How to rescue banks without creating more risk

At times, the government has to rescue banks against its will, because some banks are so big that they cannot be allowed to fail. VISUAL: ALIZA RAHMAN

- BY Mp Main UDDIN

iE Bangladesh, 86 percent of financial intermediation occurs through banks.

Commercial banks typically provide small and short-term loans to a large number of borrowers. By offering such loans, they build a well-diversified portfolio, which is crucial for risk minimisation. However, instead of small loans, banks in Bangladesh tend to prioritise large loans, which contribute mainly to the creation of nonperforming loans (NPLs).

The country's banking sector has been experiencing a crisis for the last two decades due to ever-growing NPLs. According to the Bangladesh Bank, the amount of NPLs stood at Tk 420,335 crore (24.13 percent of total loans) in March 2025, rising from only Tk 22,481 crore in 2009. The amount of total distressed assets now stands at Tk 756,526 crore, about 45 percent of total loans. About 71 percent of the total bad loans are concentrated to 10 banks only.

The NPL crisis is the result of massive corruption, fund embezzlement, weak governance, and regulatory laxity which have pushed the economy to a credit crunch—a decline in lending activity owing to a sudden shortage of funds. The economy is experiencing a long period of low growth accompanied by high unemployment. There is also increasing erosion of trust and confidence in the banking sector.

The increase of NPLs primarily affects asset quality and profitability of banks. When a loan (asset of a bank) becomes nonperforming, it is classified as substandard, doubtful, bad, and a loss, depending on the severity of its underperformance. Among them, a substandard loan is bad, a doubtful loan is worse, and a bad and loss loan is the worst. With the rise of NPLs, a bank fails to generate the expected income.