Originally posted in The Business Standard on 5 May 2025
What does the capital shortfall mean for banking sector?
The Business Standard spoke with leading economists and bankers to unpack the causes, risks, and remedies.
Bangladesh’s banking sector is under mounting stress as the combined capital shortfall of 20 banks surged by Tk1.18 lakh crore in Q4 of 2024, pushing the total deficit to Tk1.72 lakh crore by year-end.
This sharp rise signals growing fragility in the sector, with many banks now struggling to absorb losses, meet regulatory buffers, or retain depositor trust. A prolonged shortfall may lead to credit rating downgrades, liquidity pressures, or even institutional collapse.
Regulators could be forced into tough choices — from imposing restrictions to pursuing recapitalisation or forced mergers.
The Business Standard spoke with leading economists and bankers to unpack the causes, risks, and remedies.
No quick fix for shortfall, needs multiple strategies
Professor Mustafizur Rahman
Distinguished Fellow, Centre for Policy Dialogue (CPD)
The shortfall is mainly due to provisioning. Previously, bad loans could be concealed through data massaging. Now, transparency has been introduced. As a result, provisioning must be made against them. This, in turn, is causing the shortfall.
However, exercising this transparency was necessary anyway. Before, we were sweeping the bad loans under the rug and pretending as if nothing was wrong. It was bound to cause a big problem someday.
It already has. These banks are certainly a burden on the banking sector. They are also having multifaceted impacts on the overall economy. The most significant effect is that, due to provisioning requirements, lending rates have to be kept very high — even higher than the policy rate.
To that extent, it is adverse for investment and job creation. Overall, it poses several challenges to macroeconomic management.
It is a good thing that at least the primary and most important issue has been identified, and the process has been made transparent.
It must be acknowledged that Bangladesh Bank is taking some discrete steps.
Firstly, bringing in transparency, and secondly, establishing accountability through a recovery drive. The recovery drive is being carried out using several strategies — one is by appointing asset recovery companies to handle it, another is by seizing their shares in various places. In the future, there may be attempts at some mergers and acquisitions as well.
However, it is important to note that the deep-rooted problems that have accumulated over the years cannot be solved overnight. There is no quick fix. The shortfall problem needs to be addressed gradually through various strategies.
Professor Mustafizur Rahman spoke to TBS’ Ariful Hasan Shuvo over the phone.
