Strong Banks Must Lead Recovery: Mashrur Arefin

Mashrur Arefin, Managing Director and CEO of City Bank PLC, also Chairman of Association of Bankers of Bangladesh (ABB), in an exclusive interview with The Daily Observer discussed about the current crisis in the banking and financial sector. He also focused the reforms and measures to overcome the present weakness of the sector which will strengthen the sector to contribute to the national economy. His interview was taken by Shamsul Huda, Senior Business Correspondent of The Daily Observer. Following is the excerpt of the interview:

The banking sector is passing through a difficult period, but the current crisis also offers a chance to fix long-standing weaknesses, said Mashrur Arefin, managing director and CEO of City Bank PLC.

He said the biggest concern now was the sharp rise in classified loans, which had exposed serious problems in asset quality, capital and governance.

According to Bangladesh Bank data, classified loans crossed Tk6 lakh crore in June 2026, reaching Tk6,06,555 crore, or 32.78 per cent of total loans. The amount rose by nearly Tk50,000 crore in just six months.
Arefin also chairman, Association of Bankers Bangladesh (ABB) said the figure clearly showed the depth of the banking sector’s credit-quality problem.

“Almost one taka out of every three taka lent by banks is now classified,” he said.

However, he said the whole banking industry should not be viewed through the same lens. Some banks remained profitable, well-capitalised and capable of expanding their business, while a number of troubled banks were responsible for a large share of the sector’s bad loans and capital shortfall.

He described this as a “two-speed banking system.”

“Strong banks are growing, investing in technology and mobilising deposits, while a group of distressed institutions requires recapitalisation, restructuring or resolution,” he said.

Despite the problems, deposits continued to grow. Total deposits increased 12.2 per cent year-on-year to around Tk21.58 lakh crore in March 2026, while loans and advances grew only 4.2 per cent to Tk17.84 lakh crore.

As a result, the advance-to-deposit ratio fell from 89 percent to 82.7 percent.

Arefin said this showed that the banking sector did not have a shortage of funds. Rather, banks were struggling to find good borrowers and manage credit risks.

“The real constraints are weak credit demand, high lending risks and uneven distribution of liquidity among banks,” he said.

Private-sector credit growth fell to 4.47 per cent in June, while excess liquidity in the banking system reached around Tk4.08 lakh crore.

Much of this liquidity, however, was invested in government securities. Arefin said banks were naturally becoming cautious about lending when default risks were high. 

Government securities, meanwhile, offered banks a relatively safe return.

He said the ongoing banking reforms, including asset quality reviews, risk-based supervision, stronger loan-classification rules, the Bank Resolution Act and the proposed distressed asset management framework, were important steps.

The reforms could initially make the banking-sector numbers look worse because previously hidden weaknesses would become visible.

“But transparency is the first step towards recovery,” he said. He said the priority now should be to recognise losses properly, recapitalise viable banks, resolve non-viable institutions, strengthen corporate governance and bring back responsible credit growth.

“I am cautiously optimistic,” he said. 

“We should neither understate the crisis nor lose confidence in the whole industry.”

ECL can bring earlier warning on bad loans
Arefin said the introduction of Expected Credit Loss, or ECL, could significantly improve credit-risk management in Bangladesh’s banks.

He explained that the traditional provisioning system often reacts after a loan becomes overdue or classified. ECL under IFRS 9 is different because it looks ahead and estimates possible credit losses before a loan actually defaults.

“Simply put, the current system often reacts after the fire starts. ECL works more like an early warning system,” he said.

Under ECL, performing loans are subject to 12-month expected-loss provisioning. If the credit risk increases significantly, lifetime expected losses have to be recognised. Credit-impaired loans also require lifetime provisioning.

Arefin said this would encourage banks to identify warning signs earlier and start working with borrowers before their loans turn into major defaults.

He said ECL could improve credit monitoring, risk-based pricing, loan recovery and capital planning, while also reducing the scope for evergreening.

However, he stressed that ECL would not magically reduce the existing stock of NPLs.

“It will reveal and measure risk more accurately, enabling banks to act earlier,” he said.

Some banks may need to make additional provisions during the transition, which could hurt short-term profits and capital.

But Arefin said this should not be viewed simply as a new cost.

“It should be viewed as balance-sheet strengthening,” he said.

He also stressed that ECL should not remain the responsibility of only the finance or accounts department.

“It must become an institution-wide risk management framework,” he said, involving the board, senior management, credit, risk, finance, recovery, IT and internal audit teams.

Tk 60,000cr package can revive private credit
Arefin said the government’s Tk60,000 crore stimulus, pre-financing and refinancing package could provide a much-needed boost to private-sector lending.
But he cautioned that liquidity alone cannot revive credit growth.

Of the Tk60,000 crore package, Tk41,000 crore will come from banks with surplus liquidity and Tk19,000 crore from Bangladesh Bank. The package targets industry, agriculture, CMSMEs, exports, startups and employment-generating activities.

He said the structure made sense because it would try to move excess liquidity into productive sectors instead of leaving much of the money invested in government securities.

Pre-financing could particularly help smaller banks and CMSME lending because banks receive funds before disbursement. Refinancing provides support after banks have already extended loans.

The package could help private-sector credit recover from the current 4.47 percent growth rate. Bangladesh Bank has projected credit growth of 6.8 percent by December 2026 and 8 percent by June 2027.

Arefin said the target appeared achievable, but only if banks found enough viable borrowers.

“Excess liquidity and lendable liquidity are not the same,” he said.

He pointed out that businesses were also reluctant to borrow because of high interest rates, energy shortages, weak demand and policy uncertainty.

“A factory will not borrow simply because subsidised credit is available if it cannot secure reliable energy or operate at sufficient capacity,” he said.

He said banks should use the stimulus to finance new investment and productive businesses, rather than using the money to keep troubled loans alive through repeated rescheduling.

He also called for effective credit guarantees or risk-sharing mechanisms for CMSMEs, reasonable margins for participating banks and a simple, fast refinancing process.

The success of the programme, he said, should not be measured simply by the amount of loans disbursed.

It should be judged by whether the financing creates new investment, production, exports and jobs-and whether borrowers are able to repay the loans.

“The stimulus can provide private-sector credit with a much-needed initial push,” Arefin said.

“But it should be seen as a bridge to recovery, not a substitute for banking reform, reliable energy, better governance and an improved investment climate.”