Moody’s Ratings has downgraded Bangladesh’s banking system outlook from stable to negative, citing rising asset risks, poor corporate governance, and slower economic growth.

The U.S.-based agency, in its latest report, warned that inflationary pressures will further strain banks’ profitability and financial stability.

According to Moody’s, banks’ capitalization will remain stable as slower credit growth offsets weaker internal capital generation. However, the agency notes that liquidity will remain tight, and the government’s ability to support banks in crises is deteriorating.

Bangladesh’s real GDP growth is forecast to slow to 4.5% in the fiscal year ending June 2025, down from 5.8% in the previous fiscal year. Key challenges include political and social unrest, supply-chain disruptions in the garment sector, and weakening demand.

The central bank has raised policy rates from 6% to 10% over 15 months, yet inflation is projected to stay high at 9.8% in fiscal 2025. Moody’s warns that this will limit the interim government’s ability to implement reforms.

The banking sector faces worsening asset quality, with non-performing loans (NPLs) rising to 20.2% of total loans by the end of 2024, up from 9% a year earlier. Structural weaknesses, including lax regulations and governance issues, are expected to persist.

Moody’s predicts banks will increase loan-loss provisions, impacting profitability, while moderate credit growth may help contain capital erosion amid economic headwinds.