A SHARP rise in banks’ investment in government securities reflects a deepening crisis of the banking sector. Banks’ investments in government securities, according to the Bangladesh Bank, increased by 35.5 per cent in 2025 to Tk 4,04,931 crore that year from Tk 2,99,001 crore a year ago. The increase indicates that banks, faced with soaring default loans and liquidity stress, are increasingly choosing the safety of treasury bills and bonds over lending to businesses. The strategy may appear rational from a risk-management perspective because government securities offer assured returns with virtually no risk. But, the trend is a problematic departure from the fundamental role of banks as financial intermediaries. Commercial banks exist primarily to mobilise deposits and channel funds into productive economic activities. When they shift overwhelmingly towards risk-free government securities, private investment and the economy at large inevitably suffer. The record low private sector credit growth, now at less than 5 per cent, stands testimony to that. The consequences are sluggish growth and weak employment generation. The private sector employs about 85 per cent of the work force and depends heavily on bank financing for expansion. A prolonged contraction in credit availability discourages entrepreneurs, weakens economic growth and job creation.
The causes of banks’ growing aversion to lending are understandable. More than a third of outstanding loans have become defaulted, exposing years of governance failures. The violation of banking rules in loan disbursement, politically-motivated lending, repeated loan rescheduling, regulatory forbearance and inadequate supervision led to such a debilitating situation. During the Awami League regime, systemic corruption and undue political influence distorted credit discipline, leaving banks highly vulnerable. All this has led banks to prefer government securities to corporate lending. Such a retreat, however, cannot be the answer. Banks cannot and should not walk away from their core responsibilities. Excessive dependence on investment-related earnings rather than traditional lending distorts the banking business model and raises concerns about the sector’s long-term sustainability. What banks should do and the central bank should facilitate is to fundamentally reform lending and governance practices. Sound governance, professional management and rigorous credit assessment should replace politically driven and relationship-based lending. Loan proposals should be evaluated solely on commercial merit, repayment capacity and business viability. Strong internal controls, effective risk management systems and due diligence are essential to preventing the accumulation of bad loans. Ensuring accountability for wilful defaulters and those responsible for imprudent lending decisions is also necessary.
The banking sector’s recovery depends not on avoiding risks but on managing it carefully. The regulators must enforce governance reforms; and, banks, for their part, must adhere to sound management practices and prioritise productive lending. Only a healthy and accountable banking system can support sustainable growth, employment generation and economic transformation.
