The banking sector’s dangerous free fall while defaulters thrive

Plagued with a huge amount of non-performing loans (NPLs), capital deficiency, provision shortfall, management inefficiency, and other issues, Bangladesh’s banking sector is indeed in an extremely vulnerable state. At the same time, the sector is discriminatory, too, because rural areas’ capital is systematically transferred to urban areas. A staggering amount of deposits in this sector is supplied by small depositors, but most of these funds go to the hands of the rich.

The NPL ratio dropped to 30.60 percent in December 2025 after peaking at 35.73 percent just three months before. This decline was the result of a relaxed loan rescheduling policy by the Bangladesh Bank, where a defaulted loan could be regularised by repaying only a two-percent down payment of the outstanding loans.

Bangladesh’s NPL ratio was the highest in the world in September 2025. In comparison, Pakistan and India had the NPL ratios of 7.4 percent and 2.3 percent, respectively. Even Sri Lanka maintained it at 12.6 percent despite going through an economic crisis. Ukraine, locked in a prolonged war with Russia, had an NPL ratio of 26.1 percent, while Lebanon, which faced an enduring economic crisis, also maintained a considerably lower NPL ratio of 23.8 percent. In Bangladesh, NPL ratios of some banks were extremely high in 2025, five of which had an NPL ratio of more than 90 percent. Most of these banks cannot be made operationally successful at all.

Under the Basel III guidelines, introduced in 2015 and implemented nationwide by 2019, Bangladeshi banks need to maintain a capital to risk-weighted assets ratio (CRAR) of 12.5 percent. In 2020, the banking industry’s CRAR stood at 11.6 percent. In June 2023, it was 10.64 percent, but it dropped sharply to 6.86 percent in September 2024, then 3.08 percent in December 2024, per the central bank data. Before the political changeover in August 2024, the banks’ risk-weighted assets were highly underreported, which resulted in higher capital ratios. But when the banks started disclosing their true asset quality, the capital ratio fell seriously. In contrast, Pakistan maintained a CRAR of 20.6 percent, India 16.7 percent (as of September 2024), and Sri Lanka 18.4 percent—well above the required.

By 2025, the situation got worse in Bangladesh. By September 2025, 23 banks saw a combined capital shortfall of Tk 2.82 lakh crore, with the top five banks—First Security Islami Bank, Bangladesh Krishi Bank, Union Bank, Islami Bank, and Exim Bank—accumulating around Tk 1.68 lakh crore, 59 percent of the total shortfall. In December 2025, the banking sector’s CRAR fell to negative 2.9 percent, a first in the country’s history.

The efficiency of a bank can be estimated by the expenditure to income ratio, meaning how much expenditure it incurs to generate certain income. Around 50-60 percent is the standard ratio. In Bangladesh, the banking sector’s expenditure to income ratio was 92 percent in 2005, which declined to 73 percent in 2010 before rising to 84 percent in 2020. Another decline to 80 percent in 2024 introduced a temporary improvement.

The geographical and sectoral concentrations of loans indicate both vulnerability and unfairness of our banking sector. About 87 percent of total loans are concentrated in Dhaka (67.34 percent) and Chattogram (19.4 percent) divisions. As of 2024, nearly 31 percent of the total loans are concentrated in large industries, about 18 percent in wholesale and retail trade, and approximately 11 percent in import financing.

Small depositors supply a huge portion of deposits in the banking sector. Deposits ranging between Tk 2 lakh and Tk 25 lakh constitute 55 percent of total deposits. Deposits amounting to less than Tk 1 crore found a whopping 92 percent of total deposits. The NPL ratio of small loans is lower than that of large ones. As of September 2025, loans worth up to Tk 1 crore had the NPL ratio of 15.2 percent, and the loans worth Tk 1 crore to Tk 10 crore had the NPL ratio of 27.9 percent. Loans between Tk 10 crore and Tk 20 crore had the NPL ratio of 48.1 percent, and those sized Tk 50 crore or more saw an NPL ratio of 51 percent.

In 1992, rural depositors supplying about 22 percent of total deposits received nearly 20 percent of loans, which constituted approximately two percentage points of capital flight from rural to urban areas. This rose to 10.33 percentage points in 2016, continuing upwards to 10.47 percentage points in 2018 and eventually peaking at 10.63 percentage points in 2019. It was more than 10 percentage points for the next three years. However, a slight drop to 9.29 percentage points in 2023 and a considerable plunge to 7.50 percentage points in 2024 introduced a setback.

To tackle the capital shortfall, especially in state-owned commercial banks, over Tk 25,000 crore has been injected into the ailing banks through budgetary allocation between 2009 and 2024. The ultimate burden of this injection is borne largely by the general taxpayers.

Instead of developing capital, bond, and insurance markets from which businesspersons are supposed to take large and long-term loans, banks are made available to them for large lending. Earlier, a single borrower exposure could not exceed 35 percent of a bank’s total capital. This rule was dangerous because three such borrowers could eat up the bank’s total capital. Now the exposure limit is 25 percent of a bank’s total capital. It is still alarming because a bank could be at serious risk with four such borrowers. The Bangladesh Bank frequently changes loan classification, rescheduling, and restructuring rules when NPLs pile up. These opportunities are mostly to facilitate large borrowers.

It is impossible to establish a robust banking system in the country without shrinking the NPL volume. At the same time, the financial discrimination between rural and urban areas, and also between the rich and the poor, produced by the existing banking system must be reduced to a minimum for fairness. Addressing these problems is not impossible, although they are time-consuming. What is truly required is strong political resolve and good intention.

China, for instance, was seriously hit by the Asian Financial Crisis in 1997, and its NPL ratio rose to 25 percent in 1999. It was reduced to 1.14 percent after just a decade. The list of defaulted borrowers in China contained many political bodies and legislative and government staff, but there was no exception to punishment. Its success was due to political will backed by the right usage of public funds.

The Bank Resolution Act, 2025 in Bangladesh created a mechanism through which previously merged banks can revert to their former owners. The previous shareholders can reacquire control by paying just 7.5 percent of the total funds supplied by the government and the central bank for operating the merged entities. Without punishing the owners allegedly liable for making the banking sector extremely vulnerable, giving such opportunities will expose the sector to more risks. At some point, it may fall apart like a house of cards if timely measures are not employed to strengthen it.

Dr Md Main Uddin is professor and former chairman of the Department of Banking and Insurance at the University of Dhaka. He can be reached at mainuddin@du.ac.bd.

Views expressed in this article are the author's own. 

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