Staff Reporter:
A report from Bangladesh Bank (BB) has revealed that the financial stability of 18 banks is at risk due to potential loan defaults by their top three borrowers.
The inability of these borrowers to repay their loans could trigger a dangerous liquidity crisis for these banks, the report warns.
“If the top three borrowers default, 18 banks will fail to maintain the minimum cash reserve. These banks are already grappling with capital deficits against their risk-based assets,” the central bank said.
Analysts emphasize that a bank’s financial strength is primarily measured by its capital reserves. A capital deficit not only signals poor asset quality but also categorizes these banks as financially weak. The Bangladesh Bank report underscores that the banking sector is already burdened by defaulted loans, putting additional pressure on the system.
The report highlights that, under current conditions, the sector cannot sustain the minimum Capital to Risk (Weighted) Assets Ratio (CRAR). This international benchmark requires banks to hold a certain percentage of their assets as capital to safeguard against risks.
The report identifies two major risks affecting the sector: market-related risks and credit-related risks.
If non-performing loans increase by just 3%, the report warns that at least five banks will fall below the required CRAR of 10%. Currently, 11 out of 61 banks are already failing to meet this standard, indicating a systemic fragility.
Although the banking sector has shown some resilience to minor risks, the report highlights that interest rate increases could exacerbate the crisis. A sudden uptick in rates may significantly erode the capacity of banks to manage their capital requirements.
Under international norms, banks are required to maintain a minimum of 10% of risk-weighted assets as capital reserves. Failing to meet this standard indicates a capital deficiency, which exposes the bank to greater risks in the face of financial shocks.
