With 62 scheduled banks operating at present, Bangladesh is an overbanked country, considering the fact that neighbouring Pakistan and Sri Lanka have 33 and 31 banks, respectively. The country’s banking sector has been in an extremely vulnerable state for a while, struggling with a massive amount of non-performing loans (NPLs), capital deficiency, provision shortfall, management inefficiency, and other factors.
Amid this situation, as reported earlier this month, the youth and sports ministry proposed a specialised “youth bank” in May, to cater to the needs of the country’s youth. The development was One has to wonder how the ministry is justifying this addition in an oversaturated market, considering that over the past few years, experts have been suggesting the number of banks in the country be reduced; the topic was discussed even during the budget session in parliament last month.
In almost every country, the banking sector is dominated by a select number of large firms, hence bank licences are approved very carefully. There are many objectives of bank chartering, such as: ensuring financial stability by smoothly allocating resources, managing risks, and absorbing economic shocks; increasing financial inclusion, which guarantees that worthy individuals and businesses have access to affordable financial services; and enhancing market competition by providing quality financial services at lower prices. Competition also forces banks to be innovative, which ultimately drives economic efficiency. With these objectives in mind, the licensing authority makes a thorough feasibility analysis before approving a new bank.
In Bangladesh, the NPL rate in the banking sector stood at 30.6 percent in 2025, despite a very relaxed loan rescheduling policy. As of September 2025, the NPL rate of loan sizes up to Tk 1 crore was 15.2 percent and the loan size between Tk 10-20 crore had an NPL rate of 48.1 percent. The amount of distressed loans—the combination of NPLs, rescheduled loans, written-off loans and loans stuck in courts—reached 60 percent of total outstanding loans in 2025, jumping from 45 percent in 2024 and nearly 32 percent in 2023. About 80 percent of the total loans are concentrated in Dhaka and Chattogram (60 percent and 20 percent, respectively).
According to the global regulatory framework Basel III, banks in Bangladesh are required to maintain 12.5 percent capital of their risk-weighted assets. They could preserve only 3.08 percent in 2024, which dropped abnormally to a negative 2.64 percent in 2025. In contrast, Pakistan, Sri Lanka, and India maintained capital adequacy ratios of 20.8 percent, 19.4 percent (end-June), and 17.2 percent (end-September) in 2025, respectively. To address the capital shortfall in state-owned commercial banks (SCBs) in Bangladesh, over Tk 25,000 crore has been injected through budgetary allocations between 2009 and 2024, imposing a burden on the general public.
These statistics show the banking sector crisis in Bangladesh is rooted in weak governance and lending discipline.
Bank inefficiency in the country, estimated by the expenditure-to-income ratio, was 73 percent in 2010, which rose to 84 percent in 2020. Although a drop to 80 percent in 2024 indicated temporary improvement, it is still much higher. A standard ratio is 50-60 percent.
Distribution of loans to rural borrowers has been unequal. In 1992, rural depositors supplied about 22 percent of total deposits but received just 20 percent of loans, constituting a two-percentage-point capital flight from rural to urban areas. This gap widened to 10.33 percentage points in 2016 and peaked at 10.63 percentage points in 2019. However, a considerable plunge to 7.5 percentage points in 2024 indicated an improvement.
These indicators show that the primary objectives of banking in Bangladesh have not been achieved. Despite having so many banks operating in the country, only 28.3 percent of the population has bank accounts, according to the Bangladesh Sample Vital Statistics 2023. Although the state-owned specialised banks were established to finance specific sectors like agriculture, rural development, and targeted industries, they failed to bring the expected outcomes. For instance, Bangladesh Development Bank, Bangladesh Krishi Bank, and Probashi Kallyan Bank are struggling with high amounts of NPLs and capital shortfalls. Bangladesh Krishi Bank, created to benefit the farmers, had an NPL rate of over 49 percent and a capital shortfall of Tk 29,207 crore in 2025. Other specialised banks are in a similar situation.
However, instead of addressing the issues causing the crises in the banking sector, the Bangladesh Bank frequently changed policies to prevent the NPLs from piling up. On top of that, the government is reportedly considering establishing a new bank for the youth to support tech-based entrepreneurship, startups, skill development and training, entrepreneurship development and financial training, loan facilities on easy terms, and job creation. The bank is expected to grant collateral-free loans to young people. However, most of these objectives have already been met by several existing financial institutions. For example, Karmasangsthan Bank offers collateral-free loans to unemployed youth. Microfinance institutions (MFIs) grant loans without collateral, largely in rural and partially in urban areas. NGOs, meanwhile, provide training to their potential borrowers before granting any loans.
For some years, the country’s annual budgets have allocated funds for startup assistance. The central bank offers refinancing for banks providing loans or equity investments to startups at low interest rates as well. Thirty-nine commercial banks now offer risky capital tailored for early-stage companies. Entrepreneurship development is driven by government bodies and incubators offering training and funding. The SME Foundation and Bangladesh Small and Cottage Industries Corporation provide low-interest loans and skills development training. Funds are also accessible through initiatives like the Orange Corners Bangladesh programme. If the set objectives of the proposed bank are not fulfilled by the existing financial system, customised financial services could be developed and offered by the currently functioning institutions. A new bank will incur huge fixed costs, which will make it difficult for the bank to become commercially viable.
A good number of banks in the country, including specialised ones which are now facing severe financial crises, were also established with noble objectives. Over time, they became a fertile ground for looting and embezzlement. Whereas the present banking structure demands reducing the number of banks, the chartering of a new bank, even with some splendid objectives, could prove to be the straw that finally breaks the camel’s back. There are many viable alternatives to achieving the above-mentioned objectives without establishing a new one. We must remember that the consequences of bad policy choices are not immediately visible; sometimes, they emerge after years, but when they do, the effects become systemic and unbearable.
Dr Md Main Uddin is professor and former chairman of the Department of Banking and Insurance at Dhaka University.
Views expressed in this article are the author's own.
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