A recent study by the Centre for Policy Dialogue (CPD) reveals that various factors have led to the increasing bad loans in the banking sector of Bangladesh, not limited to deliberate defaulters and poor lending practices. The CPD study highlights that macroeconomic elements such as currency devaluation, high real interest rates, and governance deficiencies play a significant role in the surge of bad loans. An empirical model based on banking sector data from 2015 to 2025 indicates that these factors contribute to the bad loan crisis.
The CPD analysis, utilizing data from the Bangladesh Bank, World Bank, and the Bangladesh Bureau of Statistics, emphasizes that the negative impact escalates when the banking sector is already facing challenges. During a recent press briefing on the economy, CPD’s Executive Director Fahmida Khatun pointed out longstanding weaknesses in the sector that official figures fail to fully capture.
Although the Bangladesh Bank reported a decrease in the gross bad loan ratio from 35.7 percent to 30.60 percent, CPD argues that this reduction is not a true reflection of recovery. The decline is primarily attributed to loan rescheduling, restructuring, and write-offs, tactics that delay rather than resolve defaults, masking the actual financial health of banks. By March this year, the bad loan ratio had surged back to 32.26 percent, indicating that the sector remains under stress.
The CPD study’s empirical model emphasizes that currency devaluation consistently drives up non-performing loans (NPLs), with a weaker taka correlating to higher NPLs, regardless of the banking sector’s condition. High real interest rates also impact loan quality significantly during stressful periods compared to normal times. Conversely, GDP growth plays a positive role in reducing bad loans by supporting borrowers’ repayment capabilities, especially during economic stress.
Fahmida highlighted that private sector credit growth hit a record low of 4.72 percent in March, reflecting weak business confidence and high financing costs. Additionally, excess liquidity in banks increased from 43 percent to 55 percent, indicating reduced lending activity and business borrowing rather than a healthy banking sector.
The CPD report also stresses the importance of governance quality in mitigating NPLs, particularly during financial stress. Stronger oversight, less political interference, and transparent lending decisions have a notable impact on reducing bad loans during challenging times. The report flags concerns about recent regulatory relaxations, warning that extended loan rescheduling periods with minimal down payments could weaken repayment discipline and delay recovery.
The CPD report concludes that the bad loan issue is now affecting the broader economy, hampering credit flow to productive sectors, deterring investments, and impeding job creation. To combat this crisis, CPD advocates for stricter loan classification enforcement, enhanced bank supervision, improved governance, and reduced political intervention in lending decisions. The organization urges swift and effective implementation of ongoing reforms, including asset quality reviews, bank mergers, and legal amendments to bolster governance practices in the banking sector.
