Bangladesh is witnessing a financial strain among six state-managed specialized banks, as unchecked loan disbursements, lackluster recovery mechanisms, and systemic inefficiencies threaten their survival. These institutions, mandated to drive socio-economic inclusion, have instead become hotbeds for defaulted credit and corrupt lending practices. In a recent high-level meeting convened by the Finance Ministry's Financial Institutions Department, the dire state of affairs was laid bare, prompting urgent directives for reform.
Banks Under the Scanner: The specialized banks named at the meeting-Bangladesh Krishi Bank, Rajshahi Krishi Unnayan Bank, Karmasangsthan Bank, Ansar BDB Unnayan Bank, Probasi Kalyan Bank, and Bangladesh Finance Corporation (BFC) along with Palli Sanchay Bank-are now grappling with severe loan delinquency. These institutions, which are central to agricultural credit, rural development, employment generation, migrant welfare, and labor financing, are now marred by financial instability.
Looting Disguised as Lending: Multiple senior officials have confirmed that these banks skirted central bank guidelines during loan disbursement. Instead, loans were being processed with minimal checks and oversight, leading to what has been described as "unbridled looting" disguised as legitimate lending. The ease with which credit was extended to preferred clients-often politically connected-led to a ballooning of non-performing loans (NPLs), festering at an alarming rate.
The problem became so pronounced that courts' intervention through the Bangladesh Recovery of Writs and Enforcement of Peremptory Orders Act Tribunal (BRIT) has, paradoxically, compounded the recovery crisis. Tribunals have frequently stalled recovery attempts, thereby prolonging defaults and inflating the size of the loan portfolio in arrears.
Loan Deficit at Negative Levels: The loan deficit figure-representing the gap between disbursed and recovered loans-has plunged into negative territory for these six banks. This is a dramatic signal that not only are defaults eroding principal, but recovery measures are so ineffective that institutions are hemorrhaging capital. Sources suggest that combined bad debts could total Tk 30,000-40,000 crore, with recovery rates languishing at disastrous lows.
Finance Ministry Alarmed: At the Finance Ministry's recent meeting with senior management from these banks, officials voiced deep concern. Dr. Anisuzzaman Chowdhury, Special Assistant to the Chief Advisor for Finance, stated:
"The banks' functions are not working properly, which has created such a dire situation. The matter will be brought to the attention of the central bank."The urgency of the situation was clear: if corrective action is not taken swiftly, these banks may become liability burdens in upcoming national budgets, potentially requiring substantial bailouts or reorganizations.
Emergency Action Plan Issued: The meeting concluded with directives for each bank to prepare detailed action plans to repair their loan portfolios. These plans are to include:A quarterly loan recovery roadmap, Improved internal credit evaluation and monitoring, Tightened control over rescheduling and loan restructuring, Proactive default detection and prosecution. These plans must be submitted to the Financial Institutions Department every three months. Implementation will be monitored closely, with potential penalties and leadership changes for non-compliance.
Banking Sector Woes Under Interim Government: Since the current interim government assumed power in late 2024, persistent allegations have surfaced regarding systematic looting of state banks. These allegations extend beyond specialized institutions and include score-ling state-owned commercial banks. Investigations point to artificially inflated credit, diverted funds, and politicians using banks as tools for patronage.
The central bank restructuring of loan rescheduling rules has failed to stem the tide. Notably, Arun Kumar Chowdhury, MD of Karmasangsthan Bank, cautioned against a reduction in permissible rescheduling periods, warning it may worsen the default count.
Regulatory Incoherence Adds Fuel: Wahida Begum, Managing Director of Rajshahi Krishi Unnayan Bank, highlighted directives from the central bank exacerbating recovery challenges:
"A circular of Bangladesh Bank states that if the total amount of agricultural loan including interest is double the principal loan, no further interest can be charged. As a result, many are not paying the loan intentionally."
This policy, while well-meaning in limiting debt burdens for small farmers, has opened loopholes for intentional non-payment and extended deferral of debts. Instead of punishing serial defaulters, the policy inadvertently reduces incentives to repay.
Structural Issues Hamper Recovery: Senior ministry officials expressed disappointment with recovery performance. Collectively, these six banks recovered only 25-30% of overdue loans through cash settlements and rescheduled loans against targets-far below expected performance. Credit analysts earmark several root causes:Credit Approval Failures - Weak due diligence and credit risk assessment have enabled large loan disbursements that lack enforceable repayment plans.Fraud and Collusion - There are numerous peer-reviewed cases of loan disbursement through forged title documents, collusion with local officials, or issuance of loans against property of dubious valuation.
Manipulative Loan Rescheduling - Borrowers exploit lenient rescheduling rules to perpetually defer repayments.Legal Impediments - Though court intervention is necessary, criminal courts and tribunals often slow the repossession process. BRIT proceedings frequently exclude recovery options or require excessive procedural delays.
Limited Follow-up Capacity - Banks lack specialized recovery teams capable of efficiently managing non-performing assets.Politically Influenced Leadership - Bank leadership often comprises senior public-sector appointees with limited competence and excessive political connections.
Urgent Calls for Reform: Experts argue that stronger regulatory oversight and governance reforms are imperative. Suggestions include:Enable Recovery Agencies - Banks should be granted greater authority to repossess collateral without relying solely on the court system.
Centralized Problem Loan Units - Bangladesh Bank should establish a centralized unit to monitor problem loans across all major banks and coordinate recovery efforts.Performance-Based Management - Bank leadership and recovery officers should be held financially responsible for NPL write-offs.Government Monitoring Agency - Finance Ministry to form a supervisory committee for ongoing monitoring of specialized bank health.Independent Credit Rating - Loan portfolios over a threshold should be independently audited and rated.Targeted Government Subsidies - Instead of blanket rescheduling, aid should be linked to performance and creditworthiness.Bangladesh Bank must also consider revoking the BRIT's exclusive recovery jurisdiction on excessive debt, favouring specialized asset recovery tribunals with explicit powers.
Wider Economic Implications: The crisis in specialized banks has a ripple effect across the economy. Many current borrowers include low-income farmers, migrant workers, and small entrepreneurs. These disadvantaged groups now face a sudden tightening of credit, harming livelihoods and pushing them toward high-interest informal lenders.
Political Fallout: The issue is now attracting political attention. Opposition leaders have questioned the government's commitment to rural empowerment and labor rights, drawing links between political patronage and banking malpractice.
Next Steps and Medium-Term Outlook: The Finance Ministry is expected to work closely with Bangladesh Bank to ensure compliance with the action plans. If these plans succeed, the banks could begin stabilizing their loan portfolios within 12-18 months. However, failure to improve governance and recovery could force strategic mergers, privatizations, or full-scale recapitalization.
Without profound structural change, specialized banks-designed as lifelines to marginalized communities-may soon function as fiscal deteriorators. Immediate policy action, regulatory strengthening, and resolve to arrest corruption are imperative. The credibility of Bangladesh's financial ecosystem, and by extension its inclusive growth strategy, now hinges on rescuing these public assets from systemic collapse.
