Bad loans hollow out bank capital
Bangladesh’s banking sector is facing a deepening structural crisis as a decade of politically influenced lending, weak oversight and alleged manipulation of financial statements has left banks struggling with record levels of bad loans and a severe capital shortfall, according to industry experts and recent Bangladesh Bank data.
The scale of the problem has become clearer as independent audits and international loan-classification standards have brought previously under-reported distressed assets into the banking system’s official figures.
By June 2026, non-performing loans (NPLs) accounted for 32.78 per cent of total bank lending – a level described as the highest globally – while mounting provisioning requirements have further weakened banks’ capital positions.
Bangladesh Bank statistics show that banks had disbursed a total of Tk18.51 lakh crore in loans by June 2026, of which Tk6.07 lakh crore had been classified as non-performing loans.
In other words, nearly Tk33 out of every Tk100 lent by banks was either in default or otherwise impaired.
The ratio is substantially higher than those reported for several regional economies, including India at 2.3 per cent, Pakistan at 7.4 per cent and Sri Lanka at 12.6 per cent.
The distress is also highly concentrated. Ten financial institutions account for Tk4.395 lakh crore, or about 72 per cent, of the banking sector’s total bad loans.
Among the institutions with the largest volumes of NPLs are Islami Bank Bangladesh PLC, with Tk98,914 crore and an NPL ratio of 52.15 per cent; Janata Bank PLC, with Tk75,728 crore and a 75.05 per cent NPL ratio; First Security Islami Bank, with Tk60,645 crore and a 97.08 per cent ratio; EXIM Bank, with Tk38,052 crore and a 70.81 per cent ratio; and Agrani Bank PLC, with Tk32,133 crore and a 43.98 per cent ratio.
Industry insiders say a substantial portion of the troubled lending was extended to politically connected individuals and large business groups, including Beximco, S Alam, Nassa, Sikder, Uttara Group, Bengal Group and Ashiyan City.
Several key directors associated with these groups are currently detained or have left the country, according to the sources.
Capital under pressure
The surge in defaults has imposed a heavy provisioning burden on banks. As institutions are required to make provisions against bad assets, rising NPLs have eroded profits and weakened their capital bases.
By June 2026, the banking sector’s aggregate provision shortfall had reached Tk2.223 lakh crore.
The deterioration is reflected in the sector’s capital adequacy position. The aggregate Capital-to-Risk-Weighted Assets Ratio (CRAR) fell to negative 3.17 per cent in March 2026, compared with the Basel III requirement of 12.50 per cent.
During the same period, 21 banks recorded a combined capital deficit of Tk2.94 lakh crore. First Security Islami Bank had the largest shortfall, at Tk66,264.80 crore.
Economists warn that the capital crisis could have consequences beyond individual institutions, affecting depositors, trade finance and the broader economy.
The first is an erosion of depositor confidence. Capital acts as a cushion protecting depositors, and negative capital can create uncertainty about a bank’s ability to maintain liquidity and provide new credit.
The second is a loss of international credibility. Foreign financial institutions tend to assess the banking system as a whole.
When more than 20 domestic banks have structural capital deficits, international lenders may reduce credit lines and increase the cost of confirming letters of credit (LCs), potentially affecting even solvent and adequately capitalised banks.
The government has begun allocating resources to shore up vulnerable institutions.
Finance Minister Amir Khosru Mahmud Chowdhury recently told Parliament that nearly Tk40,000 crore would be allocated during the current fiscal year for restructuring and recapitalising weak banks.
Banking-sector policymakers and senior bankers, however, argue that recapitalisation alone will not resolve the underlying problems.
Experts also stress the need for governance reforms, particularly stronger oversight of merged institutions and an end to political influence over lending decisions.
The scale of the bad-loan problem, combined with the sector’s capital deficit, now places the focus not only on rescuing troubled banks but also on addressing the governance failures that allowed distressed lending to accumulate over years.
