When will surge in distressed loans in banking sector stop

Borrowing from banks is increasing, but repayment is not. On top of that, irregularities, scams and collusion with boards are leading to looting of funds. As a result, distressed and defaulted loans are rising uncontrollably. In such a situation, distressed loans in the banking sector have reached Tk 7.56 trillion. By the end of 2024, this amount rose by nearly 59 per cent compared to the previous year. This figure starkly illustrates the fragile state of the country’s financial sector.

According to the recently published Financial Stability Report 2024 of Bangladesh Bank, 45 per cent of all outstanding loans are now “distressed loans”. This amount is equivalent to the national budget of the 2025–26 fiscal year, which is a matter of serious concern for the country’s economy.

Even more worrying is that a large portion of rescheduled loans is again turning into defaults. Bangladesh Bank data show that by the end of 2024, Tk 1.338 trillion of rescheduled loans had defaulted again, which is 38.42 per cent of all rescheduled loans. Just a year earlier, this rate was 18.74 per cent.

The hopeful sign is that the central bank has already identified various cases of corruption and irregularities in the banking sector—loan scams, fraud, fake loans and misuse of loans. As the “bank of banks” and the last resort for all banks, Bangladesh Bank appears to be showing maturity in trying to overcome this crisis. However, frustration and anger are being expressed in many quarters that the central bank is lagging behind in proper supervision as the regulator.

We must remember, this is not a sudden development but the result of years of irregularities and failure to take effective action against loan defaulters. The reality is that the figure will rise further. Already nearly Tk 2.5 trillion is stuck in litigation in money loan courts, the High Court and the Supreme Court. Therefore, to bring normalcy to the banking sector, there is no alternative but to bring major loan defaulters quickly under judicial process and ensure accountability.

We believe that the combined impact of the overall economic slowdown, political change and years of irregularities has put the banking sector under extreme pressure. Until the volume of distressed loans is brought under control, stability in the financial sector will not return.