10-point recommendation on banking sector

Staff Reporter :

The World Bank has urged Bangladesh to implement sweeping reforms to stabilize its struggling financial sector, weakened by poor governance, political interference, and related-party lending.
In its latest South Asia Development Update, the WB proposed a 10-point action plan targeting structural flaws in the banking system. Chief among the
recommendations are restructuring state-owned banks, improving non-performing loan (NPL) management, and enacting a comprehensive bankruptcy law.
Other key reforms include strengthening the bank resolution framework, enhancing the deposit insurance system, enforcing regulations, improving corporate governance, and ensuring the central bank’s full independence. The report also calls for adopting international supervision standards and introducing an emergency liquidity assistance mechanism.
This year’s report places particular focus on the financial sector, describing it as facing “significant challenges,” including high NPLs, weak capital buffers, and inefficiencies. The WB criticized prolonged regulatory forbearance, which has obscured the sector’s true condition.
It warned of “zombie banks” – institutions with negative net worth and severe liquidity issues – that continue to operate due to lax enforcement. Ten such banks account for a third of market loans, with eight facing critical liquidity shortages.
The WB noted that the fragility of the banking sector intensified following the political transition in mid-2024. Sluggish economic growth, foreign exchange shortages, and waning investor confidence have added strain to businesses and banks alike.
As of September 2024, Bangladesh Bank data showed gross NPLs had more than doubled to Tk2.9 trillion ($23.7 billion), pushing the NPL ratio to 20.2% by December. State-owned banks made up 46% of the total NPLs. The central bank expects the ratio to exceed 30% after implementing an international-standard NPL definition in April 2025, which classifies loans overdue by 90 days.
The WB emphasized the high opportunity cost of NPLs, which limit credit availability for productive sectors. Meanwhile, the loan loss provisioning coverage ratio dropped from 52% in September 2023 to 44% a year later, with a $4.5 billion shortfall in provisions.
The report underlines the importance of swift, comprehensive reform, noting that international experience shows early intervention reduces the economic costs of banking crises. The interim government and Bangladesh Bank have begun assessing sectoral vulnerabilities and outlining required reforms.
On the macroeconomic front, Bangladesh’s GDP growth is forecast to slow to 3.3% in FY25, driven by weakened public and private investment amid political unrest. Violence, curfews, and internet blackouts disrupted activity in early FY25.
Inflation averaged 10.6% in the first eight months, eroding consumer purchasing power. It was fueled by high food and energy prices and a depreciating taka. While inflationary pressure began easing in Q3 FY25, the central bank plans to maintain a tight monetary policy despite slow growth.
Global trade disruptions are expected to have limited impact in FY25 due to late timing, but their effects are projected to grow in FY26. The WB estimates a 1.7 percentage point reduction in exports and a 0.5 point decline in GDP growth from earlier forecasts. Exports and real GDP are projected to grow at 4.2% and 4.9%, respectively, in FY26.
Lower global fuel prices may help offset some pressure on the current account deficit.