Non-performing loans surge by Tk74,570cr in Q1 as hidden rot exposed

Infographic: TBS

Non-performing loans (NPLs) in Bangladesh's banking sector surged by a staggering Tk74,570 crore in the January-March quarter of 2025, reaching over Tk4.20 lakh crore, according to Bangladesh Bank data released today. 

The sharp increase is largely attributed to the implementation of stricter loan classification guidelines and the deterioration of several large loan accounts.

This spike pushed classified loans to 24.13% of total outstanding loans, meaning that nearly one in every four taka lent by banks is now classified as troubled.

Of the total classified loans, a significant Tk3.42 lakh crore, representing 81.38%, are categorised as "bad loans" – deemed unrecoverable. This requires banks to maintain 100% provisioning, severely limiting their capacity to extend fresh credit for vital working capital or project financing.

Experienced bankers and economists have emphasised the critical need for a long-term plan to curb the escalating non-performing loans in the troubled banking sector. They argue that since these NPLs did not accumulate overnight or in a single year, a short-term solution is not feasible. However, regardless of the time required, ensuring good governance within banks must be the paramount priority.

The Bangladesh Bank said it is now adhering to international standards for term loan classification. Inspections by the central bank's department have reclassified several large customer loans as bad loans. The failure to renew current loans and the non-payment of instalments on rescheduled loans are contributing significantly to this widespread increase in defaulted loans.

Bankers say many of these loans had, in reality, been non-performing for years. Under the previous Awami League government, influential business groups allegedly used political leverage to show their loans as regular. Following the change in political administration, banks are now being pressured to disclose the true state of these loans, revealing the actual financial picture of the banking sector. 

NPLs stood at Tk2.11 lakh crore at the end of June 2024, accounting for 12.56% of total loans, when the previous government was still in power. This implies that defaulted loans surged by Tk2.09 lakh crore in just nine months following the change in government, as the true figures emerged.

A Bangladesh Bank monetary policy statement released last February projected that NPLs in the banking sector are expected to exceed 30% of total outstanding loans by June this year.

Experts suggest long-term recovery plan

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told TBS, "The rate at which non-performing loans are increasing was actually expected. This is because past irregularities are now coming to light. Several business groups' loans, which had previously defaulted, were shown as regular. 

"Now that these loans are being added to the NPL category, the total amount of non-performing loans is increasing. In particular, many banks showed lower NPLs in the last March quarter, but these have increased following central bank inspections."

Mahbubur added that the surge in NPLs will force banks to hold higher provisions, commenting, "A significant increase in non-performing loans will reduce banks' profitability. Simultaneously, their capital will decrease, which will lower their capital to risk-weighted asset ratio (CRAR). Consequently, banks must now focus more on recovery processes. Simultaneously, measures must be taken to reduce the time for case resolution in the judiciary."

Fahmida Khatun, executive director at the Centre for Policy Dialogue (CPD), pointed out that an increase in banks' provision requirements impacts their liquidity. "This makes it difficult for banks to both return depositors' money and reduce their capacity to issue new loans." 

An increase in government borrowing from the banking sector also reduces the amount of loanable funds, she said. "However, while the cost of doing business has increased in the private sector, demand for loans is currently low. In the future, as inflation is expected to decrease, bank interest rates should follow suit. Yet, if banks' liquidity situations do not improve, loan interest rates may not fall significantly even with lower inflation."

Sheikh Mohammad Maroof, managing director of Dhaka Bank, warned that the rise in NPLs could also lead many foreign correspondent banks to reduce their lines of credit.

He stressed the need for a long-term plan for NPL recovery, suggesting, "Currently, we don't have a dedicated debt management company in our country that specifically works on NPL recovery. This is something we need to introduce." 

Maroof also advocated for providing "regulatory and liquidity support" to underperforming banks. "Many banks have a large portion of their disbursed loans turned into NPLs, with no recovery. For the safety of these banks' depositors and the stability of the banks themselves, this support must be provided." 

Category-wise non-performing loans

During the March quarter, the NPLs at state-owned banks surged to Tk1.46 lakh crore, representing a staggering 45.79% of their total disbursed loans. A significant 90% of these NPLs are categorised as "bad." These banks also face a massive provision shortfall of Tk64,000 crore.

The NPLs at private banks reached Tk2.64 lakh crore, accounting for 20.16% of their total disbursed loans. Approximately 77% of these NPLs are categorised as "bad." Private banks collectively have a provision shortfall of Tk1.07 lakh crore.

At foreign banks, the NPLs stood at Tk3,238 crore, representing a lower 4.83% of their total disbursed loans, while the figure amounted to Tk6,494 crore, or 14.47% of total loans at the specialised banks.