Banking Sector Reform Demands Conditional Liquidity, Asset Resolution, and Binding Governance

Situation

Bangladesh’s banking system is experiencing a simultaneous solvency and profitability breakdown that, left unchecked, will paralyze credit intermediation and threaten public finances. Non-performing loans are at levels that wipe out regulatory capital and the sector’s collective net loss has exhausted retained earnings, leaving little buffer against further shocks. The newly proposed national budget, a World Bank financing operation, and a sizable central bank refinance package have created a narrow window in which coordinated action can halt the spiral. Delaying decisive intervention while these resources are available would deepen the stock of bad assets and inflate the eventual fiscal bill.

Evidence

The system-wide capital-to-risk-weighted-assets ratio turned negative, reaching negative 2.6 percent as of the end of December 2025 [Research, December 2025], implying that losses have consumed the entire capital base of the banking sector. Non-performing loans stood at Tk 5.89 trillion as of March 2026 [Research, March 2026], which translates to an NPL ratio of 32.6 percent as of the same date [Research, March 2026]. The banking sector collectively posted a net loss of Tk 1.3 trillion in 2025 [Research, 2025]. In response, the government allocated approximately Tk 40,000 crore for the recapitalization and restructuring of distressed banks in the proposed national budget for FY2026-27 [Research, June 11, 2026]. Concurrently, the World Bank Board of Executive Directors approved $450 million in financing for the Financial Sector Support Project II [Research, June 24, 2026], and Bangladesh Bank announced Tk 19,000 crore across four key refinance schemes in June 2026 [Research, June 22, 2026].

Prescription

1. The Ministry of Finance must front-load the Tk 40,000 crore recapitalization allocation [Research, June 11, 2026] as soon as the FY2026-27 budget is enacted, but release funds only in tranches tied to verifiable milestones: removal of incumbent management in recipient banks, a binding timeline for NPL write-offs and recoveries, and a halt to new related-party lending. A dedicated unit within the Finance Division should publish quarterly progress reports on each bank’s milestones.
2. Bangladesh Bank should urgently operationalize the Tk 19,000 crore refinance schemes [Research, June 22, 2026] only for banks that meet three preconditions: full adoption of International Financial Reporting Standards loan classification, an independent special audit of the top 50 borrowers, and a board resolution discontinuing any evergreening practices. The central bank must publicly disclose disbursements, repayment status, and scheme-level asset quality every month to temper misuse.
3. Bangladesh Bank and the Ministry of Finance must jointly establish, within 90 days, a professionally managed, state-owned asset management company empowered with the World Bank’s $450 million project [Research, June 24, 2026] as the initial capital and technical anchor. The asset management company should acquire, at a haircut determined by independent valuation, the most distressed Tk 5.89 trillion NPL pool [Research, March 2026], starting with the top five banks by NPL volume, and pursue resolution through the money loan courts and negotiated settlements, with all recoveries returned to the selling banks after deducting costs.
4. Bangladesh Bank must enforce the existing prompt corrective action framework immediately by restricting lending, branch expansion, and dividend payments for all banks whose individual capital adequacy ratios have fallen below the system-wide negative 2.6 percent [Research, December 2025], and initiate time-bound resolution plans that can culminate in mergers or license revocation if capital is not restored from private sources within six months.
5. The Ministry of Finance and Bangladesh Bank should jointly commission a quarterly stress-testing exercise whose results are published with bank-level granularity, using the March 2026 NPL ratio of 32.6 percent [Research, March 2026] and the 2025 net loss of Tk 1.3 trillion [Research, 2025] as baseline shock scenarios, to guide the sequencing of further public capital injections and to inform Parliament’s review of the deposit insurance framework.

Risks and tradeoffs

The foremost risk is that the Tk 40,000 crore recapitalization [Research, June 11, 2026] becomes a blank cheque, where state capital is absorbed without altering governance and the same connected lending patterns recur, ultimately producing a larger NPL ratio than the current 32.6 percent [Research, March 2026]. Tying funds to management change and lending restrictions faces political resistance from entrenched interests. A rapid transfer of NPLs to an asset management company, while necessary, will expose the state to valuation disputes and losses if recovery infrastructure is not simultaneously strengthened. The negative 2.6 percent system capital [Research, December 2025] masks wide dispersion: a one-size-fits-all enforcement may force some viable banks to contract credit abruptly, hurting the real economy. The World Bank’s $450 million [Research, June 24, 2026] may be disbursed slowly, delaying the asset management company’s operational start. Without credible resolution of the Tk 5.89 trillion NPL stock [Research, March 2026], the Tk 19,000 crore refinance [Research, June 22, 2026] will simply fund the continued servicing of bad assets.

Bottom line

The combination of negative aggregate capital, an NPL ratio of 32.6 percent, and a sector-wide net loss of Tk 1.3 trillion signals an acute crisis that demands immediate conditional deployment of the Tk 40,000 crore budget allocation, the Tk 19,000 crore refinance schemes, and the $450 million World Bank facility. Only a sequenced package of governance reform, independent asset valuation, and transparent enforcement can rebuild confidence and prevent a larger fiscal bailout.