Ballooning defaulted loans have exposed Bangladesh’s financial sector to growing vulnerabilities, according to the International Monetary Fund (IMF) in its draft Financial Sector Stability Review 2020.
The report states that banks in Bangladesh are concealing the true scale of their defaulted loans, noting that the actual size of non-performing loans is far higher than the figures officially released by the Bangladesh Bank.
The IMF has advised banks to avoid repeatedly restructuring loans for large borrowers and has pointed out that many loan defaulters are exploiting legal loopholes by obtaining stay orders from higher courts.
The global lender, which works to promote economic growth and financial stability, warned that excessive lending to well-connected groups has generated systemic risks within the financial sector. It has urged the government to establish a Financial Council to thoroughly assess sectoral risks and implement corrective measures.
The draft report was sent to the Bangladesh Bank last September for feedback.
Differing Reactions from Officials and Experts
Economists and financial experts in Bangladesh have largely agreed with the IMF’s observations, whereas the Ministry of Finance and the central bank have expressed disagreement with parts of the report.
Last week, the Ministry of Finance and the Bangladesh Bank held a virtual meeting to communicate Bangladesh’s position and comments after reviewing the IMF’s observations. The meeting was chaired by Md Asadul Islam, Senior Secretary of the Financial Institutions Division.
During the meeting, officials from both institutions supported the adoption of reform measures to address the highlighted risks. However, sources indicated that Bangladesh disagreed with many of the IMF’s conclusions.
Officials present at the meeting said Asadul Islam stressed the importance of addressing the identified weaknesses:
“There is no point in sweeping the dirt under the carpet. The crisis will escalate if the banking sector does not move forward in step with the country’s progress.”
Abdur Rouf Talukder, Senior Secretary of the Finance Division, added:
“The IMF has identified a number of weaknesses in our financial sector. Initiatives should be taken to eliminate these. This requires institutional reforms.”
The central bank is expected to send its formal response to the IMF within a few days.
IMF’s Key Observations
According to officials who attended the meeting, the IMF has raised concerns about the limited autonomy and weak supervisory actions of the Bangladesh Bank.
The report criticises the Ministry of Finance’s control over state-owned banks and calls for a clear separation between ownership and supervision. It further recommends categorising state-owned banks into two types — commercial and development banks.
To enhance governance in the financial sector, the IMF proposes:
- Increasing the number of independent directors in banks.
- Implementing Bangladesh Bank’s refinancing schemes through a separate development or fiscal agency.
- Establishing a Financial Stability Council.
- Creating a National Real Estate Taskforce to regularly assess risks in the property sector.
The organisation has also raised concerns about flaws in the licensing of banks and financial institutions, the reluctance to issue agricultural loans without land collateral, and the quality of bank data.
According to the IMF’s Financial Sector Stability Review (September 2019), Bangladesh’s total problem assets — including defaulted, rescheduled, and court-stayed loans — amounted to Tk 240,167 crore as of June that year, while the Bangladesh Bank reported Tk 112,425 crore.
Bangladesh’s Response
Officials from the Ministry of Finance and the Bangladesh Bank rejected the IMF’s claim that defaulted loans are being concealed.
They explained that debt rescheduling for large borrowers is intended to keep businesses operational during times of crisis, thereby protecting employment and enabling loan repayment.
The central bank will also update the IMF on progress in forming a Financial Stability Council.
Meeting sources said that both the Ministry and the central bank found no justification for the IMF’s concerns over data reliability or the practice of requiring land collateral for agricultural loans.
It was further noted that the Bangladesh Bank regularly identifies sectoral risks, monitors key financial institutions, and reviews large borrowers’ balance sheets.
The IMF’s proposal to form a National Real Estate Taskforce to evaluate banks’ and financial institutions’ exposure to the property market was deemed unnecessary by the central bank, which stated that the country’s real estate sector poses no immediate threat.
The IMF has also offered technical assistance in 28 areas to strengthen financial sector resilience, with Bangladesh considering help in five of them.
Asadul Islam told the meeting:
“We are working on amending 13 laws to reduce risk and ensure good governance in the financial sector. Once these laws are reformed, the banking sector will experience significant positive change.”
‘Asset Quality the Biggest Risk’
Dr Zahid Hussain, former Lead Economist at the World Bank’s Dhaka office, identified asset quality as the most serious threat facing Bangladesh’s financial sector.
He explained that the true scale of defaulted loans becomes evident only when reported non-performing loans are combined with distressed assets.
According to him, state-owned banks often lend and recover funds based on political rather than commercial considerations, a long-standing issue worsened by weak corporate governance and insufficient central bank oversight.
He also noted that due to pandemic-related loan moratoriums and rescheduling facilities, no borrower is being classified as a defaulter until December, concealing the true size of defaulted debt.
“When the moratorium expires, the accumulated size of defaulted debts will be much larger,” he warned.
Governance and Supervision Concerns
Dr Salehuddin Ahmed, former Governor of the Bangladesh Bank, stated that the banking sector’s earlier drive to improve performance has waned.
“There is a lack of good governance in the banking sector, and bad loans are increasing. Political and bureaucratic influence, as well as inadequate monitoring by the central bank, are largely responsible,” he said.
He added that many banks submit fabricated data on defaulted loans, and urged the central bank not to rely solely on information provided by banks but to independently verify it.
Reform and Structural Risks
Ahsan H. Mansur, Executive Director of the Policy Research Institute, told The Business Standard that the IMF’s concerns are valid and have long been recognised, but meaningful reforms have not been implemented.
“Defaulted loans are being hidden through rescheduling. Before the Covid-19 pandemic, distressed loans accounted for about 23–25% of total banking sector loans. Due to rescheduling and moratoriums, the actual picture is now obscured.”
On the IMF’s call for a real estate taskforce, Dr Zahid Hussain argued that non-bank financial institutions (NBFIs) pose a greater risk than the property sector.
“Only three or four NBFIs are in good condition; the rest are struggling. Overexposure to real estate may be a factor, but not the sole reason,” he observed.
He suggested forming a taskforce to identify and address the challenges facing NBFIs and to ensure that its recommendations are implemented by the government.
Ahsan H. Mansur added that Bangladesh lacks proper long-term financing instruments for housing:
“NBFIs are providing 15–20-year loans using deposits of only two to three years. The housing sector needs 20–30-year bonds, which could be developed through a dedicated taskforce.”
He noted that in the United States, homebuyers can purchase property with a 10% down payment and repay the remaining 90% over 20–30 years.
“Because of this facility, people there can own a home early in life. In Bangladesh, only a fortunate few manage to buy a flat near the end of their careers,” he added.