Bangladesh’s banking sector faces collapse due to soaring bad loans, political interference, and weak governance, demanding urgent, transparent reforms to restore stability and investor trust.
Bank building under stress with cracked façade, showing loan documents, political symbols, and worried citizens nearby.
Bangladesh’s banking sector stands precariously close to collapse, weighed down by defaulted loans exceeding Tk 5.3 lakh crore, nearly 30 per cent of total outstanding loans. Non-performing loans (NPLs) surged alarmingly from 16.9 per cent to over 20 per cent in just three months ending December 2024, far outstripping the global distress benchmark of 10 per cent. This stark rise lays bare years of entrenched corruption, persistent political interference, and regulatory inadequacies that have allowed toxic loans to accumulate unchecked.
The situation deteriorated markedly following the recent tightening of regulatory standards, which reduced the overdue period for classifying bad debts from six to three months, thus revealing the true scale of distress previously masked by manipulated accounting practices. The interim government led by Muhammad Younis has faced harsh criticism for its inability to implement effective reforms. Weak governance, policy indecision, and lack of accountability under its watch have compounded the banking sector’s difficulties, placing ordinary citizens at heightened financial risk. Experts warn that urgent, wide-ranging reforms are imperative to restore investor confidence and avert a broader economic catastrophe.
At its core, Bangladesh’s banking turmoil stems from a confluence of structural financial vulnerabilities and chronic political mismanagement. Asset quality has eroded dramatically, driven by rapidly accumulating NPLs, which more than doubled to exceed 20 per cent by late 2024. Concurrently, banks have encountered severe capital shortages, reflected by the critically low capital adequacy ratio of 3.08 per cent recorded by December 2024 and a collective capital deficit of Tk 1.7 lakh crore among leading institutions. These pressures have severely constrained banks’ lending capabilities, with small and medium-sized enterprises (SMEs)—the backbone of the economy suffering most from tightening credit conditions.
Yet this banking crisis is as political as it is financial. While politically influenced lending practices and corruption created structural weaknesses, critical missteps by the interim government have exacerbated the severity of the issue. The Younis-led administration has notably failed to enforce rigorous financial discipline or tackle governance deficiencies in the banking sector, eroding market confidence and obscuring the genuine extent of financial distress. Following political upheaval and governmental transition in 2024, the full magnitude of underlying problems became apparent. These domestic issues unfolded against a challenging macroeconomic backdrop, marked by rising inflation, currency depreciation, and sluggish global growth, compounding repayment difficulties and financial instability. Though authorities have initiated some measures, stricter supervision, recapitalisations, and bank mergers—progress remains sluggish. Analysts agree that without resolute political commitment and comprehensive structural reforms, the banking sector’s decline will likely accelerate, inflicting significant economic damage.
The financial health of Bangladesh’s leading banks remains critically fragile as of 2025. State-owned banks in particular exhibit exceptionally high NPL ratios, with Janata Bank recording a staggering 66.8 per cent NPL by December 2024. Private banks, while comparatively healthier, are also under considerable stress. Collectively, the country’s top 20 banks face a capital shortfall of Tk 1.7 lakh crore, severely limiting their lending capacity. This weak capital position is restricting the availability of credit vital to SMEs and other growth-oriented sectors, stifling economic expansion.
Government responses so far have included forced mergers of weaker banks, recapitalisation contingent on addressing governance irregularities, and new frameworks for restructuring distressed loans. However, these interventions are viewed by market observers as incomplete and fragile, at best delaying an inevitable reckoning. Efforts to reclaim defaulted or laundered funds are underway but depend heavily on political resolve and judicial efficiency. Absent deeper reforms and robust governance, analysts warn the banking sector crisis may deteriorate further, posing broader risks to the overall economy.
By June 2025, Bangladesh’s banking distress has deepened markedly, as defaulted loans surged to Tk 5.3 lakh crore, sharply up from Tk 4.2 lakh crore in March 2025 and more than double the Tk 2.11 lakh crore recorded a year earlier. Business leaders and senior Bangladesh Bank officials warn that many more loans could soon slip into default, exacerbating an existing liquidity crunch. Already, nearly 1,200 businesses in default have applied for loan restructuring amid an ongoing economic slowdown. This mounting wave of defaults severely restricts banks' ability to recover funds, heightening fears of widespread corporate failures absent urgent systemic reform and enhanced accountability.
The ramifications of Bangladesh’s banking crisis extend far beyond financial institutions. With banks overwhelmed by unpaid loans, their capacity to issue fresh credit is severely curtailed. This has crippled business investment, economic growth, and job creation. Borrowing costs continue to climb, aggravating economic hardship amid already weak macroeconomic conditions. Observers express mounting concern that banks may soon experience liquidity crises akin to the global financial turmoil of 2007–08, potentially triggering depositor panic.
Financial experts concur that incremental policy adjustments will no longer suffice. A comprehensive overhaul of the banking system is required, encompassing accountability for corrupt practices, the eradication of political patronage, market-driven resolutions for failing banks, and the establishment of professional, politically independent management structures. Transparent and rigorous financial reporting practices must also be enforced. Without such decisive action, Bangladesh risks prolonged and profound economic stagnation.
Bangladesh’s banking turmoil epitomises current governmental failings, systemic corruption, and regulatory negligence, compounded by broader economic strains. Continuing political unrest has further undermined market confidence, amplifying economic uncertainty. For Bangladesh to stabilise its financial system and safeguard its economic future, decisive and politically neutral banking oversight, transparent reform processes, and strict accountability are essential. Failure to act swiftly and comprehensively risks entrenching deeper financial instability, undermining the nation’s economic ambitions. The path ahead is challenging yet essential for restoring market trust and ensuring sustainable economic resilience.
