Business slowdown pushes default loans higher

Business, trade and investment remained nearly stagnant during the tenure of the interim government, with entrepreneurs and businesspeople facing frustration amid attacks, legal cases, vandalism, mob violence, account freezes, harassment and obstacles to overseas travel, affecting overall economic activities.

As a result, many businesses suffered losses despite investing borrowed funds, as conditions failed to improve. Consequently, it became increasingly difficult for many entrepreneurs to repay loan instalments or interest payments, a trend that continues to persist and is now reflected in the country’s rising default loans.

Many businesses are turning into defaulters despite their unwillingness to do so, according to the latest Bangladesh Bank report on default loans for March.

The report showed that default loans increased by Tk31,487 crore within just three months.

According to the central bank, total default loans in the banking sector stood at Tk557,217 crore at the end of December. By the end of March 2026, the amount rose to Tk588,704 crore, accounting for 32.26% of total outstanding loans.

Currently, total outstanding loans in the banking sector amount to Tk1,824,668 crore.

Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) Executive President Fazlee Shamim Ehsan told journalists that businesses have been facing multiple challenges for a long time, including high interest rates, rising dollar prices, international conflicts and political instability.

“There was no elected government for a long period. As a result, private sector credit growth fell to the bottom. The interim government failed to create an investment-friendly environment, which prevented businesses from operating properly,” he said.

He alleged that instead of supporting the private sector, the government borrowed heavily from banks, further harming business activities.

“The government was anti-business. Not only trade, but it also weakened banks by publicly declaring them fragile,” he said.

He expressed optimism that investment would recover within the next two years under the elected government, provided policy support remains and global conditions improve.

“If international conflicts subside, the country’s investment climate will improve and stability will return to the banking sector,” he added.

However, former chief economist of the World Bank’s Dhaka office, Dr Zahid Hussain, offered a different explanation.

According to him, many borrowers renewed loans ahead of the 12 February election, which temporarily reduced default loans during the December quarter.

“Those loans have again turned non-performing. That is now reflected in the overall figures,” he said.

He argued that the rise in default loans was expected because authorities have yet to enforce strict legal measures against defaulters.

“As long as legal actions are not taken against loan defaulters, default loans will continue to rise,” he said.

He further criticised what he described as unequal application of laws.

“In our country, rules vary from one borrower to another. Laws often appear ineffective for powerful people but are strictly applied to ordinary customers. If this continues, the default culture could spread further and become severe,” he warned.

According to Zahid Hussain, Bangladesh Bank itself bears responsibility for rising default loans due to delayed decision-making.

He alleged that large-scale loan irregularities and anonymous borrowing were ignored for years while default loans were effectively hidden.

“Those hidden problems are now becoming visible and affecting even good borrowers,” he said.

Bangladesh Bank data showed that total loan disbursement among the country’s 61 scheduled banks rose to Tk1,824,668 crore by March, an increase of nearly Tk4,000 crore within three months.

However, default loans increased by Tk31,487 crore during the same period.

State-owned banks recorded the highest default loan ratio, with nearly 46% of their distributed loans becoming non-performing.

Despite this, default loans in state-owned banks declined slightly during the January-March quarter compared with the previous quarter, with total default loans standing at Tk149,785 crore.

Private commercial banks accounted for Tk416,482 crore in default loans, representing 30.11% of their total distributed loans.

Meanwhile, foreign banks recorded Tk3,262 crore in default loans, while specialised banks reported Tk19,175 crore.

When the Awami League-led alliance government assumed office in January 2009, default loans stood at Tk22,481 crore. Before leaving office, default loans had increased to Tk211,391 crore by June 2024.

Following the fall of the Awami League government, the interim administration took office and began presenting what officials described as the actual picture of the banking sector.

Many borrowers reportedly linked to the previous government were no longer visible publicly, contributing to a sharp increase in default loans.

The interim government later introduced special loan rescheduling facilities, temporarily reducing defaults, though the upward trend has resumed.

Bankers say that widespread irregularities, fraud, corruption and financial scandals during the Awami League government’s 15-and-a-half years significantly contributed to rising default loans.

Several major corporate groups, including S Alam, Beximco, Nassa, Bismillah and Hallmark, along with scandals involving National Bank, Islami Bank and Basic Bank, contributed substantially to the increase.

Analysts believe another major reason behind the surge in default loans is the prolonged slowdown in business activities.

With investment remaining weak, employment opportunities declining and many factories shutting down or operating below capacity, businesses are struggling to maintain profitability.

Where business growth remains absent, analysts say, regular loan repayments become increasingly difficult -- ultimately contributing to rising default loans.