Bangladesh Bank’s lending shift fuels fears over inflation, bad loans, banking risks

Corporate Credit: The Great Gamble

Relaxed loan caps: Bangladesh Bank has raised the single-borrower credit limit to 25 percent of a bank's capital, allowing major corporate borrowers to access significantly larger loans.

Risk decoupling: Banks with non-performing loan (NPL) ratios as high as 10 percent can now allocate up to half their total advances to large loans -- a facility previously restricted to banks with NPL ratios below 3 percent.

Inflation risk: Economists warn that fresh liquidity injections through these rules and Tk 210 billion in refinancing support could intensify inflation, which has remained above 9 percent despite prolonged monetary tightening.

Systemic fragility: Allowing financially distressed banks to increase corporate exposure could heighten default risks in a banking system already burdened by Tk 5.45 trillion in bad loans.

Growth over stability: Bangladesh Bank has defended the policy shift, saying employment generation and economic activity currently require greater priority, even if inflationary pressures rise in the short term.

Bangladesh’s banking sector is entering a critical phase.

In a significant departure from recent monetary restraint, Bangladesh Bank has relaxed longstanding credit exposure rules in a move analysts say could reshape lending behaviour, increase financial risks and complicate the country’s efforts to contain inflation.

Economists caution that the effects may not be immediate, but warn the long-term implications for banking stability and asset quality could be substantial if safeguards fail.

Financial analysts have raised concerns over the central bank’s decision to sharply increase credit limits for single borrowers, arguing that the changes could concentrate banking resources among large corporate groups while exposing weaker banks to greater lending risks.

The revised framework comes as Bangladesh continues to grapple with elevated inflation, mounting bad loans and fragile confidence in parts of the banking sector.

Speaking to bdnews24.com, Zahid Hussain, former lead economist at the World Bank’s Dhaka office, questioned the urgency behind the policy shift.

“What exact emergency cropped up that necessitated such a massive hike in the single-borrower loan ceiling for commercial banks? The central bank needs to offer a far clearer explanation.”

“The banking sector is already facing serious structural vulnerabilities. It is difficult to understand why Bangladesh Bank would choose this moment to expand those risks further,” he said.

The latest measures accompany another major intervention by the regulator: a Tk 10-billion refinancing fund for small and medium enterprises outside Dhaka and a proposed Tk 200-billion facility aimed at reviving closed industrial units in support of the government’s employment targets.

Taken together, analysts say the measures signal a broader shift towards stimulating economic growth and job creation, despite inflation remaining stubbornly high.

New Lending Concessions

Under the revised guidelines, Bangladesh Bank has merged funded and non-funded credit limits, capping total exposure to a single borrower at 25 percent of a bank’s regulatory capital.

Previously, funded loans -- direct cash disbursements to borrowers -- were capped at 15 percent.

Analysts say the change substantially expands banks’ capacity to lend to existing large corporate clients.

The central bank has also eased restrictions tied to banks’ non-performing loan ratios.

Under the revised rules, banks with NPL ratios of up to 10 percent can allocate as much as 50 percent of their total advances to large loans. Earlier, that threshold applied only to banks with NPL ratios below 3 percent.

Moreover, while aggregate large-loan exposure was previously restricted to 400 percent of a bank’s capital base, the central bank has now effectively permitted all banks to lend up to that ceiling regardless of financial condition.

Analysts argue that the uniform application of these rules could increase vulnerabilities among weaker institutions already facing capital stress.

In parallel with the credit easing, Bangladesh Bank has reduced penalty interest rates for defaulters and relaxed compliance rules governing trade finance and foreign exchange transactions.

To support the government’s pledge to create 10 million jobs, the central bank is also establishing a Tk 200-billion refinancing scheme aimed at reviving inactive industrial units.

Economists warn that the combined effect of these interventions could weaken monetary discipline and complicate inflation management.

‘Past Experience Is Not Encouraging’

“An expansion in money supply will inevitably fuel inflation,” Zahid told bdnews24.com.

“However, increasing the ceiling does not automatically ensure productive credit growth. Commercial banks must still exercise discipline through their boards and risk management committees.”

He warned that Bangladesh’s historical experience with politically connected corporate lending has been troubling.

“Politically influential groups have repeatedly used their leverage to secure large loans. Our past experience in this area is not encouraging.”

According to central bank figures, non-performing loans in the banking sector rose to approximately Tk 5.45 trillion by December 2025, underscoring continuing fragility across the industry.

Zahid questioned the absence of differentiated safeguards for weaker banks.

“Many banks are already suffering from acute capital shortages. Allowing financially distressed institutions to expand their corporate exposure could deepen existing vulnerabilities,” he said.

“Capital-deficient banks should have been explicitly excluded from this facility. The regulator should also have established clearer eligibility standards for corporate borrowers.”

Selim RF Hussain, former chairman of the Association of Bankers, Bangladesh (ABB), echoed similar concerns.

“Banks already facing capital and provisioning shortfalls should ideally have been excluded from these concessions,” the BRAC Bank managing director told bdnews24.com.

“If weaker institutions aggressively pursue large corporate lending under these relaxed conditions, their financial stress could intensify further.”

He argued that the expanded lending flexibility should have been restricted to stronger banks with sound capital adequacy, lower NPL ratios and high credit ratings.

Inflation Conundrum

Bangladesh’s inflationary pressures intensified after sharp depreciation of the taka in Sept 2022 pushed consumer inflation to 9.52 percent from 7.56 percent a month earlier.

Despite successive policy rate hikes beginning in late 2022, inflation climbed to 11.66 percent in July 2024 and remained above 9 percent in April 2026.

Following the student-led uprising that led to the fall of the Awami League government on Aug 5, 2024, the interim administration adopted a contractionary monetary stance. However, bringing inflation down has remained difficult.

The International Monetary Fund (IMF) advised Bangladesh Bank not to loosen monetary policy until inflation fell below 7 percent.

In line with that guidance, the central bank kept the benchmark repo rate at 10 percent since Oct 2024, while the Standing Lending Facility remained at 11.5 percent and the Standing Deposit Facility at 8 percent.

Even under this tighter framework, reserve money expanded by 13.35 percent year-on-year in February 2026, according to central bank data.

Reserve money rose to Tk 4.24 trillion from Tk 3.74 trillion a year earlier, representing a liquidity injection of Tk 114.3 billion during the first eight months of the fiscal year. During the same period of the previous fiscal year, reserve money growth had contracted by Tk 390 billion.

Zahid warned that further credit expansion without stronger safeguards could intensify inflationary pressures and weaken banking stability.

“Injecting capital may support economic activity, but poor credit allocation creates long-term risks for the financial system,” he said.

“The central bank should clearly explain how it intends to balance growth with price stability.”

Pressure on Capital Markets?

Market analysts also warned that easier access to large bank loans could slow the development of Bangladesh’s bond and equity markets.

Abu Ahmed, chairman of the state-owned Investment Corporation of Bangladesh (ICB), said regulators should encourage major corporate groups to raise long-term financing from capital markets rather than depending heavily on banks.

“Given the vulnerabilities in the banking sector, policies should incentivise corporate houses to seek funding from the bond and equity markets,” he told bdnews24.com.

“Businesses will naturally seek easier credit, but the regulator must prioritise broader macroeconomic stability.”

Saiful Islam, president of the DSE Brokers Association of Bangladesh (DBA), said excessive dependence on commercial banks was limiting capital market development.

“Our commercial banks are already burdened with large volumes of non-performing loans,” he told bdnews24.com.

“Increasing corporate exposure further could delay recovery in the financial sector.”

Central Bank’s Position

Responding to criticism that inflation control and asset quality concerns were being sidelined, Bangladesh Bank spokesperson and Executive Director Arief Hossain Khan defended the policy as part of a broader effort to stimulate employment and economic activity.

“Inflation is a secondary concern for someone who has no purchasing power,” Arief told bdnews24.com.

“The central bank’s immediate priority is to put money into people’s pockets through employment generation.”

Asked whether prioritising growth and job creation over inflation control departed from traditional central banking priorities, Arief acknowledged the tension.

“This initiative may appear temporarily inconsistent with standard central bank approaches,” he said.

“While reducing inflation remains an important responsibility, our broader focus right now is employment generation. If inflation rises slightly in the short term, we will recalibrate accordingly.”

The policy shift has also prompted speculation over whether Bangladesh Bank is responding to broader political and economic pressures.

Arief defended that alignment.

“When political priorities align with economic welfare, the central bank has a legitimate role to play,” he said, adding that the governor had instructed officials to continue regular regulatory work while he focused on supporting the government’s economic commitments.

“A government with a public mandate will naturally prioritise employment and economic activity.”