Bangladesh’s banking sector is currently in a vulnerable state, according to international credit rating agency Moody’s, which has issued a warning over the country’s rising financial sector risks. Moody’s stated that the central bank’s new policy on rescheduling defaulted loans may offer short-term relief but will likely increase long-term risks for the banking industry.

Under the new policy, distressed borrowers can reschedule defaulted loans with just a 2% down payment and a repayment period of up to 10 years. Additionally, the policy offers a two-year grace period and allows ongoing court cases related to the loans to be put on hold.

Moody’s warned that these lenient terms would delay proper assessment of borrowers’ actual repayment capacity, which, while easing immediate pressure on banks, would ultimately undermine the loan recovery process in the long run. The agency cited 2022 data as evidence, noting that similar loan rescheduling facilities did not lead to sustainable improvements at the time.

Further caution was raised about the provision allowing withdrawal of legal cases within 90 days after rescheduling and the 2% down payment, which may artificially portray loans as performing, while in reality loan risk remains elevated.

Economists estimate that non-performing loans (NPLs) in the banking sector surged from 11.1% of total loans in 2024 to 24.1% by March 2025. Moreover, banks’ capital coverage against risky assets stands at just 3.1%, far below the required 10%, amplifying concerns about financial stability.

While Moody’s noted that three banks — Eastern Bank, BRAC Bank, and City Bank — remain relatively stable, it issued a general warning for the broader banking sector, indicating growing systemic risk.