How loan fraud, fund diversion, cronyism push NPLs to 36%

Out of every Tk100 lent by banks in Bangladesh, nearly Tk36 has now turned into defaulted loans — an unprecedented level of financial distress that has weakened balance sheets, eroded capital buffers, and restricted fresh lending. This credit squeeze is slowing private investment, dampening job creation, and weighing on the country’s economic recovery.

According to data released by Bangladesh Bank on Wednesday, total non-performing loans (NPLs) surged to a historic Tk6.44 lakh crore – 35.73% of all outstanding loans – by the end of September. Just a year earlier, defaults stood at Tk2.84 lakh crore.

Why has the NPL situation become so dire? And what went wrong inside both the banking industry and the business community that pushed defaults to a historic number?

How did the NPL crisis become this severe?

A former top banker with nearly four decades of experience said fund diversion remains the single biggest driver of rising defaults. Referring to LPG projects, he noted that while a bottling plant and cylinder factory cost about Tk450 crore in 2015–16, some companies borrowed up to Tk1,000 crore.

Much of the extra money was allegedly diverted to buying land, luxury cars, and financing foreign trips.

“The plant will generate returns of Tk450 crore, but it must repay instalments on Tk1,000 crore – so it will always remain in deficit,” he said.

Experts also stress that the NPL problem is not new – it was simply hidden for years.

“The information on non-performing loans had been a game of hide-and-seek for a long time, because the data had not been published for many years,” said Zahid Hussain, former lead economist at the World Bank’s Dhaka office.

Agrani Bank Chairman Syed Abu Naser Bukhtear Ahmed echoed the point, stating that many defaulted loans were previously concealed. “Accurate information on NPLs was not disclosed, and there was a bad practice of hiding them. Now that international standards are being followed, we are getting the real picture,” he said.

Bangladesh Bank’s asset-quality review – conducted by foreign firms – uncovered the true extent of defaults in several private banks that had been masking their bad loans under the previous regime. Industry insiders say this review significantly increased default figures in the April-September period.

Bankers also point to massive corruption during the ousted Sheikh Hasina regime, which they say pushed dozens of banks toward collapse and contributed heavily to the surge in NPLs.

For example, S Alam Group has been implicated in loan irregularities amounting to at least Tk1 lakh crore, much of which was allegedly siphoned abroad. The central bank has now initiated mergers involving five banks – four previously controlled by the group – whose NPL ratios exceeded 90%. These five banks alone account for Tk1.5 lakh crore, or 24% of total default loans. The cost of these mergers will ultimately fall on taxpayers.

Ashikur Rahman, principal economist at the Policy Research Institute (PRI), identifies three key factors behind the NPL spike.
“Many NPLs were hidden during the previous government. These have now surfaced because of the asset-quality review. They can no longer be concealed through false accounting,” he said.

He added that politically connected borrowers under the past regime created a large share of the problem, while fresh NPLs have emerged as the government now enforces existing laws.

“In my opinion, the majority of the default loans are the result of fraud. This did not happen because of economic stagnation, but because economic oligarchs used political influence to take loans and then never repaid them.”

Did tighter loan classification rule trigger the spike?

The Bangladesh Bank has reinstated its 2012 loan-classification rule by reducing the overdue period for term loans by six months, in line with conditions set by the International Monetary Fund (IMF) under its $4.7 billion loan programme.

Under the revised rule, a borrower becomes classified the day after the instalment payment falls due, meaning a loan will enter classification after three months of non-payment. Previously, loans were classified nine months after the instalment expiry date.

Economist Zahid Hussain said that international best practice is to classify an overdue loan as sub-standard after 90 days. “But our gold-medalist finance minister, Mustafa Kamal, relaxed this rule and extended it to 180 days before a loan became sub-standard. We followed that system for a long time, so it’s not a question of capacity. There is a rationale behind the international standards,” he pointed out.

By stretching the overdue period from 90 to 180 days, the system encouraged irresponsible behaviour, he said. “It became like an addiction – the idea that you could take a loan and not repay it. Easy access to money turned into a habit, almost like a drug. And within this system, we ran our banking business.”

He also noted that the Bangladesh Bank introduced a new rescheduling facility in September this year. The purpose of such a facility, he said, should be to recover money and identify the reasons behind default. “However, the way this facility is currently being offered must be monitored so that it is not applied forcefully,” he added.

Agrani Bank Chairman Syed Abu Naser Bukhtear Ahmed also said the reduction of the overdue period from 180 days to 90 days was a major factor behind the rise in NPLs. “And I believe a loan should indeed be classified after 90 days, because that is the international practice,” he said.

Bank management failures

When asked why default loans spiked after the new loan-classification rule was implemented, former Bangladesh Bank deputy governor Muhammad A (Rumee) Ali said the root cause lies in weak bank management.

He said bankers can generally predict which businesses are likely to default based on specific parameters. Yet many banks fail to assess these risks properly, even when warning signs are clear, leading to a surge in defaults once international best practices in classification are enforced.

Ali noted that reputable global banks continuously review their borrowers and gradually downgrade them based on performance. “In Bangladesh, bankers do not maintain proper grading of borrowers, even when they know the actual condition of the business,” he said.

He added that troubled businesses should not be allowed to continue operating indefinitely, and banks should work together to sell or transfer such enterprises. Borrowers showing early signs of distress should be reviewed frequently and warned promptly. “But here, banks wait until the last moment and classify borrowers only when the situation becomes unmanageable, which causes the sudden spike in default loans,” he said.

Ali also pointed out that some bank management teams deliberately avoid downgrading borrowers despite knowing their weak performance.

He said the Bangladesh Bank’s asset-quality review – along with widespread corruption during the previous regime – further exposed the true scale of bad loans. Citing an example, he noted that the default ratio of one private commercial bank shot up to over 80% in just a year from 30%, largely due to the asset review revealing concealed irregularities.

Genuine economic shocks also contributed

Beyond fraud and mismanagement, genuine economic pressures have played a role.

Over the past five years, Bangladesh endured back-to-back shocks: Covid-19, the Russia-Ukraine war, and a severe dollar shortage. The taka depreciated from Tk86 to Tk110 within six months, and to Tk120 within a year.

Despite this steep devaluation, the country faced a severe dollar shortage, and businesses were forced to defer import payments by six months or more.

Many businesses imported raw materials or food items at Tk86 per dollar and sold them accordingly, but by the time they paid their import bills, the exchange rate had risen to Tk120 – a 40% jump relative to their selling price.

Large commodity players like Meghna Group of Industries and City Group together incurred losses of around Tk3,000 crore due to exchange-rate volatility. Being large conglomerates, they managed to absorb the shock by adjusting cash flows across multiple companies. But smaller and mid-sized firms that lost Tk100-200 crore could not survive the hit and fell into default, industry insiders said.

A banker who preferred anonymity added that some businesses became defaulters simply because they could not obtain utility connections for years. “They had to start paying instalments even before their factories became operational,” he said.

Bankers also noted that the ongoing slowdown in business activity and weak investment climate have contributed to the rise in NPLs. Rumee Ali pointed out that private-sector credit growth has fallen to around 6%, signalling heightened business vulnerability.

“Investment growth is very weak. At the same time, interest rates have been raised to control inflation. Such an economic climate naturally leads to more loan defaults,” he said.

Additionally, many businesses closely linked to the previous Awami League-led government have fled or are no longer operating. Their factories and business establishments remain idle, and many of these borrowers have now become defaulters, bankers said.

Recovery of bad loans key to overcoming the situation

Ashikur Rahman of PRI said Bangladesh is yet to have the capacity to follow international best practices because the country has never faced such a challenge before. But now the capacity must be built. There are lessons to learn from how other countries have recovered bad loans, such as Malaysia, the United Kingdom, and China. “Bangladesh must follow their approaches and build the capacity to execute proper policy.”

He said in many countries, Asset Management Companies (AMCs) purchase the NPLs recorded on banks’ balance sheets. For example, suppose the unified five banks have NPLs totalling Tk1.5 lakh crore – where will an AMC get that much money? Many strategies can be applied here. China and Malaysia provide many examples, such as issuing bonds at a fixed interest rate. In China, these bonds were government-backed. If an AMC in Bangladesh issues government-backed bonds, banks will be able to remove NPLs from their balance sheets.

But the question is – how will these NPLs be valued? Will they be valued at book value or market value? Because most NPLs lack collateral support, there is no opportunity to assess them at market value.”