Govt sets five-year plan to clean up banking sector

The government has set out a five-year plan to clean up the banking sector, with a focus on recovering bad loans, tightening supervision, improving governance and restoring depositor confidence.

The plan comes as banks grapple with record non-performing loans (NPLs), weak governance, political interference and lending to politically connected businesses. These problems have eroded both capital and profitability of many banks, with state-owned lenders particularly exposed.

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By December last year, NPLs in the country’s banking sector reached Tk 5.57 lakh crore, equivalent to 30.6 percent of total loans, according to official data.

Over the same period, banks’ return on equity fell from 9.42 percent in 2016 to minus 16.11 percent in 2025.

The five-year framework, titled “Five-Year Strategic Framework for Reform and Development (July 2026-June 2031)”, was prepared by the General Economics Division of the Planning Ministry and approved by the National Economic Council on May 18. It was released yesterday.

The government will roll out the reforms in three overlapping phases.

Those are containing immediate risks in the first year, rebuilding banks over the next two years and pursuing deeper reforms in years three to five.

FIRST YEAR: CONTAIN THE DAMAGE

The first year will focus on high-risk banks, bad loans and depositor protection.

Operational autonomy of the Bangladesh Bank will be enforced on an interim basis, while high-risk banks will face stricter supervision and regulatory action.

The central bank will identify willful defaulters and take legal action against them. It will also enforce stricter loan classification and provisioning rules to prevent bad loans from piling up.

The government will apply fit-and-proper criteria to bank boards and senior management and restructure boards that fail to meet the requirements.

The Deposit Protection Fund will be made operational. The government will strengthen the capital position of merged banks and begin reimbursing depositors, while interim arrangements will be introduced to repay depositors of distressed banks.

The immediate priority will be to enforce rules, address governance failures, recover bad loans, protect depositors and maintain liquidity.

NEXT, REBUILDING BANKS

Over the next two years, the government plans to strengthen governance, risk management and loan recovery while building stronger financial safety nets.

The central bank will receive full operational autonomy, with risk-based supervision and stress testing introduced.

Loan rescheduling will be tightened, large borrowers will face closer monitoring, and banks will have to comply more strictly with lending rules. Board appointment procedures will also be standardised, with limits on board tenure and family representation.

Banks will have to disclose financial data at the individual bank level and follow reporting standards aligned with Basel III -- a global regulatory framework.

DEEPER REFORMS IN FINAL PHASE

The final phase will focus on making banks more efficient and competitive while reducing risks to the wider financial system.

The plan calls for stronger governance, greater transparency, better data systems and stronger supervisory capacity at the Bangladesh Bank. Legal and institutional changes will also be introduced to strengthen its operational independence and bring regulations closer to international standards.

The government plans to improve the recovery of bad loans through specialised financial tribunals, stronger legal enforcement and faster resolution mechanisms.

The plan also proposes a fully functioning deposit protection system, including the pay-box model, to protect depositors and strengthen market discipline.

BANKS MUST FIX THEIR BALANCE SHEETS

The framework makes clear that simply increasing credit will not solve the banking sector’s problems.

Banks must first repair their balance sheets through restructuring, disciplined write-offs and faster recovery of defaulted loans. Then they can expand lending safely to small and medium-sized enterprises, agriculture and productive industries.

The plan also identifies political interference as a major problem.

Weak board oversight, preferential lending and limited accountability have contributed to poor risk management and the buildup of bad loans, it says.

WHO WILL OVERSEE THE REFORMS?

The Bangladesh Bank will lead regulatory and supervisory reforms, while the Financial Institutions Division will coordinate legal and policy changes involving state-owned banks and other government-owned financial institutions.

Progress will be measured against indicators covering capital adequacy, asset quality, liquidity, governance, depositor confidence and transparency.

The central bank will conduct annual reviews, with a mid-term assessment in FY2028 to measure progress and recommend changes.

The government says the reforms are urgent as Bangladesh prepares for LDC graduation, which could reduce access to concessional financing and external liquidity support and increase reliance on the domestic financial system.

The bigger challenge, however, will be implementation.