Surge in distressed loans cause for serious concern

The latest figures of distressed loans in the country's banking sector paint a deeply troubling picture of a financial system struggling under the weight of accumulated weaknesses. A sharp rise in distressed assets is not merely a banking-sector concern; it is a matter of national economic significance. According to the central bank's latest Financial Stability Report (FSR) 2025, distressed loans across most scheduled banks surged by more than 47 per cent to Tk 10.08 trillion by the end of 2025. The sheer magnitude of the figure is striking. It exceeds the size of the country's proposed national budget and underscores the scale of vulnerabilities embedded within the financial system. Even more alarming is the fact that distressed loans now account for over 55 per cent of total outstanding loans and advances. If written-off loans are included, the volume rises to Tk 10.87 trillion, representing nearly 60 per cent of the banking sector's total loan portfolio.
Distressed loans encompass not only non-performing loans (NPLs) but also rescheduled loans, loans under court stay-orders, and written-off loans. Together, they offer a dismal picture of deteriorating asset quality. The FSR attributes the worsening situation largely to imprudent lending practices, inadequate oversight and the slow recovery of defaulted loans. External shocks, including the prolonged effects of the Russia-Ukraine conflict, global economic uncertainties and domestic economic pressures, have further weakened borrowers' repayment capacity. What makes the situation particularly concerning is that the deterioration is visible across multiple categories of banks. State-owned commercial banks, specialised development banks, private commercial banks and Islamic banks have all experienced significant strain. Profitability indicators have also weakened considerably, with both return on assets (ROA) and return on equity (ROE) declining sharply. Such trends indicate that many banks are finding it increasingly difficult to generate sustainable earnings while carrying the burden of problematic assets.
Equally worrying is the erosion of the banking sector's capital base. The capital-to-risk-weighted assets ratio (CRAR), a key measure of financial resilience, fell dramatically from 3.08 per cent in 2024 to a negative 2.64 per cent in 2025. This is far below the regulatory minimum requirement of 10 per cent under the Basel III framework. Yet, amid these grim statistics, there are some encouraging signs. A number of banks have managed to maintain distressed asset ratios below 5.0 per cent, demonstrating that prudent lending, effective risk management and strong governance can still yield positive outcomes even in a challenging environment. Their performance offers valuable lessons for the wider sector.
The current crisis calls for more than temporary remedies. It demands comprehensive reforms aimed at strengthening governance, improving loan appraisal and monitoring, accelerating recovery mechanisms and ensuring accountability in lending decisions. Restoring confidence in the banking system is essential not only for financial stability but also for sustaining economic growth. The surge in distressed loans should therefore serve as a wake-up call -- one that policymakers, regulators and bank managements cannot afford to ignore.