A report by the central bank reveals that 70.58% of default loans from the 61 state-owned and private banks in the country are held by just 10 banks. This information was published in a report by Bangladesh Bank yesterday. However, the names of these banks were not disclosed in the report.
According to the report, if the top borrowers of these banks default, 29 banks will fail to maintain their minimum capital adequacy ratio (CAR).
The central bank’s June-quarter report shows that the concentration of default loans in the top five and ten banks has increased by 2.89 and 2.79 percentage points, respectively, compared to the previous (March) quarter. By the end of June 2024, 54% of default loans were in the top five banks.
The report indicates that this increasing concentration of default loans in the top five and ten banks is concerning for the overall banking sector.
Zahid Hossain, former Chief Economist of the World Bank’s Dhaka office, stated that the default loan amount revealed in the current report is likely the minimum figure for this sector. The actual situation may be worse.
He further stated that the true picture of the banking sector would emerge in the 2025 June Stability Report.
He also mentioned that new regulations from the central bank regarding classified loans will come into effect in April, which will create more default loans from loans that are currently classified as regular. Additionally, the provision shortfall of banks will also become clearer.
When asked if the central bank’s measures are sufficient to improve the banking sector, Zahid Hossain said that banks are currently being given “first aid” to prevent the situation from worsening. The main treatment has not yet started, and more time is needed. After obtaining a comprehensive picture of the banks, the main treatment must begin.
According to Bangladesh Bank’s report, by the end of June 2024, the share of bad and loss loans in total default loans had decreased slightly, but these loans still accounted for the largest portion.
Of the total default loans, 79.42% were classified as bad and loss loans, 17.39% were substandard loans, and 3.19% were doubtful loans. Bad and loss loans are the worst type of default loans.
According to Bangladesh Bank, by the end of June 2024, the total amount of default loans was BDT 2.11 trillion, which is 12.56% of the total outstanding loans.
However, by the end of September 2024, the amount of default loans increased to BDT 2.85 trillion, which is about 17% of the country’s total outstanding loans. At that time, the total outstanding loans amounted to approximately BDT 16.83 trillion.
Capital Shortfall Risk for 29 Banks if Top 3 Borrowers Default
The report from Bangladesh Bank also mentions that if the top three borrowers default, 29 banks in the country will face capital shortfall and will fail to maintain their minimum CAR.
The report further states that by June 2024, among the 61 scheduled banks in the country, 11 banks have already failed to meet the 10% minimum CAR requirement. If the top three borrowers of these banks default, another 18 banks will be at risk.
On the other hand, due to the rise in default loans, the provision shortfall situation in the banks has worsened. According to Bangladesh Bank’s data, by June of this year, the combined provision shortfall of 10 banks amounted to BDT 31.55 billion.
These banks facing provision shortfalls are: National Bank, Basic Bank, Agrani Bank, Rupali Bank, Bangladesh Commerce Bank, Dhaka Bank, Standard Bank, Bangladesh Development Bank, IFIC Bank, and Southeast Bank. Among these, four are state-owned, and six are private banks.
When default loans increase, provision shortfalls also rise. As provision shortfalls increase, banks’ net profits decline, which in turn affects shareholders’ dividends.
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