Bangladesh Bank Rejects Moody’s Downgrade as Unfair

Moody’s Ratings has downgraded Bangladesh’s banking system outlook from "stable" to "negative," citing increasing asset risks and worsening economic conditions. The report highlights concerns such as deteriorating asset quality, high inflation, and weakening economic growth, which will negatively impact bank profitability and financial stability. Structural risks, including lax regulations and poor corporate governance, remain persistent.

Bangladesh Bank has decided to discontinue the Assured Liquidity Support (ALS) facility for primary dealer (PD) banks, citing the absence of devolvement in government securities (G-Sec) auctions for over three financial years. Introduced in 2008 to help PD banks meet their underwriting obligations, the ALS allowed them to access liquidity at the repo rate (currently 10%).

Bangladesh Bank has eased down payment requirements for exit facilities on defaulted loans of closed or loss-making companies, reducing the minimum payment from 10% to 5% of the outstanding loan balance. Additionally, the loan threshold for management-approved exit facilities has been raised from Tk10 lakh to Tk20 lakh, while higher amounts will require board approval.

Government borrowing from commercial banks has surged by 74% in the current fiscal year as private sector credit growth remains low and authorities aim to reduce central bank debt under a contractionary monetary policy. Between July and 20 February, the government borrowed Tk78,832 crore through Treasury bills and bonds, compared to Tk45,231 crore in the same period last year.

Private sector credit growth in Bangladesh hit a decade-low of 7.15% in January 2025, the lowest since at least 2015. This growth was significantly below the Bangladesh Bank's target of 9.80% for the second half of the fiscal year. Economists and bankers attribute the slowdown to the central bank’s tight monetary stance, high lending rates, and economic uncertainty following political changes.

Fourteen banks in Bangladesh have been found breaching lending limits, leading to a severe liquidity crisis and increasing bad loans. As of December 2024, banks like National Bank, Padma Bank, and AB Bank exceeded their loan-to-deposit ratio (ADR) limits of 87% for traditional banks and 92% for Islamic banks, with some banks reaching ADRs as high as 128%.