ADB: Bangladesh faces worst financial crisis in decades

❐ BD Digest Desk

Bangladesh’s economy is currently going through the most serious crisis in its history. The banking sector, non-banking financial institutions (NBFIs), and the stock market—all three pillars of the economy—are in a state of extreme instability. The vicious cycle of bad loans, weak regulation, political interference, corruption, and the dominance of low-quality companies has led to a dangerous state of affairs in the economy, deepening uncertainty about the future.

The web of defaulted loans in the banking sector

The banking sector is burdened with bad loans due to lax policies, political interference and corruption. According to the latest data from Bangladesh Bank, the amount of bad loans at the end of June was about 6 lakh crore taka. In addition, another 3.18 lakh crore taka of hidden bad loans are in the process of being disclosed. Of this, 1.78 lakh crore taka of money loans are stuck in the courts, 80,000 crore taka has been cancelled and 60,000 crore taka is under court stay. This amount may reach 9 lakh crore taka after updating the Credit Information Bureau (CIB).

In this dire situation, the government has proposed to remove the definition of “wilful defaulter” from the draft of the new Banking Companies Act. The draft states that identifying wilful defaulters is complex and not in line with reality. However, the amended Act of 2023 had directed each bank to prepare a list of wilful defaulters and submit it to the central bank.

An official of Bangladesh Bank, who did not want to be named, said, “There was widespread looting in the name of loans during the previous government’s tenure. Many influential businessmen did not repay loans despite having the means. That is why it has been proposed to remove this definition in the new draft.”

Experts, however, say that if the accounts of actual defaulters are disclosed, it is possible to identify intentional defaulters. Former professor of Chittagong University Dr. Moinul Islam said, “The culture of loan rescheduling, cancellation and interest waiver does not improve the financial health of banks, even if defaults decrease on paper. What is happening must be disclosed. This will be beneficial for the banking sector in the long run.”

Bangladesh Bank Governor Dr. Ahsan H. Mansur promised greater transparency, saying, “From now on, no information will be kept secret. All defaulted loans will be disclosed and strict recovery efforts will be made.”

The weakest banking system in Asia

The Asian Development Bank (ADB) recently reported that Bangladesh has the highest level of non-performing loans in Asia. In 2024, 20.2% of the country’s total loans disbursed were non-performing, up 28% from the previous year. The ADB described Bangladesh as having the “weakest banking system” in Asia.

In comparison, India, Pakistan and Sri Lanka have been able to reduce non-performing loans through reforms. Dr. Zahid Hossain, former chief economist of the World Bank, said, “The stricter the rules, the more non-performing loans will increase. Without bold reforms like India’s, this crisis will not be solved.”

“This problem will not be solved until political interference is stopped and the justice system is strengthened,” said Selim Raihan, executive director of the South Asian Network on Economic Modeling (SANEM).

NBFI sector on the verge of collapse

The situation is even worse for non-banking financial institutions. 83% of total loans in this sector have defaulted, pushing the institutions to the brink of collapse.

Stock market crash

The stock market has fallen by 38%, and the share price of half of the companies has fallen below Rs 10. The dominance of low-quality companies and lack of investor confidence has accelerated this decline.

Experts say that this crisis can be addressed through transparency, strict regulation, and an end to political interference. But this requires swift and bold action. Otherwise, the deterioration of these three pillars of the economy will push the country into a deeper crisis.