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.

Restoring Trust in the Banking Sector

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.

What Lies Ahead for Troubled Banks?

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.

Current Weak Banks in Bangladesh

As of November 2024, the following banks have been identified as weak:

First Security Islami Bank’s

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.

Dr Selim Raihan, a professor of Economics at the University of Dhaka and Executive Director of the South Asian Network on Economic Modelling (SANEM), pointed out that banking sector reforms have taken place worldwide, including in the United States.

"As per global practice, weak banks can be merged and in some cases, multiple troubled banks are consolidated under a stronger institution for better management. This has happened in Bangladesh before, particularly after independence," he said.

Companies and organisations will be required to file tax returns on the income generated by employee welfare funds from the current fiscal year and pay a 27.5 percent tax on the earnings. 

The Income Tax Act 2023 incorporates the provision, lifting the tax exemption and amnesty on the compulsion to file returns for funds such as provident funds, gratuity funds and workers' profit participation funds maintained by the private sector.

The law, however, has exempted government-managed provident funds from taxation, raising questions.

TIM Nurul Kabir, executive director of the Foreign Investors' Chamber of Commerce & Industry, said there were many other avenues to collect tax.

"Employees benefit from provident funds after their retirement. So, the authority should not slap taxes on retirement benefit."

He said while levying the tax, the government has not treated provident funds of the private and public sectors equally.

"It is discriminatory," he said, adding that they would appeal to the tax authority for the withdrawal of the tax on income from provident funds.

Debabrata Roy Chowdhury, director for legal, regulatory and corporate affairs at Nestlé Bangladesh PLC, said the introduction of income tax on trust funds would lower the overall income from such schemes.

"This will have an adverse long-term impact on retired employees of private organisations."

Chowdhury urged the authority to address the issue in line with the spirit of the government's initiatives aimed at ensuring social security for private sector employees.

"The recent introduction of the universal pension scheme for private sector employees is a good example of that."

A senior official of the NBR, on condition of anonymity, said the income of government-managed provident funds was exempted in line with the Provident Fund Act 1925.

He said provident funds under the private sector had been historically exempted and there was no requirement to submit tax returns. As a result, it was unclear whether the funds were properly utilised.

"From now onwards, we will see proper disclosure."

The tax official said the contribution of payroll tax is about 3 percent of the total income tax although it should increase as the economy is growing.

Md Shahadat Hossain, a former president of the Institute of Chartered Accountants of Bangladesh, said income from investment in savings certificates, where people invest as a source of future earnings, is already taxed.

"From that perspective, the imposition of tax on provident and other employee welfare funds seems okay."

However, Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue, said social protection for private sector employees was low.

"Provident and other workers' welfare-related funds provide little social protection. The imposition of tax will increase inequality. But there can't be any discrimination in taxation between private and government provident funds."

Khan, citing the latest income tax law that replaced the Income Tax Ordinance 1984, said the NBR tried to find new avenues to increase tax collection and improve the nation's revenue-gross domestic product ratio, which is one of the lowest in the world.

"We can see the desperation of the tax authority to boost collection. This ultimately reveals the inability of the NBR to catch the tax evaders and illicit money makers."