Distressed assets threaten banking sector

Bangladesh’s banking sector is facing one of its most serious challenges in recent history. According to the Bangladesh Bank Financial Stability Report 2025, distressed assets have climbed to Tk 10.88 trillion, equivalent to 59.73 percent of total outstanding loans. This is not merely a banking statistic. It reflects years of weak governance, poor credit discipline and repeated regulatory concessions that have masked underlying vulnerabilities.

Distressed assets provide a broader measure of banking sector risk than the conventional non-performing loan (NPL) ratio. They include classified loans, unpaid portions of rescheduled loans and loans that have been written off but remain unrecovered.

At the end of 2025, total loans in the banking sector stood at Tk 18.21 trillion. Of this, Tk 5.57 trillion was officially classified as defaulted loans. Another Tk 4.47 trillion represented unpaid balances of rescheduled loans, while Tk 834.79 billion had already been written off. Combined, these exposures pushed distressed assets to Tk 10.88 trillion, an increase of Tk 3.31 trillion in just one year.

The pace of deterioration is alarming. Distressed assets had already risen by Tk 2.60 trillion in 2024. The continued acceleration suggests the problem is no longer temporary but a structural weakness threatening financial sector stability. For years, troubled borrowers were allowed to reschedule loans with minimal down payments and extended repayment periods. Various restructuring facilities helped banks avoid showing the true extent of defaulted loans. While these measures offered short-term relief, they often delayed rather than solved the problem.

The consequences are now clear. Many repeatedly rescheduled loans have eventually turned non-performing. The practice may have improved reported figures temporarily, but it failed to restore repayment capacity.

The record Tk 1.71 trillion of loans rescheduled during 2025 highlights this challenge. Despite the largest rescheduling exercise in the country’s history, key indicators continued to worsen. Without genuine recovery and stronger enforcement, restructuring simply postpones losses.

The impact is now visible in banks’ capital positions. The sector-wide capital adequacy ratio has fallen into negative territory, reaching minus 2.64 percent, compared with a positive 3.08 percent a year earlier. The deterioration is largely driven by 20 banks facing a combined capital shortfall of about Tk 2.78 trillion.

Banks with inadequate capital have limited capacity to absorb losses, support new lending or withstand economic shocks. Persistent weakness also undermines confidence among depositors and investors. Particularly worrying is the condition of the Islamic banking sector. Its capital adequacy ratio has plunged to negative 43.18 percent. Although the ratio improves when five merged banks are excluded, the sector remains under significant stress. Several Islamic banks have also struggled to meet key liquidity and funding requirements set by the central bank.

The roots of the current crisis lie in years of politically influenced lending, weak risk management and inadequate accountability. Large borrowers often received repeated concessions while recovery efforts remained ineffective. As a result, credit discipline eroded and risks accumulated across the banking system.

The challenge facing policymakers extends beyond cleaning up balance sheets. The priority must be restoring confidence in the financial system. Banking ultimately depends on trust: trust in institutions, financial statements and regulatory oversight. When nearly 60 percent of total loans fall into the distressed category, that trust inevitably comes under pressure.

Bangladesh’s banking sector therefore needs comprehensive reforms rather than temporary relief measures. Stronger governance, improved loan recovery mechanisms, greater transparency and stricter accountability for both borrowers and lenders are essential. The latest figures should serve as a wake-up call. Distressed assets are no longer a hidden weakness within individual banks. They have become one of the greatest threats to Bangladesh’s financial stability and long-term economic growth.

The writer is an economic analyst