Over 1.34 trillion Indian rupees in previously rescheduled loans have once again defaulted.
In the year 2024, the banking sector in Bangladesh faced a significant challenge with distressed loans reaching an all-time high of Tk7.56 lakh crore, equating to 45% of total outstanding loans.
The rise in distressed assets, primarily driven by an increase in non-performing loans (NPLs), has been a steady trend. According to the Bangladesh Bank's Financial Stability Report 2024, banks had rescheduled loans worth Tk3.48 lakh crore as of December 2024.
The volume of distressed assets has been a significant burden for the sector. Poor governance in some banks, coupled with the tendency to conceal bad loans to inflate profits and reduce provisioning, has worsened the situation. The amount of rescheduled loans that turned sour increased by approximately 148% in 2024, with Tk79,800 crore being added to the list of NPLs.
The situation has been particularly challenging for banks that focus on wholesale banking by targeting large corporate clients. This strategy increases the risk associated with a few large borrowers. Notable banks such as BRAC Bank, City Bank, and HSBC Bangladesh, which primarily focused on wholesale banking, achieved significant profit growth and strong deposit growth. However, troubled banks lost deposits and struggled with non-performing loans.
The Bangladesh Bank attempted to alleviate the issue by promulgating a loan schedule and restructuring policy in 2022, allowing banks to reschedule loans by taking a lower down payment and granting a relatively longer tenure to the borrower for repayment of their debts.
However, the overall drop in Capital Adequacy Ratio (CRAR) was primarily due to poorer capital positions in state-owned commercial banks, specialised development banks, and a few of both conventional and Islamic private commercial banks. The CRAR fell by 8.56 percentage points to a dismal 3.08% at the end of December 2024, the lowest among major South Asian countries.
The total amount of rescheduled loans in 2024 decreased compared to the preceding year. However, the overall classification status of the rescheduled loans deteriorated. Approximately 38.42%, or Tk1.34 lakh crore, of this amount turned bad again, despite repeated policy forbearance. Out of the total outstanding rescheduled loans, the share of the top five banks was 38%, while the top 10 banks possessed 57%.
High inflation, dollar shortage, a weakened taka, and a prolonged energy crisis have eroded businesses' repayment capacity. Mahbubur, a financial expert, warned that the situation will not improve quickly due to insufficient energy supply and the exploitation of policy facilities by borrowers with no genuine intention to repay.
Banks are advised to diversify their loan portfolios to mitigate this kind of risk. Nearly Tk2.5 lakh crore remains stuck in various courts, adding to the burden of distressed assets. The default of the top two borrowers at each of the existing 19 under-capitalised banks would cause an additional five to become non-compliant with the minimum required risk-weighted assets ratio (CRAR).
The banking sector in Bangladesh is facing a critical juncture. Efforts to revitalise the sector and address the issue of distressed loans will be essential for the health and stability of the economy.
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