Published: 01:36 AM, 15 September 2026
Due Diligence Is Missing in Most Banks
Bangladesh’s banking sector is facing a crisis that goes beyond bad loans and weak balance sheets. At the heart of the problem is a failure of due diligence—the careful process of verifying borrowers, assessing risks, examining ownership structures, and ensuring that loans are used for legitimate and productive purposes.
For years, banks in Bangladesh have formally maintained procedures for customer verification, credit assessment and risk management. Yet the country’s growing mountain of non-performing loans suggests that these safeguards have often been inadequate, poorly enforced or deliberately bypassed.
The latest figures paint a troubling picture. According to Bangladesh Bank’s 2024-25 annual report, the banking sector’s gross non-performing loan ratio reached 24.13 percent at the end of March 2025, compared with 9 percent in December 2023. The ratio was even higher among state-owned commercial banks, at 45.79 percent, while private commercial banks recorded 20.16 percent. The situation has deteriorated further. The World Bank reported that Bangladesh’s non-performing loan ratio stood at 32.6 percent in March 2026, while the country’s banking sector continued to suffer from weak corporate governance, regulatory capture and related-party lending.
These numbers raise a fundamental question: How did so many risky loans receive approval in the first place?
The answer, in many cases, points to shortcomings in due diligence.
A bank is not simply a place where money is deposited and lent out. Its primary responsibility is to protect depositors’ money by determining whether borrowers have the financial capacity, business credibility and repayment ability to receive credit. That requires much more than collecting tax documents, trade licenses, financial statements and collateral papers.
A proper credit investigation should examine the borrower’s actual business operations, cash flow, debt obligations, ownership structure, sources of funds, previous repayment history and connections with other borrowers. It should also determine whether the proposed loan makes economic sense.
In Bangladesh, however, the quality of such investigations has frequently been questioned. Loans have sometimes been approved on the strength of personal connections, political influence, inflated collateral values or optimistic business projections. In some cases, related parties have reportedly benefited from lending arrangements that should have received much greater scrutiny.
This creates a dangerous cycle. A borrower receives a large loan without adequate assessment. The project fails—or the money is diverted elsewhere. Repayment stops. The loan is restructured or rescheduled. The bank delays recognizing the loss. Eventually, the problem becomes too large to conceal.
Bangladesh Bank itself has acknowledged that poor governance contributed significantly to the deterioration in asset quality. Its annual report said the sharp increase in reported non-performing loans in 2024 was largely associated with the lack of good governance, which impeded accurate reporting of actual loan conditions. The central bank also introduced stricter loan-classification rules that helped reveal the scale of the problem.
This is an important distinction. Stricter classification does not necessarily mean that banks suddenly made more bad loans. In part, it means that previously hidden problems are finally being recognized.
The weaknesses are not limited to lending decisions. Customer due diligence is equally important in preventing money laundering, fraud and the misuse of the financial system. Bangladesh Bank's updated electronic Know Your Customer guidelines require banks and other financial service providers to verify customers and apply stronger measures where risks are higher.
Technology can make this process faster, but technology alone cannot solve the problem. A national identity number may establish who a customer is. It does not automatically establish whether the customer's large loans, credit concentration, loan operations, fraud, corporate governance and compliance with regulations. The challenge is ensuring that these mechanisms operate independently, declared income is genuine, whether a company's financial statements reflect reality, or whether a loan applicant is acting on behalf of another person.
That is why Know Your Customer must evolve into Know Your Business and Know Your Risk.
Bangladesh Bank already has a framework for comprehensive and risk-based inspections. Its supervisory work includes evaluating large loans, credit concentration, loan operations, fraud, corporate governance and compliance with regulations. The challenge is ensuring that these mechanisms operate independently, consistently and before problems become systemic.
The responsibility also lies with bank boards and senior executives. Due diligence should not be treated as paperwork completed by junior credit officers. Directors must understand where the bank's money is going and whether lending decisions are consistent with the institution's risk appetite.
Internal audit and compliance departments must also have sufficient independence. An employee who raises concerns about a powerful borrower should not fear professional retaliation. Similarly, loan officers should not be pressured to approve credit simply because a customer is influential or well connected.
The consequences of weak due diligence extend far beyond individual banks.
When bad loans accumulate, banks become reluctant to lend to legitimate businesses. Small and medium-sized enterprises, which often lack political connections or substantial collateral, can find themselves competing with large borrowers for limited credit. Higher risk premiums increase the cost of financing. Investment suffers. Employment suffers. Ultimately, economic growth suffers.
Ordinary depositors also bear the consequences. When banks become financially weak, public confidence declines. Depositors may rush to withdraw funds, creating liquidity pressure. The government may then be forced to provide support, shifting the cost of banking failures to taxpayers and the wider economy. The World Bank has warned that Bangladesh's banking sector, which accounts for roughly 90 percent of the country's financial-sector assets, faces serious challenges from weak governance, regulatory capture and related-party lending.
The solution therefore cannot be another temporary loan-rescheduling scheme. Bangladesh needs a culture in which every loan is treated as a responsibility to depositors and the economy.
Banks should strengthen independent credit committees, conduct rigorous borrower background checks, verify beneficial ownership, use reliable cash-flow analysis, monitor loan utilization after disbursement and take early action when repayment problems emerge. Large and related-party loans deserve particularly intensive scrutiny.
Regulators, meanwhile, need stronger supervisory capacity and faster enforcement. Bangladesh Bank's reform efforts, including its work on bank resolution and improved governance, are important steps in the right direction.
But rules are meaningful only when violations carry consequences.
Bangladesh does not lack banking regulations. What it has lacked is consistent enforcement and a banking culture that places risk assessment above influence.
Due diligence is not an obstacle to lending. It is the foundation of responsible lending. A bank that carefully investigates a borrower may reject some applications, but it will also protect its depositors, shareholders and long-term profitability.
The current banking crisis offers Bangladesh an opportunity to rebuild that culture.
The country needs banks that ask difficult questions before disbursing money—not after a loan becomes a problem. Until that happens, reforms will remain incomplete, and the cost of inadequate due diligence will continue to be paid by depositors, taxpayers, businesses and the broader economy.
Nasir Uddin Shah is Chief
Reporter at The Asian Age.
