Rescheduling shows gains but pushes banking stress into future

Sonali Bank, which had been suffering from a massive capital deficit for years, recorded its highest net profit of Tk1,313 crore in 2025, more than 33% higher than the previous year.

The country's largest state-owned lender posted this staggering profit in a year when its core banking businesses, including interest income and loan disbursement, fell significantly.

The magic behind the artificial profit was massive loan rescheduling under a relaxed policy offered by the central bank in September 2025. It helped Sonali Bank to cut default loans by 22.32% in just three months.

The sharp decline in default loans reduced provision maintenance costs significantly, helping the lender post the record profit despite negative business growth.

Infograph: TBS

The bank's net interest income saw a sharp decline, falling 77% to Tk337 crore during the year. The drop was attributed to reduced interest earnings from borrowers and higher interest payments to depositors, according to its audited financial statement.

The bank, which had a capital deficit of nearly Tk6,000 crore in 2024, is no longer in deficit. Instead, it posted a capital surplus of Tk1,325 crore in 2025.

Bankers and economists said that although the financial indicators show a massive improvement in performance, the so-called gains carry serious risks as banks deferred interest payments for two years by locking bad loans under a long-term rescheduling policy spanning 10 years, including a two-year grace period.

They added that the grace period gives borrowers temporary relief from paying principal and interest, easing the immediate burden of defaults on banks. However, it significantly impacts the sector by delaying the recognition of bad loans and disrupting cash inflows.

Bangladesh Bank data show that default loans in the country's banking sector declined by Tk87,298 crore during the final three months of 2025, primarily driven by a massive debt rescheduling campaign under relaxed central bank policies.

This massive reduction of default loans through rescheduling is not sustainable for the banking sector, observes Zahid Hussain, former lead economist at the World Bank's Dhaka office.

In many cases, he said, such facilities had been granted on political considerations or ahead of elections to keep businesspeople off the defaulters' list.

The World Bank, in its latest Bangladesh Development Update 2025, said: "BA recent relaxation of loan rescheduling and restructuring rules, along with continued regulatory forbearance, risk delaying full recognition of banks' asset quality problems and slowing balance-sheet repair."

Sonali's 200% unaudited profit

Sonali Bank, in its unaudited financial report released in January this year, reported a 200% year-on-year jump in net profit to Tk2,650 crore in 2025. However, the audited financial statement published this month showed net profit falling to Tk1,313 crore, following higher provisioning requirements imposed by the central bank against the lender's large stock of bad assets, according to central bank sources.

A deputy managing director of Sonali Bank told The Business Standard, requesting anonymity, said, "One of the main reasons that the figure was revised was because some exposures had to be reclassified as fresh non-performing loans under instructions from the Bangladesh Bank."

He added that the bank's profits increased largely because of the large-scale rescheduling of default loans, which reduced provisioning requirements. At the same time, interest income from regularised loans could be booked in income statements.

Other banks take opportunity

Bangladesh Bank data shows state-owned banks and troubled private commercial banks mostly availed the entire benefits of relaxed loan rescheduling policy by cutting down default loans significantly in just three months from October to December. 

For instance, Agrani Bank under the relaxed policy rescheduled loans of Tk8,368 crore, more than six times higher than the previous year, according to its statement. The massive rescheduling helped the bank cut default loans by 15.59%, or Tk5,285 crore, in the last three months of 2025.

Among troubled private commercial banks, AB Bank rescheduled more than Tk1,300 crore, helping it reduce defaults by nearly Tk12,000 crore. The bank's default loan ratio declined to 50.88% at the end of December from 84% in September, according to central bank data.

Islami Bank Bangladesh, the country's largest private commercial bank, reduced default loans by more than Tk14,000 crore in just three months through rescheduling, while National Bank Limited cut default loans by nearly Tk10,000 crore during the same period.

'Banking sector stress pushed into future' 

Arfan Ali, former managing director of Bank Asia, said banking sector stress has effectively been pushed into the future through repeated deferment and rescheduling over the past decade.

"In many cases, loans are shown as regular by recovering only a nominal amount. Even disciplined borrowers are increasingly incentivised to delay repayment and seek similar concessions," he said.

He warned that the sector must move away from this long-standing practice. "We are seeing that many of those becoming newly classified as defaulters are old borrowers who had long remained non-performing in substance but were kept outside default classification through repeated facilities. Once such support is withdrawn, they quickly fall back into default, weakening asset quality further."

Rescheduling sends misleading signals to depositors'

Explaining the future consequences, a managing director of a private commercial bank, who wished not to be named, said such a loan rescheduling facility sends misleading signals to depositors, as they would see cleaner balance sheets and lower default loans and be encouraged to place more funds.

"However, after two years, when these loans turn default again, it will erode capital and depositors will lose money, similar to what happened in some merged banks," he added.

He said several private commercial banks are already in a severe but undisclosed financial crisis, and rescheduling allows them to present artificial balance sheets.

Moreover, when banks engage in foreign business, institutions such as IFC, ADB, Standard Chartered and other international lenders analyse balance sheets by treating rescheduled loans as distressed assets. As a result, they either restrict credit lines or charge higher rates, raising costs for exporters and importers, which are ultimately passed on to consumers, said the banker.

"When a customer becomes a defaulter, our job is to find the root cause and take corrective measures to make that company viable," he said. 

When the Bangladesh Bank introduced the policy, all defaulting companies approached for 10-year rescheduling with a two-year grace period, he said. "Most of these firms are facing severe cash flow crises, with factories shut and significant financial gaps."

He argued that such extensions are unlikely to revive them, as the policy merely postponed payments for two years, reducing reported default loans in the industry.

"Strong banks didn't fully adopt the policy as it doesn't restore viability, while loss-making banks saw it as an advantage. It helped them reduce provisioning, show profits and declare dividends," he said.

He added that these banks are fully aware that many borrowers are likely to default again within months. "That is why they offered a two-year grace period with no repayment or interest. Loans originally structured for six months have now been extended to 10 years, along with additional working capital."

As a result, default loans decline on paper without actual recovery, provisioning requirements fall and profits increase. He warned that while balance sheets may appear clean for the next two years, they could suffer a sharp deterioration in the third year.

He also said that although cash flow is reduced, the benefit from lower provisioning is far greater than the annual income loss. "For instance, a Tk100 crore loan that turns bad requires full provisioning of Tk100 crore. Rescheduling eliminates that requirement, while annual interest income of Tk12 crore, assuming a 12% rate, is moved to a suspended account. In effect, banks trade recognised income for immediate provisioning relief, which violates accounting standards."

How loan rescheduling will squeeze lending capacity 

A managing director of another private commercial bank said the two-year grace period will squeeze lending capacity as banks will not get repayment during the period. Moreover, banks cannot take interest incurred against rescheduled loans in their income statement which will impact profit in next two years. 

He said that when banks receive neither repayments nor interest from rescheduled loans, while continuing to service depositors, cash flows come under pressure, constraining lending capacity.

He added that financial statements have been "engineered" over the past 15 years by underreporting defaults. "Now, with defaults suddenly rising to around 30%, banks are facing a sharp increase in provisioning requirements."

Previously, banks maintained provisions against 5% to 10% of classified loans, but this has now increased five- to six-fold, creating a severe provisioning gap. 

He said that had proper governance been enforced over the past decade, banks would have built adequate buffers. "Instead, many distributed profits as dividends without making sufficient provisions."

In this situation, he said, banks are being forced to rely on the relaxed policy for survival. "However, the central bank should've allowed partial interest payments rather than a full grace period."

He warned that while balance sheets may appear cleaner, most banks will have limited capacity for fresh lending in the coming years, which could significantly affect private sector credit growth.

Plummeting credit growth 

The country's private sector credit growth plummeted to an all-time low of 6.03% in January, as prolonged political instability and a high-interest-rate regime forced businesses to stall expansion plans and prompted banks to adopt a highly cautious lending stance.

According to the latest Bangladesh Bank data, credit growth edged down from 6.1% in December, continuing a sharp decline from 10.13% recorded in July 2024.

The data also show total default loans stood at Tk5.57 lakh crore at the end of December 2025, accounting for 30.60% of total outstanding loans, down from Tk6.44 lakh crore, or 35.73%, at the end of September.

Two reasons why rescheduling is unsustainable 

According to Zahid Hussain, there are two main reasons why the practice is unsustainable. 

Firstly, loan rescheduling directly hurts banks' balance sheets and erodes capital. He compared it to "continuous bleeding" in the human body, which gradually weakens a financial institution over time. 

Second, it creates "moral hazard" in society. When borrowers see that repeated concessions are available despite failing to repay loans, they become more inclined to spend borrowed money on luxury consumption – such as expensive cars or foreign travel – instead of investing in productive sectors.

"As a result, honest borrowers become discouraged, while wilful defaulters are further emboldened. Overall, he said, the trend is undermining discipline in the banking system and weakening the sector's long-term sustainability," added the economist.