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Nearly two-fifths of rescheduled loans in Bangladesh have fallen back into default, highlighting the vulnerability of the country’s banking sector, according to the Bangladesh Bank’s Financial Stability Report 2024 released on Tuesday.

As of December 2024, banks had rescheduled loans worth Tk3.48 lakh crore—roughly one-fifth of total outstanding loans. Of this, 38.42%, or Tk1.34 lakh crore, turned bad again despite repeated policy forbearance.

Bankers point to persistently high inflation, a weakened taka, dollar shortages, and a prolonged energy crisis as major factors eroding businesses’ repayment capacity. Poor governance in some banks, coupled with efforts to conceal bad loans to inflate profits, has further aggravated the problem.

Syed Mahbubur Rahman, MD and CEO of Mutual Trust Bank, said, “Many manufacturers and industries were hit hard. Even borrowers willing to pay could not meet instalments on time. In weaker banks, loans were often rescheduled mainly to conceal bad assets and inflate balance sheets.”

Central bank data shows that re-defaulting loans surged sharply, with Tk79,800 crore added to non-performing loans (NPLs) in 2024, up from Tk54,060 crore in 2023—a 148% increase.

Distressed assets at record high

The banking sector’s total distressed assets—including defaulted, rescheduled, and written-off loans—reached a record Tk7.56 lakh crore in 2024, equivalent to 45% of all outstanding loans and nearly matching the national budget for FY2025-26.

Of the total distressed assets, defaulted loans accounted for Tk3.45 lakh crore, rescheduled loans Tk3.48 lakh crore, and written-off loans Tk62,300 crore. Mahbubur warned that nearly Tk2.5 lakh crore remains tied up in court cases, delaying recoveries and worsening financial stress.

Top borrowers pose systemic risk

The report highlights that defaults by just the top two borrowers at each of the 19 under-capitalised banks could push an additional five banks below the minimum required Capital to Risk-weighted Assets Ratio (CRAR).

CRAR—a key measure of capital adequacy—fell sharply to 3.08% at the end of 2024, down 8.56 percentage points, making Bangladesh’s banking sector the weakest among major South Asian countries. By comparison, CRAR stood at 16.7% in India, 20.6% in Pakistan, and 18.4% in Sri Lanka.

The decline was mainly driven by state-owned commercial banks, specialised development banks, and some private conventional and Islamic banks.

Mahbubur noted that the sector’s heavy focus on wholesale lending to large corporates amplifies concentration risk. “Operational costs for small loans are higher, but banks must diversify portfolios to mitigate systemic risks,” he said.

Rescheduling policies under scrutiny

Bangladesh Bank introduced a loan rescheduling policy in 2022, allowing borrowers lower down payments and longer tenures, especially in sectors such as shipbuilding and cold storage. However, while the total rescheduled loan amount declined in 2024 compared to the previous year, the proportion of loans turning bad increased, indicating deteriorating asset quality.

Sector-wise, the Industrial and RMG & Textile sectors hold the bulk of rescheduled loans, while the top five banks account for 38% of total rescheduled loans and the top 10 banks 57%.

Mahbubur cautioned that without sufficient energy supply, stable law and order, and timely judicial processing of top defaulters, recoverability will remain uncertain.

“Grace periods and repeated rescheduling can only do so much. Many borrowers exploit these policies, and long-term recovery remains doubtful,” he said.

The report underscores an urgent need for stronger governance, portfolio diversification, and judicial efficiency to prevent further deterioration of Bangladesh’s banking system.