The default loan rate in Bangladesh's banking sector has surged to 32.78%. This means nearly one-third of all disbursed loans in the banking sector are now non-performing (defaulted).
Furthermore, there is virtually zero likelihood of recovering 80% to 90% of these defaulted loans.
Compounding the crisis, banks lack the necessary capital to absorb the losses stemming from these defaulted loans. By the end of 2025, the banking sector’s capital conservation ratio stood at a negative 2.64%.
As a result, the country's banking sector is under severe pressure from a dual crisis of high default rates and capital deficits.
These findings were revealed on Saturday (November 14) at a Knowledge Hub Institute seminar in Dhaka titled “Banking Sector Evaluation and Policy Review: January–September 2026.”
The report was presented by Noor Iyana Jannat, research associate at the institute.
Knowledge Hub president Khondaker Golam Moazzem and other board of trustee members were present at the event.
According to a KHI report, the capital situation of the banking sector is equally alarming. At the close of 2025, the capital conservation ratio was negative 2.64%, with a provisioning shortfall of approximately Tk191,441 crore.
Additionally, court injunctions on 845 pending lawsuits have blocked the recovery of Tk182,419 crore.
Shah Md Ahsan Habib, component lead at Knowledge Hub, remarked that the volume of default loans is extraordinary.
"Nearly one-third of all disbursed loans cannot be recovered. Even worse, the overall capital of the banking sector is negative, meaning there is a severe deficit in the capital required to absorb loan-related losses."
Analyzing the classification of NPLs, he noted that a large portion falls into the doubtful and bad loan categories. Specifically, for bad loans, the chance of recovery is virtually non-existent—accounting for roughly 80% to 90% of all defaulted loans.
"My personal assessment is that less than 10% of this 33% default rate stems from genuine credit risk," Habib stated.
"The vast majority is tied to operational risk, procedural irregularities, and criminal offenses. Tackling these crimes is beyond the capacity of banks alone; the government and the central bank must step in."
Impact of willful defaulters
Highlighting the issue of willful loan defaults, Habib noted that a significant portion of NPLs results from deliberate evasion—a fact recognized by regulators and market insiders alike.
"Ordinary depositors are bearing the cost of willful defaults," he warned. "Many bank employees who were never involved in the loan disbursement process are also paying the price. Honest businesses are forced to borrow at higher interest rates, and even sound banks are absorbing the shockwaves. Ultimately, the entire economy is bearing the cost because our financial system is heavily bank-dependent."
The report highlighted sharp disparities in default rates across different categories of banks:
- State-owned banks: 43.2% default rate
- Private commercial banks: 31.6% default rate
- Foreign banks: 6.5% default rate
- Full-fledged Islamic banks: Highest at 58.9% (deposits in these banks dropped by 1.7%, with an advance-deposit ratio standing at 127.7%)
Meanwhile, while overall deposits grew, credit growth in the private sector slowed.
Deposit growth in the banking sector reached 11.96% in August, while private sector credit growth crawled at just 4.75% during the same period, dropping further to 4.09% in September.
In September, inflation stood at 8.34%, and the policy interest rate was maintained at 9.50%. Foreign exchange reserves stood at $31.20 billion on September 30. Remittance growth reached 13.28% between July and September.
Although excess liquidity in banks stood at Tk441,954 crore in August, the report cautioned that aggregate excess liquidity can mask severe crises in weaker, vulnerable banks.
To navigate the crisis, the report recommends conducting independent loan reviews of vulnerable banks by December, and establishing bank-specific capital recovery or resolution frameworks by March 2027.
It also stressed the importance of regular public disclosures regarding cash recoveries, capital adequacy, and customer service quality.
The report touched upon the Bank Resolution Act 2026, the Deposit Protection Act 2026, and the Tk35,000 crore capital restructuring package announced for Sammilito Islami Bank.
However, it noted that concrete evidence of completed payout mechanisms for depositors in the merged bank has yet to be observed.