Published: 12:21 AM, 28 March 2026
The Silent Siege of NPLs on Bangladesh’s Economic Citadel
Md. Saiful Islam Masum
Bankers candidly acknowledge that weak credit governance, coupled with political interference, lies at the heart of the crisis. The phenomenon of ‘name-lending’—where influential actors secure loans under proxy identities—has facilitated large-scale capital flight. This cyclical feedback loop transforms a banking issue into a full-blown macroeconomic crisis. Despite repeated circulars from Bangladesh Bank—including stricter guidelines on loan rescheduling, single borrower exposure limits, and risk-weighted capital adequacy (Basel III compliance)—implementation remains inconsistent.
The creeping malignancy of non-performing loans (NPLs), long stigmatized as a latent infirmity within Bangladesh’s banking ecosystem, has now morphed into a full-blown systemic contagion, infiltrating the very sinews of the real economy. No longer confined to the balance sheets of troubled financial institutions, this virulent accumulation of distressed assets has permeated the business, trade, and industrial sectors with disquieting intensity. The most recent revelations from Bangladesh Bank paint a deeply unsettling portrait: by December 2025, an astonishing 42 per cent of loans within the business and trade segment had devolved into non-performing status, while the industrial sector grappled with a formidable 30.8 per cent default ratio. Such figures are not merely indicative of financial stress; they signal an incipient crisis with the potential to destabilize the broader macroeconomic architecture.
A granular dissection of the data underscores the colossal scale of this deterioration. The business and trade sector, commanding Tk 5,94,624.55 crore—equivalent to 33 per cent of aggregate bank lending—has witnessed an alarming 42 per cent of its credit stock lapse into non-performance. Simultaneously, the industrial sector, which constitutes 43 per cent of total credit exposure with disbursements amounting to Tk 7,64,117 crore, has seen 30.8 per cent of its loans succumb to default. Although a marginal amelioration is observable relative to September 2025—particularly within the industrial segment where NPLs receded from 37 per cent—the incremental decline offers scant solace in light of the overwhelming magnitude of impaired assets.
The etiology of this escalating crisis is inherently dualistic, encompassing both endogenous governance frailties and exogenous economic perturbations. On the domestic front, the banking fraternity tacitly acknowledges that regulatory laxity and entrenched political patronage have severely distorted the credit dispensation mechanism. The insidious practice of channeling loans through fictitious or proxy identities—often orchestrated by influential actors—has facilitated substantial capital exfiltration, with funds surreptitiously transferred abroad and seldom repatriated. Such malpractices constitute a flagrant breach of prudential banking doctrines, including stringent Know Your Customer (KYC) protocols, robust credit risk assessment frameworks, and adherence to single-borrower exposure ceilings. Notwithstanding a succession of policy directives and circulars promulgated by Bangladesh Bank—encompassing tighter loan classification norms, enhanced provisioning requirements, and Basel III-aligned capital adequacy standards—their implementation has been attenuated by enforcement deficits and a proclivity toward regulatory forbearance.
From a theoretical standpoint, NPLs are not merely accounting anomalies but indicators of credit market failure. Within the framework of asymmetric information theory (Akerlof, 1970), borrowers often possess superior information about their repayment capacity, leading to adverse selection and moral hazard. Banks, in turn, may misprice risk due to weak due diligence or external pressures.
The Financial Accelerator Theory (Bernanke, Gertler & Gilchrist, 1999) further elucidates how deteriorating balance sheets amplify economic downturns.
India faced a severe NPL crisis between 2015–2018, particularly in infrastructure and steel sectors. The establishment of the Insolvency and Bankruptcy Code (IBC) and recapitalization of public banks helped reduce stressed assets significantly. Pakistan, under IMF-guided reforms, strengthened asset quality reviews and improved loan recovery tribunals, stabilizing its banking sector.
The implications of such elevated NPL levels are profound and multifaceted:
Liquidity Crunch and Credit Contraction. As banks allocate higher provisions against bad loans, their lendable funds shrink, triggering a liquidity squeeze. This aligns with the warning from a senior banking executive that the system may face a severe liquidity crisis.
In recent years, Bangladesh Bank has introduced a series of policy measures:
like Revised Loan Classification Guidelines (2023-2025) to align with international standards, Special Restructuring Schemes during COVID-19, Enhanced Credit Information Bureau (CIB) reporting
Prompt Corrective Action (PCA) framework for weak banks. However, critics argue that regulatory forbearance—particularly repeated loan rescheduling—has created a culture of “ever greening”, masking the true extent of asset quality deterioration.
The warning signs are unmistakable. If decisive reforms are not undertaken, the banking sector risks entering a phase of credit paralysis, with cascading effects on economic growth and social stability. For policymakers, regulators, and financial institutions alike, this is a moment of reckoning. The question is no longer whether the system is under stress—but whether it possesses the resilience and political will to reform before the stress turns into systemic collapse.
Conversely, industrial stakeholders advance a narrative shaped by formidable global headwinds. The post-pandemic economic milieu has been characterized by severe supply chain disruptions, escalating input costs—particularly in energy and raw materials—and pronounced exchange rate volatility. For an import-dependent industrial base, these exogenous shocks have exerted immense pressure on operating margins, eroding profitability and undermining debt-servicing capacity.
The corpus of empirical literature further reinforces the adverse macro-financial ramifications of elevated NPL ratios. Scholarly inquiries by Espinoza and Prasad delineate a robust inverse correlation between economic growth and the prevalence of non-performing assets, while the work of Louzis and his associates underscores the salience of macroeconomic determinants such as unemployment, interest rate trajectories, and fiscal disequilibria. Within the South Asian milieu, the trajectories of India and Pakistan furnish instructive analogues. India’s confrontation with a burgeoning NPL crisis, particularly in infrastructure and heavy industry, precipitated the enactment of the Insolvency and Bankruptcy Code alongside an extensive bank recapitalization programme, thereby restoring a semblance of balance sheet integrity.
The macroeconomic sequelae of Bangladesh’s escalating NPL burden are both profound and multifarious. The compulsion for banks to augment provisioning against impaired assets inevitably constricts their lendable resources, precipitating a liquidity compression that stifles credit intermediation. This contractionary impulse reverberates across the investment landscape, dampening industrial expansion and curtailing employment generation. Concurrently, heightened risk perception is likely to engender an upward recalibration of lending rates, thereby inflating the cost of capital and further disincentivizing productive investment. The progressive erosion of bank capital, particularly Tier-1 buffers, raises disquieting concerns regarding compliance with regulatory capital adequacy thresholds and portends potential solvency challenges for weaker institutions. The cautionary pronouncement by a senior banking executive that such elevated NPL levels could precipitate a severe liquidity crisis and even existential threats for certain banks is thus emblematic of a looming systemic fragility rather than an exaggerated conjecture.
In an attempt to arrest this deteriorating trajectory, Bangladesh Bank has undertaken a suite of policy interventions aimed at buttressing financial stability. These encompass the recalibration of loan classification frameworks in alignment with global best practices, the introduction of targeted restructuring schemes during the pandemic epoch, the augmentation of Credit Information Bureau (CIB) surveillance, and the operationalization of prompt corrective action regimes for distressed banks. Yet, the persistence of elevated NPL ratios suggests that these initiatives have yielded only partial efficacy. A growing chorus of critics contends that repeated loan rescheduling and restructuring exercises have engendered a culture of “evergreening,” wherein the cosmetic refurbishment of distressed assets obfuscates the underlying deterioration in credit quality.
What renders Bangladesh’s predicament particularly precarious is its pronounced reliance on bank-centric financial intermediation in the absence of a sufficiently deep and diversified capital market. This structural concentration amplifies systemic vulnerability, as perturbations within the banking sector transmit rapidly to the broader economy. The exigency of the moment thus demands a resolute and comprehensive reform paradigm. Strengthening credit governance through enhanced accountability, digitized appraisal systems, and the minimization of discretionary lending is imperative. Legal and institutional reforms aimed at expediting insolvency resolution and fortifying loan recovery frameworks are equally indispensable in reinstating credit discipline. The cultivation of a vibrant capital market would serve to diversify financing channels, thereby alleviating systemic dependence on banks. Above all, the depoliticization of banking operations and the reinforcement of regulatory autonomy constitute the sine qua non for restoring integrity within the financial intermediation process.
The inexorable rise of non-performing loans within Bangladesh’s industrial and trade sectors is thus emblematic of a deeper structural pathology rather than a transient economic perturbation. While exogenous shocks have undeniably exacerbated the situation, the genesis of the crisis lies firmly within domestic institutional frailties that demand urgent rectification. The warning signals are both stark and unequivocal. Absent decisive and sustained reform, the financial system risks descending into a vortex of credit paralysis, with far-reaching repercussions for economic stability and developmental aspirations. In this moment, the imperative is not merely to acknowledge the crisis but to confront it with unwavering resolve and strategic foresight.
Md. Saiful Islam Masum is a
banker and economic analyst.
