Bangladesh鈥檚 banking sector has seen some tangible reforms over the past one year under the interim government, but a sustainable recovery of the sector damaged badly during the past government is constrained by some knotty challenges such as rising non-performing loans, outdated regulations and weak institutional capacity, economists said.
The interim government led by Professor Muhammad Yunus assumed office on August 8, 2024, three days after the ouster of the Awami League-led authoritarian regime in a student-led mass uprising.
The Bangladesh Bank under Ahsan H Mansur, who became the central bank governor after the 2024 political changeover, has gone for reforms to address deep-rooted maladies such as loan irregularities, political interference and financial malpractice in the country鈥檚 banking sector.
M Masrur Reaz, chairman and chief executive office of the Policy Exchange Bangladesh, an independent advocacy firm, told 抖阴精品 that among all sectors, the banking sector had witnessed the most visible and impactful reforms over the past one year under the interim government.
He said that a huge amount of funds had been looted and laundered from banks by oligarchs who exploited their political connections with the ousted regime.
The powerful business tycoons reportedly siphoned off $17 billion from the banking sector of the country during the 15-year rule of the ousted prime minister Sheikh Hasina.
That cycle of corruption and abuse of power has been stopped due to the BB steps, Masrur Reaz said describing it as a major achievement.
Reaz said that the central bank took decisive steps by reconstituting boards of several banks, thereby removing the influence of politically connected business groups.
This move, he said, has significantly improved governance and helped restore regulatory compliance in those banks.
The BB has restructured boards of 14 banks, removing controversial and politically connected business groups like the S Alam Group.
The S Alam Group had controlled eight private commercial banks directly or indirectly and allegedly withdrew about Tk聽2.25 lakh crore from 10 banks in names and anonymously.
The central bank initiated asset quality reviews at banks known to have faced serious corruption and malpractice, aiming to identify the true extent of damage within those banks.
The reporting of non-performing loans and other data had previously been compromised through data manipulation, but the central bank has now brought those reporting practices under stricter oversight and closer to international standards.
Reaz, however, said that the central bank should have established an asset management company to deal with defaulted loans and facilitate recovery of such loans.
He also stressed the need to revisit the country鈥檚 legal framework. He said that many existing laws and regulations posed obstacles to effective banking reforms and those should be amended to support the ongoing restructuring efforts.
The sector鈥檚 most pressing challenge remains the ballooning non-performing loans.
By March 2025, NPLs reached Tk聽4.2 lakh crore 鈥� nearly double the figure from a year earlier, representing about 24 per cent of all outstanding loans and are projected to climb further.
The bad loans had long been understated through rescheduling, restructuring, or even data manipulation during the deposed Awami League-led government, which have now been exposed.
The central bank鈥檚 move in April to tighten NPL classification by cutting the overdue period from six to three months as per international standard has exposed more hidden bad loans.
The BB has also frozen a massive amount of liquid assets and tangible assets of defaulters and alleged money launderers over the past one year to recover bad loans.
Mustafizur Rahman, executive director of the Centre for Policy Dialogue, a local think tank, said that the banking sector experienced the highest concentration of reforms over the past one year.
He said that the real picture of the sector 鈥� long sugar-coated and obscured 鈥� had finally been revealed.
He noted that the Bangladesh Bank formed dedicated task forces and engaged international audit firms to conduct asset quality reviews at struggling banks that uncovered deep-rooted irregularities and malpractices.
Mustafizur added that the central bank had been working with weak banks either to restore their financial health or to facilitate their liquidation through mergers.
鈥楾he Bangladesh Bank has plans to establish an asset management company to recover bad loans and has also initiated processes to bring back laundered funds from abroad, although this will take time due to complex legal and diplomatic procedures,鈥� he said.
Bankers said that due to the mounting NPL, many banks were now facing acute capital shortfalls and provisioning gaps.
Some 19 banks have been barred from declaring dividends for taking deferral facilities against their high provision shortfalls.
While corruption and loan scams have been somewhat curbed, the overall financial condition of these banks has not improved much, the bankers said.
In desperation, the central bank injected about Tk聽37,000 crore into nine struggling banks through printing money to meet depositors鈥� demands, yet the cash crisis persists, with depositors still struggling to withdraw their funds, BB officials said.
Legal obstacles, including court-ordered stays on loan recoveries and delays in enacting new legislation, continue to shield defaulters, they said.
The BB plans to merge a number of private commercial banks through an ordinance, but the process has yet to begin. Similarly, proposals to establish asset management companies and independent recovery units remain in limbo.
Proper rules for bank directors have been announced but not enforced. A significant amount of defaulted loans is linked to bank directors who have granted themselves loans across different banks, exploiting loopholes in regulations.
The central bank continues to uphold lenient loan rescheduling rules, allowing defaulters with the down payment as low as 2.5 per cent and the repayment period of up to 29 years.
Banks have identified over a thousand of wilful defaulters, but the central bank has failed to take decisive measures, despite having the authority to impose travel bans and other restrictions.
Furthermore, no steps have been taken to hold central bank and commercial bank employees accountable for their roles in corruption and loan scams.
The central bank has recently launched a special rescheduling facility for businesses who defaulted on their loans for reasons beyond their control. Under the facility, only a handful of large borrowers have been benefited, but small borrowers are yet to get any support.
Despite these, Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said that the banking sector witnessed the most comprehensive reforms in the past one year.
He cited the formation of task forces, audits by renowned chartered accounting firms, board reconstitutions, and regulatory reviews as positive developments that could help stabilise the sector.
He also noted improvements in the macroeconomic context, pointing out that the balance of payments strengthened, remittance inflows and exports rose sharply, and foreign exchange reserves improved. The exchange rate, too, has returned to a relatively stable position, he said.
Bangladesh鈥檚 gross foreign exchange reserve, calculated under the International Monetary Fund guidelines, soared to $24.98 billion on July 17 from $20.47 billion in August 2024.
He, however, said that the central bank should now shift focus towards stimulating private sector credit growth and improving the investment climate.
Without such measures, he warned, the country鈥檚 overall economic growth could face significant headwinds despite improvements in banking oversight.
BB executive director Areif Hussain Khan, also the spokesperson for the central bank, said that they were working to restore the people鈥檚 confidence in the banking sector and therefore initiated many reform initiatives.
鈥楽ome initiatives have already been implemented, others are awaiting to be executed,鈥� he said.
