Bangladesh’s banking sector is on the verge of a major collapse as non-performing loans (NPLs) have surged to an all-time high of Tk 345,764 crore ($2.83 billion) by December 2023. This represents 20.20% of all outstanding loans, significantly up from Tk 284,000 crore (16.93%) just three months earlier, according to The Daily Star. The alarming rise in bad loans has intensified concerns over financial stability, prompting authorities to introduce the Bank Resolution Ordinance as a potential solution.

Crisis Deepens as NPLs Reach Record High

The gravity of the crisis was highlighted by Bangladesh Bank Governor Ahsan H Mansur, who disclosed the latest NPL figures during a press conference. His statement exposed the deteriorating health of the banking sector, triggering fresh concerns among financial experts and depositors.

To tackle the worsening situation, Bangladesh Bank has proposed a Bank Resolution Ordinance, which has been published for public feedback on the Financial Institutions Division’s website under the Ministry of Finance. The ordinance is designed to introduce bridge banks, which are temporary institutions that would take over struggling banks until a suitable buyer is found. The law also gives Bangladesh Bank the authority to appoint temporary administrators, restructure failing banks, and raise capital from existing or new shareholders.

In a decisive move, the ordinance allows the central bank to transfer shares, assets, and liabilities of weak banks to third parties without requiring shareholder approval. This is intended to speed up financial restructuring and prevent prolonged disruptions in the banking sector.

Furthermore, the ordinance proposes the creation of a Bank Restructuring and Resolution Fund to finance interventions, with funds sourced from government contributions, international financial institutions, and risk-based levies on banks.

Safeguards to Prevent Financial Misconduct

One of the key objectives of the ordinance is to protect depositors and curb financial misconduct. The law seeks to prevent insider transactions, unauthorized loan write-offs for powerful borrowers, and artificial inflation of bank profits. It also empowers Bangladesh Bank to restrict troubled bank shareholders from selling or transferring their shares, ensuring accountability and stability.

While the ordinance aims to restore confidence in the financial system, industry experts warn that rebuilding depositor trust will be a major challenge. The banking sector has been marred by financial scandals, mismanagement and regulatory lapses, allowing influential borrowers to exploit the system with little accountability.

Governor Mansur’s Transparency Sparks Debate

Governor Ahsan H Mansur’s candid approach in addressing the crisis has stirred intense debate among financial stakeholders. His tenure has been marked by bold reforms, including the restructuring of 11 banks, some of which have ties to the controversial S Alam Group.

However, his outspoken statements have caused concern. In September 2023, Mansur warned that 10 commercial banks were on the brink of collapse, triggering panic among depositors and mass withdrawals. His refusal to name the struggling banks further fuelled speculation, raising fears that his transparency might exacerbate instability instead of restoring confidence.

During a virtual session on Macroeconomic Policy and Governance in the Banking Sector, Mansur reaffirmed that not all struggling banks would survive. While he acknowledged progress in Islami Bank Bangladesh and United Commercial Bank, his remarks left many questioning the future of other troubled financial institutions.

Critics argue that Mansur’s blunt assessments could further destabilise the sector. National Bank Chairman Abdul Awal Mintoo criticised the governor’s approach, suggesting that public discussions on banking failures could do more harm than good. Similarly, Task Force member Monzur Hossain cautioned regulators against excessive transparency, warning that it might fuel panic rather than restore order.

A Sector Plagued by Systemic Weaknesses

Bangladesh’s banking crisis is not a sudden development but the result of years of deep-rooted structural weaknesses. The sector has been riddled with financial scandals, unchecked corruption, and regulatory failures. The appointment of Ahsan H Mansur as governor was seen as a step toward reform, but doubts remain over whether these measures will be enough to stabilise the sector.

The fundamental challenge remains weak oversight, which has allowed powerful borrowers to exploit the system with little fear of consequences. While Mansur has pushed for stricter financial discipline, experts argue that the real test lies in whether the banking sector can regain public trust while tackling corruption and inefficiencies.

Bangladesh’s Banking Crisis Amid Political Uncertainty

The financial turmoil comes against the backdrop of a deepening leadership crisis. In August 2024, an elected leader was ousted following massive student-led protests. Nobel Laureate Muhammad Yunus was subsequently appointed chief adviser, tasked with overseeing parliamentary elections.

However, the Yunus administration lacks a popular mandate and has delayed elections despite pressure from political parties. The prolonged political uncertainty is now causing unrest within the armed forces, with the army chief expressing frustration over the ongoing turmoil.

The combination of a banking sector in distress and an unresolved political crisis has placed Bangladesh’s economic stability at serious risk. If the leadership vacuum persists, and if urgent reforms are not implemented effectively, the banking crisis could escalate into a full-scale financial disaster.

A Crossroads for Bangladesh’s Economy

Bangladesh is at a crucial turning point. The banking crisis, compounded by political instability, threatens the country’s long-term economic future. While the Bank Resolution Ordinance is a step in the right direction, its success will depend on its swift and effective implementation.

Governor Ahsan H Mansur’s push for reforms has exposed the vulnerabilities of the financial system, but the challenge remains in rebuilding depositor trust while ensuring regulatory enforcement. Policymakers must take strong, decisive action to safeguard depositors, enforce strict financial discipline, and restore confidence in the banking system.

With the leadership crisis still unresolved, the road ahead for Bangladesh remains uncertain. The government’s ability to stabilise the banking sector while addressing political tensions will determine whether the country can navigate this crisis or slide deeper into financial instability.