MAMUN RASHID
The recent decline in the non-performing loan (NPL) ratio, from 35.73 percent in September 2025 to 30.60 percent in December, may appear encouraging. However, the improvement largely reflects relaxed loan rescheduling policies rather than any meaningful improvement in asset quality. Allowing defaulted loans to be regularised with only a 2 percent down payment, now further staggered, merely delays recognition of the problem.
Even after this decline, Bangladesh still has one of the world’s highest NPL ratios. The comparison with neighbouring and crisis-hit economies is striking. Pakistan’s stands at 7.4 percent, India’s at 2.3 percent, while Sri Lanka, despite a severe sovereign debt crisis, maintains 12.6 percent. Ukraine, amid prolonged war, recorded 26.1 percent, and Lebanon, after years of economic collapse, 23.8 percent. Bangladesh’s banking distress therefore appears deeply structural.
The capital adequacy situation is even more concerning. Under Basel III guidelines, banks must maintain a Capital to Risk-Weighted Assets Ratio (CRAR) of 12.5 percent. Yet the industry’s position has deteriorated sharply. CRAR fell from 11.6 percent in 2020 to 10.64 percent in June 2023, then to 6.86 percent in September 2024 and 3.08 percent by December 2024. By December 2025, it had entered negative territory at minus 2.9 percent, the first such occurrence in Bangladesh’s history.
This exposed a reality long hidden by weak governance and underreported risk-weighted assets. For years, several banks projected an illusion of stability by understating the quality of their loan portfolios. Once disclosures became more transparent after the 2024 political changeover, the scale of impairment surfaced rapidly.
By September 2025, 23 banks had accumulated a capital shortfall of Tk 2.82 lakh crore. Five banks accounted for nearly 59 percent of the deficit. Some now carry NPL ratios exceeding 90 percent, raising serious questions about their viability under existing ownership and governance structures.
A banking system cannot survive indefinitely on regulatory forbearance. Capital is the final shield against financial instability. Without adequate buffers, banks lose credibility at home and abroad. Cross-border trade finance becomes more difficult as foreign correspondent banks place significant emphasis on capital strength before advising, confirming or funding letters of credit. Weak capitalisation also affects risk ratings, constrains deposit mobilisation and limits lending.
In this context, aggressive recapitalisation has become unavoidable.
One possible route is the issuance of rights shares. However, this may prove ineffective for distressed banks where sponsors are financially weakened or face allegations of insider lending, governance failures or siphoning money abroad. Rights issues are therefore likely to remain undersubscribed, leaving banks trapped in chronic undercapitalisation.
Bangladesh needs a more pragmatic ownership restructuring framework. The regulation restricting any individual, family or group from holding more than 10 percent equity in a financial institution may require temporary relaxation for selected distressed banks. A time-bound policy window of three to five years could allow financially capable sponsors to inject fresh capital beyond the ownership ceiling. During this period, banks could stabilise operations, improve governance, rebuild compliance standards and restore profitability. Once financial health is restored, excess ownership could gradually be diluted through partnerships with strategic investors. The central bank’s recent stipulation allowing only banks with more than Tk 20 billion in equity to declare cash dividends is a step in the right direction.
Several Asian economies have used similar restructuring approaches during periods of banking stress. Their experience shows that temporary flexibility, backed by strong oversight and governance reforms, can prevent systemic collapse and restore market discipline. Bangladesh’s banking sector requires more than liquidity support or loan rescheduling facilities. It needs credible capital, competent ownership and institutional accountability. Without them, financial stability will remain fragile, and the sector’s ability to support economic growth will continue to weaken.
The writer is an economic analyst