Banks are grappling with three major challenges as defaulted loans surge to Tk6.5 lakh crore

The newly elected government led by the Bangladesh Nationalist Party (BNP) has assumed office at a time when the economy is grappling with deep-rooted challenges. The banking sector — widely regarded as the backbone of the economy — remains in a particularly fragile state.

Burdened with nearly Tk6.5 lakh crore in defaulted loans, an estimated $234 billion siphoned abroad, and systemic disorder, the sector is now looking to the government for swift and decisive intervention.

Industry stakeholders say restoring governance in banks, recovering defaulted loans, and curbing money laundering will be among the toughest tasks facing the new administration as it seeks to stabilise the economy.

During the tenure of the Awami League government, prolonged irregularities, weak supervision, and unplanned loan disbursement severely strained the sector. Former Managing Director of Mutual Trust Bank, Anis A Khan, said structural reforms are critical for long-term recovery.

He proposed forming a dedicated task force to identify systemic weaknesses, particularly to tackle the growing volume of defaulted loans. Without strong oversight and targeted measures, he cautioned, the sector risks further deterioration.

Data from Bangladesh Bank as of September 2025 show that more than one-third of all disbursed loans have turned non-performing. Defaulted loans now stand at nearly Tk6.5 lakh crore — 35.73 percent of the Tk18,03,840 crore in total outstanding loans.

There were allegations under the previous government that defaulted loans were understated. With fuller disclosures now emerging, the scale of the problem has become clearer. When the Awami League-led alliance assumed power in January 2009, defaulted loans totalled Tk22,481 crore.

Former Bangladesh Bank Governor Farashuddin Ahmed stressed that restoring discipline across the financial system must be the top priority. Strengthening governance, he said, would help prevent fraudulent lending, curb hundi (informal money transfers), and boost remittance inflows and foreign exchange reserves.

Describing defaulted loans as a “cancer” within the banking system, he argued that resolving the issue is unavoidable. He also highlighted the urgency of reducing inflation and enhancing revenue mobilisation.

According to Bangladesh Bank, during the interim government’s tenure, boards of 14 banks were dissolved, six banks were merged, and Tk52,500 crore in liquidity support was injected into the system. Several ordinances were issued, and the policy interest rate was raised to 10 percent. Despite these measures, the sector has yet to achieve full stability.

The central bank has noted that increasing policy rates alone cannot tame inflation; supply chain management is equally important. However, the interim government claims success in reducing hundi transactions, contributing to stronger remittance flows and foreign exchange reserves. When former Prime Minister Sheikh Hasina left office, reserves stood at $20 billion. By the end of the interim administration’s tenure, reserves had surpassed $29 billion.

A White Paper Committee formed by the interim government to assess the economy reported that over the past 15 years, a system of “crony capitalism” had evolved into what it termed a “kleptocracy,” involving politicians, military and civil officials, and members of the judiciary. The committee estimated that $234 billion was illicitly transferred abroad through 28 channels during this period.

Syed Abu Naser Bakhtiar, chairman of Agrani Bank, said Bangladesh Bank had made notable progress over the past year and a half in curbing hundi and stabilising the foreign exchange market, helping maintain relative exchange rate stability. Banks also stepped up promotional campaigns in remittance-sending countries, boosting inflows and strengthening reserves.

He added that the new government should adopt a zero-tolerance stance against hundi and unveil a comprehensive plan to restore governance and accountability in the banking sector.