[🇧🇩] Banking System in Bangladesh

[Saif]

Banks get remedies but what about ailing NBFIs?

Irregularities, scams, and governance failures necessitate reforms for both banks and non-bank financial institutions (NBFIs), but the severity of ailments in both sectors seems to have left the banking regulator with no option to pick and choose.

www.thedailystar.net

Banks get remedies but what about ailing NBFIs?

Irregularities, scams, and governance failures necessitate reforms for both banks and non-bank financial institutions (NBFIs), but the severity of ailments in both sectors seems to have left the banking regulator with no option to pick and choose.

For the Bangladesh Bank, the question is no longer regarding which will get the remedy first, but how long the other can sustain itself in a state of neglect.

The longer NBFIs remain untreated, the worse their condition will become. Banks require urgent reforms, but so do NBFIs, industry leaders say, warning that delays may push them beyond recovery.

Of the 35 NBFIs in the country, a dozen are currently struggling to repay depositors due to an acute liquidity crisis, a persistent issue that has tarnished the sector's image over the years.

After the political changeover on August 5 last year, the central bank initiated a series of banking sector reforms, including the formation of taskforces, the introduction of new laws and amendments to existing legislation such as the Bank Company Act.

The regulator also injected fresh funds into weak banks to protect depositors.

However, the treatment has been entirely different for struggling NBFIs. Since the interim government took office in early August last year, no visible initiatives have been taken to reform the ailing sector.

The central bank has also refrained from injecting funds to revive the NBFI sector and help companies repay depositors.

Following the political changeover, more than half a dozen banks were unable to repay depositors, prompting the central bank to inject over Tk 25,000 crore into weak banks by printing money.

Justifying this move, BB Governor Ahsan H Mansur said it was necessary to maintain depositor confidence.

This raises a simple but important question: if banks receive central bank funds to protect depositors, why are weak NBFIs denied similar support?

Institutional and individual depositors of over a dozen NBFIs, including People's Leasing, International Leasing, Union Capital, FAS Finance, Aviva Finance, Fareast Finance, and First Finance, are still struggling to recover their deposits. For instance, Khalil Ahmed Khan, a depositor at Aviva Finance, has not received his full deposit despite it maturing on January 21 this year.

He told The Daily Star that he invested Tk 23 lakh in three fixed deposit receipts (FDRs) on January 21, 2024. Despite repeated requests, the company has repaid only Tk 8.98 lakh, while Tk 14.01 lakh remains unpaid.

Many other desperate depositors visit weak NBFIs daily, only to return empty-handed.

The Bangladesh Leasing and Finance Companies' Association (BLFCA), a forum of non-bank financial institutions, has met with the BB governor twice but has yet to receive any commitment regarding liquidity support for weak NBFIs.

Md Golam Sarwar Bhuiyan, managing director of Industrial and Infrastructure Development Finance Company Ltd and former chairman of the BLFCA, told The Daily Star that the central bank informed them it is currently prioritising banking sector reforms.

According to Bhuiyan, NBFI sector reforms will begin once banking reforms are completed.

But Mohammad Rafiqul Islam, managing director of United Finance, believes reforms to both the sectors can run simultaneously. He urged the central bank to extend its focus to ensure depositors recover their funds.

Akin to weak banks, Midas Finance Managing Director Mustafizur Rahman said most NBFIs require liquidity support from the central bank.

Meanwhile, central bank officials maintain that banking sector reforms are crucial for economic stability. However, they assure that a mega reform plan for the NBFI sector is in the pipeline.

"Now is the time to initiate NBFI sector reforms," Fahmida Khatun, executive director of the Centre for Policy Dialogue, told The Daily Star.

She highlighted severe governance issues in the sector, stressing the need for stricter rules and regulations to strengthen governance.

The economist also recommended that regulators conduct audits of NBFIs, similar to banks, to assess their actual financial health.​

 

[Saif]

Tk 41,129cr bad loans written off by 10 banks

The top 10 banks in Bangladesh have collectively written off Tk 41,129 crore in bad loans by the end of December 2024, accounting for nearly half of the total written-off loans in the banking sector, according to Bangladesh Bank data.

www.newagebd.net

Tk 41,129cr bad loans written off by 10 banks
Mostafizur Rahman 05 April, 2025, 23:24

The top 10 banks in Bangladesh have collectively written off Tk 41,129 crore in bad loans by the end of December 2024, accounting for nearly half of the total written-off loans in the banking sector, according to Bangladesh Bank data.

Banks typically resort to loan write-offs when they determine that the chances of recovering the money lent are practically nil, banking experts said.

Written-off bad loans have increased due to a higher rate of non-performing loans and write-off policy relaxation by the central bank in February 2024, they said.

The top state-owned bank, Sonali Bank, alone wrote off Tk 8,568 crore, followed by Agrani Bank writing off Tk 5,627 crore, Janata Bank Tk 5,126 crore and Bangladesh Development Bank Limited Tk 2,968.89 crore.

Among the private sector banks, Southeast Bank wrote off Tk 3,664 crore, United Commercial Bank Tk 3,197 crore, Prime Bank Tk 3,184.76 crore, The City Bank Tk 3,164.79 crore, BRAC Bank Tk 2,962.5 crore, and Bank Asia Tk 2,664 crore.

As of December 31, 2024, the total volume of outstanding written-off loans in the banking sector stood at Tk 81,578 crore, marking a sharp increase from Tk 53,612 crore a year earlier.

Of the total amount written off by the end of 2024, state-run banks wrote off Tk 25,832 crore and private commercial banks Tk 52,780 crore.

Nine foreign banks operating in Bangladesh wrote off Tk 2,353 crore in total, with Standard Chartered Bank accounting for nearly half of that amount -- Tk 1,139 crore.

The practice of writing off loans allows banks to remove irrecoverable debts from their balance sheets, transferring them to off-balance sheet records, banking experts noted.

While this accounting maneuver presents a healthier financial picture on paper, the underlying liabilities remain unresolved, raising concerns about the long-term stability of the banking system, they observed.

The surge in write-off loans, however, raised critical questions about the banks’ loan approval processes, risk management practices, and political interference, they further observed.

The relaxed loan write-off policy came on February 19, 2024, when the Bangladesh Bank — under the influence of the previous Awami League-led government — eased the write-off guidelines.

According to the revised rules, banks can now write off loans classified as ‘bad and loss’ after just two years of default, down from three years previously.

This followed a 2019 policy change, which had already reduced the timeframe from five years to three.

Additionally, banks no longer need to file a case with the Artha Rin Adalat (Money Loan Court) for writing off defaulted loans below Tk 5 lakh, raising the threshold from Tk 2 lakh.

By lowering the write-off barrier, the central bank essentially provided banks with a tool to mask their deteriorating asset quality rather than confront it.

Surprisingly, the policy still exists even after the political shift on August 5, experts said.

Mustafizur Rahman, Distinguished Fellow at the Centre for Policy Dialogue, said that the loan write-off policy needs tightening, especially considering the leniency that was introduced earlier in 2024.

He said that the Bangladesh Bank must undertake a comprehensive review of the policy to identify its flaws and enact necessary reforms to prevent the situation from worsening.

He also emphasised that banks must focus more seriously on recovery efforts if they are to regain public trust and stabilise their financial base.

The ever-increasing volume of written-off loans is a direct consequence of banks’ failure to pursue recovery effectively, BB officials said.

‘Once a loan is written off, most banks stop meaningful follow-up efforts to recover the dues. This has created a perverse incentive for willful defaulters, who now find it even easier to escape the consequences of defaulting,’ they said.

Non-performing loans surged dramatically in 2024, reaching Tk 3.45 lakh crore by year’s end — up from Tk 1.45 lakh crore in December 2023.

The NPLs grew rapidly each quarter in 2024: Tk 1,82,295 crore in March, Tk 2,11,391 crore in June, and Tk 2,84,977 crore in September.

Nearly 20 per cent of all loans in the banking sector —amounting to Tk 17.11 lakh crore — were classified as non-performing by the end of the year, indicating for Bangladesh the highest NPL ratio in South Asia.

A draft white paper released on December 2, 2024 further revealed that the total distressed assets —including NPLs and rescheduled, restructured, written-off, and litigated loans — had exceeded Tk 6.75 lakh crore.

The situation has put tremendous pressure on banks’ profitability and liquidity.

As most of their income comes from interest on performing loans, the erosion of loan quality severely limits their revenue generation.

Banks are now forced to maintain higher provisions against defaulted loans.

According to Bangladesh Bank regulations, provisions range from 0.25 to 5 per cent for unclassified loans and rise sharply to 20 per cent for substandard, 50 per cent for doubtful, and 100 per cent for bad or loss category loans.

Besides the top 10 banks, Pubali Bank wrote off bad loans amounting to Tk 2,463 crore, Uttara Bank Tk 2,446 crore, AB Bank Tk 2,304.73 crore, National Bank Tk 2,154 crore, IFIC Bank Tk 2,144.86 crore, Dutch-Bangla Bank Tk 2,096.80 crore, One Bank Tk 2,072 crore, and Eastern Bank Tk 2,018.75 crore.​

 

[Saif]

Can ‘bridge banks’ act as a ‘financial ambulance’ for ailing banks?

Bangladesh’s banking sector, once celebrated for its contribution to economic growth, is currently facing a crisis. The sharp increase in non-performing loans (NPLs), severe liquidity issues, and persistent governance scandals have placed several banks on the brink of failure. This precarious...

www.thedailystar.net

Can ‘bridge banks’ act as a ‘financial ambulance’ for ailing banks?

Bangladesh's banking sector, once celebrated for its contribution to economic growth, is currently facing a crisis. The sharp increase in non-performing loans (NPLs), severe liquidity issues, and persistent governance scandals have placed several banks on the brink of failure. This precarious situation not only threatens the stability of the financial system but also undermines public trust. In such a challenging environment, the concept of "bridge bank" emerges as a potential solution.

The crucial question is: can "bridge banks" truly rescue Bangladesh's troubled banking sector?

The challenges besetting Bangladesh's financial landscape are serious and widespread. Non-performing loans, often worsened by politically motivated lending practices and inadequate credit management, have reached concerning levels, with the NPL ratio ranking among the highest in South Asia. Many banks are also grappling with significant capital shortages, failing to meet the minimum capital requirements set by regulatory authorities. These financial troubles are aggravated by significant governance issues. Insider lending, a lack of transparency, and high-profile scams have seriously damaged public confidence in the banking system. This creates a harmful cycle: as banks struggle to manage their operations, depositor trust declines, which in turn destabilises the entire financial ecosystem.

This is where "bridge bank" comes into play. This temporary institution is designed to take over the operations of distressed banks, essentially acting as a "financial ambulance" that stabilises these failing entities until a long-term solution—whether it be restructuring, sale, or liquidation—can be achieved. Normally established by central bank or regulatory authorities, a "bridge bank" aims to protect depositors, maintain essential banking services, and reduce systemic risks.

The advantages of "bridge banks" for Bangladesh is significant. By stepping in to manage troubled banks, it can prevent sudden collapses, ensuring that customers continue to have access to their funds and banking services. This continuity helps maintain public confidence during turbulent times. Additionally, a "bridge bank" can safeguard depositors' funds during crises, reducing the risk of panic withdrawals and bank runs. It also creates necessary time and framework for restructuring distressed banks, including recapitalisation, governance improvements, and management of non-performing assets. Most importantly, by isolating failing banks from the broader financial system, a "bridge bank" can prevent the crises from spreading to healthier institutions, thereby protecting the overall banking sector.

However, the introduction of a "bridge bank" in Bangladesh presents a distinct set of challenges. A strong legal and regulatory framework is vital for ensuring successful outcomes. While the proposed "Bank Resolution Ordinance" is a positive step forward, it requires transparent execution free from political interference to be effective. Setting up and managing a "bridge bank" needs considerable financial resources, meaning they will require backing from the government, international institutions, and contributions from other banks.

Good governance and transparency in managing a "bridge bank" is also crucial. Without proper oversight, there is a risk of mismanagement or misuse of resources, which could further erode public trust. Moreover, there is the moral hazard; banks may adopt reckless behaviour, believing that they will be shielded by a "bridge bank". This highlights the necessity for stringent regulatory oversight.

Globally, the "bridge bank" model has proven effective in addressing banking crises. During the 2008 financial crisis in the United States, for instance, the Federal Deposit Insurance Corporation employed a "bridge bank" to manage failing institutions like IndyMac Bank, ensuring the continuity of services and protection for depositors. Similar results have been observed in countries like Portugal, Italy, and India, where "bridge banks" played a key role in stabilising troubled banks and restoring public confidence in the financial system.

While a "bridge bank" may not be the panacea for all the issues facing Bangladesh's banking sector, it presents a promising avenue for addressing its challenges.

The author is a former managing director and CEO of a first-generation private bank in Bangladesh.​

 

[Saif]

Islamic problem banks to merge in two large banks

Bangladesh's Islamic-banking sector will be restructured with planned merger of the weakened and struggling ones of the lenders into two large banks to restore stability. Bangladesh Bank Governor Dr Ahsan H Mansur Wednesday announced the plan, now that there have been wide-ranging reforms launch

thefinancialexpress.com.bd

Islamic problem banks to merge in two large banks
BB governor places plan on restructuring Islamic banking sector to restore stability
FE Report
Published :
Apr 09, 2025 23:44
Updated :
Apr 09, 2025 23:44

Bangladesh's Islamic-banking sector will be restructured with planned merger of the weakened and struggling ones of the lenders into two large banks to restore stability.

Bangladesh Bank Governor Dr Ahsan H Mansur Wednesday announced the plan, now that there have been wide-ranging reforms launched in the country by the post-uprising interim government, including in financial sector.

"Most Islamic banks are in trouble. We plan to restructure the sector and consolidate it into two large banks," he said while inaugurating the 10th Annual Banking Conference 2025, hosted by Bangladesh Institute of Bank Management (BIBM).

He notes that there is currently one large Islamic bank and several smaller ones -- many in distress. And weaker banks would likely be merged with the stronger ones.

Mansur acknowledges the absence of a dedicated legal framework for Islamic banking, saying, "There is a regulatory gap, and we are working to address it, aligning with international standards."

Issuing a strongly worded warning to money-launderers, the Governor said the central bank is spearheading a multi-agency initiative to recover funds siphoned off abroad -- especially during the previous government's tenure --through the banking channel.

"Both legal and ethical measures are required. Life will be made difficult for those who laundered money, so that nobody follows suit in the future," he said.

"Even if we fail to recover all the laundered money, we will ensure those responsible face immense difficulties."

He stresses that the central bank is firmly committed to tackling illicit financial flows and calls for cooperation from all stakeholders.

Highlighting regulatory reforms, Mansur said Bangladesh Bank had recently dissolved boards of several underperforming banks to protect depositors' interests.

"If a bank's board fails to function within the regulatory framework, we will intervene -- forcefully, if needed. The message is loud and clear."

He notes that amendments to the Bank Company Act 2023 aim to improve governance, ensure proper board formation, and enforce stricter 'fit and proper' criteria for directors.

The Governor also calls for further amendments to the Bangladesh Bank Order to enhance the institution's autonomy and establish a unified regulatory framework for both public and private banks.

He feels that despite political changes, reforms must continue, and central bank autonomy must be preserved.

On digital banking, Mansur said licensing terms are being revised to promote small and nano-loans, aligning with broader financial-inclusion goals.

He mentions rapid expansion of mobile-financial services, with Nagad hitting a record transaction volume last month and average daily MFS transactions reaching Tk 5,000 crore.

He told the meet of bankers that capital-deficient banks would be gradually brought from negative to positive capital levels, potentially aided by political stability.

In the keynote presentation, Grameen Bank Chairman and North-South University Vice-chancellor Prof Abdul Hannan Chowdhury urged structural reforms and ethical leadership to rebuild public confidence in the banking sector.

He has identified persistent challenges -- such as weak oversight, rising non-performing loans (NPLs), and liquidity stress -- and advocated for aggressive technological adoption and institutional reform.

Citing successful blockchain pilot projects by Standard Chartered, HSBC, Prime Bank, and bKash in LC settlements, Prof Hannan said the technology can help curb trade-based money laundering which accounts for 75 per cent of illicit financial outflows.

He recommends using AI for CMSME credit scoring, adopting Robotic Process Automation (RPA) for compliance, and developing crowd-funding regulations for startups.

To address governance issues, he proposes a Bangladesh Bank-managed pool of independent directors and institutionalized performance-based board evaluations.

He also called for constitutional safeguards to ensure central bank independence, real-time IT-based supervision tools, and better coordination between fiscal and monetary policies.

To recover bad loans, he suggests establishing a special tribunal and an asset- management company, along with independent international audits to verify financial disclosures and detect "window-dressing".

Bangladesh Association of Banks (BAB) Chairman Abdul Hai Sarker stressed that customer trust is central to the sector's turnaround. "The real owners of banks are the customers. Without their confidence, the sector cannot recover."

He appreciated the conference as a platform for sharing reform strategies and governance improvements by regulators and industry leaders.

BIBM Director-General Md Akhtaruzzaman highlighted the need for inclusive digital transformation. "While the sector has seen major transformation over the past decade, digitalization must ensure no one is left behind -- financial inclusion remains our top priority," he said.​

 

[Saif]

Defaulted bank loans in Bangladesh and the IMF

Bangladesh was supposed to implement its new loan reclassification policy as of first April. Now it seems that because of the vulnerabilities of the banking sector, Bangladesh Bank will renegotiate the programme with the International Monetary Fund (IMF), a mission of which is in the capital now. T

thefinancialexpress.com.bd

Defaulted bank loans in Bangladesh and the IMF
Selim Jahan
Published :
Apr 11, 2025 00:12
Updated :
Apr 11, 2025 00:12

Bangladesh was supposed to implement its new loan reclassification policy as of first April. Now it seems that because of the vulnerabilities of the banking sector, Bangladesh Bank will renegotiate the programme with the International Monetary Fund (IMF), a mission of which is in the capital now. The new policy would declare a loan as defaulted, if it is not paid within three months of the due date. Earlier, the time limit was six months. The new loan classification policy is consistent and compatible with the global Basel III Banking Regulatory Policy. Bangladesh initially agreed to implement this new loan reclassification policy as a condition for the $2.7 billion loan that it received from the IMF in 2023.

Bangladesh is not alone in requesting a postponement in the implementation of the Basel III Banking Regulation Policy. The United States (US), the United Kingdom (UK) and the European Union (EU) have also requested for more time in implementing this policy. The United States will start its implementation from July this year with a three-year transitional period. The European Union will also delay the process so that their medium-sized banks are not under pressure. All these events may strengthen the position of Bangladesh with regard to the renegotiation of its loan reclassification policy.

Currently, the amount of defaulted loans is on the rise in the Bangladesh economy. At the end of 2024, defaulted loans of the country stood at 20 per cent of the total disbursed loans. Only a year ago, in 2023, the ratio was 8 per cent. During the period 2023 -2024, the defaulted loans in Bangladesh have increased by Tk 2 trillion, bringing its total to Tk 3.6 trillion by end-December, 2024. The Bangladesh Bank projects that the ratio of defaulted loans in the country may rise up to 30 per cent of the total disbursed loans, and in absolute terms, it may surpass Tk 5 trillion. A weak regulatory framework, persistent inefficiency in the financial system, illicit money laundering and capital flight have all contributed to increases in defaulted loans in the country.

The increases in the defaulted loans may impede the implementation of the new loan reclassification policy of the Bangladesh Bank. If the country returns to the global definition of defaulted loans, the defaulted amounts may rise, and it may be more difficult to conform to the IMF conditionalities. The IMF conditionalities require Bangladesh to decrease the ratio of defaulted loans to total disbursed loans to 10 per cent for public banks and to 5 per cent for the private banks. All these are linked to the February 5 release of the third tranche of the IMF loans. That date has been postponed without any explanation.

On the other hand, because of the deterioration of the country's banking sector's asset quality, Moody has downgraded its rating of the future of the banking sector of Bangladesh. Further tough loan classification policy will make the current situation more complex. Given the country's economic sluggishness and its high inflation, a higher number of entrepreneurs may not be able to pay off their debts.

In fact, in 2012, Bangladesh adopted the global standard for loan reclassification to identify the country's defaulted loans. According to that standard, if after three months of the stipulated time, a loan is not paid off, that becomes a defaulted loan. But in 2019, that standard was relaxed and the relevant dead line for loan repayment was extended from 3 to 6 months. But in reality, the debtors used to get about 9 months to repay their loans. Furthermore, in 2012, because of the policy of refixing of the time period for repayment of loans, the defaulters could reclassify their loans for three successive times. That process helped the defaulters to hide their bad assets.

There were, however, many reasons for such phenomena. But the biggest reason was to provide undue and illegal advantages under the state patronage to a few vested interest groups. With the state saving their backs, these interest groups used the banks as their private coffers. By breaking the rules and regulations of all economic disciplines, they dominated the management boards of different banks, controlled the management structures of these financial institutions. And as such, they institutionalized a permanent system of stealing money and money laundering from the banking system, where there were no structures of transparency and accountability. There were dual outcomes of the process - non-repayments of loans amounting crores of taka and laundering abroad the money and resources representing the defaulted loans.

There is no doubt that because of all these deviations, huge amounts of defaulted loans could be hidden on paper, but ultimately, it devastated the financial wellbeing of the country. As a result, during the last decade, 10 banks were on the verge of collapse. Along with it, billions of taka were laundered outside the country. In spite of all these wrong-doings, the foreign credit rating institutions did not downgrade the rating of our financial institutions. Yet, because of the rapid soaring of defaulted loans as well as the ensuing tough implementation of the policies, in future, there may be downgrading of these ratings. The outcome of the Bangladesh-IMF negotiations will have an important impact of the future stability on our financial system. Balancing between the rules and regulations of the regulatory system and the economic realities on the ground would represent a big challenge for Bangladesh.

Dr Selim Jahan is former Director, Human Development Report Office and Poverty Division, United Nations Development Programme (UNDP), New York, USA.​