Banks and Financial Institutions Facing Multifaceted Risks


Banks and Financial Institutions Facing Multifaceted Risks

Banks and Financial Institutions Facing Multifaceted Risks


In the global economic perspective, banks and financial
institutions in Bangladesh are facing multifaceted risks. These institutions
are grappling with challenges such as rising interest rates, an unnatural
decline in the exchange rate of the dollar, an increase in non-performing
loans, a decrease in their capital base, reduced income, and a decrease in loan
repayments, among various other economic risks. Among these, non-banking
financial institutions are exposed to more significant risks.

The recent “Financial Stability Assessment Report,
January-March 2023,” published by the central bank on Thursday, has
analyzed these issues. The report provides an overview of the economic
conditions up to March, building upon the data from last March. The situation
has worsened since then.

According to the report, compared to December, banks have
experienced a decrease in loan repayments and an increase in non-performing
loans, leading to a reduction in their capital base. Both interest income and
income from the capital base have also decreased. As a result, banks have seen
a substantial adverse impact on their financial stability. Due to the dollar
crisis, banks are struggling to conduct normal international trade. They are
unable to buy dollars from the central bank, and this has resulted in a
significant portion of their funds being tied up with the central bank.
Meanwhile, central banks are managing their liquidity by borrowing funds at a
higher interest rate. This has led to an increase in their costs.

On the other hand, the situation in non-banking financial
institutions is extremely delicate. While they earn some income from their
assets and capital, these institutions derive no income from the two essential
accounts. Moreover, both accounts are in the red. A few financial institutions
are performing well, but most are not.

Within banks, an alarming increase in non-performing loans
is observed alongside significant loans stuck with major defaulters. As a
result, banks are at a higher risk. Approximately 61.90% of the total
non-performing loans are held by the top 10 banks, while the remaining 38.10%
are distributed among the other 51 banks. This means that almost 62% of the
non-performing loans are concentrated within the top 10 banks.

In addition, the top 5 banks hold 43.45% of the total
non-performing loans, and the rest are divided among the remaining 56 banks.
This concentration of non-performing loans in a few institutions has heightened
the overall risk in the banking sector. Furthermore, non-performing loans have
increased, surpassing an additional 1.56 trillion taka since December.

According to the report, banks’ income from their assets and
loans has decreased significantly from 62% in December to 39% in March. With
income from interest rates decreasing by almost half, banks’ overall income is
being substantially affected. The majority of their income comes from interest
rates, so this decrease will have a negative impact on their financial health.

In contrast, income from the capital base has also
decreased. In December, income from the capital base was at 10.70%, but in
March, it dropped to 6.83%. However, the actual financial base income has
decreased. Banks mainly generate income from interest rates, and due to the
impact of the COVID-19 pandemic and the global economic downturn, loan
repayments and interest payments have been affected, contributing to the
decrease in income from these two critical accounts.The banking and financial
institutions in Bangladesh are facing significant challenges on multiple fronts.
The rise in non-performing loans, a decline in income, and the impact of the
dollar crisis have weakened the financial stability of these institutions.
Addressing these multifaceted risks is crucial for the stability and growth of
the country’s financial sector.

More than 20% of Loans Held by 8 Banks in Bangladesh
are Non-performing:

Bangladesh’s banking sector has been facing a significant
challenge in recent times, with a high proportion of non-performing loans
(NPLs). According to international standards, when a bank’s NPL ratio exceeds
3%, it is considered at risk. Currently, 48 out of the 48 banks in the country
are grappling with NPL ratios exceeding 3%, making them vulnerable to financial

Among these banks, eight have NPL ratios of over 20%,
indicating a severe issue with non-performing loans. Three banks have NPL
ratios between 15% and 20%, while five banks have NPL ratios between 10% and
15%. Fourteen banks have NPL ratios between 5% and 10%, and seven banks have
NPL ratios between 2% and 5%. Only two banks have NPL ratios below 2%.

Non-performing loans pose a significant risk to banks, as
they can lead to financial instability and erode the bank’s capital. In December,
the total amount of non-performing loans across all banks in Bangladesh stood
at Tk 16,821 billion, and by March, it had increased to Tk 17,855 billion. The
rise in non-performing loans is a cause for concern and can have severe
consequences for the financial stability of the banking sector.

The banking sector is also struggling with a decrease in
capital. In December, the total capital in banks was Tk 1,59,371 billion, but
by March, it had decreased to Tk 1,54,946 billion. This decrease in capital is a
worrying sign for the banks, as it affects their ability to absorb losses and
continue their operations effectively.

Interest income is a significant source of revenue for
banks, and it has been declining in recent times. In December, the interest
income was at 1.27%, but by March, it had decreased to 0.88%. The decrease in
interest income is a result of a drop in lending and the impact of the COVID-19
pandemic on borrowers’ ability to repay loans.

The banking sector’s performance is also affected by the
exchange rate risk, with banks unable to engage in normal foreign trade due to
the dollar crisis. This has led to an increase in the cost of borrowing from
the central bank, affecting the banks’ profitability.

Non-banking financial institutions are also facing
challenges, with many of them dealing with non-performing assets. The financial
health of these institutions has been deteriorating, impacting their ability to
conduct business effectively.

In conclusion, the banking and financial sector in Bangladesh
is facing significant risks due to a high level of non-performing loans and
various economic challenges. The non-performing loans are a severe concern, as
they can lead to financial instability and impact the overall economy. It is
crucial for the authorities to address these issues and implement measures to
strengthen the banking sector and ensure its stability.

The banking sector in Bangladesh is currently grappling with
a complex set of challenges that are impacting its stability and financial
health. Here, we will delve into these issues in more detail.

High Proportion of Non-Performing Loans (NPLs): One of the
most pressing concerns in the Bangladeshi banking sector is the high proportion
of non-performing loans (NPLs). NPLs are loans where the borrowers have failed
to meet their repayment obligations, causing financial stress to the banks. As
per international standards, a bank is considered at risk when its NPL ratio
exceeds 3%. However, the situation in Bangladesh is much more severe, with all
48 banks in the country facing NPL ratios exceeding 3%. This makes them highly
vulnerable to financial instability.

Eight banks in the country are in particularly dire straits,
as they have NPL ratios exceeding 20%. This level of non-performing loans poses
a grave risk to these financial institutions, making it challenging for them to
operate smoothly. These banks are in urgent need of effective strategies to
recover these loans and bolster their financial health.

Three more banks fall into the category of having NPL ratios
between 15% and 20%, signifying that the problem is not limited to just a few
institutions. The financial challenges extend to other banks as well. In the
case of five banks, their NPL ratios are between 10% and 15%. With 14 banks
having NPL ratios between 5% and 10% and seven banks between 2% and 5%, it is
evident that NPLs are a widespread issue affecting the entire banking industry.

Consequences of NPLs: Non-performing loans are not merely a
financial headache for banks; they pose a substantial risk to their stability.
When a bank accumulates a high proportion of NPLs, it can lead to significant
capital erosion. In response, banks may need to allocate more of their capital
to cover potential losses, limiting their capacity to provide new loans and
support economic growth.

 Additionally, a high level of NPLs can result in an increased
cost of borrowing for banks, as they become more risky borrowers themselves.
This, in turn, can affect the profitability and competitiveness of the banks.

 Total NPL Amount: The total amount of non-performing loans
in the Bangladeshi banking sector is a staggering Tk 17,855 billion as of
March, up from Tk 16,821 billion in December. This significant increase over
just a few months is a clear indication of the severity of the problem.

 Capital Erosion: 

Capital erosion within the banking sector poses a significant challenge with far-reaching implications for financial stability and the overall economy. The data reveals a concerning trend, indicating a decline in total capital from Tk 1,59,371 billion in December to Tk 1,54,946 billion by March. This reduction in capital raises red flags and warrants a closer examination of the factors contributing to this erosion and its potential consequences.

The capital of banks serves as a crucial buffer, providing a financial cushion that enables institutions to absorb losses, navigate economic downturns, and maintain confidence in the financial system. A decrease in capital undermines this resilience, exposing banks to heightened vulnerability and limiting their capacity to weather unforeseen challenges.

One primary concern associated with capital erosion is its potential impact on the ability of banks to absorb losses effectively. In a dynamic and often volatile financial landscape, banks must be equipped to handle unexpected setbacks, such as non-performing loans, economic downturns, or external shocks. A diminished capital base weakens the banks’ ability to absorb these losses, making them more susceptible to financial distress and compromising the stability of the entire banking sector.

Furthermore, the effective functioning of banks relies heavily on their capital adequacy, a key regulatory metric designed to ensure financial institutions maintain a robust financial position. A decline in capital levels may trigger regulatory concerns and lead to increased scrutiny, potentially resulting in regulatory interventions aimed at restoring stability and protecting depositors’ interests.

The consequences of capital erosion extend beyond the banking sector. Banks play a pivotal role in facilitating economic activities by providing credit to businesses and individuals. A weakened banking sector may translate into reduced lending capacity, constraining economic growth and development. Businesses may find it challenging to access the necessary financing for expansion, innovation, and day-to-day operations, ultimately impeding overall economic progress.

Addressing capital erosion requires a comprehensive approach. Regulatory bodies, financial institutions, and policymakers must collaborate to identify the root causes of the decline in capital and implement measures to strengthen the financial health of banks. This may involve reassessing risk management practices, enhancing transparency, and implementing prudent lending strategies to mitigate potential losses.

Additionally, restoring investor and public confidence in the banking sector is crucial. Clear communication about corrective measures, regulatory interventions, and the overall health of the financial system can help rebuild trust and stability. Timely and effective intervention is essential to prevent further capital erosion, ensuring the resilience of banks and safeguarding the broader economic landscape against potential shocks.

Declining Interest Income:

The declining interest income within the banking sector presents a multifaceted challenge, as it serves as a pivotal revenue stream for financial institutions. The data highlights a noticeable decrease, plummeting from 1.27% in December to 0.88% in March, underscoring the urgency of addressing the factors contributing to this decline and their broader implications.

Interest income is a fundamental component of a bank’s financial health, representing the earnings generated from the interest charged on loans and other interest-bearing assets. The reduction in this crucial revenue source can be attributed to various interconnected factors, with one primary driver being a decline in lending activity. As economic conditions fluctuate, borrowers may become more risk-averse, leading to a decrease in demand for loans. This reduced lending activity directly impacts interest income, as banks have fewer opportunities to earn interest on their loan portfolios.

The ongoing impact of the COVID-19 pandemic further exacerbates the challenges faced by banks. The economic disruptions caused by the pandemic have created a scenario where borrowers, both individuals and businesses, may experience financial hardships, affecting their ability to meet their loan obligations. As a result, banks may witness an increase in non-performing loans and face challenges in recovering interest income from borrowers facing economic uncertainties.

To address the decline in interest income, banks must adopt a strategic and proactive approach. Implementing effective risk management practices becomes crucial, as it allows banks to navigate economic uncertainties, identify potential credit risks, and make informed lending decisions. Strengthening relationships with borrowers through targeted financial assistance programs and flexible repayment options can also contribute to mitigating the impact of the pandemic on loan repayment capacity.

Diversification of revenue streams is another key strategy for banks to counter the effects of declining interest income. Exploring alternative sources of income, such as non-interest income from fees, commissions, and other financial services, can provide a buffer against fluctuations in interest-related earnings. Additionally, optimizing operational efficiency and exploring digital banking solutions can contribute to cost savings and enhance overall financial performance.

Collaboration with regulatory authorities is essential to create an enabling environment that supports economic recovery and sustainable lending practices. This may involve the implementation of supportive monetary policies, fiscal measures, and regulatory frameworks that encourage responsible lending while safeguarding the stability of the financial system.

In summary, addressing the declining interest income requires a comprehensive and adaptive approach by banks. By implementing sound risk management practices, exploring alternative revenue streams, and fostering collaboration with regulators, financial institutions can navigate the challenges posed by economic uncertainties and contribute to the resilience of the banking sector in the face of evolving financial landscapes.

Exchange Rate Risk: 

Exchange rate risk has emerged as a significant challenge for the banking sector in Bangladesh, presenting a complex set of issues that impact not only individual financial institutions but also the broader economic landscape. The ongoing dollar crisis has disrupted normal foreign trade activities, leading to a series of consequences that are particularly pronounced in the cost of borrowing and, consequently, the profitability and financial health of banks.

The inability of banks to engage in normal foreign trade activities due to the dollar crisis has far-reaching implications. Foreign trade plays a pivotal role in the global economy, and disruptions in currency markets can create a ripple effect, influencing various aspects of financial transactions. Banks, as intermediaries in these transactions, are directly affected by fluctuations in exchange rates.

One of the immediate repercussions of the dollar crisis is an increase in the cost of borrowing from the central bank. The intricacies of exchange rate dynamics can lead to currency depreciation, making it more expensive for banks to access foreign currencies. This increased cost of borrowing, when translated into the domestic currency, puts additional strain on the financial resources of banks. Higher borrowing costs can erode profit margins, limit lending capacity, and hinder overall financial performance.

The impact on profitability is a key concern for banks, as it directly affects their ability to generate sustainable earnings. A decline in profitability can, in turn, hamper the ability of banks to build capital, invest in technology and infrastructure, and fulfill their role as catalysts for economic growth through lending and financial intermediation.

To navigate exchange rate risk effectively, banks need to implement robust risk management strategies. This may involve hedging mechanisms to mitigate the impact of currency fluctuations, closely monitoring and analyzing foreign exchange exposure, and developing contingency plans to address sudden and adverse changes in exchange rates.

Collaboration between banks, regulatory authorities, and policymakers is essential to formulate comprehensive solutions to address exchange rate risk. Regulatory frameworks that provide guidance on risk management practices, incentives for prudent financial behavior, and mechanisms to stabilize currency markets can contribute to a more resilient banking sector.

Addressing the root causes of the dollar crisis requires a coordinated effort at both the national and international levels. Diplomatic and economic measures aimed at stabilizing currency markets, addressing trade imbalances, and fostering a conducive environment for foreign trade can contribute to long-term solutions.

In conclusion, the exchange rate risk faced by the banking sector in Bangladesh is a multifaceted challenge that requires a strategic and collaborative approach. By implementing effective risk management practices, engaging in dialogue with regulatory authorities, and participating in broader economic initiatives, banks can enhance their resilience in the face of exchange rate volatility and contribute to the overall stability of the financial system.

 Challenges in Non-Banking Financial Institutions: 

The challenges facing Non-Banking Financial Institutions (NBFIs) in Bangladesh underscore the broader complexities within the financial sector. The struggles experienced by many NBFIs are multifaceted and have far-reaching implications for their financial health and operational viability.

1. Non-Performing Assets (NPAs):

   Non-performing assets have emerged as a major challenge for NBFIs. The inability of borrowers to meet their repayment obligations has led to an increase in NPAs, adversely affecting the asset quality of these institutions. This, in turn, hampers their ability to generate revenue from interest payments and disrupts the overall financial stability of NBFIs.

2. Deteriorating Financial Health:

   The financial health of many NBFIs has deteriorated, posing a threat to their sustainability. Factors contributing to this decline may include a combination of economic downturns, poor risk management practices, and challenges in recovering loans. A weakened financial position not only limits the capacity of NBFIs to extend credit but also undermines investor and depositor confidence.

3. Impact on Business Operations:

   The financial challenges faced by NBFIs have a direct impact on their ability to conduct business effectively. Reduced financial resources and profitability may restrict the scope for new investments, expansion of services, and fulfillment of their role in supporting economic growth through financing activities.

4. Regulatory Compliance and Oversight:

   Regulatory compliance is paramount in the financial sector to ensure stability and protect the interests of stakeholders. NBFIs facing financial challenges may encounter difficulties in meeting regulatory requirements, leading to increased oversight and potential interventions by regulatory authorities to restore compliance and stability.

5. Market Confidence and Stakeholder Trust:

   The challenges faced by NBFIs can erode market confidence and trust among stakeholders. Depositors, investors, and other financial market participants may become wary of engaging with NBFIs, impacting their ability to raise funds and sustain operations.

6. Need for Improved Risk Management:

   Strengthening risk management practices is crucial for NBFIs to navigate uncertainties effectively. This involves comprehensive assessments of credit risk, market risk, and operational risk. Implementing robust risk management frameworks can enhance the resilience of NBFIs in the face of economic fluctuations and challenges in the operating environment.

7. Exploring Diversification Strategies:

   NBFIs should explore strategies for diversifying their portfolios to mitigate concentration risk. A more diversified range of financial products and services can help reduce dependence on specific sectors or types of assets, enhancing the overall resilience of NBFIs.

8. Collaboration and Industry Initiatives:

   Collaboration among NBFIs, regulatory bodies, and other stakeholders is vital. Industry-wide initiatives, knowledge sharing, and collective efforts can contribute to finding solutions to common challenges, fostering a more stable and sustainable non-banking financial sector.

In conclusion, addressing the challenges faced by NBFIs in Bangladesh requires a comprehensive and strategic approach. This involves regulatory support, improvements in risk management practices, and a commitment to transparency and accountability within the sector. By addressing these challenges, NBFIs can play a more effective role in supporting economic development and financial stability in Bangladesh.


In conclusion, the challenges confronting the Bangladeshi banking and financial sector paint a complex picture, demanding urgent attention and concerted efforts from regulatory authorities, financial institutions, and stakeholders. The multifaceted risks, including non-performing loans, declining capital, reduced interest income, exchange rate fluctuations, and issues in non-banking financial institutions, collectively threaten the stability and health of the sector.

The high level of non-performing loans reflects vulnerabilities in credit quality, requiring meticulous risk management strategies to identify and mitigate potential threats. Simultaneously, the decline in capital and interest income signals financial strain, emphasizing the need for adaptive measures to sustain operational resilience and profitability.

Exchange rate risks further amplify challenges, impacting the cost of borrowing and overall financial health. The issues faced by non-banking financial institutions add another layer of complexity, highlighting the interconnectedness of challenges within the broader financial landscape.

To address these issues, collaborative efforts are imperative. Regulatory authorities play a pivotal role in implementing measures that reinforce the sector’s stability. Tightening risk management practices, encouraging diversification strategies, and fostering transparency are essential components of a robust regulatory framework.

Financial institutions must proactively adapt to evolving economic conditions, reassess risk profiles, and explore innovative approaches to remain resilient. Collaboration between banks, non-banking financial institutions, and regulatory bodies can facilitate the sharing of expertise and resources, contributing to comprehensive and effective solutions.

The stability and health of the Bangladeshi banking and financial sector are paramount for sustaining economic well-being. By addressing these challenges head-on, through coordinated regulatory initiatives, prudent financial practices, and a commitment to resilience, stakeholders can build a foundation for a more secure and prosperous financial future in Bangladesh.


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