Bangladesh’s non-banking financial institutions (NBFIs) are currently facing an unprecedented crisis, with several institutions teetering on the brink of collapse. These institutions, which once played a pivotal role in providing financial services outside the traditional banking sector, are now struggling to return deposits to their clients and attract new investments. A significant portion of their distributed loans has turned into non-performing loans (NPLs), highlighting a deep-rooted crisis in the sector.
Shocking Rise in Non-Performing Loans
According to the latest report from Bangladesh Bank, out of the country’s 35 non-banking financial institutions, 11 have seen between 75% and 99% of their distributed loans turn into NPLs. Among them, five institutions have over 95% of their loans classified as defaulted. Overall, approximately 36% of the loans distributed by the financial institutions have become non-performing as of September 2024.
One of the most alarming cases is FAS Finance, where out of a total loan portfolio of BDT 1,822 crore, a staggering BDT 1,820 crore is now classified as NPL—equivalent to 99.92% of its total loans. Similarly, Far East Finance has seen 98.06% of its BDT 890 crore loans turn into bad loans. BIFC, another troubled institution, has 97.27% of its BDT 773 crore loans in default. Other notable examples include:
- People’s Leasing: 97% of its BDT 1,058 crore loans are non-performing.
- International Leasing: Out of BDT 4,135 crore in loans, BDT 3,977 crore (96.19%) is in default.
- Union Capital: 94.60% of its BDT 1,197 crore loans have turned into NPLs.
This crisis is not limited to a few institutions. In total, 22 financial institutions have over 50% of their loans classified as non-performing.
Institutions with the Highest Default Rates
| Institution | Total Loans (BDT crore) | NPL (%) |
| FAS Finance | 1,822 | 99.92 |
| Far East Finance | 890 | 98.06 |
| BIFC | 773 | 97.27 |
| People’s Leasing | 1,058 | 97.00 |
| International Leasing | 4,135 | 96.19 |
| Union Capital | 1,197 | 94.60 |
| Aviva Finance | 2,928 | 89.81 |
| Phoenix Finance | 88.57 | 88.57 |
Financial institutions like IIDFC, Bay Leasing, and National Finance also report significant portions of their loans as non-performing, though they are not as heavily affected as the top defaulters.
The Growing Burden of Non-Performing Loans
Bangladesh Bank’s data indicates a worsening trend in the NBFI sector. As of September 2024, the sector’s total loans stood at BDT 73,663 crore, of which BDT 26,163 crore is classified as non-performing. This marks a significant increase from June 2024, when the NPL amount was BDT 24,711 crore. At the end of December 2023, the NPL amount was BDT 21,567 crore, representing 29.27% of total loans at the time.
The three-month period from June to September 2024 saw an increase of BDT 1,425 crore in non-performing loans, while the nine-month period since December 2023 saw an increase of BDT 4,569 crore.
High Interest Rates Failing to Attract Depositors
Despite offering high interest rates, NBFIs are struggling to attract deposits. In November 2024, the average interest rate on deposits offered by financial institutions was 10.43%, while the average interest rate on loans was 13.67%. Yet, these rates have not been sufficient to restore depositor confidence.
As of September 2024, total deposits in NBFIs had decreased to BDT 47,838 crore, down from BDT 47,906 crore in June 2024 and BDT 47,491 crore in December 2023. The overall loan portfolio of the sector has also shrunk, with the total loan amount decreasing to BDT 73,663 crore in September 2024 from BDT 74,534 crore in June 2024.
Causes of the Crisis
Experts and insiders point to several factors contributing to the unprecedented crisis in the NBFI sector:
- Poor Governance and Management: Many institutions suffer from a lack of proper governance, with board members and executives engaging in unethical practices.
- Fraud and Embezzlement: High-profile cases of embezzlement, such as those involving former managing directors like Prashanta Kumar Halder, have severely damaged the credibility of NBFIs.
- Lack of Regulatory Oversight: Critics argue that Bangladesh Bank has been slow to take action against poorly performing institutions, allowing the crisis to deepen.
- Overlapping Client Base with Banks: NBFIs have been competing with banks for the same clients without offering distinctive products, leading to a lack of competitive advantage.
- Political Influence: Many NBFIs were established with political backing, and loans were often given to politically connected individuals and entities without proper due diligence.
Bangladesh Bank’s Stance
A senior official from Bangladesh Bank told local media that most NBFIs have no net income. “They are barely surviving by paying salaries from loan recoveries and breaking into their own deposits,” he said. He also pointed out that the institutions’ downfall is due to severe mismanagement and collusion between different parties.
To address the crisis, the central bank is considering various measures, including merging failing institutions, introducing stricter regulations, and creating a bailout fund of BDT 5,000 to BDT 6,000 crore to support struggling institutions.
Impact on the Banking Sector
The crisis in the NBFI sector mirrors a broader trend in Bangladesh’s financial sector. Non-performing loans in the banking sector have also been on the rise. As of September 2024, the banking sector’s NPLs stood at BDT 284,977 crore, accounting for nearly 17% of total loans. In contrast, at the end of December 2023, the NPL amount was BDT 145,633 crore, or 9% of total loans.
The International Monetary Fund (IMF) has urged Bangladesh to reduce its NPLs as part of its loan conditions. The IMF has set a target for Bangladesh to bring NPLs below 5% of total loans by December 2025 and below 10% for state-owned banks.
Recommendations from Experts
Mohammad Nurul Amin, chairman of Global Islami Bank, highlighted that the purpose of NBFIs was to complement banks by providing specialized financial services. However, NBFIs have ventured into areas traditionally served by banks without having the necessary expertise or infrastructure.
He also questioned the necessity of having 35 NBFIs in a market already saturated with banks. “A comprehensive review is needed to determine whether all these institutions are essential,” he said. He recommended that Bangladesh Bank set up a restructuring fund to stabilize the sector.
The Road Ahead
While some institutions may recover through mergers and restructuring, others may face liquidation. Experts warn that without immediate reforms, the crisis will deepen, further eroding public confidence in the financial system. The government and Bangladesh Bank must take swift and decisive action to restore stability and trust in the sector, ensuring that depositors’ money is protected and that financial institutions operate with transparency and accountability.
