Averting Systemic Banking Collapse: Immediate Priorities for Bangladesh

Situation

The Bangladesh banking system is confronting a solvency crisis of extraordinary depth. Distressed loans reached Tk 10.87 lakh crore by the end of 2025 [Bangladesh Bank, June 16, 2026], equivalent to 59% of total outstanding loans of Tk 18.20 lakh crore [Bangladesh Bank, June 16, 2026]. The sector’s capital adequacy ratio fell to -2.64% by the same date [Bangladesh Bank, June 2026], indicating that the aggregate equity cushion has been fully exhausted. The official non-performing loan ratio stood at 30.60% as of December 31, 2025 [Bangladesh Bank, June 2026], with NPLs reaching Tk 5.88 trillion [Other reports, June 2026]. Two immediate pressures compound these balance-sheet weaknesses: 36 banks are considering a syndicated restructuring plan for City Group, whose outstanding loans exceed Tk 26,600 crore [Research report, June 19, 2026], and the proposed FY2026-27 budget includes a plan for the government to borrow Tk 112,000 crore from the banking system [Research report, June 19, 2026]. Foreign exchange reserves provide a partial external buffer, standing at US$35.63 billion (US$31.08 billion under the BPM-6 standard) [Bangladesh Bank, June 15, 2026], but they cannot substitute for domestic bank solvency. The convergence of these factors threatens depositor confidence, the credit channel for real economic activity, and the state’s capacity to finance its deficit without a disorderly monetary expansion.

Evidence

• Distressed loans: Tk 10.87 lakh crore, or 59% of total outstanding loans of Tk 18.20 lakh crore [Bangladesh Bank, June 16, 2026].
• Capital adequacy ratio: -2.64% at end-2025 [Bangladesh Bank, June 2026].
• NPL ratio and stock: 30.60% as of December 31, 2025 [Bangladesh Bank, June 2026]; NPLs Tk 5.88 trillion [Other reports, June 2026].
• Corporate exposure: 36 banks are discussing a syndicated restructuring for City Group, with loans exceeding Tk 26,600 crore [Research report, June 19, 2026].
• Fiscal pressure: The FY2026-27 budget targets bank borrowing of Tk 112,000 crore [Research report, June 19, 2026].
• External buffer: Foreign exchange reserves US$35.63 billion (US$31.08 billion under BPM-6) [Bangladesh Bank, June 15, 2026].

Prescription

1. Immediate loss recognition and capital restoration, led by Bangladesh Bank. The central bank must order a special asset-quality review for all banks, using a standardized classification that eliminates evergreening and forbearance. Banks with capital ratios below a regulatory minimum (including the aggregate -2.64% [Bangladesh Bank, June 2026]) must submit binding recapitalization plans within a timeline set by the central bank. For state-owned banks unable to attract private capital, the Ministry of Finance should create a contingent budget facility to inject equity, funded by re-prioritized development spending and proceeds from long-term bonds placed with the Bangladesh Bank, sterilized through reverse repos to prevent monetary overhang.
2. Reform the government borrowing plan to reduce bank crowding-out. The Ministry of Finance should revise the proposed bank borrowing of Tk 112,000 crore [Research report, June 19, 2026] downward and redirect a significant portion to non-bank sources such as national savings certificates, bilateral project loans, and international financial institution disbursements. Bangladesh Bank should coordinate with the ministry to calibrate weekly Treasury bill and bond auctions so that net flow to banks stays within deposit growth and does not crowd out liquidity needed for existing commitments, including the City Group restructuring.
3. Overhaul the City Group restructuring under a Bangladesh Bank-mandated framework. The 36 banks involved [Research report, June 19, 2026] must agree on a common terms sheet that includes a material maturity extension, an initial interest moratorium, and partial conversion of debt into equity or long-term subordinated instruments. Bangladesh Bank should appoint an independent monitoring trustee with full access to the company’s accounts. To prevent individual holdouts from blocking the deal, the central bank may invoke its resolution powers to enforce terms agreed by a qualified majority of exposure value.
4. Depositor protection and liquidity support mechanism. The government should announce an explicit, statutory guarantee for depositors, with the coverage limit set to protect the vast majority of accounts, funded by an increased premium levy on banks and a backstop from the central bank’s lender-of-last-resort window. Bangladesh Bank should simultaneously establish a standing liquidity facility that permits solvent but illiquid banks to borrow against high-quality collateral at a predetermined penalty rate, thereby preventing fire sales of assets while restructuring advances.
5. Establish a dedicated distressed-bank resolution agency. The Ministry of Finance, in consultation with Bangladesh Bank, should table urgent legislation creating a resolution authority empowered to merge, sell, or temporarily nationalize non-viable banks, with a sunset clause. The authority would operate under an independent board and be funded through an industry levy. Its first mandate would be to draw up resolution plans for the weakest banks by capital ratios within a strict regulatory deadline.

Risks and tradeoffs

The primary risk is moral hazard: explicit depositor guarantees and capital injections may reduce market discipline on bank owners and encourage future recklessness. To mitigate this, guarantees must be time-limited and paired with strict enforcement of fit-and-proper criteria for directors. Political resistance to reducing the government’s bank borrowing target of Tk 112,000 crore [Research report, June 19, 2026] is high; if the target is not cut, the resulting liquidity drain could stall private-sector credit and raise domestic interest rates, pushing more loans into distress. The City Group restructuring could fail if a minority of banks withhold consent, requiring Bangladesh Bank to use coercive resolution powers that may be contested in court. Rapid recognition of true NPLs will initially push reported ratios well above the current 30.60% [Bangladesh Bank, June 2026], potentially triggering deposit runs if not accompanied by credible guarantees. Finally, the available foreign exchange reserves of US$35.63 billion [Bangladesh Bank, June 15, 2026] might be tapped to support dollar liquidity, but large-scale conversion to taka would jeopardize external stability.

Bottom line

Bangladesh’s banking system has a negative capital adequacy ratio of -2.64% [Bangladesh Bank, June 2026] and distressed loans equal to 59% of total lending [Bangladesh Bank, June 16, 2026], necessitating an immediate and sequenced intervention that starts with loss recognition, capital infusion, and a government borrowing recalibration. Delay will deepen the solvency hole, erode depositor confidence, and eventually force a larger fiscal and monetary bailout that the current foreign reserve cover of US$35.63 billion [Bangladesh Bank, June 15, 2026] cannot underwrite.