Hidden Loan Risks Threaten Banks

Fresh concerns over the true financial health of the country’s banking industry have emerged following a high-level workshop organised by the Bangladesh Institute of Bank Management in the capital, Dhaka.

Titled “Monetary Policy Statement: Relevance for Banks”, the event brought together policymakers, economists and senior banking executives, many of whom warned that concealed non-performing loans, weak governance and poor coordination between fiscal and monetary authorities are placing mounting strain on financial stability.

Ahsan Ullah, a former adviser to a governor of Bangladesh Bank, claimed that the actual ratio of non-performing loans could be as high as 35.7 per cent — far exceeding officially published figures. According to him, prolonged regulatory forbearance and opaque reporting practices have delayed essential reforms. The result, he argued, has been a steady deterioration in asset quality and an erosion of capital adequacy across segments of the sector.

If the real scale of loan distress remains obscured, investor confidence may weaken further, potentially fuelling uncertainty in domestic financial markets. Participants noted that transparent recognition of impaired assets is a prerequisite for restoring credibility and attracting long-term investment.

Key Stress Indicators in the Banking Sector

The Chief Economist of Bangladesh Bank, Dr Ahsan H Mansur Akhtar Hossain, described the present monetary environment as “fragmented and inconsistent”. He observed that distortions in the credit market, compounded by pressure from influential groups, have led to inefficient capital allocation. In a high-inflation environment, rising interest rates may inadvertently attract risk-prone borrowers, potentially triggering a new wave of loan defaults.

Speakers further stressed that insufficient coordination between the central bank and the Ministry of Finance is complicating inflation management. Volatility in global energy prices and domestic supply constraints are adding further pressure to price stability.

Mohammad Ali, Managing Director of Pubali Bank Limited, cautioned that excessive government borrowing from commercial banks could restrict credit availability for private enterprises. Such crowding out, he warned, may suppress production growth and discourage fresh investment. Stronger corporate clients, meanwhile, are gravitating towards better-governed institutions, leaving weaker banks increasingly vulnerable.

A reform roadmap proposed for implementation from January 2026 includes the introduction of risk-based supervision, structured resolution mechanisms for distressed banks, strengthened governance standards, enhanced asset recovery frameworks and the development of the domestic bond market. Expanding financial inclusion and promoting cashless transactions have also been identified as priorities.

Deputy Governor Nurun Nahar characterised the Monetary Policy Statement as a strategic guidepost. Workshop chair and Director General Dr Md Ejazul Islam concluded that without sustainable reform and firm accountability, long-term stability will remain elusive. The consensus was clear: restoring transparency and discipline in the banking system is now an urgent national imperative.