Bad Loans Devour Banks' Capital as 90pc of Defaults Face Recovery Dead End

Bangladesh's banking sector is sinking deeper into crisis as nearly one-third of outstanding loans have turned sour, the industry's capital position has plunged into negative territory and an estimated 80 to 90 per cent of defaulted loans are unlikely to be recovered, exposing a staggering weakness in the country's financial system.

The mounting bad-loan burden has left banks struggling to absorb credit losses, while deliberate defaults, financial irregularities and alleged criminal activities have shifted the cost of the crisis onto ordinary depositors, honest borrowers and financially sound banks.

The alarming picture emerged in a report titled 'Assessment of the Banking Sector and Policy Review: January-September 2026', unveiled by the Knowledge Hub Institute (KHI) at a programme in Shyamoli, Dhaka, on Saturday.

Noor Yana Jannat, Research Associate of KHI, presented the report. Khandaker Golam Moazzem, President of the institute, and members of its Board of Trustees attended the event.

According to the report, non-performing loans (NPLs) accounted for 32.78 per cent of total outstanding loans in June 2026, meaning nearly one-third of bank lending had turned non-performing.

The sector's capital position was equally alarming. Its capital adequacy ratio (CAR) stood at negative 2.64 per cent at the end of 2025, reflecting an inability to maintain sufficient capital against mounting credit risks. The shortfall against required loan-loss provisions reached around Tk1,91,441 crore, while another Tk1,82,419 crore remained locked in 845 cases due to court-imposed stay orders.

BIBM professor and KHI Lead Economist Shah Md Ahsan Habib said an estimated 80 to 90 per cent of defaulted loans were unlikely to be recovered, describing the scale of bad loans as exceptionally high.

"My personal assessment is that less than 10 per cent of this 33 per cent default loan portfolio represents genuine credit risk. The larger portion is associated with operational risks, operational irregularities and criminal activities. Banks cannot tackle such offences on their own. The government and the central bank must play an active role alongside the banks," he said.

He said a significant portion of NPLs had resulted from wilful defaults rather than genuine business failures, with ordinary depositors, bank employees, responsible borrowers and financially sound banks bearing the consequences.

"Ordinary depositors are bearing the consequences of wilful loan defaults. Many bank officials and employees who had no involvement in the loan disbursement process are also being forced to suffer the consequences”, Prof Habib said.
 
“Good borrowers are having to take loans at higher interest rates, while even financially sound banks are bearing the impact of the crisis. Ultimately, the entire economy is paying the price, as our economy is largely dependent on a bank-based financial system," he added.

Quoting the Bangladesh Bank’s recently published assessment report, the KHI report noted that state-owned banks recorded the highest NPL ratio among conventional banking categories at 43.2 per cent, followed by private commercial banks at 31.6 per cent and foreign banks at 6.5 per cent.

The situation was worse among full-fledged Islamic banks, where the NPL ratio reached 58.9 per cent. Their deposits declined by 1.7 per cent, while the loan-to-deposit ratio climbed to 127.7 per cent.

Meanwhile, deposit growth failed to translate into stronger private-sector lending. Banking sector deposits grew by 11.96 per cent in August, but private-sector credit growth stood at just 4.75 per cent, declining further to 4.09 per cent in September.

The broader economic indicators also reflected persistent pressure. Inflation stood at 8.34 per cent in September, while the policy interest rate remained unchanged at 9.50 per cent. 

Foreign exchange reserves stood at $31.20 billion on September 30, while remittance growth reached 13.28 per cent during July-September.

Banks held excess liquid assets of Tk4,41,954 crore in August. However, the report warned that the aggregate surplus could conceal liquidity weaknesses in individual troubled banks.

The KHI report also exposed persistent gaps in financial inclusion. SME loans accounted for 15.87 per cent of total lending in March, against a target of 25.50 per cent. Loans to women entrepreneurs represented only 7.28 per cent, compared with the target of 15 per cent.

Although rural deposits accounted for 16.25 per cent of total deposits, rural lending stood at just 7.42 per cent. Moreover, 34.48 per cent of agricultural and rural loans remained overdue in August, it added.

To contain the crisis, KHI recommended independent reviews of vulnerable banks' loan portfolios by December 2026 and bank-specific decisions on capital restoration or resolution by March 2027.

It also called for regular disclosure of individual banks' cash recoveries, capital positions and customer services to strengthen transparency and accountability.

The report highlighted the enactment of the Bank Resolution Act 2026 and the Deposit Protection Act 2026, alongside the announced Tk35,000 crore capital framework for the proposed Sammilito Islami Bank.

However, it found no evidence that the process of returning depositors' money in the case of Sammilito Islami Bank had been completed.