Bangladesh’s banking sector is facing mounting strains as weak growth, high inflation, and political uncertainty weigh on lenders’ balance sheets, said Moody’s, a leading global credit ratings and research agency.
In its latest outlook published yesterday, the firm maintained a negative outlook on the country’s banking system as it predicts a challenging operating environment amid below-potential economic growth and a high inflation rate.
For all latest news, follow The Daily Star’s Google News channel.Economic growth in Bangladesh is expected to recover only modestly to 5 percent in the current fiscal year 2025-26, up from 4 percent in the previous year, it said.
“Bangladesh’s economy will continue to navigate multiple macroeconomic challenges, including institutional weaknesses and poor governance, as well as a high unemployment rate,” Moody’s said.
The report said economic recovery will heavily hinge on an orderly transition to a new government following elections slated for the first half of 2026 and the policy priorities set afterwards.
“While the ready-made garment sector has been resilient to disruptions so far, we expect ongoing political and social unrest to subdue business sentiment.”
Inflation is projected to stay elevated at 8.3 percent, constraining the central bank’s ability to ease its policy rate, which has been held at 10 percent since October 2024, it said in an outlook on Bangladesh’s banking system.
The 12-month average inflation stood at 8.66 percent in January this year, well above the Bangladesh Bank’s (BB) target to bring it down to 7 percent. In these circumstances, the central bank has kept its monetary policy hawkish for the rest of the fiscal year, announcing that it would maintain the rate unchanged until next June.
Moody’s warned that banks’ asset quality and profitability will deteriorate as businesses face the dual challenges of sluggish demand and high costs caused by supply chain disruptions.
The report highlights a sharp deterioration in loan quality as many borrowers continue to face stress amid weak economic conditions.
Bangladesh’s non-performing loan (NPL) ratio surged to 35 percent by June 2025, up from 9 percent at the end of 2023, following tighter classification rules.
“Asset quality will deteriorate as economic conditions remain weak,” Moody’s said, warning of a further build-up of soured loans due to the phased rollout of International Financial Reporting Standard (IFRS 9) from September this year.
The agency said profitability will decline as NPLs swell.
“Loan-loss provisions will increase significantly across the system in 2026 as existing reserves are insufficient to cover fast-growing NPLs,” it said.
Both state-owned and private Islamic banks remain undercapitalised, reflecting weak governance and poor underwriting standards.
The outlook, however, said liquidity conditions are relatively stable, supported by deposit growth and remittance inflows.
It notes that the loan-to-deposit ratio fell slightly to 79 percent as of the end of June 2025 from 82 percent a few months ago.
“Financially stronger banks will continue to attract deposits as customers move to safer institutions, while it will take time for weaker ones to regain confidence and rebuild their deposit bases,” Moody’s said.
It added that the BB injected Tk 52,500 crore in emergency liquidity last June to shore up confidence.
The agency expects that the government will remain supportive through regulatory forbearance and liquidity measures, but warned that “widening budget deficits will constrain its ability to capitalise banks.”
With revenues projected to remain below 10 percent of gross output of the economy and heavy spending on subsidies and interest payments, fiscal space is limited, it added.
https://www.thedailystar.net/business/economy/news/moodys-maintains-negative-outlook-banking-sector-4102391
