Banking sector must regain public trust for survival

Bangladesh's banking sector is passing through the gravest crisis in its history since independence. What was once viewed primarily as a problem of rising defaulted loans has evolved into a full-scale systemic crisis affecting banks' profitability, liquidity, capital adequacy, depositor confidence and, ultimately, the country's economic stability. The latest Financial Stability Report 2025 of Bangladesh Bank paints an alarming picture that can no longer be dismissed as a temporary setback. The crisis has reached a stage where restoring public confidence in the banking system should become one of the government's highest priorities.

The magnitude of the deterioration is staggering. Bangladesh Bank reports that, along with the default loan crisis, distressed assets-including classified loans, unrecovered portions of rescheduled loans and written-off loans-have reached Tk10.88 trillion, representing nearly 60 percent of total outstanding loans. These figures expose a reality long hidden through repeated regulatory concessions. Successive rescheduling facilities, relaxed loan classification standards and extended repayment opportunities temporarily improved banking statistics but failed to address the underlying problem.

For the first time in recent history, the banking sector has collectively posted a net post-tax loss exceeding Tk1.36 trillion after earning a modest profit only a year earlier. Net interest income has turned negative, meaning banks are paying more interest to depositors than they earn from lending

However, the banking crisis cannot be explained by financial indicators alone. The present situation is the cumulative outcome of years of political interference, regulatory weakness, poor corporate governance and institutional failures. Large borrowers repeatedly received favorable treatment while ordinary borrowers remained subject to strict enforcement. Weak oversight allowed politically connected businesses to accumulate enormous loans without adequate scrutiny. Many influential defaulters obtained repeated restructuring facilities, minimal down-payment requirements and relaxed repayment conditions unavailable to ordinary businesses.

The result was the gradual destruction of credit discipline throughout the financial system. Loan defaults became a business strategy instead of a financial accident. Political patronage protected influential borrowers from accountability while regulators often lacked either the authority or willingness to intervene effectively. The damage extends well beyond banks' balance sheets. Banking is fundamentally built upon trust. Depositors place their life savings in banks because they believe those institutions are safe, properly regulated and capable of returning their money whenever required. Once that confidence weakens, the entire financial system becomes vulnerable regardless of accounting ratios.

Recent developments have intensified public anxiety. Several troubled banks have struggled to meet deposit withdrawal requests, creating panic among customers. Discussions about possible bank liquidations, together with legal provisions limiting insured deposits to only Tk200,000, have further undermined confidence. Many depositors naturally wonder whether their lifelong savings remain fully protected.

At this critical moment, the government's policy response must prioritize restoring confidence rather than creating additional uncertainty. Citizens need reassurance that every legitimate depositor will recover the full amount of their deposits, whether held in commercial banks or non-bank financial institutions (NBFIs). The present crisis is not the result of reckless behavior by ordinary depositors but of years of political influence, regulatory failures and large-scale financial misconduct. Therefore, depositors should never become its ultimate victims.

Likewise, imposing additional transaction taxes, service charges and stricter procedural requirements on ordinary customers sends the wrong message during such a fragile period. Instead of encouraging people to return to banks, these measures discourage formal financial transactions precisely when banks need deposits most. The government's immediate objective should be making banking easier, cheaper and more attractive. Temporary reductions in banking-related taxes, simplified account procedures, lower transaction costs and customer-friendly incentives can encourage people to retain their savings within the formal banking system rather than shifting to informal channels.

Simply injecting government money into failing banks, however, cannot become the principal solution. Large-scale recapitalization financed through public funds risks expanding the money supply and increasing inflationary pressure when households are already struggling with rising living costs. Such bailouts also create moral hazard by allowing irresponsible lending practices to continue without meaningful accountability. Instead, authorities should focus on identifying the actual sources of the problem-the major loan defaulters. Some businesses may have become distressed due to genuine economic difficulties, supply-chain disruptions or temporary market conditions. These enterprises deserve targeted restructuring support, technical assistance or carefully designed financial packages that enable them to revive operations, restore profitability and eventually repay their outstanding obligations.

Conversely, willful defaulters who deliberately diverted borrowed funds, engaged in money laundering or exploited political influence must face swift legal action. Loan recovery mechanisms should become substantially more efficient, financial crimes should be prosecuted without political interference and asset recovery should become a national priority. Recovering stolen assets would strengthen banks far more sustainably than repeated government bailouts.

Another area requiring immediate attention is banks' expenditure management. At a time when many institutions are reporting historic losses, operational discipline must begin at the top. Yet senior executives in numerous banks continue to receive exceptionally high salaries, generous allowances and subsidized benefits. Meanwhile, many employees continue receiving heavily leveraged staff loans at interest rates far below market levels, financed ultimately by depositors' money.

Bangladesh Bank should therefore establish a transparent compensation framework across the banking industry. The maximum salary of any bank's Managing Director, Chief Executive Officer or Chairman could reasonably be aligned with the salary structure of a Secretary to the Government. Compensation for other senior executives should follow proportionately. Performance-based incentives may remain possible, but only after banks return to sustainable profitability and meet clearly defined governance standards. At the same time, preferential employee loan facilities carrying unusually low interest rates should be phased out or rationalized. Banks must utilize every taka responsibly.

Restoring financial stability also requires banks to redirect lending towards productive sectors with stronger repayment prospects. Instead of concentrating exposure among a handful of politically connected conglomerates, greater emphasis should be placed on agriculture, small and medium enterprises, export-oriented manufacturing, information technology, renewable energy and other sectors demonstrating genuine economic potential. Diversifying credit portfolios would reduce concentration risks while generating healthier, more sustainable earnings.

Equally important is strengthening governance across the banking ecosystem. Political influence over lending decisions must end. Regulatory independence should be reinforced. Loan classification, provisioning and capital adequacy rules should never again be relaxed merely to improve cosmetic financial indicators. Honest recognition of problems is always less costly than prolonged concealment.

The banking crisis should also remind policymakers that economic recovery cannot be achieved simply by increasing public-sector salaries while most citizens continue facing financial hardship. Businesses, industries, entrepreneurs and households all depend on a healthy financial system. If people lose confidence in banks and NBFIs, savings will leave the formal financial sector, credit creation will weaken, investment will decline and economic growth will inevitably slow. 

Bangladesh therefore stands at a defining moment. The country's banking system does not merely require recapitalization; it requires restoration of integrity, accountability and public confidence. Depositors must be reassured. Willful defaulters must be pursued relentlessly. Genuine businesses should receive support to recover and repay. Banking should become more customer-friendly rather than more burdensome. Operational waste must be reduced, governance strengthened and productive lending revived.

The latest financial indicators are not simply warning signals-they are evidence that the banking crisis has become a national economic emergency. Stabilizing banks and NBFIs is no longer just another policy objective; it is an indispensable prerequisite for protecting businesses, safeguarding people's savings and securing Bangladesh's long-term economic future. Unless trust is restored quickly, no amount of regulatory reform or financial assistance alone will be sufficient to rescue the country's financial system, and we hope the authorities realize that soon.