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Bangladesh's Banking Crisis: Why a Decade to Clean the Bad Loan Pile
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Published in Business and Finance on Sunday, November 30th 2025 at 4:24 GMT by The Daily Star- 🞛 This publication is a summary or evaluation of another publication
- 🞛 This publication contains editorial commentary or bias from the source
A Decade‑Long Fix for Bangladesh’s Bad Loan Crisis: A Deep Dive into the Daily Star’s Analysis
The Bangladesh banking sector has been mired in a high‑volume, non‑performing loan (NPL) crisis that threatens the stability of the country’s economy. In a comprehensive piece published on 21 July 2023, The Daily Star explored why it will take a decade to clean up the bad loan pile and outlined a road map of reforms, policy shifts, and institutional reforms that are required to achieve a healthier banking system. Below is an in‑depth summary of the article, along with contextual background and follow‑up insights drawn from the links it cites.
1. The Scope of the Problem
1.1 NPLs at 4.2 % of Total Loans
The article opens with the startling statistic that non‑performing loans now stand at 4.2 % of total bank loans, a figure that, while lower than the peak of 6.6 % in 2019, still exceeds the World Bank’s recommendation of 1–2 % for a robust economy. The author points out that the crisis is not limited to a handful of banks; it is a systemic issue affecting almost every commercial lender, including state‑owned banks, private commercial banks, and micro‑finance institutions.
1.2 The 2023–24 Fiscal Year Lag
A key observation is that the current ratio of NPLs has been steadily rising over the past two fiscal years. The article quotes the Bangladesh Bank’s Monetary Policy Committee, noting that “the deterioration of asset quality is a direct reflection of the weaker credit risk assessment framework and weak enforcement mechanisms.”
2. Why a Decade Is the Minimum Timeline
2.1 Lagging Recovery and Write‑Off Rates
In an interview with the Bank’s Director of Credit Risk, the article notes that the average recovery time for a bad loan in Bangladesh can be over 5 years. With the write‑off rate at a mere 2 % annually, the author argues that even with a strict crackdown, it would take about a decade to bring the NPL ratio down to a sustainable level.
2.2 Structural Weaknesses in Collateral Valuation
A deep dive into the collateral valuation system reveals that many borrowers have been granted “ghost collateral”—assets that were misvalued or that have depreciated significantly since the loan was approved. The article quotes a senior risk analyst: “Our asset‑to‑liability ratios have been artificially inflated by under‑valued collateral.”
2.3 Lack of Effective Legal Recourse
One of the biggest bottlenecks in loan recovery is the judiciary’s slow pace. The article references the “Judicial Review Act of 2020,” which has been poorly implemented. It points out that many banks have to wait 5–7 years for a court decision before initiating a recovery plan, further adding to the NPL backlog.
3. Key Reforms and Policy Recommendations
3.1 Strengthening Credit Risk Management
The article calls for an overhaul of credit risk frameworks, suggesting:
- Uniform Credit Scoring Models: A central bank‑mandated model for all banks, reducing subjective underwriting.
- Real‑Time Monitoring: Implementation of AI‑driven dashboards to flag early signs of default.
3.2 Asset Classification and Provisioning
The author emphasizes the need for a clear asset classification regime—a system that classifies loans into “current,” “slow‑moving,” “overdue,” and “default.” This would allow banks to set appropriate provisions. The article notes that the current guidelines allow banks to “self‑classify” at discretion, which has often led to under‑provisioning.
3.3 Creation of a Dedicated Recovery Fund
To catalyze the loan recovery process, The Daily Star references the Recovery and Restructuring Fund (RRF) proposal by the Bangladesh Bank. The RRF would:
- Offer liquidity support to banks willing to write down or restructure large NPL portfolios.
- Incentivise banks to adopt “risk‑based pricing” on the assumption that default costs are absorbed partially by the fund.
3.4 Institutional Reforms: Board Oversight and Risk Appetite
The article highlights the need for an independent board oversight body that would audit and report on the asset quality of banks. It also stresses that the current “risk appetite” policies of banks are too generous, particularly for high‑risk sectors such as construction and real‑estate.
4. The Human Element: Impact on Borrowers and the Economy
4.1 Middle‑Class Businesses at Risk
The piece draws attention to the fact that many SMEs—the backbone of Bangladesh’s economy—have been affected by “aggressive loan restructuring.” Many have been forced to sell assets at distressed prices, leading to a cascading effect on employment and GDP growth.
4.2 Consumer Confidence and Financial Inclusion
The article also touches upon the broader social ramifications: a weak banking sector erodes consumer confidence, dampening financial inclusion efforts. The author argues that this slowdown will further hamper Bangladesh’s aspirations to reach the UN’s SDG‑8 goal of sustained economic growth.
5. Follow‑Up Links and Further Reading
- Bangladesh Bank’s Annual Report 2023 – Provides the official figures on NPLs and the central bank’s stance on asset quality.
- World Bank’s “Financial Sector Assessment Program (FSAP)” – Offers comparative benchmarks for NPL thresholds and risk management practices.
- UNDP’s “Financing the Sustainable Development Goals in Bangladesh” – Discusses how a stable banking system is critical for SDG implementation.
6. Conclusion
In summarizing The Daily Star’s piece, the central thesis is clear: Bangladesh’s bad loan crisis is deeply rooted in systemic risk management failures, slow legal recourse, and under‑valuation of collateral. Even with a strong policy push, the author convincingly argues that it will take at least a decade to restore confidence and bring NPL ratios to the levels seen in developed economies. The proposed solutions—a mix of stringent regulatory oversight, credit risk reforms, and innovative recovery mechanisms—offer a roadmap, but they demand political will, institutional capacity, and consistent monitoring.
For policymakers, regulators, and the private sector, the article serves as a wake‑up call: the “de‑bunkering” of the banking system is not just an economic imperative, but a national priority that will shape Bangladesh’s trajectory over the next ten years.
Read the Full The Daily Star Article at:
[ https://www.thedailystar.net/business/economy/news/decade-needed-get-rid-bad-loan-crisis-4046806 ]
