Bangladesh’s banking sector is teetering on the edge, as mounting bad loans gnaw at the heart of its institutions, eroding capital and profitability, and sending a chilling warning to the nation’s economy.

Default loans in Bangladesh's banking sector have surged significantly, reaching Tk 6,44,515 crore at the end of September this year. This alarming figure represents 35.73 percent of the total disbursed loan.

Shahriar Siddiqui, Director and Spokesperson for Bangladesh Bank, disclosed the figures on Wednesday, warning of a looming financial crisis.

In just twelve months, he said defaulted loans ballooned by Tk 3,59,718 crore, highlighting deep-seated irregularities, scams, and weak oversight, particularly in state-run and Islamic banks.

The sharp rise in bad loans highlights widespread irregularities, scams, and weak oversight throughout the Awami League’s 16-year rule. Major borrowers, including S Alam Group and Beximco Group, defaulted on a massive scale after the government’s fall in August last year, driving an unprecedented surge in non-performing loans.

“Nearly 35 percent of loans are now classified as non-performing, a level that has far-reaching effects,” said Toufic Ahmad Choudhury, former director general of the Bangladesh Institute of Bank Management (BIBM).

The alarming increase in defaults is largely attributed to politically motivated lending and large-scale fund diversion by influential business groups during the Awami League’s tenure. The interim government has pledged decisive action against chairmen, directors, and managing directors of 24 state-owned and private banks, along with senior Bangladesh Bank officials, for widespread corruption, financial irregularities, and embezzlement.

On 19 August, the Finance Ministry’s Financial Institutions Division formally requested the Anti-Corruption Commission (ACC) to investigate. The ACC has already begun scrutinizing the officials’ bank accounts and assets. Among the 24 banks under investigation, six are state-owned: Sonali, Janata, Agrani, Rupali, BASIC, and Bangladesh Development Bank.

The sharp rise in bad loans highlights widespread irregularities, scams, and weak oversight throughout the Awami League’s 16-year rule. Major borrowers, including S Alam Group and Beximco Group, defaulted on a massive scale after the government’s fall in August last year, driving an unprecedented surge in non-performing loans.

In 1999, bad loans in the banking sector stood at a record 41.1 percent, the highest on record. Since then, the ratio began to decline and fell to 6.1 percent in 2011. After that, the NPL ratio started rising again.

State-owned banks carried Tk 1,52,755 crore in non-performing loans (NPLs) in June, accounting for 44.6 percent of their total credit, according to a Bangladesh Bank report. Private commercial banks held around Tk 4,25,660 crore in bad loans, or 32.9 percent of their portfolios, while specialised banks reported Tk 19,305 crore in defaults, equal to 39 percent of their lending.

Foreign commercial banks fared comparatively better, with Tk 2,952 crore in NPLs, just 6.1 percent of their loans. Bad loans also surged sharply in several Islamic banks, including Islami Bank Bangladesh, reflecting widespread irregularities and fund mismanagement during the previous regime.

Several shariah-based banks linked to S Alam Group, a business conglomerate long surrounded by controversy, have seen sharp increases in defaulted loans, according to BB officials. They also said politically connected businesses with ties to the previous ruling party influenced lending decisions in a number of banks.

However, the long-awaited merger of five troubled Shariah-based private banks into a single state-owned Islamic bank has officially begun, as Bangladesh Bank appoints administrators to manage the process.

The five banks—Exim Bank, Social Islami Bank (SIBL), First Security Islami Bank, Union Bank, and Global Islami Bank—face a combined equity shortfall nearing Tk 40,000 crore, largely tied to years of alleged loan embezzlement and fund diversion by S Alam Group and affiliates.

Forensic audits exposed default rates of 95–98 percent at some banks, with advance-to-deposit ratios exceeding regulatory limits, placing depositors’ funds at serious risk.

The problem is long-standing: bad loans once hit a record 41.1 percent in 1999, declined to 6.1 percent in 2011, but have climbed alarmingly since.

Rising defaults cripple banks’ ability to lend, straining liquidity, slowing business investment, and stalling economic growth. Small and medium enterprises, the backbone of the economy, face severe constraints, while depositor confidence wavers and investor trust erodes.

Government bailouts, if required, would drain public resources, creating a perilous chain reaction across jobs, growth, and public faith.

Recent regulatory tightening and stricter loan classification rules have exposed a backlog of “toxic” loans, many linked to politically connected conglomerates including S Alam Group, Beximco, Orion Group, and Abdul Monem.

Loan recovery is slow, hampered by a sluggish legal system, weak bank governance, and a culture of impunity for powerful defaulters.

The NPL ratio surged from 12.2 percent in June last year to 34.6 percent in June this year, with total loans and advances at Tk 17,34,200 crore, of which nearly Tk 6 lakh crore have turned sour.

Experts warn that the ballooning of bad loans, combined with stricter international standards and exposure of siphoned funds under the previous government, has pushed the banking sector to a critical tipping point. If unchecked, the ripple effects could destabilise the financial system, undermine economic growth, and shake public confidence to its foundations.