The financial institutions sector in Bangladesh is facing a crisis of unprecedented proportions, with a staggering 36% of all loans now in default, according to a recent report from Bangladesh Bank. The distress is particularly severe among non-banking financial institutions (NBFIs), some of which are on the brink of collapse, unable to meet their obligations to depositors and struggling to secure new deposits.
As of September 2024, 11 out of 35 financial institutions in the country had defaulted on 75 to 99 percent of their disbursed loans.
Alarmingly, five of these institutions reported default rates exceeding 95%, and 22 institutions reported defaulting on half or more of their total loan portfolios. This financial collapse is contributing to a widespread loss of confidence in the sector, with numerous institutions failing to repay depositors and unable to generate new business.
For example, FAS Finance, with loans totaling Tk 1,822 crore, has defaulted on 99.92% of its loans-amounting to Tk 1,820 crore. Similarly, Far East Finance’s default rate stands at 98.06% on a loan book of Tk 890 crore, and BIFC is reporting a default rate of 97.27% on its Tk 773 crore loan portfolio. People’s Leasing and International Leasing are also facing catastrophic default rates, with 97% and 96.19% of their respective loans in default, respectively.
Other institutions are also in deep trouble, including Union Capital, Aviva Finance, Phoenix Finance, and First Finance, all with default rates above 80%. The financial instability is becoming a systemic issue, as 36% of the total loans disbursed by financial institutions have turned into non-performing loans (NPLs).
A senior official at Bangladesh Bank, speaking to The Daily Industry, attributed this crisis to a combination of mismanagement, irregularities, and collusion among parties responsible for overseeing the sector. “The net income of these institutions is virtually nonexistent. They are surviving only by using the deposits from their clients to stay afloat. The situation is dire, and urgent decisions are needed to address the underlying issues,” the official explained.
The report highlights that while some institutions are managing to keep their default rates relatively low, the overall picture remains grim. By September 2024, non-performing loans (NPLs) in the sector had reached Tk 26,163 crore, accounting for 35.52% of the total loan portfolio of Tk 73,663 crore. Just three months earlier, at the end of June, the defaulted loans stood at Tk 24,711 crore, and at the end of December 2023, the NPLs amounted to Tk 21,567 crore, or 29.27% of the total loans. This indicates a troubling acceleration of defaults, with an increase of Tk 1,425 crore in the past three months alone, and Tk 4,569 crore in just nine months.
The ongoing crisis is not only threatening the stability of the financial institutions but also causing a ripple effect throughout the broader economy. Many depositors are left in limbo, and the failure of these institutions could lead to a further erosion of confidence in the financial system, which may take years to restore.
As the situation continues to deteriorate, calls are mounting for swift and decisive action by the government and regulators to prevent further damage. Experts urge for comprehensive reforms, including stricter regulatory oversight, improved governance, and a restructuring of institutions that are deemed to be beyond recovery. Without intervention, the fallout from the current crisis could undermine economic stability and growth prospects for years to come.
According to Bangladesh Bank data, there are as many as 13 financial institutions, whose non-performing loans are relatively low. Due to which, till last September, Tk 26 thousand 163 crores of the total 73 thousand 663 crores of loans of this sector have become defaults which is 35.52 percent of the total debt. Three months ago, at the end of last June, the defaulted debt was Tk 24 thousand 711 crore. And at the end of December last year, the defaulted loan was Tk 21 thousand 567 crore, which is 29.27 percent of the loan disbursed till that time. This means that in the last three months, defaulted loans have increased by Tk 1,425 crore. And 4 thousand 569 crores increased in 9 months.
A review of Bangladesh Bank data shows that many financial institutions are now not getting deposits even with high interest rates. Last November, financial institutions took deposits at an average of 10.43 percent interest. And the average loan interest rate was 13.67 percent. Still not getting deposits as expected. As a result, new loans are not being distributed. Most of the institutions survive. Until last September, the amount of deposits of these institutions has decreased to 47 thousand 838 crores. At the end of last June, which was Tk 47, 906 crore. And at the end of December last year, it was 47 thousand 491 crores. Similarly, the debt level decreased to Tk 73, 663 crores at the end of last September. Three months ago it was 74 thousand 534 crores. And at the end of last December, it was Tk 73,759 crores. Deposit and loan balances are calculated by adding quarterly interest to financial institutions. As a result, net loans and deposits have decreased significantly.
When asked about the reason for the plight of the financial institution sector, prominent banker and chairman of the reorganized board of directors of Global Islami Bank Mohammad Nurul Amin said that there was a different purpose to build financial institutions after the bank. But financial institutions are chasing the same customers with the same products as banks. However, the bank’s skills and capabilities are lagging behind because these institutions do not have them. Again, after so many banks in Bangladesh, there is no need for 35 financial institutions. Due to political considerations, the approval of financial institutions has been given some time back. His recommendation is that the Central Bank should make a provision of 5 to 6 thousand crores for these institutions.
Those concerned said that although there was extreme chaos in the financial institutions sector, it was hidden for a long time. In most cases, these institutions become the basis of sharing the ownership of the parties. In 2019, Prashant Kumar Halder, the former MD of Global Islami and Aviva Finance under the control of S Alam, opened a fake company and took control of FAS Finance, BIFC, People’s Leasing and International Leasing. At one point these institutions were not able to return the money of the depositors. That is why the Central Bank took the initiative to liquidate some institutions including People’s Leasing, BIFC. However, it did not work.
According to Bangladesh Bank data, defaulted loans have increased in the banking sector as well as financial institutions. In the first 9 months of this year, the defaulted loans of the banking sector have almost doubled. At the end of last September, the amount of defaulted loans stood at Tk 2 lakh 84 thousand 977 crores, which is about 17 percent of the total loans. Last December 1 lakh 45 thousand 633 crores or 9 percent was defaulted. Those concerned said that the defaulted loans are increasing due to the default of loans due to various unethical influences during the Awami League government. The IMF has given conditions to reduce the defaulted loans of the banks. In this case, it has been asked to reduce the total debt to 5 percent and government banks below 10 percent by December next year.
Meanwhile, a review of Bangladesh Bank’s data reveals that many financial institutions in the country are facing severe challenges, struggling to attract deposits even though they have raised interest rates to attract savers. Last November, the average interest rate for deposits offered by financial institutions stood at 10.43%, while the average loan interest rate was higher at 13.67%. However, despite these attractive rates, financial institutions have been unable to secure the expected level of deposits, leading to a slowdown in the distribution of new loans.
According to the latest figures from Bangladesh Bank, the total deposits of these institutions had decreased slightly to 47,838 crore taka by the end of September 2024, compared to 47,906 crore taka at the end of June 2024. This decline is a continuation of a downward trend from December 2023 when the figure stood at 47,491 crore taka. Similarly, the total loan balance also shrank to 73,663 crore taka at the end of September, from 74,534 crore taka three months earlier, and 73,759 crore taka at the end of last year.
Experts point out that the slowdown in both deposits and loans is a reflection of deeper structural issues within the financial sector. Financial institutions, which are often smaller and less robust than commercial banks, are finding it increasingly difficult to maintain profitability and meet the needs of their depositors and borrowers.
Mohammad Nurul Amin, a prominent banker and Chairman of the reorganized board of directors at Global Islami Bank, offered insight into the sector’s plight. According to Amin, the original intent behind the establishment of financial institutions was different from the operations of banks, yet many of these institutions have ended up pursuing the same clientele with similar products. However, Amin suggests that their capacity, infrastructure, and skills are lagging behind those of larger commercial banks. He noted that with the large number of banks already in operation in Bangladesh, the need for 35 financial institutions is questionable.
He further recommended that the Bangladesh Bank (BB) should consider allocating a provision of 5 to 6 thousand crore taka to support these struggling institutions. Such measures, he argued, could help stabilize the sector and prevent further systemic risks.
The challenges faced by financial institutions are compounded by unethical practices and political interference that have led to instances of financial mismanagement and fraud. In 2019, the former Managing Director of Global Islami and Aviva Finance, Prashant Kumar Halder, was implicated in a massive financial scandal involving the creation of a fake company and fraudulent control of multiple financial institutions, including FAS Finance, BIFC, People’s Leasing, and International Leasing. These institutions were unable to return depositors’ money, prompting the Central Bank to step in and attempt liquidation. However, these efforts proved largely ineffective, and many of these institutions remain in a state of turmoil.
The ongoing instability has left many depositors in a precarious situation, with some institutions continuing to struggle with liquidity and trust issues. The financial sector’s woes are not limited to deposit and loan balances. Defaulted loans have surged across both the banking and financial institution sectors. In the first nine months of 2024, the defaulted loans in the banking sector alone nearly doubled. As of September 2024, defaulted loans had reached an alarming 2,84,977 crore taka, which constitutes approximately 17% of the total loans in the sector, a sharp rise from 1,45,633 crore taka, or 9% of total loans, at the end of 2023.
Observers believe that these defaults are linked to unethical lending practices and political influence, particularly during the tenure of the ruling Awami League government. The International Monetary Fund (IMF) has made it clear that addressing the growing levels of non-performing loans (NPLs) is critical for Bangladesh’s economic stability. As part of the IMF’s conditions for continued support, the government has been asked to reduce total defaulted loans to below 5% in the broader banking sector and to bring defaulted loans in state-owned banks below 10% by the end of 2025.
The situation facing Bangladesh’s financial institutions presents a difficult challenge. While some institutions are taking steps to reorganize and improve governance, many remain mired in issues related to poor management, political interference, and the inability to offer competitive products that can attract and retain customers. In light of these circumstances, industry experts are urging both the Bangladesh Bank and the government to consider more significant reforms, including consolidating weaker institutions and providing targeted financial support, to prevent further deterioration of the sector.