Initiatives are underway to enhance Bangladesh Bank's authority in resolving troubled banks and stabilising the financial sector, officials said.
Several weak banks are deteriorating further due to liquidity being tied up with industries linked to the S Alam Group, which has almost defaulted.
Bangladesh Bank, the country's central bank, recently disclosed that approximately Tk 3.45 lakh crore in loans have defaulted within the banking sector.
This figure is expected to rise further once the assets of these weak banks are assessed.
A significant portion of the defaulted loans belongs to troubled banks.
The central bank has already appointed auditors to evaluate the asset quality of these institutions to determine their future.
A new law is being introduced to manage the country's struggling banks, which may involve mergers or liquidations.
To this end, Bangladesh Bank has finalised the draft of the Bank Resolution Ordinance 2025, which will grant the central bank the authority to oversee financial institutions, including banks.
Bangladesh Bank Governor Dr Ahsan H Mansur recently stated that Bangladesh had witnessed one of the world's largest banking sector scams due to the abuse of state power, leading some banks to the brink of collapse.
He explained that auditors-both domestic and international-are conducting assessments in consultation with the World Bank.
Once the asset evaluations are completed, Bangladesh Bank will decide the fate of these banks.
Dr Mansur said, "We do not yet know the true quality of the assets held by some troubled banks. However, a preliminary investigation suggests that over 80% of their loans were issued to a single group, while the remaining deposits were allocated to benefit the same group's affiliates."
He pointed out that some banks would struggle to survive as their liabilities exceed their assets.
Dr Mansur emphasised the need to restore public trust in banks, stating that Bangladesh Bank will take all necessary measures to achieve this.
A central bank official noted that most troubled banks are relying on loans from Bangladesh Bank, as their recovery rate is alarmingly low.
These banks issued loans in violation of standard banking regulations, leading to their inability to recover despite liquidity support from the central bank.
A new law is being introduced to manage the country's weak banks, potentially involving mergers or liquidations.
Bangladesh Bank has finalised the Bank Resolution Ordinance 2025, which was recently published on the Financial Institutions Division's website, inviting feedback from stakeholders.
The draft ordinance states that Bangladesh Bank must be granted resolution powers to ensure financial stability by safeguarding depositors' interests and addressing capital or liquidity risks, insolvency, or threats to a bank's existence. Consequently, efforts are underway to finalise this law.
The ordinance also specifies that in the event of a conflict with existing laws, its provisions will take precedence.
Under the ordinance, a 'bridge bank' will be established to manage struggling financial institutions.
This entity, created by Bangladesh Bank, will oversee the operations of a failing bank to maintain uninterrupted banking services throughout the resolution process.
The bridge bank will ensure the continuity of essential banking functions while addressing financial instability until the troubled banks undergo merger, liquidation, or other necessary restructuring.
The draft ordinance highlights several key objectives, including:
Protecting depositors' funds, Minimising government financial assistance, Preventing the depreciation of bank assets, Reducing creditor losses, Ensuring overall financial sector stability
When Bangladesh Bank decides to resolve a scheduled bank, it will issue a formal notification and implement the resolution mechanism under this ordinance.
The proposed legislation empowers the central bank to transfer shares, assets, and liabilities of the resolved bank to a third party.
As of November 2024, the following banks have been identified as weak:
First Security Islami Bank, Islami Bank Bangladesh PLC, Social Islami Bank, Union Bank, Global Islami Bank, National Bank, Exim Bank, ICB Islami Bank, Bangladesh Commerce Bank, NRB Bank, Padma Bank.
Among these, Islami Bank Bangladesh PLC has shown signs of recovery, benefiting from a large customer base and strong public support. The bank has regained customer confidence domestically and internationally, as evidenced by its leading position in remittance inflows.
Causes Behind the Failure of Weak Banks: High levels of bad debt, Insufficient liquidity, Weak management, Financial irregularities and corruption, Inability to compete in the market.
A bank is classified as weak when its liquidity or solvency is compromised. This can occur if its financial resources, risk profile, or business model deteriorates significantly. �"UNBss
