Daily Policy Advisor archive (10)
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Reversing the Credit Contraction in a Liquidity-Strapped Banking System

Situation

The banking system is caught between soaring money market rates, a historic collapse in private credit, and a balance-sheet overhang that is blocking fresh lending. Average overnight interbank call money rates have hovered between 9.90% and 10.19% throughout May 2026 [The Business Standard, May 26, 2026], while 91-day term money rates reached 13% by May 24, 2026 [bd-pratidin.com, May 24, 2026]. Private sector credit growth has fallen to a historic low of 4.7% [The Financial Express, May 26, 2026]. The banking industry is weighed down by non-performing loans of approximately Tk 6.44 trillion, or 35.73% of total disbursed loans [The Financial Express, May 18, 2026], and a combined capital shortfall of nearly Tk 282,000 crore across 23 banks as of end-2025 [Dhaka Tribune, May 26, 2026]. Currency circulating outside the banking system reached Tk 3.03 trillion in March 2026 [The Financial Express, May 26, 2026], fuelled in part by a physical note shortage: the Security Printing Corporation has limited the supply of newly printed banknotes to approximately Tk 8,000 crore, half of the requested Tk 16,000 crore [Dhaka Tribune, May 27, 2026]. The Bangladesh Bank announced a Tk 60,000 crore production and employment revival stimulus on May 23, 2026 [The Business Standard, May 25, 2026], but since May 3, 2026, it has restricted central bank repo facilities to a seven-day tenure [The Financial Express, May 20, 2026], tightening the liquidity screw further.

Evidence

* Average overnight call money rate: 9.90% to 10.19% in May 2026 [The Business Standard, May 26, 2026].

* 91-day term money rate: 13% as of May 24, 2026 [bd-pratidin.com, May 24, 2026].

* Private sector credit growth: 4.7%, a historic low [The Financial Express, May 26, 2026].

* Non-performing loans: approximately Tk 6.44 trillion, 35.73% of total disbursed loans, reported prior to recent rescheduling provisions [The Financial Express, May 18, 2026].

* Capital shortfall: nearly Tk 282,000 crore across 23 banks at end-2025 [Dhaka Tribune, May 26, 2026].

* Currency outside banks: Tk 3.03 trillion in March 2026 [The Financial Express, May 26, 2026].

* Banknote supply: approximately Tk 8,000 crore provided, half of the requested Tk 16,000 crore [Dhaka Tribune, May 27, 2026].

* Stimulus package: Tk 60,000 crore “production and employment revival” announced May 23, 2026 [The Business Standard, May 25, 2026].

* Repo facility: restricted to a seven-day tenor since May 3, 2026 [The Financial Express, May 20, 2026].

Prescription

  1. Bangladesh Bank must immediately lengthen the repo tenor and expand available volumes. The seven-day cap imposed since May 3, 2026 [The Financial Express, May 20, 2026] has amplified the squeeze that pushed overnight rates to 9.90–10.19% [The Business Standard, May 26, 2026] and term rates to 13% [bd-pratidin.com, May 24, 2026]. Introduce repo windows of 14 and 28 days with a graduated rate structure that penalises persistent reliance, while requiring high-quality collateral and daily liquidity reporting from participating banks.
  2. The Ministry of Finance, together with Bangladesh Bank, should finalise the disbursement framework for the Tk 60,000 crore stimulus within days. The package was announced on May 23, 2026 [The Business Standard, May 25, 2026] but remains without clear eligibility rules. Issue operational guidelines that link disbursements to verifiable employment and production targets, channel funds only through banks that meet prudential thresholds, and exclude institutions that are part of the 23-bank capital shortfall cluster of nearly Tk 282,000 crore [Dhaka Tribune, May 26, 2026].
  3. Bangladesh Bank must enforce the recently enacted NPL rescheduling provisions without delay. The non-performing loan pile of Tk 6.44 trillion, 35.73% of disbursed loans, was reported before the introduction of these provisions [The Financial Express, May 18, 2026]. Create a dedicated resolution unit that segments large impaired exposures, sets binding provisioning timelines, and facilitates accelerated workouts, thereby reducing the distressed-asset overhang that is freezing fresh lending.
  4. The Ministry of Finance and the Security Printing Corporation should jointly raise the banknote printing allocation above the current Tk 8,000 crore cap [Dhaka Tribune, May 27, 2026] to match seasonal demand. Simultaneously, Bangladesh Bank should launch an incentive scheme for digital retail payments to permanently reduce the demand for physical cash, given that Tk 3.03 trillion is already circulating outside banks [The Financial Express, May 26, 2026].
  5. Bangladesh Bank should impose a prompt corrective action framework on the 23 banks with a combined Tk 282,000 crore capital shortfall [Dhaka Tribune, May 26, 2026]. Restrict dividend payouts, branch expansion, and credit growth until each institution submits and obtains approval for a credible, time-bound recapitalisation plan, with early intervention triggers tied to liquidity and capital ratios.

Risks and tradeoffs

Extending the repo facility could transmit liquidity into inflation if the injected funds are not sterilised promptly. Rapid NPL resolution may crystallise losses that further weaken capital, especially in banks already facing a Tk 282,000 crore shortfall [Dhaka Tribune, May 26, 2026], and could trigger deposit runs. Raising the banknote supply may reinforce the cash-hoarding trend that keeps Tk 3.03 trillion outside the banking system [The Financial Express, May 26, 2026], complicating monetary management. The prompt corrective action on 23 banks risks deepening the credit crunch in the short term, as restrained institutions cut lending. Binding constraints include limited fiscal space for recapitalisation, political resistance from bank owners, and the operational capacity of Bangladesh Bank to supervise differentiated measures.

Bottom line

Liquidity distress has paralysed private credit at a time when productive-sector revival is urgent. A coordinated sequence of liquidity injection, targeted stimulus disbursement, aggressive NPL resolution, and strict corrective action is the only defensible path to break the impasse.

Sources

  • Average overnight interbank call money rates have hovered between 9.90% and 10.19% throughout May 2026. [The Business Standard, May 26, 2026]
  • 91-day term money rates reached 13% by May 24, 2026. [bd-pratidin.com, May 24, 2026]
  • The Security Printing Corporation has limited the supply of newly printed banknotes to approximately Tk 8,000 crore, half of the requested Tk 16,000 crore. [Dhaka Tribune, May 27, 2026]
  • Currency circulating outside the banking system reached Tk 3.03 trillion in March 2026. [The Financial Express, May 26, 2026]
  • Private sector credit growth has fallen to a historic low of 4.7%. [The Financial Express, May 26, 2026]
  • On May 23, 2026, the Bangladesh Bank announced a Tk 60,000 crore 'production and employment revival' stimulus package. [The Business Standard, May 25, 2026]
  • Since May 3, 2026, Bangladesh Bank has restricted central bank repo facilities to a seven-day tenure. [The Financial Express, May 20, 2026]
  • Non-performing loans were reported at approximately Tk 6.44 trillion, or 35.73% of total disbursed loans, prior to recent rescheduling provisions. [The Financial Express, May 18, 2026]
  • As of the end of 2025, 23 banks were facing a combined capital shortfall of nearly Tk 282,000 crore. [Dhaka Tribune, May 26, 2026]

Grounded in 14 newspaper articles retrieved via search.

Today's other watched topics

  1. 2. Inflation and Purchasing Power Inflation at 9.04% is eroding real income for households. Rising import costs for fuel and raw materials, driven by currency devaluation, are increasing production costs and threatening economic stability.
  2. 3. External Sector and IMF Negotiations Securing a $4.0–$4.5 billion IMF program is critical to managing debt servicing and external pressures, especially as foreign aid disbursements have declined by nearly 18%.
  3. 4. Energy and Infrastructure Investment New energy projects and $5 billion in planned ADB assistance are essential to address energy security and support long-term industrial growth and economic resilience.
  4. 5. Seasonal Economic Pressures (Eid-ul-Azha) The festival drives critical liquidity demand and retail activity, but highlights structural weaknesses in the leather export industry and rising costs for essential goods like cattle.

Topics ranked by gemini-3.1-flash-lite; prescription drafted by deepseek-v4-pro; grounding verified by gemini-3.1-flash-lite. Generated 2026-05-27T19:24:40.824097+00:00.