Is Loan Default Here to Stay?

Defaulted loans in Bangladesh have increased to almost 33 per cent of the total loans in the financial sector as of June 2026. Reportedly the world's highest. Now the million-dollar question is, do we remain in this high default loan zone forever?

I was invited to join the large loan (more than Tk50 crores) restructuring scrutiny committee set up by Bangladesh Bank in collaboration with the Ministry of Finance and FBCCI.   Senior officials from central and commercial banks also participated.

As a banker with global risk management and portfolio review experience as well as first local senior credit officer (SCO) at Citibank N.A., I found the exercise insightful despite the long hours spent on background checks, revalidating financing structures, reviewing security and collateral, ensuring the cases in review were not under ACC or BFIU scrutiny, and above all, assessing the repayment capacity of borrowers whose obligations were extended with even partial write-offs.

Out of more than 1,200 applications, we reviewed around 300 over a period of almost four months. Many applicants reviewed complained that their credit lines had been discontinued at critical times. Some received project loans but no working capital. Others suffered from very high interest rates, significant exchange rate fluctuations, energy price hikes or energy supply shortages, and even disruptions caused by post-August unrest.

According to many, they were targeted because of political affiliations. Some were jailed, few even sent to Aynaghar, some were frequently picked up by law enforcement agencies, and in certain cases, businesses were seized by political cronies of the previous government under allegations of belonging to BNP or, in a few cases, Jamaat. Attempts were made by the then government, BSEC and banking seniors’ nexus even to grab listed companies. I was surprised to see such a large number of businessmen linked to political parties, possibly unmatched anywhere in the world. Some were granted large loans, but the money never reached their coffer; rather, it was taken away by the bank owners or their chosen groups. For many, it was a clear sign of governance failure, lack of accountability and poor financial management. Most of these were family businesses or “pocket companies” of the owners. Many had no CFO or finance professional, even though they borrowed more than a hundred crore. Some cases showed clear proof of syphoning out money.

In many cases, banks were at fault. They failed to assess client needs, accepted weak or insufficient security or collateral, lacked specific industry knowledge or did not look at internal cash generation of the businesses and neglected proper monitoring of production, sales, succession planning and financial performance. Through this process, we also came across a few capable central bankers as well as some weak commercial bankers who were found to be highly susceptible to pressure.

Interestingly, most loans under our review that turned bad were approved and disbursed between 2016 and 2020, concentrated in one or two state-owned banks, one state agency-owned bank, one shariah-based bank, and one third-generation private bank. Their present credit and recovery heads regularly attended our meetings. The blemishes, however, were left with the CEOs who led these banks during that period. Their risk management capacity and their susceptibility to board pressure were questionable.

Wrong structuring, weak or inappropriate collateral and repeated granting of excess over limits often forced us to salvage the banks rather than the distressed clients. It was not always about supporting borrowers; sometimes the priority was saving the banks from acute repayment risk.

There was, of course, some pressure. But mostly we saw good intentions: to help distressed businesses recover, generate employment and revive exports.

Will those whose loans were restructured be able to stand on their own in five to ten years? Much would have depended on whether they focus on fundamentals, optimise resources, strengthen governance, avoid political cronyism and build competitiveness in an increasingly globalised economy.

Ironically, nothing much happened. I get to hear many borrowers did not make agreed down payments; even many banks did not honour agreements reached through the central bank with the borrowers. Lately we see large and classified loan repayments have been made much more relaxed. Whether it will let the economy rebound? Possibly not. It is high time our political masters tightened their belts and went deep-dive.
____________________________________________________
Mamun Rashid is a banker and economic analyst having worked with three global banks and professional services firm for around four decades