The banking sector in Bangladesh is grappling with an uncontrollable surge in defaulted loans, posing serious risks to the stability of both public and private banks.
By December 2024, the total amount of non-performing loans (NPLs) had risen to Tk3,45,765 crore, accounting for 20.20% of the total loans disbursed.
This increase in NPLs is exacerbated by a significant shortfall in provisions, with several banks failing to safeguard against these risky loans.
The aggregate provision deficit at the end of 2024 stood at Tk1,06,849 crore, a nearly fourfold increase from the same period the previous year when the shortfall was Tk24,189 crore.
This growing gap in provisions indicates a precarious situation for the banking sector, with the deficit rising by Tk51,471 crore, or 47.82%, in just three months, compared to the previous quarter.
Experts attribute this crisis to the disbursal of questionable loans during the past decade and a half under the Awami League government, many of which are now unlikely to be repaid.
Consequently, nearly every bank in the country, both state-owned and private, has witnessed an alarming increase in bad loans.
As defaulted loans continue to rise, the provision deficit is expected to follow suit.
This trend could lead to capital shortages for banks that fail to maintain the necessary provisions, raising concerns about their long-term financial health.
According to the Banking Company Act, banks with insufficient provisions are prohibited from declaring dividends, further complicating their financial position.
Former caretaker government advisor, AB Mirza Mohammad Azizul Islam, explained that the rise in non-performing loans is directly linked to the inability of banks to set aside full provisions for these risky loans.
The country’s ongoing financial crisis, coupled with stagnant deposit growth and liquidity shortages, is making it increasingly difficult for banks to meet provision requirements.
In a similar vein, experienced banker and Chairman of Global Islami Bank, Nurul Amin, stated that the accumulation of bad loans increases the requirement for provisions, and if these provisions cannot be met through profits, they directly impact the capital base of the banks.
This, in turn, weakens the financial health of the banks, especially those listed on the stock market, as they may be forced to withhold dividends, leading to a decline in their share prices.
Typically, banks are required to set aside provisions based on the quality of loans they offer, ranging from 0.25% to 5% for regular loans, 20% for substandard loans, 50% for doubtful loans, and 100% for bad loans.
However, this year, details of individual bank shortfalls have not been disclosed, though it is known that some banks have consistently faced provision deficits year after year.
A detailed analysis of the situation reveals that by December 2024, state-owned banks alone faced a provision deficit of Tk57,966 crore.
These banks needed to reserve Tk74,217 crore in provisions against their defaulted loans but only managed to set aside Tk16,251 crore.
On the other hand, private banks required Tk1,36,236 crore in provisions but set aside only Tk87,353 crore, resulting in a provision deficit of Tk48,883 crore.
While the situation remains dire for most domestic banks, foreign and specialised banks have fared better, with no provision deficits reported.
In fact, these banks have maintained surplus provisions.
Foreign banks set aside Tk2,688 crore in provisions, exceeding the required Tk2,225 crore by Tk463 crore.
Similarly, specialised banks reserved Tk3,083 crore, surpassing the required Tk2,828 crore by Tk255 crore.
Overall, the report indicates that, of the Tk2,15,508 crore required to be set aside across the banking sector, only Tk1,09,377 crore has been provided, leading to a total provision shortfall of Tk1,06,130 crore across the industry.
The growing number of defaulted loans and the widening provision gap signal a deepening crisis in the country’s banking sector.
With mounting risks, it remains to be seen how banks will navigate these turbulent waters in the coming year.
