The banking sector continues to face challenges, including rising non-performing loans (NPLs), which are likely to exceed 30 percent of total outstanding loans by June this year, raising serious concerns, said Bangladesh Bank (BB).

The central bank has forecast a surge in NPLs, which stood at 16.93 percent at the end of September 2024, up from 9.93 percent a year ago.

"Contributing factors include systemic weaknesses, regulatory gaps, and exploitative practices such as money laundering and illicit capital flight," BB said in the monetary policy for the January–June period of 2025, unveiled yesterday.

The BB highlighted the growing concerns over NPLs, sluggish economic activity, and a slowdown in deposit and credit growth, all of which present formidable challenges for the banking sector.

The central bank noted that several banks are currently facing a significant liquidity crisis due to the rising NPLs, slow deposit growth, and weak loan recovery.

Deposit growth, which was 14.3 percent in March 2021, stood at 7.4 percent in December 2024, further constraining credit expansion.

The BB said it was allowing struggling banks to borrow from the interbank market under central bank guarantees.

"However, the increasing demand for funds has led BB to provide temporary liquidity support to some of these banks," it said.

"Meanwhile, measures have been taken to absorb excess liquidity from the banking system through the issuance of BB bills to avoid long-term financial imbalances," it added.

The central bank said the management and recovery of NPLs remain its paramount priorities to ensure the financial stability and resilience of the banking sector.

The BB has stressed the necessity for solid credit risk management policies and tools that comply with Basel III requirements, an international accord aimed at strengthening the supervision, risk management, and regulation of banks.

Accordingly, an "Expected Credit Loss" methodology-based provisioning system is scheduled for implementation in 2027, in alignment with International Financial Reporting Standards.

GOOD GOVERNANCE AND REFORMS

The BB said it has initiated reforms to enhance governance, including restructuring the boards of 11 banks and strengthening monitoring mechanisms for liquidity management.

To ensure greater transparency in bank ownership, the central bank issued guidelines in December last year on identifying the "Ultimate Beneficial Owners" and mandated the disclosure of ownership structures within banks.

"These guidelines require financial institutions to submit detailed ownership information in standardised reporting formats, thereby promoting clarity and accountability in bank ownership," it said.

The BB said it established three specialised task forces to implement comprehensive banking sector reforms.

Of them, one is to improve governance and risk management practices, while another is to strengthen the BB's capacity and restructure its operations for better enforcement of banking regulations.

The third is to recover stolen assets and manage NPLs through the establishment of an asset management company.

The first "Banking Sector Reform Taskforce" aims to assess banks' financial health, mitigate risks, and recommend reforms to strengthen governance and resilience within the sector.

"A central component of this reform initiative is the systematic implementation of Asset Quality Reviews across the banking landscape," said the central bank.