The International Monetary Fund (IMF) on Thursday expressed concern over the consistent increase in non-performing loans (NPLs) and lack of transparency in use of reserves in the country’s banking sector.
The global lender’s latest mission believes that despite the government’s promise to control NPLs, the situation is actually deteriorating.
At the same time, they have also raised questions about the formation of the Export Development Fund (EDF) from the reserves and its use.
An IMF delegation expressed these concerns at a meeting held at the Bangladesh Bank on the day.
Chris Papageorgiou, head of the organization’s Development Macroeconomics Department, led the IMF delegation.
Bangladesh Bank deputy governor Habibur Rahman, executive director of the research department Ejazul Islam, and other high-ranking officials were present from Bangladesh.
The IMF said that despite the promise to reduce the NPL rate of government banks to below 10%, in reality, it has now exceeded 40%. In the case of private banks, the rate is also more than 10%.
According to the latest figures from Bangladesh Bank, defaulted loans have increased by nearly Tk400,000 crore in just one year, taking the total amount of defaulted loans to Tk667,000 crore.
After the change of government in August 2024, information on the huge defaulted loans that had been kept secret began to be released.
While the IMF sees this transparency as positive, it has warned that such loan inflation poses an ‘extreme risk’ to the economy.
Questions on use of reserves
The delegation also raised questions on the transparency of the formation of EDF from the reserves and various refinancing and pre-financing facilities at the meeting.
They wanted to know how effectively these funds are being used and what impact they are having on the stability of the reserves.
According to the IMF, the uncontrolled trend of reserve use and lack of transparency can have a long-term impact on monetary policy and foreign exchange balance.
Praise for controlling inflation, but also concern
While the IMF delegation praised the somewhat controlled inflation at the meeting, it also raised questions about whether private investment and growth could be hampered in the long run due to excessive contractionary policies.
They also took detailed information on the progress of monetary policy, interest rate setting, liquidity support, and steps taken to reduce the provision deficit of banks.
A Bangladesh Bank official said: “The IMF has taken detailed information on various issues, including the recapitalization of state-owned banks, foreign exchange flows, the liquidity crisis, and green investment. They especially expressed satisfaction over the disclosure of the hidden picture of non-performing loans.”
“The IMF’s fifth review mission is collecting information as part of its regular visit. They have shown interest in the steps taken to control inflation, interest rate setting, reserve management, and our progress in reducing non-performing loans,” said Shahriar Siddiqui, assistant spokesperson of Bangladesh Bank.
Economists say the IMF’s warning has once again exposed the deep crisis and structural weaknesses of Bangladesh’s banking sector.
The situation could become more complicated if policy firmness is not brought to reserve management and credit recovery.
