Banking sector reform begins with tackling bad loans

Efforts to tackle loan defaults have repeatedly failed. In Bangladesh, exposing defaulters in parliament or promising punishment after scandals like Hallmark yielded little, while the Money Loan Court and central bank appointments were often influenced by powerful borrowers. 

Similarly, in Pakistan, even strict measures under Pervez Musharraf faltered, and in India, political backing for large, unjustified loans persists despite the Insolvency and Bankruptcy Code (IBC) reducing non-performing loans.

The rising problem of bad loans runs much deeper. Crony capitalism, political patronage, a weak justice system, legal limitations, inadequate supervision by the central bank, board-level failures in risk assessment, and corruption and incompetence within banks—all have contributed. 

We wondered at the central bank's loan restructuring committee: beyond S Alam or Beximco, how did so many borrowers manage to obtain loans worth Tk100–3,000 crore so easily? Most had no business plan, no projections, no proper accounting, not even a finance or accounts manager. Some were even identified as wilful defaulters or money launderers, yet they continue to give media interviews.

And how do we absolve bank officials who frequently line up at the central bank to plead for relief from default classification? What about borrowers who became defaulters due to excessively high interest rates imposed in the name of inflation control, or the sudden 50% devaluation caused by artificially holding down the exchange rate? Should we also ignore those businesspeople who were politically marginalised over the past 16 years? We cannot avoid the broader questions: why should businesspeople engage in politics, and why should politicians extort money from businesses? Nor is it entirely true that bad loans have ballooned simply because previously hidden defaults have now come to light.

Bangladesh's bad-loan problem is not new. Non-performing loans (NPLs) or bad loans have long eroded the stability of our financial system. Once largely confined to state-owned banks, the problem later spread to private banks as well. Gradually, it became an invisible but pervasive culture—as if defaulting on loans were no longer considered a serious matter. This mindset, combined with long-standing weaknesses in governance, has pushed our banking sector into deep soup.

It is true to some extent that after the political transition last August, previously concealed loans began to surface. People assumed 12% was probably the maximum. But within just over a year, the rate almost tripled, reaching the 30–35% range. Today, more than one-third of all loans in the banking sector are non-performing. A system on which business, investment, and employment depend cannot function when such a large portion of its assets has become paralysed.

The concern has been amplified by a recent Asian Development Bank (ADB) report, which shows that as of 2023, Bangladesh ranks highest in loan defaults not only in South Asia but across the entire Asia-Pacific region. Meanwhile, countries such as India, Bhutan, and the Maldives have dramatically reduced their NPL ratios. India's NPL rate has dropped to 1.7%—almost 20 times lower than Bangladesh's. This comparison alone makes it clear that the problem is not merely the result of global or regional economic conditions; it is rooted in our policies, supervision, and political-economic structures.

There are several reasons behind the surge in defaults. First, for years, loan disbursement and credit management have suffered from a severe lack of professional standards. Loans were often granted not on the basis of business viability but because of identity, influence, or political affinity. When such projects inevitably failed, the burden fell on the banks—not on the powerful borrowers.

Second, lenient policies on rescheduling and restructuring helped mask the true extent of defaults. Some banks repeatedly rescheduled the same loans for years to create the appearance that everything was fine. But without real business expansion or improved cash flow, these loans were bound to default again. Political uncertainty and the generosity shown around election periods only worsened the problem.

Third, the recent economic slowdown and contraction in demand have placed pressure on legitimate businesses, making repayment difficult. Meanwhile, those who had taken politically backed loans no longer enjoy the same patronage after the political transition, turning many of those exposures into bad loans almost overnight.

Fourth, weak governance and ineffective risk management within banks have deepened the crisis. International standards on credit rating, loan classification, and provisioning were ignored for years. Especially in private banks, board-level nepotism, conflicts of interest, and managerial incompetence have repeatedly undermined the sector.

Bangladesh Bank, too, often opted for compromise rather than strict enforcement. Pressure from the political government, influence from bank owners, and excuses about "systemic risk" prevented decisive action. But the reality is: without firmness, the culture of default only becomes stronger and governance weaker.

According to Bangladesh Bank, as of September 2025, total non-performing loans exceeded Tk6.44 lakh crore-about 36% of all loans issued in the country. No South Asian country has ever reached such a level. For perspective, Bhutan reduced its NPL ratio from 11% to 3%, while ours climbed from 10% to 36%-an unmistakable red flag.

The most alarming aspect is that such enormous default volumes undermine banks' capital, liquidity, and credibility. As a result, credit flow to industries will shrink, employment will stagnate, and import-based businesses will face severe constraints. Existing businesses will hesitate to expand, and new entrepreneurs will lose interest. Even at the state level, the risk perception among international lenders and investors will rise sharply-which we are already witnessing.

The problem is large, but not insurmountable. What we need is firmness, professionalism, and political will. First, governance in loan disbursement must be established. Competence, ethics, and transparency must be ensured in bank boards. Both public and private banks require a rebuilding of their credit culture. 

Second, unjustified rescheduling benefits for defaulters must end. Restructuring should be reserved only for entrepreneurs with genuine potential to survive-those whose businesses hold real promise. The perception that Bangladesh is a "haven for defaulters" must be dismantled. 

Third, international-standard audits and well-designed stress tests are essential to uncover hidden defaults. Without transparency in bank balance sheets, the problem will only intensify. Fourth, political exposure in loan decisions must face a zero-tolerance policy. This is the time to dismantle the politics-business nexus that has distorted our credit market. 

Fifth, strict punitive measures are needed against nepotism and preferential treatment within bank governance. Any relaxation of rules will push the sector into deeper danger.

Most importantly, we must bring back genuine, capable, honest entrepreneurs into the business environment. A sustainable banking sector cannot be built on enforcement alone-supportive conditions are equally essential. Policy support, market confidence, simpler taxation, and faster loan approvals must be guaranteed for the right businesses.

The banking system is the backbone of Bangladesh's economy. If one-third of this backbone is already paralysed, it is obvious the entire structure is weakening. Given the political transition and current market realities, this is the moment for real reform. Failure to take bold decisions now will intensify not only financial risks but also social and macroeconomic vulnerabilities. 

Sketch: TBS

Mamun Rashid is a banker and economic analyst.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.