Banks are quietly abandoning private sector
Lured by risk-free government bonds yielding 12%, the country’s banks have turned their backs on private borrowers. Now private credit has hit a 21-year low, capital adequacy has collapsed, and debt service is consuming more than 100% of government revenue. Economists warn the clock is ticking.
Walk into the treasury department of any major private bank in Dhaka today and you will find something unthinkable a decade ago: Bankers whose job is not making loans to businesses, but buying government bonds. For every ten taka a typical bank earns, six to eight now come from government securities – not from financing the factories or startups that drive Bangladesh's economy.
This is the logical outcome of structural forces that have made government bonds the most attractive, capital-efficient asset a bank can hold – what economists call the "sovereign-bank nexus": a self-reinforcing trap in which government borrowing crowds out private credit, weakens growth, shrinks tax revenue, and demands yet more borrowing.
Numbers that raise alarm bells
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Treasury yield peaked at 12.59% in June 2024 – a fifteen-year high – while fixed deposit rates offered to ordinary savers lagged by two to four percentage points. That gap represents a hidden transfer: from depositors who have no meaningful alternative, to bank shareholders who pocket the spread, and to a government that benefits from artificially suppressed retail financing costs. Private sector credit growth has fallen to 6.03% – a 21-year low – while government credit expanded at 24%, exceeding Bangladesh Bank's own ceiling. Capital machinery imports, a reliable signal of business investment, fell more than 10.43% in the July 2025-March 2026 period. Banks now hold 67% of all public debt. The system-wide Capital Adequacy Ratio has fallen to 1.53% against a 12.50% minimum. And debt service now consumes over 100% of government revenue: Bangladesh is borrowing to repay what it has already borrowed.
Why your bank would rather own a bond than lend to your business
The logic is brutally rational. Under Bangladesh Bank's Basel III rules, government securities carry a 0% risk weight; private loans carry 100% or more. For a capital-constrained bank, every taka shifted from a corporate loan to a government bond eliminates the capital requirement, earns 10-12% with no credit risk, satisfies reserve requirements, and removes the need for loan-loss provisions. With gross NPLs at 30.6% and total bad loans by end-2025, the incentive to lend to the private sector has rarely looked weaker. Several major banks now derive 60-80% of operating income from government securities. To name a few, BRAC Bank's investment income grew fourfold between 2020 and 2025. City Bank's net interest income from lending fell nearly 87% in the nine months to September 2025.
A tale of two banking systems: who is winning deposits – and why it matters
Beneath the treasury shift lies a second story: a dramatic redistribution of deposits from scandal-hit banks towards better-governed institutions. When the political transition of August 2024 exposed the true condition of several state-connected Islamic commercial banks and state-owned banks, depositors did not leave the system – they moved their money. The sector-wide deposit growth rate was just 7.69% in 2024, but that average conceals a stark disparity between winners and losers.
BRAC Bank, City Bank, Eastern Bank, Prime Bank and Pubali Bank are also among those most aggressively deploying their deposits into government securities rather than private loans. They win the deposit race precisely because they are trusted. But the system's structural incentives then redirect that trust – and that capital – away from the businesses that need it most. It is a flight to quality that ends, perversely, in a flight from productive lending.
We have seen this movie and it does not end well
We see Bangladesh's banking sector within a grim panel of comparators. Pakistan – the most extreme parallel – holds the world's highest share of government securities in its banking sector, has required multiple IMF bailouts, and has seen private investment collapse. Sri Lanka, whose banks held over 30% of assets in government securities before its 2022 default, is the cautionary endpoint: GDP contracted over 8%, and a sitting president resigned. Ghana restructured its domestic debt in 2022-23, imposing losses on banks and pension funds alike, debunking the myth that a government never defaults in its domestic debt as they can print more money to service the ever increasing domestic debt.
Bangladesh's peak yield of 12.59% is well below Sri Lanka's 35%. Its debt-to-GDP ratio of 38.6% remains below the IMF's 55% danger threshold. Remittances are strong, reserves have recovered, and after the interim government took over after August 2024 and still continuing in a positive trajectory. However, the newly elected BNP government has taken an ambitious budget growth of 16.75% to Tk9,10,000 crore (Tk9.10 trillion) with a revenue target of Tk6,40,000 crore (Tk6.40 trillion).
What must be done – and why it hasn't been done yet
The root cause is a tax-to-GDP ratio of roughly 7% – among the lowest in South Asia. Pakistan collects 9-11% and India, 11-12%. Raising Bangladesh's ratio to 10-11% could eliminate the need for the bank borrowing that is crowding out private credit. Alongside revenue reform, we recommend enabling ordinary citizens to buy treasury bills directly via bKash, Nagad or Rocket – following Brazil's Tesouro Direto model – to diversify the government's investor base and give savers a fair return. The ADB-assisted Asset Quality Review must be carried through to full NPL recognition, state banks recapitalised transparently and conditionally, and the Bangladesh Bank should consider imposing non-zero risk weights on government securities above threshold holdings to remove the unconditional regulatory incentive to pile into sovereign bonds.
Bangladesh's interim government has, to its credit, signalled seriousness about fiscal consolidation and capital market reform. The IMF programme – with $3.65 billion disbursed out of a $5.5 billion package – provides both a framework and a deadline for action. The World Bank and the IMF formally upgraded the country's debt distress rating from "low" to "moderate" in June 2025. That is not yet a red card. But it is emphatically a yellow one – and the clock is running.
