Banks ‘Most Fragile Link’ in economy

Staff Reporter :

Bangladesh’s banking industry remains the most fragile segment of the economy, weighed down by inadequate capital, deteriorating asset quality and declining profitability, according to the Centre for Policy Dialogue (CPD).

The assessment was presented by CPD Executive Director Fahmida Khatun at a press briefing at the organisation’s Dhaka office on Saturday, during the release of its independent review of economic performance for the first half of the 2025–26 fiscal year.

CPD warned that persistent structural weaknesses in the banking system continue to pose risks to macroeconomic stability and underscored the need for swift passage and enforcement of reform-oriented legislation.

Restoring the independence and operational authority of Bangladesh Bank, alongside the strict and consistent application of the bank resolution framework, is critical to re-establishing discipline in the sector, it said.

According to the think tank, most banks are falling short of required risk-based capital standards, with capital adequacy eroding across the system. Asset quality has also weakened significantly, with defaulted loans now accounting for around 36 per cent of total outstanding credit, amounting to Tk5,44,549 crore — almost twelve times the level recorded in 2015.

An asset quality review of six banks revealed severe stress, with some institutions reporting nearly equal volumes of loans disbursed and non-performing loans. Loan-loss provisioning remains insufficient, covering only about 38 per cent of classified loans, further limiting banks’ ability to absorb financial shocks.

CPD noted that while liquidity is broadly available, credit demand remains subdued due to protracted weakness in investment.

Higher interest rates and political uncertainty have weighed on private-sector sentiment, lowering loan-deposit ratios and leaving many banks with excess liquidity. As a consequence, profitability has fallen sharply and asset quality has slipped to its lowest level in nearly three decades, it added.

To stabilise the sector, the government has injected Tk20,000 crore in capital support to facilitate mergers involving financially weak banks.

CPD acknowledged that several reform measures are progressing, including asset quality assessments in six banks, ongoing reviews in three more, and plans to extend the process to 17 banks.

The organisation also welcomed efforts to enhance depositor protection — such as raising deposit insurance coverage from Tk1 lakh to Tk2 lakh — and amendments to the Bank Resolution Ordinance and the Bank Company Act, 1991 aimed at curbing excessive family influence and strengthening corporate governance.

However, CPD cautioned that effective implementation remains the key hurdle. Political interference, vested interests, limited regulatory capacity and low depositor confidence continue to impede reform efforts.

It stressed the need to promptly translate legal changes into enacted laws and to safeguard Bangladesh Bank’s independence to ensure that reforms are sustained and that weak banks do not receive undue forbearance.