Bangladesh’s banking sector is going through a painful but necessary transition. The old comfort of hiding weak loans, extending repeated facilities, and calling survival stability has reached its limit. The new task is harder: recognise losses, rebuild capital, restore governance, consolidate weak institutions, and return banks to their basic duty of protecting depositors and financing productive growth. This is not only a crisis of numbers. It is a crisis of trust. And trust is the first capital of banking.
The latest asset quality data show why the reform cannot wait. At the end of March 2026, defaulted loans reached Tk 588,704 crore, or 32.26 percent of total outstanding loans. Only three months earlier, the figure was Tk 557,217 crore. The increase of more than Tk 31,000 crore in one quarter shows that the problem is not cosmetic. It reflects weak recovery, rescheduled loans falling back into default, slow business activity, and long-standing governance failure. More troubling, almost 94 percent of NPLs are in the bad-and-loss category. These are not lightly bruised assets. Many are deeply impaired exposures that now require honest recognition and aggressive recovery.
The provision gap gives the same warning in another form. The sector’s provision shortfall stood at about Tk 205,665 crore in March 2026. When provisions are inadequate, banks overstate strength and understate pain. Profit becomes fragile. Capital becomes thinner. Lending capacity shrinks. Public confidence weakens. A bank that does not provide properly for yesterday’s losses cannot confidently finance tomorrow’s growth. It may still open branches, publish advertisements and hold strategy meetings, but the balance sheet keeps its own diary.
Capital pressure has become the centre of the problem. At the end of 2025, Bangladesh’s banking sector recorded a negative capital-to-risk-weighted-assets ratio of 2.64 percent, far below the Basel III requirement of 12.5 percent applied in Bangladesh, including the capital conservation buffer. Twenty banks had a combined capital shortfall of around Tk 2.78 lakh crore. Yet the picture is not uniformly dark. Forty-two banks reportedly remained compliant with Basel III requirements and accounted for more than 60 percent of banking sector assets. It means the system has a weak core in some institutions, but it also has banks that can become anchors of recovery if reform is managed carefully.
Bangladesh Bank deserves recognition for taking important steps. The central bank has moved toward stricter loan classification and provisioning, better alignment with Basel standards, asset quality reviews, risk-based supervision, and a clearer resolution framework. It has completed pilot risk-based inspections of 20 banks covering nearly half of banking sector assets. It has approved an organisational shift toward single supervisory teams for each bank, which should make supervision more focused and less fragmented. It has also adopted a plan for banks to move toward IFRS 9 by 2027, bringing expected-credit-loss thinking into financial reporting. These are not small steps. They are the beginning of a more honest system.
The creation of a bank resolution framework is also important. The merger of five troubled Islamic banks into Sammilito Islami Bank shows that the central bank and government are willing to use consolidation as a tool rather than letting weak banks drift endlessly. This is positive, but it must be handled with discipline. A merger is not magic. It does not make bad loans disappear. It only creates a new structure within which recovery, governance reform and capital repair can happen. If the new institution protects depositors, improves governance, recovers assets and avoids political capture, it can become a confidence-building example.
Some banks are also responding positively. Stronger banks are improving provisioning discipline, strengthening recovery units, reviewing large borrowers, tightening credit approval, and investing in risk management. Some are preserving capital instead of chasing dividends. Others are becoming more cautious in sector concentration and related-party exposure. This response should be encouraged. The reform message should not punish good banks for the sins of weak banks. Instead, it should reward transparency, early recognition and better governance.
Still, optimism must not become decoration. Bangladesh Bank should now move from reform announcement to reform execution. Each weak bank should have a time-bound capital restoration plan based on a credible asset quality review. These plans must include fresh capital from sponsors where possible, recovery targets, board restructuring, cost rationalisation, business model correction and restrictions on dividends, bonuses and expansion until health improves. If owners cannot recapitalise, their control should dilute. Depositors deserve protection. Failed ownership does not.
Risk-based supervision should become sharper and more differentiated. Banks with high NPLs, weak capital, liquidity stress, related-party lending, poor governance or repeated dependence on regulatory support should face more frequent inspection, closer reporting and stronger corrective action. Banks with cleaner books and stronger capital should receive regulatory recognition through faster approvals, better market confidence and lower supervisory friction. The message must be simple: risk has a price, discipline has a reward.
The central bank should also separate liquidity support from solvency support. A solvent bank may need temporary liquidity. An insolvent bank needs restructuring, merger or resolution. Giving liquidity to an insolvent bank without deep reform is like repainting a cracked bridge and inviting traffic. Public support should protect depositors and financial stability, not irresponsible shareholders, politically connected borrowers or negligent management.
Commercial banks must redesign capital management from inside. Capital planning should not be a year-end compliance exercise. Boards should approve risk appetite statements linked to sector exposure, top borrowers, group exposure, collateral quality, stress-test results and recovery performance. Credit decisions must be based on cash flow, not influence, collateral myths or relationship comfort. Early warning systems should track overdue behaviour, account turnover, export receipts, tax records, litigation, group exposure and market signals. Recovery teams should be separate from loan origination teams. Rescheduling should be allowed only for viable borrowers with fresh equity, cash recovery and enforceable covenants.
Bangladesh can learn from international examples. India’s Asset Quality Review forced banks to recognise hidden stress. Malaysia used separate institutions for asset management, recapitalisation and corporate debt restructuring after the Asian financial crisis. South Korea used KAMCO to resolve distressed assets through structured disposal. The lesson is not to copy institutions blindly. The lesson is to combine recognition, recovery, recapitalisation and resolution in one disciplined framework. One circular cannot repair a banking system. A system needs architecture.
The road ahead should be firm but hopeful. Bangladesh has energetic entrepreneurs, experienced bankers and a central bank that has already begun meaningful reform. The challenge is to maintain courage when the numbers look ugly. Honest numbers are not the enemy. Hidden losses are. If Bangladesh can recognise losses, rebuild capital, recover from wilful defaulters, consolidate weak banks, protect good banks and lend again to productive sectors, the banking sector can move from distress to discipline.
Capital is more than money. It is credibility stored in numbers. Bangladesh now has the chance to turn capital management into a national confidence project. The work will be difficult. But the alternative is worse: a banking system where weak loans keep eating strong possibilities. That future should not be accepted. The better future must be built, bank by bank, borrower by borrower, and decision by decision.