The banking sector in Bangladesh is facing a massive surge in excess liquidity, reaching an alarming Tk 3.06 lakh crore in August 2025, marking a 75% increase compared to the same time last year. This surge reflects a shift in banking practices as financial institutions become increasingly hesitant to lend, driven by rising defaults, sluggish investment demand, and pervasive economic uncertainty.
According to data from Bangladesh Bank, the total surplus liquidity climbed to Tk 3,06,111 crore in August 2025, up significantly from Tk 1,75,337 crore in August 2024. This drastic increase highlights the banks’ reluctance to lend as they face growing concerns about non-performing loans (NPLs) and an overall downturn in the economy.
The breakdown of excess liquidity by bank type reveals that state-run banks are holding Tk 1 lakh crore, private commercial banks account for Tk 1.73 lakh crore, and foreign banks hold Tk 32,117 crore in idle funds. These funds have accumulated over the course of the last year, rising steadily from Tk 2,15,002 crore in December 2024 and Tk 2,92,745 crore in June 2025.
This build-up of funds indicates a broader trend of banks sitting on their reserves rather than providing fresh credit. Bankers point to the rapid increase in bad loans as the primary reason behind this cautious stance. With non-performing loans now making up around 30% of total loans—one of the highest ratios in South Asia—banks are increasingly unwilling to risk new lending, fearing that more loans will end up in default.
Private Sector Credit Growth at Historic Low
In September 2025, private sector credit growth dropped to a record low of 6.29%, reflecting a broader slowdown in borrowing. Overall, credit growth to both public and private sectors also slowed to 8.8%. The Bangladesh Bank’s monetary policy statement for the second half of 2025 cited several factors contributing to the slowdown, including weaker demand for loans from non-bank financial institutions, higher borrowing costs due to a contractionary monetary policy, and prior liquidity constraints within banks.
Moreover, business confidence has not fully recovered, and firms are borrowing less for expansion or new investments. Bank executives have expressed concern that this growing pile of idle funds signals a stagnant economy, where businesses are unable to access the working capital they need, leading to slower production, fewer job opportunities, and less investment in the economy.
Defaults and Mergers Amid Crisis
The core issue underlying the banking sector’s caution is the rise in defaulted loans. Non-performing loans nearly doubled within a year, reaching Tk 6 lakh crore by June 2025, up from Tk 1.82 lakh crore in March 2024. As a result, nearly 20 banks have effectively stopped lending, while many others only approve loans after rigorous scrutiny.
In response, Bangladesh Bank has been forced to take action, initiating forced mergers among five Shariah-based banks that collapsed and reviewing the asset quality of 11 other banks. This has raised expectations of further consolidation within the sector.
Excess Liquidity is Parked in Safe Assets
With lending opportunities shrinking, more than 70% of excess liquidity is now being parked in safer assets, such as government treasury bills and bonds. Banks view these as safer investments in the current climate of economic uncertainty.
During the political unrest in July and August 2024, when the government of the Awami League faced significant challenges, excess liquidity had dipped to Tk 1,75,337 crore as depositors withdrew substantial amounts of money. Since then, however, deposits have gradually recovered, and the total deposits in the banking system reached Tk 18.80 lakh crore by July 2025, compared to Tk 17.34 lakh crore in the same period of the previous year.
This increase in deposits, alongside the growing surplus liquidity, paints a picture of a banking sector grappling with a fragile economy. Banks are holding on to their funds, waiting for more stability in the economy before they feel confident enough to resume lending and restore confidence in the financial system.