Restoring Banking Stability Through Ordered Resolution and Diversified Public Borrowing

Situation

The banking sector is contending with a convergence of asset quality decay, deep losses, and liquidity distortions. The central bank has already injected exceptional volumes of liquidity: Tk 21.68 trillion in 2025 alone [Bangladesh Bank, 2025] and a special support of Tk 2,500 crore to Islami Bank Bangladesh PLC in mid-June 2026 [Bangladesh Bank, June 14, 2026]. Despite that, distressed loans have swollen to 59 percent of total outstanding credit, with the system posting a net loss of Tk 1.3 trillion in 2025 [Bangladesh Bank Financial Stability Report, June 16, 2026]. At the same time, currency in circulation outside banks hit a record Tk 3.03 trillion in March 2026 [Bangladesh Bank, March 2026], and private sector credit growth slumped to a historic low of 4.72 percent in the same period [Bangladesh Bank, March 2026]. Against this backdrop, the government has tabled a FY2026-27 budget that targets domestic bank borrowing of Tk 1.35 lakh crore [Government of Bangladesh, FY2026-27], while the central bank has simultaneously announced its intention to liquidate five ailing non-bank financial institutions [Bangladesh Bank, June 22, 2026]. Without a sequenced recalibration of liquidity support, borrowing strategy, and institutional cleanup, the system risks an acute solvency event or a prolonged credit freeze.

Evidence

The stock of distressed loans reached Tk 10.87 lakh crore by end-2025, equivalent to 59 percent of the sector’s Tk 18.20 lakh crore loan portfolio [Bangladesh Bank Financial Stability Report, June 16, 2026]. In 10 specific banks, risky loans alone represented 47.75 percent of total lending in December 2025, up from 42.96 percent a year earlier [Bangladesh Bank Financial Stability Report, June 16, 2026]. The aggregate net loss of Tk 1.3 trillion in 2025 [Bangladesh Bank Financial Stability Report, June 16, 2026] has further eroded capital buffers. Liquidity conditions are paradoxical: the central bank provided Tk 21.68 trillion in support to financial institutions in 2025 [Bangladesh Bank, 2025], and a further Tk 2,500 crore to a single entity in June 2026 [Bangladesh Bank, June 14, 2026], yet the volume of currency held outside banks reached an all-time high of Tk 3.03 trillion in March 2026 [Bangladesh Bank, March 2026]. Meanwhile, private sector credit growth collapsed to 4.72 percent year-on-year in March 2026 [Bangladesh Bank, March 2026]. On the fiscal front, the government’s proposed FY2026-27 budget calls for Tk 1.35 lakh crore in borrowing from the domestic banking system [Government of Bangladesh, FY2026-27]. In a noteworthy signal, a government Shariah-based Sukuk of Tk 5,600 crore drew total bids of Tk 47,490.88 crore, an oversubscription of 8.5 times [Bangladesh Bank, June 23, 2026], pointing to deep non-bank appetite for sovereign paper.

Prescription

1. Bangladesh Bank should immediately suspend ad hoc, single-institution liquidity support and replace it with a transparent, conditional facility. The Tk 2,500 crore assistance to Islami Bank [Bangladesh Bank, June 14, 2026] must be the last such intervention. Instead, the central bank should announce a rules-based Emergency Liquidity Assistance framework that is accessible only after the requesting institution submits a binding distressed asset reduction plan and obtains shareholder or sponsor equity injections. Access should be limited, priced at a penalty spread, and tied to monthly milestones on non-performing loan recovery.
2. Bangladesh Bank should execute the planned liquidation of five NBFIs [Bangladesh Bank, June 22, 2026] without delay and extend the resolution discipline to the ten banks with 47.75 percent risky loans [Bangladesh Bank Financial Stability Report, June 16, 2026]. The central bank should publish, within the coming weeks, a sequenced timeline for the NBFI closures, including depositor protection payouts and asset transfer mechanisms. Simultaneously, it should issue mandatory directives for those ten banks to submit credible recapitalization and asset clean-up roadmaps. Banks that fail to present viable plans should be placed under intensified supervision with limits on director and shareholder withdrawals.
3. The Ministry of Finance should capitalize on the Sukuk demand [Bangladesh Bank, June 23, 2026] to reduce the planned Tk 1.35 lakh crore bank borrowing [Government of Bangladesh, FY2026-27]. The government should immediately launch a second, larger Shariah-compliant issuance, raising at least Tk 30,000 crore directly from non-bank investors, thereby lowering the residual call on bank liquidity. This would relieve pressure on deposit-depleted banks and allow them to allocate liquidity to private sector lending.
4. Bangladesh Bank, in partnership with scheduled banks, should launch a special savings instrument modeled on the Sukuk structure to absorb the Tk 3.03 trillion currency hoard [Bangladesh Bank, March 2026]. The oversubscription achievement, Tk 47,490.88 crore in bids against a Tk 5,600 crore offer [Bangladesh Bank, June 23, 2026], demonstrates that yield-seeking household and institutional funds exist outside the banking system. A retail, Shariah-compliant deposit product, issued through bank branches and mobile financial service providers, can channel idle currency into the formal sector, simultaneously improving banks’ deposit bases and lowering the leakage of liquidity support.
5. Bangladesh Bank should impose differentiated credit growth ceilings linked to loan quality benchmarks. For the ten banks exhibiting 47.75 percent risky loans [Bangladesh Bank Financial Stability Report, June 16, 2026], new private sector lending should be permitted only against demonstrable recoveries or write-offs of existing distressed assets. Banks below a stipulated net non-performing loan threshold may receive accelerated approval for credit to productive sectors, reversing the historic low of 4.72 percent private sector credit growth [Bangladesh Bank, March 2026].

Risks and tradeoffs

Timely liquidation of the five NBFIs [Bangladesh Bank, June 22, 2026] could spark temporary depositor anxiety, particularly if the depositor protection fund is perceived as inadequately capitalized; contagion to small banks is possible if communication is mishandled. Replacing blanket liquidity with conditional facilities may accelerate recognition of losses and trigger capital calls that some weak banks cannot meet, potentially forcing faster consolidation than the system can absorb. The oversubscribed Sukuk [Bangladesh Bank, June 23, 2026] is a clear opportunity, but a large additional issuance could also draw funds out of banks that are already deposit-starved, inadvertently tightening lending conditions if not paired with the retail deposit drive. The sector’s net loss of Tk 1.3 trillion [Bangladesh Bank Financial Stability Report, June 16, 2026] means there is virtually no loss-absorbing capacity; any policy misstep could crystallize a systemic event. Political resistance from borrowers with Tk 10.87 lakh crore in distressed exposures [Bangladesh Bank Financial Stability Report, June 16, 2026] remains a binding constraint on enforcement.

Bottom line

The banking system is trapped between extreme asset impairment and liquidity misallocation, with private credit growth at a historic low. An ordered sequence of suspending unconditional liquidity, executing NBFI liquidations, substituting market-based sovereign borrowing for bank borrowing, and absorbing idle currency can stabilize the sector only if implementation is disciplined and politically insulated.