The recent revelation of hidden bad loans in Bangladeshi banks has exposed a critical vulnerability in the country's financial sector, making it the weakest in South Asia. This development has led to a dramatic deterioration of the banks' capital adequacy ratio, plunging into negative territory by the end of 2025. The situation is particularly concerning given the international Basel III standards, which mandate a minimum capital adequacy ratio of 10 percent, plus an additional 2.5 percent buffer. Bangladesh's ratio now stands at a staggering minus 2.64 percent, a stark contrast to its regional peers.
This crisis is a stark reminder of the pervasive financial irregularities and scams that plagued the Awami League-led government. Syed Mahbubur Rahman, a former chairman of the Association of Bankers, Bangladesh (ABB), attributes the negative capital position to widespread financial scams and the use of regulatory deferral facilities by banks. These temporary measures, designed to ease short-term pressure, may now exacerbate the situation as they expire.
The non-performing loans (NPLs) are a central pressure point, with the amount of bad loans rising from Tk 557,217 crore in 2024 to Tk 588,704 crore in 2025, accounting for 32.26 percent of total loans. Mustafa K Mujeri, a former chief economist of the Bangladesh Bank, highlights the deep structural weaknesses in the sector, emphasizing the need for strong and decisive corrective measures.
The current government faces a daunting challenge, with the financial sector's weakness adding to its existing difficulties. Recapitalization, a process involving government support or mergers, is seen as a necessary but challenging solution. Finance Minister Amir Khosru Mahmud Chowdhury has allocated Tk 40,000 crore for recapitalization in the current fiscal year, with a significant portion going to Sammilito Islami Bank. However, the scale of the problem suggests that broader structural reforms, including bank mergers and other resolution mechanisms, may be required to stabilize the sector.
In conclusion, the negative capital adequacy ratio in Bangladeshi banks is a stark warning of the sector's fragility and the need for urgent action. The government must address the underlying issues, including financial irregularities and the use of regulatory deferral facilities, to restore discipline and stability in the banking sector. The example of Greece, which managed a similar crisis through large-scale recapitalization, offers a potential model for Bangladesh, albeit with significant differences in fiscal capacity.
