Distressed loans in Bangladesh’s banking sector surged by around 45 per cent to more than Tk 10 trillion at the end of 2025, highlighting growing vulnerabilities in the country’s financial system and raising concerns over banking-sector stability.

According to the latest Financial Stability Report (FSR) 2025 released by Bangladesh Bank (BB), distressed loans accounted for more than 55 per cent of the total outstanding loans and advances of Tk 18.21 trillion as of December 31, 2025.

When written-off loans are included, the total volume of distressed assets rises to Tk 10.87 trillion, representing nearly 60 per cent of total outstanding loans.

Distressed loans include non-performing loans (NPLs), rescheduled loans and written-off loans, and are considered high-risk assets because borrowers are unable to meet scheduled repayments of principal or interest.

The distressed-asset portfolio comprises Tk 5.57 trillion in defaulted loans, Tk 2.69 trillion in unclassified rescheduled loans, Tk 1.82 trillion in loans under court stay orders and Tk 834.79 billion in written-off loans, according to the report.

Bangladesh Bank said the sharp increase in NPLs reflects a deterioration in asset quality, driven largely by imprudent lending practices and weak loan oversight. The central bank also cited the slow pace of loan recovery and external shocks—including the Russia-Ukraine war, global economic tensions and domestic economic challenges—as factors that have weakened borrowers’ repayment capacity.

A Bangladesh Bank official said the overall volume of distressed assets is likely to remain broadly unchanged by the end of this year, although rescheduled loans may increase while NPLs could decline.

The report also highlighted a significant deterioration in banks’ capital positions. The capital-to-risk-weighted assets ratio (CRAR) fell sharply from 3.08 per cent in 2024 to negative 2.64 per cent in 2025, far below the minimum regulatory requirement of 10 per cent under the Basel III framework.

Bangladesh Bank noted that the capital conservation buffer fell to zero by the end of 2025, indicating heightened vulnerabilities in the banking sector. The decline was mainly driven by weaker capital positions at state-owned commercial banks, specialised banks, and both conventional and Islamic private commercial banks.

Profitability indicators also deteriorated, with both return on assets (ROA) and return on equity (ROE) declining significantly from the previous year.

However, bankers cautioned against assessing the entire industry based on sector-wide averages. Mosleh Uddin Ahmed, Managing Director of Shahjalal Islami Bank, said several banks maintain distressed-asset ratios below 5 per cent and should not be judged alongside underperforming institutions with exceptionally high levels of problematic loans.

Economists and banking experts say the sharp rise in distressed loans underscores the fragile state of Bangladesh’s financial sector and the urgent need for stronger governance, improved loan recovery mechanisms and enhanced regulatory oversight.