Non-performing loans (NPLs), defined as loans overdue by 90 days or more, have emerged as a critical threat to Bangladesh’s economy.
By March 2025, defaulted loans had soared to Tk 4.2 lakh crore, accounting for 24.13% of total disbursed loans, a sharp increase from 20.20% in December 2024.
This alarming rise, coupled with a provision shortfall of Tk 1.71 lakh crore and a declining coverage ratio of just 37.97%, signals a deepening crisis that endangers the country’s financial and economic stability.
NPLs significantly erode the financial health of banks by reducing profitability and depleting capital reserves. As these bad loans accumulate, banks forfeit interest income and are compelled to allocate substantial provisions to cover potential losses.
This undermines their capacity to lend, particularly damaging in Bangladesh where nearly 46% of loans in state-owned banks are classified as non-performing.
The resulting liquidity stress and weakened capital positions heighten the risk of insolvency, posing the threat of a broader banking collapse.
The consequences extend to the real economy. Credit contraction is a key outcome, as banks shift their focus from lending to provisioning. This reduces the availability of credit for businesses and households, dampening both investment and consumption—vital drivers of economic growth in a developing country.
Small and medium-sized enterprises (SMEs), which play a crucial role in employment and industrial development, are disproportionately affected as risk-averse banks tighten lending standards.
The macroeconomic impact is no less severe. The banking sector’s capacity to function as a financial intermediary is compromised, diminishing its contribution to GDP.
A 2025 projection suggests that NPLs could reach Tk 8 lakh crore by September, posing substantial risks to trade, job creation, and overall economic momentum.
Although moderate inflation and GDP growth can support borrowers’ repayment capacity, persistently high unemployment and rising consumer prices exacerbate defaults, creating a feedback loop of economic stress that further weakens the financial sector.
Mounting NPLs also distort the credit market. Capital-constrained banks increasingly favour low-risk borrowers, leaving riskier but economically significant sectors underfunded. This stifles industrial growth, infrastructure development, and employment generation.
The fragility of the financial system is further exposed by the central bank’s recent disclosure of hidden defaults and the forced merger of five Islamic banks under the Bank Resolution Ordinance 2025—clear indicators of systemic stress requiring urgent reform.
Beyond the economic implications, high NPL levels reflect and perpetuate deeper structural issues—moral hazard, weak regulatory oversight, nepotism, and corruption in loan disbursement processes.
These challenges have eroded public trust in the banking system and financial governance, raising the risk of social unrest.
The resulting decline in credit access not only hinders economic activity but also intensifies unemployment, poverty, and broader socio-economic instability in a country already vulnerable to both internal and external shocks.
Addressing this crisis demands comprehensive structural reform. While the central bank’s recent regulatory tightening is a step in the right direction, the scale of the problem, especially in state-owned banks, requires fundamental changes in governance, risk management, and accountability mechanisms.
Political interference and lax enforcement must be curtailed to ensure transparency and responsibility in lending practices. Meanwhile, policymakers must carefully balance inflation control with the need to support growth, ensuring that macroeconomic conditions do not further strain borrowers’ capacity to repay.
Mustafa K Mujeri, former chief economist at Bangladesh Bank, highlighted the intensifying liquidity stress, noting, “As defaults mount, liquidity stress worsens. The government’s plan to borrow Tk 1.04 lakh crore from banks in FY26 will further intensify this pressure.”
While speaking to an English daily, he warned that if private sector credit demand increases within the year, banks may be unable to respond, leading to a slowdown in production, employment, and ultimately GDP growth.
Bangladesh’s escalating NPL crisis represents a severe, multifaceted threat. Without swift and coordinated action, the country risks a financial breakdown that could derail long-term development, shake investor confidence, and deepen social and economic vulnerabilities.