Soaring NPLs: Who will stem the tide?

For years, one question has continued to dominate discussions about Bangladesh's financial sector: Can the country ever bring its non-performing loans (NPLs) under control? 

The answer extends far beyond banking statistics. 

The NPL crisis is the cumulative outcome of weak governance, political patronage, regulatory forbearance and institutional failure. 

Although Bangladesh has entered a new political chapter following the recent transition of power, the financial sector continues to carry the burden of decisions made over many years.

The making of a systemic crisis

When the Awami League assumed office in 2009, defaulted loans stood at Tk22,481 crore. Over the following decade and a half, Bangladesh achieved impressive infrastructure and economic milestones. 

Landmark projects such as the Padma Bridge, Metro Rail and Elevated Expressway transformed connectivity, while the national budget expanded to nearly Tk7.97 lakh crore.

Macroeconomic performance also remained comparatively strong. Even during the Covid-19 pandemic, GDP grew by 3.45% in 2020 before rebounding to 7.1% in 2022. Between 2014 and 2024, average economic growth exceeded 6%, outperforming many emerging economies.

Beneath these achievements, however, vulnerabilities were steadily accumulating within the banking sector. 

Politically influenced lending, repeated loan rescheduling, regulatory indulgence and preferential treatment for large borrowers weakened credit discipline and distorted risk management. Although successive policy measures temporarily masked the problem, the underlying asset quality continued to deteriorate.

The NPL ratio stood at 8.9% at the end of 2013. By December 2023, defaulted loans had risen to Tk1,45,633 crore. Within six months, the figure climbed further to Tk2,11,391 crore, representing 12.56% of total outstanding loans.

Transition, transparency and unintended consequences

Following political change in August 2024, the interim government led by Professor Muhammad Yunus inherited an economy facing multiple structural challenges. 

One of its most significant financial-sector reforms was to align Bangladesh's loan-classification standards with international practices by gradually reducing the overdue period to 90 days, consistent with IMF recommendations.

Greater transparency was widely welcomed. However, the transition coincided with business disruptions, weakened industrial production and the financial distress of several large business groups. 

Loan recoveries slowed considerably, while many previously rescheduled or concealed problem loans were formally recognised as defaults. Audits conducted after the restructuring of bank boards also revealed the extent of irregular lending accumulated over previous years.

Consequently, NPLs surged to Tk5,30,428 crore by June 2025 and reached Tk5,57,217 crore by December.

Although greater transparency restored credibility to financial reporting, policy implementation lacked coordination. Proposed bank mergers, administrative interventions in weak banks and uncertainty surrounding restructuring measures undermined depositor confidence and intensified liquidity pressures. 

At the same time, tight monetary policy helped moderate inflationary expectations but could not fully offset supply-side disruptions. GDP growth slowed to 3.49% in FY2024–25 which was lower than historical average growth. 

The current reality

The newly elected government that assumed office in early 2026 inherited a banking sector under severe stress. By March 2026, defaulted loans had increased to Tk5,88,704 crore — equivalent to 32.26% of total outstanding loans — placing Bangladesh second globally after war-affected Ukraine, whose NPL ratio stood at 37.35%.  Meanwhile, the banking sector's provisioning shortfall reached Tk 2,05,665 crore, exposing significant weaknesses in banks' capital positions.

Fiscal pressures have added another layer of concern. Within its first six weeks, the new government reportedly borrowed around Tk41,000 crore from the banking system. Combined borrowing by both the interim and current governments during the first nine months of the fiscal year approached Tk1,09,000 crore.

The newly elected government that assumed office in early 2026 inherited a banking sector under severe stress. By March 2026, defaulted loans had increased to Tk5,88,704 crore — equivalent to 32.26% of total outstanding loans — placing Bangladesh second globally after war-affected Ukraine, whose NPL ratio stood at 37.35%.

Bangladesh's public debt has also expanded sharply over the past decade. While much of the earlier borrowing financed infrastructure development, the country's total public debt has now reached unprecedented levels. If current borrowing trends continue, debt servicing will consume an increasing share of public expenditure, reducing fiscal space for development priorities.

The FY2026–27 budget proposes financing a substantial portion of its Tk2,43,000 crore deficit through domestic bank borrowing. 

Such dependence risks crowding out private sector credit at a time when private investment has already fallen to 22.5% of GDP. According to IMF projections, economic growth may recover modestly over the medium term, but inflation is expected to remain elevated. 

Although inflation eased to 9.16% in June 2026 from a peak of 10.03% in 2024, it remains substantially higher than the 5.65% recorded in 2020, underscoring the persistence of underlying price pressures.

Concentration of banking distress

The NPL problem is also highly concentrated. As of March 2026, more than 85% of all defaulted loans were held by only 15 of the country's 61 banks.

Among state-owned commercial banks, Janata Bank faces the most severe challenge, with nearly 70% of its loan portfolio classified as non-performing. Other state-owned banks also exhibit exceptionally high NPL ratios, including BASIC Bank, Bangladesh Development Bank, Rupali Bank, and Agrani Bank. 

The contrast with foreign commercial banks is particularly striking, where NPL ratios generally remain below 6%. This disparity underscores the importance of strong governance, prudent risk management, effective oversight and professional management.

A regional perspective 

Bangladesh's position appears even more concerning when compared with neighbouring countries. The average NPL ratio across Asia is around 1.6%  and approximately 3.5% in South Asia. India's banking sector has reduced its NPL ratio to below 3%, Nepal's remains around 5%, while Pakistan records approximately 7%.

By comparison, nearly one-third of Bangladesh's outstanding loans are now classified as non-performing, making the country a significant regional outlier.

International experience also offers important lessons. 

South Korea successfully restructured its banking sector after the Asian Financial Crisis through the Korea Asset Management Corporation (KAMCO), which purchased distressed assets and facilitated bank recapitalisation. Several countries have also strengthened legal frameworks to discourage wilful default and improve recovery mechanisms.

The reform agenda

Addressing Bangladesh's NPL crisis requires sustained institutional reforms rather than temporary policy responses.

First, Bangladesh Bank must be granted greater operational independence, supported by stronger supervisory capacity and stricter enforcement of single-borrower exposure limits.

Second, specialised financial courts should be strengthened to expedite the resolution of approximately 75,000 pending loan recovery cases. Legal provisions against wilful defaulters should be enforced consistently and transparently.

Third, lending decisions must be based on sound credit risk assessment rather than political influence or personal connections. Banks should strengthen internal governance, improve underwriting standards and enhance accountability at every stage of the credit approval process.

Finally, political interference in the management of state-owned banks must be minimised. Appointments to boards and senior management should be based on professional competence, integrity and experience rather than political affiliation.

Restoring confidence

The structural weaknesses accumulated over many years cannot be reversed overnight. Rebuilding confidence in Bangladesh's banking system will likely require sustained reforms over the next five to ten years.

International experience demonstrates that banking crises can be overcome when governments combine political commitment with credible institutional reforms. South Korea, Malaysia and Thailand all emerged stronger after implementing difficult but necessary restructuring measures.

Bangladesh possesses important strengths. Its economy exceeds half a trillion dollars, remittance inflows remain resilient, exports continue to offer growth opportunities and the country benefits from a large and dynamic young workforce.

The challenge is not the absence of economic potential but the consistency of policy implementation. If banking reforms continue to shift with every political transition, the NPL problem will remain unresolved.

Ultimately, defaulted loans are far more than a banking problem. They raise borrowing costs, discourage private investment, constrain employment creation, slow economic growth and intensify fiscal pressures. Restoring financial discipline is therefore not simply a banking-sector priority—it is a national economic imperative. Bangladesh now has an opportunity to reset its financial system through credible regulation, stronger institutions and consistent policy implementation. Whether that opportunity is seized will depend on the political will to place long-term economic stability above short-term interests.

M M Mahbub Hasan is a banker, development researcher and author.