Bangladesh now has the world's second-highest non-performing loan (NPL) ratio after war-ravaged Ukraine, with nearly one-third of all bank loans classified as defaulted.

The country also has the highest NPL ratio among Saarc nations, highlighting growing concerns over weak credit discipline, politically influenced lending and poor loan recovery.

According to the latest banking data, Ukraine tops the global list with an NPL ratio of 37.35%, largely reflecting the economic destruction caused by the ongoing war. Bangladesh follows with an NPL ratio of 32.26%, ahead of Chad (31.51%) and Guinea (31.15%).

The issue was discussed on Sunday at a finance ministry training session on reducing non-performing loans in state-owned banks, attended by the managing directors of state-owned lenders and chaired by the secretary of the Finance Division.

Bangladesh Bank data show that NPLs in the country's banking sector rose by more than Tk31,000 crore in the three months to March, reaching Tk5.89 lakh crore.

Within the South Asian Association for Regional Cooperation (Saarc), Bangladesh's banking sector stands out for all the wrong reasons. Its NPL ratio is nearly six to 15 times higher than that of neighbouring countries.

India's NPL ratio stands at 2.2%, while Bhutan records 4.5%, the Maldives 5.5%, Nepal 5.6%, Pakistan 5.8%, and Sri Lanka 6.5%.

The figures point to a severe deterioration in credit discipline and loan management in Bangladesh, where bankers and financial experts cite political interference, connected lending, regulatory weaknesses and ineffective legal enforcement as the principal causes behind the mounting defaults.

Stressed assets exceed 60% of total loans

An official presentation showed that Bangladesh's banking sector currently has outstanding loans worth Tk18.25 lakh crore, of which Tk5.89 lakh crore has turned non-performing, representing an NPL ratio of 32.26%.

The overall stress on the banking system is even greater when restructured loans and special mention accounts are included. These stressed assets amount to Tk11.2 lakh crore, or around 61% of the total loan portfolio, indicating widespread repayment risks beyond officially classified default loans.

Bankers say politically influenced lending decisions have weakened credit standards, with many loans approved based on connections rather than borrowers' repayment capacity.

Research by the Harvard Kennedy School and the Centre for International Development has also identified weak institutions, information asymmetry and political capture as major contributors to Bangladesh's deteriorating credit environment.

Industry insiders further point to weak corporate governance, cosmetic accounting practices and delayed legal proceedings that allow habitual defaulters to avoid timely repayment, making loan recovery increasingly difficult.

Capital ratio falls to -2.64%

Bangladesh's banking sector has slipped into negative territory in terms of capital adequacy, with the Capital to Risk-Weighted Assets Ratio (CRAR) falling sharply to -2.64% at the end of 2025, from 3.08% a year earlier, reflecting severe capital weaknesses across state-owned, specialised and private commercial banks.

CRAR is a key regulatory indicator that measures a bank's ability to absorb potential losses by comparing its capital with risk-weighted assets. Under Bangladesh Bank regulations, banks are required to maintain a minimum CRAR of 12.5%.

The latest data show Bangladesh's banking sector is significantly lagging behind its South Asian peers. While Bangladesh recorded a negative CRAR, Pakistan's banking sector maintained a CRAR of 20.8%, followed by Sri Lanka at 19.4% and India at 17.2%, indicating much stronger capital positions and greater financial resilience.

According to the Bangladesh Bank, 19 banks failed to maintain the minimum required capital adequacy ratio at the end of 2025.

Economists warn that persistently high NPLs are weighing heavily on the broader economy. Large volumes of defaulted loans force banks to maintain higher provisioning, increase litigation costs and reduce profitability, limiting their ability to extend fresh credit to productive sectors.

The deteriorating quality of banking assets also weakens capital adequacy, constrains investment, slows job creation and ultimately hampers overall economic growth.

Global leaders in credit discipline

While Bangladesh struggles with mounting defaults, several advanced economies continue to maintain exceptionally low NPL ratios through stronger governance and regulatory oversight.

Taiwan records the world's lowest NPL ratio at 0.1%, followed by Belgium, Sweden and Estonia at 0.3% each. Norway stands at 0.4%, while Canada maintains an NPL ratio of 0.7%.

Financial experts say these countries demonstrate that robust supervision, prudent lending standards and effective legal frameworks can keep bad loans under control.

Experts call for structural reforms

Md Touhidul Alam Khan, managing director and CEO of NRBC Bank, told TBS that regional peers such as India, Pakistan and Sri Lanka had strengthened their banking sectors by consistently building capital buffers.

He said, "In stark contrast, Bangladesh's extreme divergence shows that while neighbouring economies insulated their banking sectors through strict macro prudential discipline, our system repeatedly absorbed corporate and credit shocks. 

"The negative CRAR clearly indicates that unmitigated non-performing loans and persistent provisioning shortfalls have eroded the industry's aggregate capital base, requiring immediate structural reforms rather than temporary regulatory forbearance."

Md Ezazul Islam, director general of the Bangladesh Institute of Bank Management (BIBM), said, "Bangladesh Bank began revealing the actual picture of defaulted loans from 2025. The overdue period for loan classification was reduced from six months to three months, which pushed up the volume of non-performing loans. 

"In addition, many institutions utilised the rescheduling facilities introduced by the central bank at the end of 2025."

18-month action plan

Governor Md Mostaqur Rahman announced an 18-month roadmap while unveiling the monetary policy statement for July-December at the central bank headquarters.

A key element of the strategy is the transition from the current rules-based provisioning regime to the Expected Credit Loss framework under International Financial Reporting Standards, with full implementation scheduled for 2027. Expected Credit Loss is an advanced approach for banks to estimate potential credit losses in advance. The traditional incurred loss model records losses only when they occur.

As part of the next phase of reforms, the government plans to enact a new Loan Court Act to ensure cases are disposed of within six months. It is also preparing a Distressed Asset Management Act to establish asset management companies.

"Banks will eventually be required to transfer a portion of their toxic assets to asset management companies instead of keeping them on their balance sheets," the governor said, adding that the move would help prevent repeated loan rescheduling.