Cash or liquidity shortages in the banking sector in Bangladesh have been an underlying issue of common concern over the years. The banking system has frequently undergone a setback because of capital shortfall, driven by massive bad debt, weak governance and poor provisioning, thereby threatening financial stability, increasing borrowing costs and hindering SME lending. It presents significant challenges to financial stability and economic growth. The primary challenges stem from an inability to absorb potential losses, while the way out requires a multi-pronged approach combining regulatory reform, improved governance and strategic capital injections to restore confidence and ensure systemic health.
According to a recent report, capital shortfall in 24 banks soared to Tk155,866 crore by the end of June 2025. The situation deteriorated rapidly after the political changeover on 05 August 2024, as the true financial conditions of banks surfaced, revealing massive defaulted loans previously done through window dressing of balance sheets to conceal non-performing loans (NPLs), often linked to large-scale scams. Meanwhile, five shariah-based but financially weak Islamic banks have merged and formed a new entity named ‘Sammilito Islami Bank PLC’ with an eye to overcoming this severe capital shortfall and staying afloat in the market. However, the fate of the remaining 19 banks facing capital shortfall still remains questionable.
Challenges of Capital Shortfall
Weakened Financial Stability: Commercial banks with inadequate capital struggle to absorb unforeseen losses, which increase their fragility and the risk of institutional collapse, thereby potentially leading to systemic crises.
Reduced Lending Capacity: A capital-constrained financial system often results in a significant reduction in the availability of credit. This starves businesses of necessary funding for expansion and operations, thereby negatively affecting overall economic output and employment.
Erosion of Trust and Credibility: A persistent capital shortfall damages a bank’s business credibility and trust among depositors and foreign correspondents. This reluctance to transact with undercapitalised institutions can lead to liquidity pressures and rating downgrades.
High Borrowing Costs: To offset risks associated with a fragile banking sector, lending rates are often kept high. This places an undue burden on reliable borrowers and discourages much-needed investment and job creation in the economy.
Impaired Regulatory Compliance: Banks may fail to meet internationally recognized capital standards, such as those outlined in the Basel III framework, leading to regulatory scrutiny and potential restrictions on their operations, including the ability to pay incentive bonuses or dividends.
Strategies and Solutions
Addressing a capital shortfall requires a combination of short-term and long-term planning, focusing on the root causes such as poor asset quality and weak corporate governance. The following measures can aptly address capital shortfall.
Strengthening Corporate Governance: This is a fundamental step. Implementing stronger boards, better internal structures, and robust risk management systems can help prevent the concealment of NPLs and ensure compliance with regulations.
Improving Asset Quality: Vigorously pursuing the recovery of bad assets through dedicated recovery drives, potential asset management companies, and enhanced risk assessment models can improve balance sheets.
Generating and Retaining Profits: One of the primary organic ways for banks to build capital is by generating sufficient profits and retaining them rather than distributing excessive dividends.
Injecting Fresh Capital
It is crucially important to plough new blood into weak banks through shareholders’ contributions. Existing shareholders can inject fresh capital. The problem can be addressed through issuing new shares to the public.
Other measures include attracting investors who can provide necessary capital injections, and developing capital markets to foster a vibrant bond market for an alternative source of funding for banks. This requires streamlined regulations and attracting investment from pension funds, insurance companies and individuals.
Another step can be the adoption of risk-based loan pricing to ensure that higher-risk assets are compensated with higher spreads, generating sufficient earnings to cover provisioning requirements and meet capital adequacy standards.
Finally, strong regulatory vigilance and support is to be in place. Collaboration with the government and global bodies like the IMF can provide necessary support and structural reforms.
