bangladesh Bank’s latest Financial Stability Report, the capital-to-risk asset ratio (CRAR) of banks dropped to just 3.08 percent, less than half the regulatory minimum set by the central bank.

The amount of distressed loans has also surged to an unprecedented Tk7.56 trillion, up 59 percent from 2023 — the highest in the country’s history.

These risky loans now account for nearly 45 percent of total lending, almost equivalent to the national budget for FY2025–26.

Of this total, Tk3.46 trillion are non-performing loans (NPLs), Tk3.48 trillion are rescheduled loans, and Tk623 billion are written-off loans.

By contrast, CRAR stood at 16.7 percent in India, 18.4 percent in Sri Lanka, and 20.6 percent in Pakistan during the same period. Even much smaller economies like Nepal, Bhutan, and Afghanistan maintained CRAR above 10 percent.

Under the international Basel III standard, banks are required to maintain a minimum capital adequacy of 10 percent, plus an additional 2.5 percent capital conservation buffer — a total of 12.5 percent. Bangladesh is nowhere close to this benchmark.

The central bank report identifies large loan defaults and devaluation of collateral assets as the main reasons behind the capital shortfall in 2024. Only 42 banks met the CRAR requirement, holding 59 percent of the sector’s total assets.

The remaining banks — which carry 41 percent of assets and 43 percent of liabilities — are now in deficit, with liabilities exceeding assets.

State-owned and Shariah-based banks have been hit the hardest. The combined CRAR of Islamic banks, which stood at 12.71 percent in 2023, plunged to negative 4.95 percent in 2024 due to massive losses in seven banks.

Former chairman of the Association of Bankers, Bangladesh (ABB), Anis A Khan, described the crisis as structural. He noted that first-generation banks were set up with a minimum paid-up capital of only Tk30 million, while deposit and credit demand expanded rapidly. Failure to raise capital through fresh equity issues or retained earnings left banks chronically weak.

“With such a fragile capital base, banks will soon be unable to lend at all. This shows that even depositors’ money is essentially depleted, and many banks are no longer complying with central bank directives,” Khan said.

The situation in non-bank financial institutions (NBFIs) is even worse. Their non-performing loan ratio rose from 31.55 percent to 33.83 percent in 2024, while CRAR fell to negative 6.46 percent.

The Bangladesh Bank warned that if the country’s two largest borrowers default, the entire financial sector could face a catastrophic collapse. Experts have further cautioned that cybersecurity threats are emerging as another major risk for the banking industry.

According to the central bank, just 10 banks are responsible for nearly 75 percent of total non-performing loans. Shariah-based banks and some state-owned banks are suffering the most severe losses.

The fall of the Awami League government led to an end of widespread loan rescheduling, which further worsened the situation. This explosion of risky loans has shaken the sector’s capital base, with CRAR dropping 8.56 percentage points in a year to just 3.08 percent.

Bankers and analysts say the crisis will erode profitability, increase provisioning pressure, and restrict new lending.

Mohammad Ali, managing director of Pubali Bank, said, “This is the reality — the entire financial sector is now suffering from mismanagement created under the previous government. Recovery will take time.”