BB must confront bad loans’ true scale

Irrespective of the semantic disputes over distressed debt, the numbers for Bangladesh’s banking sector speak for themselves. In 2025, the industry recorded a net loss of Tk 1.36 lakh crore—its first aggregate deficit in more than a decade. Sector-wide net interest income turned negative. These are the inevitable consequences of years of politically directed lending.

The damage is highly concentrated. Five Islamic lenders—First Security, Social Islami, EXIM, Global Islami, and Union—are being merged into a single entity after catastrophic losses. First Security alone swung from a modest profit to a Tk 66,386 crore deficit. These banks share a common, fatal history: their governance was captured by interests tied to the S Alam Group and the political networks of the administration that collapsed in August 2024. While other lenders, including state-owned Janata Bank, also posted heavy losses, the deepest rot is found where political interference was most acute.

Against this backdrop, Bangladesh Bank has aggressively contested media estimates that distressed assets consume 60 percent of total credit, preferring a narrower non-performing loan (NPL) figure of 30.6 percent. It arrives at this lower number by excluding written-off debt, loans stalled by court orders, and—crucially—rescheduled loans. This accounting defence is flimsy. Global standards, such as those set by Basel III and the International Monetary Fund, dictate that rewriting a loan contract does not automatically cure its non-performing status. A borrower must prove they can service the debt under the new terms. Yet, Bangladesh Bank allows lenders to instantly reclassify rescheduled loans as "performing." The IMF explicitly criticised this practice, saying that "BB regulations allow immediate reclassification of restructured exposures, masking underlying asset quality."

The consequences of this regulatory forbearance are severe. Many recently rescheduled loans carry grace periods of up to two years, generating zero income for the lenders holding them. Combined with the heavy provisioning required for rising bad debts, this has dragged down the sector's net interest income. A banking system that costs more to fund than it earns cannot organically rebuild capital, sustain its deposit base, or extend fresh credit. The 2025 losses are not a temporary shock; they are a structural crisis.

Bangladesh Bank has urged the press to report with “sensitivity” in the “national interest,” ostensibly to protect depositor confidence. But financial stability cannot be conjured through bespoke accounting. Rating agencies, foreign investors, and multilateral lenders read the balance sheets. The reputational risk to Bangladesh stems from the condition of its banks, not the media reports on them.

Merging the five S Alam-linked banks is a necessary act of containment, but it is not a cure. The government needs a coherent reform programme. This must include rigorous loan recovery, the adoption of IMF-aligned classification standards, and a credible recapitalisation plan for insolvent institutions. The current administration inherited this wreckage; it carries no culpability for the past. But the compounding cost of inaction means it now owns the responsibility to clean it up. Bangladesh Bank must abandon regulatory forbearance and stamp out the systemic "evergreening" of bad debt.