Bulging NPLs enough to derail economy

A sound banking sector is the bedrock of a sound economy. The experience of economies across the world attests to this assertion: without a vibrant, healthy, and functioning banking system, no country can dream of sustainable development, let alone achieve rapid economic growth. In Bangladesh, however, the very pillar that is meant to support the economy stands increasingly weakened by a long-standing and dangerous affliction -- classified loans, also known as non-performing loans (NPLs).

Non-performing loans are the Achilles heel of the country's banking sector. This is not a new problem; it has plagued Bangladesh for decades. Yet the gravity of the crisis has intensified alarmingly in recent years, especially since the previous Awami League-led government came to power. That regime, often accused of favouring certain oligarchic business groups, oversaw a disturbing trend of ballooning bank credit disbursed to politically connected individuals and firms. As these borrowers defaulted on repayment, with little or no punitive action, the culture of willful default took root and grew like an unchecked weed.

Despite efforts by the current interim government to restore discipline in the banking sector, the classified loan problem continues to snowball. The new administration had pledged decisive steps to reduce bad loans, and indeed it undertook several measures aimed at stricter classification rules and enforcement. Yet, the latest figures paint a grim picture: the volume of NPLs has risen significantly, threatening not just the stability of the banking sector but also the broader economy.

According to the latest data, classified loans in Bangladesh's banking industry soared by around Tk 750 billion in just three months -- an astronomical jump that pushed total NPLs to a record Tk 4.20 trillion by the end of March 2025. This now accounts for a staggering 24.13 per cent of all loans -- up from just 11.11 per cent a year earlier. In real terms, nearly one out of every four taka lent by the banks has gone bad.

To put this into perspective, the total outstanding loans across the 61 commercial banks in the country now stand at Tk 17.42 trillion. The Tk 4.20 trillion in classified loans includes substandard, doubtful, and bad/loss categories. Alarmingly, a massive 81.38 per cent  -- over Tk 3.41 trillion -- of this amount falls under the "bad loan" category, which means there is little hope of recovery unless extraordinary measures are taken.

The implications are serious. When banks are saddled with high NPLs, their ability to disburse fresh loans gets crippled. As more of their funds are locked up in unrecoverable accounts, their liquidity dries up, forcing them to become extremely conservative in extending new credit. This hits private investment hard. Without access to finance, businesses cannot expand, create jobs, or innovate. Economic stagnation follows. And in a country like Bangladesh, where private sector investment is a key growth driver, this can be disastrous.

Furthermore, banks are legally required to maintain provisioning -- setting aside a portion of their earnings to cover the potential losses from bad loans. As NPLs mount, so does the provisioning requirement, which eats into bank profits and leaves them less capitalised. Weak capitalisation can invite further regulatory scrutiny, damage investor confidence, and eventually force banks into a vicious cycle of distress.

The Bangladesh Bank (BB), the country's central bank, acknowledges the worsening trend. In an effort to impose tighter discipline, the central bank revised the overdue loan classification system, reducing the tenure from nine months to six months. Starting from March 31, 2025, the classification period will be further shortened to three months. While these stricter norms are commendable and necessary, they also mean that the banks must brace for more loans turning classified in the coming quarters unless recovery improves dramatically.

There are structural and historical reasons behind this surge in NPLs. For the last 15 years, during the previous government's rule, a number of business accounts were opened by individuals and entities favoured by the regime. Many of these accounts were based on inflated projections, non-existent cash flows, or political protection. With the change in regime following the July-August 2024 mass uprising, many such businesses have gone into hibernation. Sales turnover has plummeted, and cash flow has dried up. These accounts are now turning toxic, and banks are left to deal with the fallout.

Moreover, some banks have been effectively captured by vested interest groups -- a "vicious circle" of politically connected borrowers and complicit bank directors. These forces have laundered public money with impunity, leaving behind a hollowed-out financial system. Now, with the regulatory environment tightening, the hidden rot is surfacing.

The problem is not just managerial but also philosophical. Many banks in Bangladesh have failed to recognise that banking is a high-risk business -- especially in emerging markets. Lending money is not just a routine function; it requires robust Credit Risk Management (CRM) frameworks, capable loan appraisals, and vigilant monitoring. Unfortunately, in several banks, especially state-owned ones, risk management has been perfunctory or even non-existent. Even the presence of Board Risk Management Committees (BRMCs), a requirement in many jurisdictions, has been symbolic at best.

The way forward requires a multi-pronged approach.

First, banks must urgently intensify their cash-recovery efforts. The current recovery rate is abysmally low and reflects a lack of seriousness. Legal processes to recover defaulted loans need to be streamlined, special tribunals empowered, and willful defaulters publicly named and penalised.

Second, the regulatory role of the Bangladesh Bank must be strengthened. No more political interference in bank appointments -- especially at the board and managing director levels -- should be tolerated. Independent directors must be made truly independent, and audit committees must be empowered to flag irregularities.

Third, policymakers must realise that the banking sector does not operate in isolation. Global factors -- such as ongoing conflicts in the Middle East, fluctuating oil prices, and rising U.S. tariffs -- can all affect trade and investment in Bangladesh. Hence, any national strategy to improve bank performance must be built on macroeconomic foresight and external risk assessment.

Fourth, structural reforms are essential. The government must seriously consider merging weaker banks and recapitalising them, but only after ensuring good governance and accountability. No recapitalisation should be done blindly using taxpayer money without resolving the root causes of inefficiency.

Finally, a broader cultural shift is necessary. The idea that bank loans are grants or political rewards must be shattered. Loan default must carry social stigma and legal consequences. At the same time, good borrowers -- especially SMEs and exporters -- must be incentivised and supported.

Bangladesh's banking sector has reached a critical juncture. The rise in classified loans is not just a financial issue; it is a national crisis. If left unaddressed, it could derail the country's economic ambitions. The interim government must use this window of opportunity to enact meaningful reforms -- reforms that may be difficult but are indispensable. The alternative is continued decay and erosion of public trust in the very institutions that are supposed to safeguard the country's financial health.

As the numbers rise, so must our collective resolve. Bangladesh deserves a banking system that fuels growth -- not one that drowns it.

mirmostafiz@yahoo.com