Standard monetary economics dictates that when private sector borrowing contracts, commercial bank balance sheets accumulate surplus cash, expanding overall sector liquidity.
However, Bangladesh’s banking sector is presenting a profound structural paradox.
Despite private sector credit expansion collapsing to a 33-year low of 4.47%, several commercial banks face acute liquidity distress, struggling to honor routine customer cash withdrawals.
To prevent systemic defaults, Bangladesh Bank has injected over Tk76,000 crore ($76 billion+) in emergency liquidity support into fragile institutions—including more than Tk17,000 crore to Islami Bank alone.
Analysts note this contradiction highlights a structural solvency and asset-quality crisis stemming from legacy non-performing loans (NPLs), capital flight, and corporate governance failures.
Private sector credit expansion dropped to 4.47% in June 2026, yet liquidity remains constrained due to unrecovered legacy debts and asset-liability mismatches.
Central bank support to distressed commercial banks has crossed Tk75,903 crore (over Tk76,000 crore), providing temporary cash flow for daily counter withdrawals.
Islami Bank Bangladesh PLC received more than Tk17,000 crore in emergency liquidity and repo support to stabilize deposit runoffs.
Official NPLs reached Tk588,704 crore by March 2026, with provision shortfalls rising to Tk205,665 crore.
Total distressed loans (including rescheduled and written-off exposures) exceed Tk10,00,000 crore—accounting for nearly 60% of total bank advances.
Full-fledged Islamic banks reported non-performing loan ratios averaging 58.4%, with Advance-to-Deposit Ratios (ADR) in distressed institutions exceeding 120%.
While overall banking sector deposit growth and remittance inflows picked up (with national FX reserves reaching $36 billion), new deposits are concentrating heavily in solvent, tier-one banks, accelerating liquidity runoffs at weaker institutions.
Root Causes of financial sector contraction
The disconnect between low credit growth and persistent cash shortages stems from three structural issues:
- NPL backlog and unrecovered assets
While new borrowing has slowed, previously issued loans are not returning to the banking system.
With distressed loans exceeding Tk10 trillion (~60% of total advances), assets listed on balance sheets generate zero cash flow, depriving banks of the principal repayments and interest income needed to fund new withdrawals.
- Governance failures and capital flight
During the previous decade, large credit exposures were approved under weak collateral requirements, leading to high concentration risk under specific conglomerate accounts.
Significant capital was lost through non-viable projects, bad-debt write-offs, or unrecovered offshore transfers, leaving affected institutions with severe asset-liability Mismatches.
- High advance-to-deposit ratios (ADR)
Aggressive lending during growth periods drove ADR levels at several full-fledged Islamic banks past 120%, well above safe regulatory thresholds.
When depositors began moving funds to safer institutions, these banks lacked the liquid reserves to meet redemption demands without central bank intervention.
"Private sector credit growth dropping to a 33-year low of 4.47% is not just a statistical headline; it reflects the real-world operational challenges facing our industrial sector," noted Mohiuddin Rubel, founder & CEO of Bangladesh Apparel Voice and former BGMEA director.
"Normally, reduced borrowing creates surplus bank liquidity. But today, the issue is unrecovered legacy debts, rising defaulted loans, and long-standing governance deficits. In manufacturing, including garments, entrepreneurs are focusing on sustaining existing operations rather than taking on new debt amidst gas and power shortages, high borrowing costs, and weak global demand."
"Ongoing central bank reforms—such as board reconstitutions, bank mergers, and asset recovery frameworks—are necessary steps," Rubel added.
"However, restoring long-term stability requires visible progress in recovering defaulted loans, enforcing corporate governance, and rebuilding depositor trust. To turn liquidity support into real economic expansion, the government must guarantee uninterrupted gas and electricity supply to factories, maintain policy stability, and foster a competitive financing environment. Without fresh industrial investment, national job creation and export growth will remain under pressure."
Restoring solvency and market trust
To resolve the liquidity crisis and safely re-engage private sector lending, financial regulators and policymakers are pursuing four reform tracks:
- Implementing the Bank Resolution Act to manage bad assets, restructure distressed balance sheets, and execute planned mergers for failing institutions.
- Setting up specialized distressed-asset recovery entities to acquire, carve out, and liquidate bad loans from commercial bank balance sheets.
- Eliminating political lending pressure, enforcing single-borrower exposure limits, and subjecting restructured bank boards to independent audits.
- Aligning financial sector stimulus with real-economy support by guaranteeing gas and power access to debt-seeking manufacturing projects.
