Bangladesh's banking sector is currently grappling with a significant loan default crisis, putting the stability of thirteen banks at risk and raising alarms over customer deposits. The core issues stem from these institutions exceeding their established lending limits, allowing dangerous practices to take root.
The Advance Deposit Ratio (ADR) policy, implemented by the central bank, limits conventional banks to loan Tk 87 for every Tk 100 deposited, with Islamic banks permitted up to Tk 92. Yet, recent data from Bangladesh Bank reveals alarming figures, indicating thirteen banks have breached these thresholds.
Take the National Bank, for example. Its ADR has skyrocketed to 103.64 percent, which translates to Tk 17 loaned for every Tk 100 of customer deposits—an unsustainable practice. Similarly, Padma Bank and AB Bank have also surpassed the limits, clocking ADRs of 91.41 percent and 89.57 percent respectively, with the latter's Islamic division even hitting 112.60 percent, signaling serious compliance breaches.
Dr. Abdur Razzak, who heads Research and Policy Integration for Development (RAPID), offers grave insights. He states, "Excessive lending beyond ADR limits jeopardizes depositors' funds and breaches compliance regulations. Aggressive loan disbursement impedes collections and affects a bank's ability to return customer funds." Such perspectives are echoed by several banking executives, who stress the urgent need for tighter central bank oversight to mitigate this crisis.
Another bank, Janata Bank, has crossed its ADR target too, reaching 90.27 percent with 74 percent of its loans concentrated among just 23 customers. This lack of diversification raises red flags about potential defaults. It's not just Janata Bank—Basic Bank and Union Bank have alarming figures as well, with ADRs at 94.79 percent and 113.95 percent respectively.
Husnay Ara Shikha, Executive Director and Spokesperson for Bangladesh Bank, claims there is regular monitoring of ADR compliance to safeguard customer interests. "Any bank breaching limits is subject to fines," she assures, highlighting the central bank's commitment to maintaining standards.
Yet, beyond these eyebrow-raising ratios, the bigger picture becomes clearer with the news of defaulted loans soaring 20.7 percent this year, now standing at Tk 145,633 crore or 9 percent of outstanding loans. Just last year, this figure was at 8.16 percent, according to Bangladesh Bank data. This sharp rise points toward systemic issues within the banking sector, where governance and accountability appear to falter.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, calls this trend distressing. He remarks, "The increase of about Tk 25,000 crore over one year is worrying, especially when the total bad loans back in 2008 were only Tk 22,000 crore." Rahman points out the growing issue of willful defaulters and slow loan recoveries to justify the alarming rise.
The provisioning shortfall has also taken its toll, increasing 75 percent year-on-year to Tk 19,261 crore. A roadmap set by Bangladesh Bank aims to cut defaulted loans to under 8 percent of all outstanding loans by 2026, but achieving this will require strict governance and potential political will. The current figures for state-owned commercial banks are stark, where 20.99 percent of disbursed loans are defaulted, amounting to Tk 65,781.43 crore.
Moinul Islam, a seasoned economist, argues the reality may be bleaker, estimating the actual volume of defaulted loans could exceed Tk 400,000 crore when factoring other pending loans and write-offs. He emphasizes the need for punitive actions against defaulters to rekindle trust and stability within the banking sector.
Drastic measures may be required to combat the crisis at hand as banks face default pressures and overall liquidity issues. With political will and rigorous regulation, Bangladesh may stabilize its economy and restore confidence among its citizens.
