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The Impact of Defaulted Loans on the Banking Sector: The Suspended 57 Thousand Crore Taka Interest Income

The Impact of Defaulted Loans on the Banking Sector

The banking sector, universally acknowledged as the cornerstone of economic growth, stands at a crucial juncture in Bangladesh, grappling with an increasingly pressing challenge— the surge in defaulted loans. The gravity of this predicament comes to the fore in a recent report from Bangladesh Bank, which sheds light on the suspension of interest income amounting to a staggering 57 thousand crore rupees, all attributable to the burgeoning issue of non-performing loans. This article aims to unravel the intricate layers of the repercussions stemming from defaulted loans, delving beyond the immediate financial implications to explore their far-reaching effects on the profitability of banks, the overall economic stability, and the regulatory framework governing the financial sector.

In recent times, the symbiotic relationship between the banking sector and economic growth has been strained due to the escalating volume of defaulted loans. The figures presented in the Bangladesh Bank report underscore the magnitude of the challenge, where a substantial chunk of interest income— a vital source of revenue for banks—remains suspended due to the inability to recover funds from non-performing loans. This financial setback paints a concerning picture not only for individual banks but also for the broader economic landscape. 

As we navigate through the subsequent sections of this article, we will unravel the complexities inherent in the deferred interest paradigm, examining how the inability to collect these funds impacts the profitability of banks. Beyond financial metrics, we will delve into the economic stability of the nation, shedding light on the broader implications that defaulted loans cast on the capacity of banks to drive economic activities. Moreover, we will scrutinize the existing regulatory framework, evaluating its efficacy in mitigating the challenges posed by mounting defaulted loans and recommending potential avenues for improvement.

This exploration into the multifaceted repercussions of defaulted loans aims to provide a comprehensive understanding of the intricate interplay between financial institutions, economic vitality, and regulatory oversight. By doing so, we hope to contribute to the ongoing discourse surrounding the critical challenges faced by the banking sector in Bangladesh and, ultimately, foster informed discussions on viable solutions to ensure the long-term sustainability and resilience of the financial landscape.

Deferred Interest and Economic Downturn:

The surge in non-performing loans has sent ripples through the commercial banking sector, rendering these financial institutions incapable of amassing significant interest income and resulting in a palpable decline in profits. At the core of this financial conundrum lies the intricate concept of deferred interest—a phenomenon that underscores the industry’s struggle to recoup funds owed on defaulted loans.

In practical terms, deferred interest represents the sum of money that commercial banks are unable to collect in the form of interest payments from borrowers with defaulted loans. This practice of segregating uncollected amounts serves as a stark reminder of the economic challenges confronting banks, where a once-reliable revenue stream becomes suspended due to the non-performance of loans. The ramifications of this deferred interest extend far beyond balance sheets, permeating the very foundation of the banking sector’s financial health.

Compounding this financial complexity is the concurrent impact of global and domestic economic recessions. The economic downturns have cast a pervasive shadow, further restricting the already beleaguered banks’ ability to recover funds from defaulted loans. As economic activity contracts, businesses struggle, and consumers face financial uncertainty, the task of recuperating defaulted loans becomes an even more arduous challenge for banks. The diminished economic vibrancy impedes the restoration of interest income, creating a compounding effect on the financial woes faced by these institutions.

The interplay of deferred interest and economic downturns underscores a cyclical challenge, where one exacerbates the other in a symbiotic relationship. The inability to collect substantial interest income not only weakens the financial position of individual banks but also hampers their capacity to spur economic recovery. As interest income remains suspended in deferred accounts, the cycle of economic downturn persists, creating a ripple effect that resonates through the broader economic landscape.

In navigating the landscape of deferred interest amid economic downturns, it becomes imperative for stakeholders—regulatory bodies, financial institutions, and policymakers—to collaborate on strategic interventions. Addressing the root causes of defaulted loans, implementing robust risk management practices, and formulating policies that promote economic resilience become essential components of a comprehensive strategy. By unraveling the complexities of deferred interest in the context of economic downturns, we gain insights into the multifaceted challenges faced by the banking sector and pave the way for informed, proactive solutions to fortify financial stability.

Former Bangladesh Bank Governor’s Perspective:

Salehuddin Ahmed, a seasoned authority in the financial realm as the former governor of Bangladesh Bank, provides a valuable perspective on the crisis engulfing the banking sector. His insights shed light on the root causes of the challenges faced by financial institutions in the country, particularly in the realm of loan disbursement and defaults.

According to Ahmed, a critical factor contributing to the crisis is the unchecked disbursement of loans, driven by political pressures. He contends that loans are often approved without the rigorous scrutiny necessary to assess their viability and the risk associated with them. This lack of thorough examination results in a disproportionate number of defaults, as loans are extended without adequate consideration of borrowers’ repayment capacity or the economic climate.

Furthermore, Ahmed highlights a critical flaw in the system—the absence of penalties for willful defaulters. The lack of punitive measures allows individuals or entities to default on loans without facing the necessary consequences. This leniency, coupled with special exemptions granted under policy assistance programs, creates an environment conducive to the proliferation of defaulted loans. Ahmed’s perspective underscores the urgency of addressing these loopholes to curb the rising tide of defaults and bring about a more accountable and responsible lending environment.

In emphasizing the urgent need for good governance, Ahmed points to the overarching role that governance plays in shaping the trajectory of the banking sector. He advocates for a more robust and transparent governance framework that ensures the prudent management of funds and promotes responsible lending practices. Ahmed contends that such measures are crucial for preventing the undue influence of external pressures in the decision-making process, thereby fostering an environment where loans are disbursed based on merit and economic viability.

Additionally, Ahmed underscores the imperative of strict enforcement of existing laws. He posits that the effectiveness of regulations lies not just in their formulation but, more crucially, in their consistent and rigorous implementation. By strictly enforcing existing laws, authorities can address the root causes of defaulted loans, instill accountability in the lending process, and create a more resilient and stable banking sector.

In summary, Salehuddin Ahmed’s perspective offers a comprehensive diagnosis of the challenges faced by the banking sector in Bangladesh. His call for good governance, stringent enforcement of laws, and a reevaluation of the loan disbursement process aligns with the imperative need for systemic reforms to ensure the long-term health and stability of the financial landscape.

Current Scenario and Provision Deficiency:

The financial landscape in Bangladesh, as outlined in the Central Bank’s recent report, paints a sobering picture of the challenges faced by the banking sector. Defaulted loans, soaring to Tk 1 lakh 55 thousand 340 crores by September, coupled with corresponding interest charges of Tk 56 thousand 841 crores 75 lakhs, have significantly strained the financial health of banks. However, the inability to collect these amounts in cash or renew them against defaulted loans has necessitated their segregation into a distinct account ominously labeled “Suspended.”

Among the financial institutions grappling with the fallout, state-owned banks find themselves bearing a substantial brunt, accounting for half of the total deferred interest income. A staggering Tk 25,749 crore of deferred interest negatively impacts their net income, creating a ripple effect that extends beyond the balance sheets of these institutions. Furthermore, the reverberations are felt across the spectrum, with two government specialized banks reporting a suspended interest income of approximately Tk 14 thousand 700 crores. Simultaneously, 43 private banks face a suspension of Tk 28 thousand 675 crore in interest income due to defaulted loans, underscoring the pervasive nature of the issue across the banking sector.

The challenges intensify with provision deficiencies exacerbating the already complex financial landscape. Prevailing provisions necessitate a provision ranging from 50% to 5% against regular loans, 20% against bad loans, 50% against doubtful loans, and a full 100% against bad loans. The cumulative provision required for both regular and defaulted loans amounts to Tk 1 lakh 6 thousand 375 crore. However, a stark reality emerges as only Tk 81 thousand 104 crores have been set aside, resulting in a deficit of Tk 25 thousand 271 crores.

This deficit in provisions not only showcases a stark misalignment between the mandated reserves and the actual provisions made but also places the respective banks in a vulnerable position. The deficiency in provisioning indicates a shortfall in the financial resources set aside to cover potential losses arising from defaulted loans, further underscoring the precarious state of the banking sector.

As we scrutinize this intricate web of deferred interest, suspended income, and provision deficiencies, it becomes apparent that a comprehensive strategy is urgently needed. Collaborative efforts from regulatory bodies, financial institutions, and policymakers are imperative to address the root causes of defaulted loans, strengthen provision frameworks, and fortify the financial resilience of the banking sector. The quest for sustainable solutions is paramount, ensuring that the current scenario becomes a catalyst for meaningful reforms, propelling the sector towards robustness and stability in the face of economic uncertainties.

Broader Economic Implications:

The ripple effects of defaulted loans reach far beyond the confines of individual banks, permeating the broader economic landscape and leaving an indelible impact on the nation’s financial health. The ramifications extend into multiple dimensions, influencing not only the banking sector but also the overall economic vitality.

One of the primary consequences is the constraint imposed on banks’ capacity to finance new ventures. As financial institutions grapple with the burden of provisioning against defaulted loans, a substantial portion of their resources is diverted to cover potential losses. This diversion of resources limits the funds available for lending to new and viable projects, stifling entrepreneurial initiatives and impeding the natural flow of capital into productive economic activities. In essence, the wheels of economic growth are hampered as banks, central to the financial ecosystem, find themselves encumbered by the financial fallout of defaulted loans.

Moreover, the curtailed ability of banks to stimulate economic growth has a cascading effect on various sectors. Businesses seeking capital for expansion or innovation face heightened challenges in securing financing, hindering their ability to contribute meaningfully to economic development. Small and medium-sized enterprises (SMEs), often reliant on bank loans for operational and growth purposes, are particularly vulnerable in such circumstances, leading to a slowdown in job creation and economic dynamism.

Shareholders and depositors become unwitting participants in the economic ramifications of defaulted loans. Reduced profits for banks directly translate into diminished returns for shareholders and lower interest rates on deposits for account holders. The erosion of profits not only affects those directly invested in the banking sector but also has a broader impact on the overall investment climate. Diminished returns may discourage future investments, exacerbating the economic slowdown and dampening investor confidence.

The potential erosion of confidence in the banking sector further compounds the economic implications of defaulted loans. As shareholders witness reduced dividends and depositors experience lower returns on their investments, trust in the banking system may waver. Confidence is a cornerstone of a robust financial system, and any dent in this trust can have cascading effects, leading to capital flight, reduced investment, and an overall decline in economic activities.

In conclusion, the broader economic implications of defaulted loans create a domino effect that transcends the banking sector. The constraints placed on financing, the impact on businesses, and the repercussions felt by shareholders and depositors collectively contribute to a slowdown in economic growth. Recognizing and addressing these implications is crucial for implementing targeted policies and reforms that not only stabilize the banking sector but also foster a resilient and dynamic economic environment. A concerted effort from regulatory bodies, financial institutions, and policymakers is paramount to mitigate the adverse consequences and pave the way for sustained economic recovery.


In navigating the intricate landscape of defaulted loans and their far-reaching implications on the banking sector in Bangladesh, it becomes evident that a comprehensive and nuanced approach is indispensable for fostering long-term resilience. Immediate measures, such as heightened governance and stringent law enforcement, are essential to plug existing loopholes and stem the immediate tide of defaulted loans. However, to fortify the sector against future shocks, a sustained and collaborative effort is imperative.

A fundamental aspect of this multifaceted approach involves cultivating a culture of responsible lending. Encouraging financial institutions to adopt rigorous risk assessment practices, ensuring thorough due diligence in loan disbursal, and promoting transparency in financial dealings are pivotal components. Simultaneously, initiatives to enhance financial literacy among borrowers can empower them with the knowledge needed to make informed financial decisions, reducing the likelihood of defaults.

Moreover, the implementation of comprehensive policies designed to discourage willful defaults plays a pivotal role in reshaping the lending landscape. Stricter penalties, targeted interventions against willful defaulters, and a reevaluation of policy assistance programs are key elements in this regard. By creating an environment where defaulting on loans is met with tangible consequences, the banking sector can incentivize responsible borrowing behavior.

Collaboration emerges as the linchpin of this strategy, necessitating concerted efforts between regulatory bodies, financial institutions, and policymakers. Regulatory frameworks should evolve to address emerging challenges, and financial institutions must actively engage in implementing and upholding these regulations. Policymakers play a crucial role in crafting an environment conducive to sustainable economic recovery, balancing the need for economic growth with the imperative of financial stability.

In essence, the sustainable recovery of the banking sector in Bangladesh hinges on a holistic and cooperative approach. By amalgamating immediate remedial measures with enduring reforms that foster responsibility, transparency, and resilience, the sector can navigate through the challenges posed by defaulted loans. This collaborative effort not only safeguards the interests of financial institutions but also reinforces the foundation of a robust and resilient banking system that can effectively weather future economic uncertainties. The collective commitment of all stakeholders—regulatory bodies, financial institutions, policymakers, and the public—is paramount in charting a course toward a banking sector that is not only financially sound but also a catalyst for sustainable economic growth.

Billal Hossain
Billal Hossain
Billal Hossain, a seasoned professional with a Master's degree in Mathematics, has built a rich and varied career as a banker, economist, and anti-money laundering expert. His journey in the financial sector has seen him in leading roles, notably in AL-Rajhi Banking Inc. in the Kingdom of Saudi Arabia and as Foreign Relations and Correspondent Maintenance Officer of Bank-AL-Bilad. Beyond the confines of traditional finance, Billal has emerged as a prominent writer and commentator, contributing thought-provoking columns and theses to various newspapers and online portals. His expertise spans a wide range of important global issues, including the complexities of economics, political dynamics, the plight of migrant workers, remittances, reserves, and other interrelated aspects. Billal brings a unique analytical perspective to his writing, combining academic rigor with practical insights gained from his banking career. His articles not only demonstrate a deep understanding of complex issues but also provide readers with informed perspectives, bridging the gap between theory and real-world application. Billal Hossain's contributions stand as a testament to his commitment to unraveling the complexities of our interconnected world, providing valuable insights that contribute to a broader and more nuanced understanding of the global economic landscape.


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