The unbridled rise in non-performing loans (NPLs) is placing significant pressure on the standard operations of the country's banking industry.
With default loans currently exceeding 32% of total disbursements, the cycle of loan recovery and reinvestment is being severely disrupted. This is negatively impacting bank liquidity, profitability, capital adequacy, and the distribution of new credit—consequences that could ultimately hit production, investment, employment, and overall economic growth.
These remarks were made Saturday by National Professor Mahbub Ullah, former professor and chairman of the Department of Development Studies at Dhaka University, while delivering a memorial lecture on "Ethics in Banking" at the 23rd Nurul Matin Memorial Lecture organized by the Bangladesh Institute of Bank Management (BIBM).
Prof Mahbub Ullah stated that the core foundation of the banking system relies on the continuous circulation of credit within the economy. Banks collect funds from depositors to extend loans; as principal installments and interest are repaid, those funds are reinvested as fresh credit. However, as defaulted loans continue to pile up, this natural cycle is being broken.
He noted that because a substantial portion of deposited funds disbursed as loans is not returning to banks on time, liquidity and lending capacity are suffering. Heavy long-term losses and accumulated default loans have left several banks struggling to maintain the capital adequacy required by international (Basel II) standards, which in turn diminishes their capacity to disburse new credit.
He added that even banks that still retain lending capacity are taking a cautious approach to approving new loans in an effort to mitigate risk. Consequently, eligible entrepreneurs and industrial enterprises are facing difficulties securing working capital and necessary financing for new investments—a trend that could drag down output, job creation, and economic growth.
He stressed the urgent need for effective, sustainable measures to curb non-performing loans, alongside ensuring good governance, accountability, ethics, and proper risk management during loan approvals and recovery efforts.
Bangladesh Bank governor and chairman of the BIBM governing board Md Mostaqur Rahman stated that the primary strength of the banking sector does not rest solely on capital, technology, or liquidity; rather, the trust of depositors, borrowers, investors, and the broader economy serves as its most critical foundation. To preserve this trust, bankers must maintain the highest professional and ethical standards.
In his welcome address, BIBM director general Md Ezazul Islam remarked that ethical decision-making is vital in loan approval, rescheduling, asset valuation, borrower selection, and risk management. Deficits in ethics breed irregularities, loan mismanagement, conflicts of interest, and weak governance.
He added that with the growing reliance on digital banking, artificial intelligence, and data analytics, matters of data privacy, customer rights, and accountability will become increasingly paramount.
