Moody’s Ratings has revised Bangladesh’s banking system outlook from stable to negative, warning of escalating asset risks, weakening economic growth, and heightened inflationary pressures that threaten financial stability.
In a report released on Wednesday (12 March), the global ratings agency highlighted concerns over deteriorating asset quality, the economic slowdown, and rising inflation, which it said would adversely impact banks’ profitability and overall resilience.
Moody’s projects Bangladesh’s real GDP growth will decelerate to 4.5% in the fiscal year ending June 2025, down from 5.8% the previous year.
The slowdown is attributed to a confluence of factors, including political and social instability, disruptions in the garment sector’s supply chain, and faltering demand both domestically and internationally.
“The operating environment will deteriorate due to economic slowdown and a high inflation rate,” the report stated.
Bangladesh Bank has raised policy rates from 6% to 10% over the past 15 months in an effort to tame inflation, which is expected to persist at 9.8% in 2025. However, tighter monetary policy has exacerbated strains in the banking sector, with non-performing loans (NPLs) rising sharply.
As of September 2024, the systemwide NPL ratio had surged to 17%, nearly doubling from 9% in just nine months.
Moody’s warned that asset quality would deteriorate further as economic conditions worsen, with social unrest exacerbating financial distress by suppressing demand, disrupting supply chains, and causing labour shortages.
The situation could be further aggravated by the introduction of stricter NPL classification rules in April 2025, which may reveal deeper fragilities within the banking sector.
Despite these challenges, overall capitalisation in the banking system is expected to remain stable, primarily due to slower credit growth.
However, state-owned banks remain particularly vulnerable, with an average capital-to-risk-weighted-assets ratio of -2.5% as of September 2024—significantly below the private sector’s 9.4% and well beneath regulatory requirements.
“State-owned banks will remain undercapitalised due to weak profitability, exacerbated by high levels of NPLs and the lack of government capital injections,” Moody’s noted.
Liquidity across the banking system is projected to be stable but tight, with the systemwide loan-to-deposit ratio standing at 81% as of September 2024.
While the government is expected to continue supporting banks through regulatory forbearance and liquidity measures to mitigate systemic risks, Moody’s cautioned that these interventions might only provide temporary relief.
