Rising default loans threaten jobs, growth, trade

Infographic: TBS

With nearly a quarter of all outstanding loans turned non-performing, banks, already in liquidity crunch, will have to keep aside more funds for provisioning, which will limit fresh credit to businesses.

Things may turn worse as the central bank hints at further rise in default loan figures due to stricter guidelines and the government plans to borrow more from the banking sector to meet the budget deficit in the next fiscal year beginning 1 July.

Economists are concerned about a slower growth in production and employment if banks fail to meet the credit demand from the private sector. 

According to Bangladesh Bank data, bad loans jumped by Tk74,570 crore in just the first quarter of 2024. The defaulted loans surged past Tk4.2 lakh crore in March 2024 and might reach Tk8 lakh crore by September as the central bank tightened loan classification rules and the financial condition of several major accounts worsened.

Economist Fahmida Khatun, executive director of the Centre for Policy Dialogue, said the spike in defaults is drying up banks' liquidity and shrinking their capacity to lend.

"This makes it harder for banks to return depositor funds, and restricts credit for business expansion," she told The Business Standard.

"Since credit drives investment and job creation, this could seriously hinder employment growth."

She noted that loan demand is already subdued as businesses grapple with rising costs.

As of March, 24.13% of all outstanding loans were categorised as NPL. Of this, Tk3.42 lakh crore – more than 81% – was classified as bad loans, requiring full provisioning. Such provisioning eats into banks' capital buffers, limiting their ability to offer fresh credit to businesses.

The central bank's latest monetary policy warns that up to 30% of all disbursed loans may eventually turn non-performing, posing a severe systemic risk to the economy.

"Spike in default loans makes it harder for banks to return depositor funds, and restricts credit for business expansion."

Fahmida Khatun, Executive Director, CPD

Mustafa K Mujeri, former director general of BIDS and ex-chief economist at the central bank, pointed out that the private sector relies heavily on bank loans due to a weak capital market.

"As defaults mount, liquidity stress worsens. The government's plan to borrow Tk1.04 lakh crore from banks in FY26 will further intensify this pressure," he said.

He warned that if private sector credit demand picks up within the year, banks may be unable to respond, causing slowdown in production, employment and ultimately GDP growth.

Zahid Hussain, former lead economist at the World Bank's Dhaka office, said foreign financial institutions rely on official data to assess the risk of dealing with Bangladeshi banks.

"With the central bank now revealing actual asset quality, some foreign banks may cut back support. While this may hurt in the short term, transparency will boost credibility in the long run," he said.

He added that stricter rules on loan classification – especially shortening the overdue threshold from six months to three – have led to a spike in reclassified defaults. 

He estimates total defaults may exceed Tk8 lakh crore by September. In June 2023, distressed assets – including rescheduled and written-off loans – stood at Tk6.75 lakh crore, much of which may soon fall under the NPL category.

Govt borrowing adds to the strain

The government's growing dependence on bank borrowing is compounding the problem. It plans to borrow Tk1.04 lakh crore in FY26 – 5% higher than the revised Tk99,000 crore in FY25 – which will finance 47% of the budget deficit, up from 44% this year.

Fahmida Khatun warned that higher government borrowing would squeeze credit availability for the private sector. Even if inflation falls and interest rates ease, liquidity constraints may keep lending rates elevated, adding pressure on businesses.

Zahid Hussain explained that with average annual deposit growth of Tk1.45 lakh crore, if the government absorbs Tk1.04 lakh crore, very little will be left for private borrowers. "Even if actual borrowing remains below target, the trend is troubling," he said.

Mujeri echoed this, noting that persistent government reliance on bank credit will impair banks' long-term lending ability.

Private sector growing unease

Former FBCCI president Abdul Awal Mintoo said people's real savings are falling as inflation outpaces wage growth. This, coupled with rising NPLs, will intensify liquidity stress and limit credit availability for businesses.

He added that the ongoing dollar crisis and political instability have disrupted production across many industries. Most factories are running below capacity, and with consumer demand weakening, defaults are expected to rise further.

He said the economy needs political stability to restore macroeconomic confidence. He fears NPLs will keep growing until the next election, and only a new government with a credible mandate can restore business trust.

BGMEA President Mahmud Hasan Khan warned that rising defaults are already affecting credit access for the garment sector.
"Liquidity is tight, and NPLs are making it worse. We've proposed extending the classification threshold from three months to six, but the central bank said IMF conditions prevent this," Khan said.

He added that the BGMEA will soon renew discussions with Bangladesh Bank on easing the loan classification criteria to improve credit flow.