Banking sector of Bangladesh is facing acute crisis of unprecedented magnitude. Distressed assets are loans that are under significant repayment stress and pose a heightened risk to the financial health of banks. Distressed assets comprise defaulted loans, rescheduled loans that remain unpaid, loans under court stay orders, and written-off loans that have not yet been recovered. These assets either generate little or no income for banks and require additional provisioning, thereby weakening profitability, capital strength, and lending capacity. As a result, the distressed asset ratio is increasingly viewed as a more comprehensive indicator of banking sector vulnerability than the traditional NPL ratio.
According to According to Financial Stability Report 2025 of Bangladesh Bank distressed assets have reached Tk 10,88,000 crore, representing 60 percent of total outstanding loans of Tk 18,21,000 crore of the banking sector. In simple terms, nearly six out of every ten taka lent by banks are now trapped in loans that are either defaulted, rescheduled, written off, or otherwise under serious financial stress. After a large volume of previously hidden bad loans of the banking sector came to light following the fall of the Awami League-led government in August 2024.
The figures are alarming not only because of their size but also because of what they reveal about the underlying health of the country's financial system. Distressed assets have become one of the greatest threats to Bangladesh's financial stability, investor confidence, and long-term economic growth.
According to Bangladesh Bank’s Report, defaulted loans stood at Tk 5,57,217 crore, followed by rescheduled loans at Tk 2,68,733 crore, loans under stay orders at Tk 1,82,419 crore, and written-off loans at Tk 83,479 crore. Together, these categories pushed total distressed assets to Tk 10,88,000 crore, up from Tk 7,56,000 crore in 2024. This represents an increase of Tk 3,32,000 crore or more than 44 percent within a single year.
Such a rapid deterioration is not the result of temporary economic difficulties alone. Rather, it reflects deep-rooted structural weaknesses that have accumulated over many years. Weak governance, politically influenced lending, inadequate risk assessment, ineffective recovery mechanisms, and repeated regulatory concessions have collectively contributed to the current situation.
According to Financial Stability Report 2025 of Bangladesh Bank
distressed assets have reached Tk 10,88,000 crore, representing 60
percent of total outstanding loans of Tk 18,21,000 crore of the banking
sector.
Loan rescheduling can be a useful tool when borrowers face temporary financial difficulties. However, when repeatedly used to mask underlying credit problems, it merely postpones the recognition of losses. The experience of recent years demonstrates that many rescheduled loans eventually become non-performing again. Instead of restoring repayment capacity, repeated rescheduling often delays necessary corrective action and creates a false sense of stability.
The Capital to Risk-Weighted Assets Ratio (CRAR) is a key financial indicator used by regulators to assess a bank's financial strength and its ability to absorb losses during periods of economic stress. Under the Basel-III framework, banks in Bangladesh are required to maintain a minimum CRAR of 10 percent, along with a 2.5 percent Capital Conservation Buffer (CCB), resulting in an effective total capital requirement of 12.5 percent. However, the banking sector's CRAR deteriorated sharply from 3.08 percent in 2024 to negative 2.64 percent in 2025. Twenty banks are reportedly facing a combined capital shortfall of approximately Tk 2,78,000 crore.
The profitability indicators are equally concerning. The sector-wide Return on Assets (ROA) plunged from 0.43 percent in 2024 to negative 4.81 percent in 2025. Meanwhile, Return on Equity (ROE) collapsed from 8.70 percent to negative 243.90 percent. Such figures indicate severe financial distress across a significant portion of the banking industry.
Bangladesh Govt. has set an ambitious goal of becoming a 1 trillion Dollar economy by 2034, but achieving this target will be extremely challenging unless the country's banking sector regains its financial health. The rapid accumulation of distressed assets, which now account for nearly 60 percent of total outstanding loans, threatens the banking system's ability to mobilise savings and channel credit to productive sectors. Without comprehensive banking sector reforms, the aspiration of becoming a trillion dollar economy may prove difficult to achieve.
Temporary regulatory forbearance measures or periodic capital injections alone will not be sufficient to address this crisis. Comprehensive reforms are essential to restore discipline, accountability, and transparency in the banking sector. Without addressing the underlying structural weaknesses, such short-term measures may only delay the resolution of problems while increasing the eventual economic and fiscal costs
First, establishing special courts for the recovery of non-performing loans (NPLs) has become a pressing necessity. Such courts would facilitate the speedy disposal of loan-related cases, reduce legal complexities, and enable more effective action against wilful defaulters. At the same time, they would accelerate banks’ recovery efforts and help restore discipline in the financial sector.
Second, the standard of governance in banks must be significantly strengthened. Boards of directors and senior management should be held accountable for their decisions regarding loan approvals and risk management. Political influence in lending decisions must be minimized, and credit decisions should be made strictly on commercial and prudential grounds.
Third, strict legal action should be taken against individuals or groups involved in the widespread irregularities, corruption, loan fraud, and plundering of the banking sector during the previous government's tenure.
Fourth, the supervisory and regulatory functions of Bangladesh Bank must be further strengthened, and the consistent application of prudential standards across all institutions must be ensured. The recent initiative to align loan classification practices with international standards is an important step toward enhancing transparency.
Fifth, urgent reforms are needed in the loan recovery framework. Specialized financial courts, expedited legal procedures, and stronger enforcement mechanisms could help improve recovery rates and discourage strategic defaults.
Sixth, transparency must be enhanced further. Investors, depositors, and policymakers should be provided with accurate and timely information regarding the true financial condition of banks. Concealing underlying problems through restructuring measures or regulatory forbearance only increases the eventual cost of resolution.
A stable, resilient, and trustworthy banking system is essential for sustaining Bangladesh’s economic development. The latest distressed asset figures should serve as a strong warning signal for policymakers, regulators, financial institutions, and borrowers alike. The time has come for decisive and effective reforms. Restoring confidence in Bangladesh’s banking sector is not merely a financial imperative; it is a prerequisite for the country’s long-term economic future.
The writer is a bank & economic analyst
