Bangladesh Banking Sector Faces Liquidity Strain Amid Rising Loan Defaults

Bangladesh's banking sector is grappling with a significant liquidity squeeze as non-performing loans (NPLs) continue to climb, raising concerns among regulators and financial analysts. According to the latest data from the Bangladesh Bank, the central bank, the total volume of defaulted loans reached a record high of Tk 1.45 trillion (approximately $13.2 billion) as of March 2025, representing nearly 12% of the total outstanding loans in the country. This marks a sharp increase from 9.6% a year earlier, driven by economic slowdown, rising inflation, and sluggish export demand.

The liquidity crunch has forced several commercial banks to tighten lending, particularly to small and medium enterprises (SMEs), which form the backbone of Bangladesh's economy. The Bangladesh Bank has responded by injecting Tk 500 billion into the banking system through repo operations and reducing the cash reserve ratio (CRR) by 50 basis points to 4.0% in an effort to ease pressure. However, bankers warn that these measures may only provide temporary relief if the underlying issue of loan recovery remains unresolved.

"The banking sector is facing a perfect storm of high NPLs, low deposit growth, and rising borrowing costs," said Md. Anisur Rahman, a senior economist at the Dhaka-based Policy Research Institute. "Without structural reforms in loan classification and recovery mechanisms, the situation could worsen."

On the international front, Bangladesh's banking troubles are being closely watched by global credit rating agencies. Moody's Investors Service recently downgraded the outlook for three major Bangladeshi banks—Sonali Bank, Janata Bank, and Agrani Bank—from stable to negative, citing deteriorating asset quality and weak capitalization. Fitch Ratings has also warned that the sector's non-performing loan ratio could exceed 15% by year-end if economic conditions do not improve.

The crisis has its roots in several factors. The COVID-19 pandemic led to a wave of loan moratoriums, which masked the true extent of defaults. When the moratoriums ended, many borrowers, especially in the ready-made garment (RMG) sector, struggled to resume payments due to global supply chain disruptions and rising raw material costs. Additionally, the Russia-Ukraine war has driven up energy and food prices, squeezing household incomes and corporate profits.

To address the crisis, the Bangladesh Bank has introduced a new loan restructuring policy that allows banks to reschedule up to 20% of their defaulted loans without requiring upfront payments. The policy, effective from April 2025, aims to provide breathing room for both lenders and borrowers. However, critics argue that such measures may encourage moral hazard, where banks and borrowers avoid taking responsibility for bad loans.

"Restructuring is a short-term fix," said Dr. Zahid Hussain, a former lead economist at the World Bank's Dhaka office. "The real solution lies in strengthening the legal framework for loan recovery, improving corporate governance in banks, and diversifying the economy away from a heavy reliance on the RMG sector."

Meanwhile, the government is considering a proposal to merge several state-owned commercial banks to reduce operational costs and improve efficiency. Finance Minister Abul Hassan Mahmood Ali hinted at the plan during a recent parliamentary session, stating that "consolidation is necessary to create stronger, more resilient banks." The proposal, however, faces opposition from trade unions and some lawmakers who fear job losses.

On the positive side, the Bangladesh Bank has been promoting digital banking and financial inclusion to reduce the sector's vulnerability. Mobile financial services like bKash and Nagad have seen a surge in transactions, with daily volumes exceeding Tk 30 billion. The central bank has also launched a pilot project for a central bank digital currency (CBDC), aiming to modernize the payment system and reduce cash dependency.

As Bangladesh prepares for its next general election in 2026, the banking sector's health will be a key economic indicator. For now, the sector remains under stress, but policymakers are hopeful that a combination of regulatory intervention, restructuring, and digital innovation will steer it toward recovery.