Bangladesh's central bank has begun liquidating its first failed lenders, a milestone in the clean-up of a banking system hollowed out under ousted premier Sheikh Hasina.

Bangladesh Bank declared four non-bank finance houses — Aviva Finance, Fareast Finance, FAS Finance and International Leasing — non-viable in the second week of August and began winding them up under the Bank Resolution Act 2026, dissolving their boards and installing its own administrators. Together with People's Leasing, the five firms hold BDT160.76bn ($1.3bn) of deposits and carry bad loans of between 93% and almost 100% of their books.

It is the first live test of a law passed only this year, and the clearest sign yet that the interim and now elected governments mean to force losses into the open rather than paper over them. The wreckage they are picking through is vast: by the middle of 2025 defaulted loans had reached 34.6% of all credit, the highest share since 2000 and a level more usually seen in a full-blown banking collapse.

Bank resolution is a complex and sensitive exercise in which slow or indecisive action risks damaging both depositors and financial stability, Ahsan H Mansur, the interim-era governor who ran the early clean-up, told the reconstituted board of one rescued Islamic lender late last year, warning that delay would drain confidence from the wider system.

A third of all credit gone bad

Even once the failures at the bottom of the system are cleared away, the arithmetic is bleak. Classified loans stood at BDT5.89 trillion, or 32.26% of all outstanding credit, at the end of March, The Daily Star reported, edging up again after a brief, rescheduling-driven dip late last year. On any measure roughly one taka in three lent out by Bangladeshi banks has gone bad.

The rot is unevenly spread. State-owned commercial banks were carrying 44.6% of their books as defaulted loans in the government's mid-2025 review, specialised lenders 39% and private commercial banks 32.9%; only the foreign banks, at 6.1%, looked anything like healthy. The provisioning that bad loans demand has torn a matching hole in capital: 24 of the 61 scheduled banks failed the minimum requirement in the June quarter of 2025, with a combined shortfall of BDT1.55 trillion).

The S Alam hole

Much of the damage traces to a single name. Companies tied to S Alam Group, the conglomerate that took effective control of several shariah-compliant banks during the Hasina years, defaulted en masse once the government fell, and forensic audits by Ernst & Young and KPMG have since laid bare lending long hidden from the regulator. Islami Bank Bangladesh, the Dhaka-listed lender that was once the country's largest private bank by deposits, has been trying to haul its bad-loan ratio down from about 50% towards 35%, chasing collateral abroad through foreign law firms.

Rather than let the weakest shariah lenders topple one by one, Bangladesh Bank has folded five of them — Social Islami, Global Islami, EXIM, First Security Islami and Union Bank — into a single, state-held institution, Sammilito Islami Bank, propped up with emergency liquidity. Depositors have gradually returned as the merged entity stabilised, but the exercise has shifted the losses onto the public balance sheet rather than erased them.

Strong banks, captured banks

The crisis has stretched the gap between a handful of well-run private banks and the captured or state-owned rest. BRAC Bank, the leading private commercial lender and an offshoot of the BRAC development agency, posted a record consolidated net profit of BDT22.51bn for 2025, up 57% y/y and the first time a local private bank has cleared the BDT20bn mark, The Business Standard reported. The City Bank, another of the stronger private names, has been handed the rescue of collapsed state lender BASIC Bank as part of the central bank's consolidation drive.

At the other end sit the state giants — Sonali, Janata, Agrani and Rupali — whose balance sheets hold the deepest capital holes and the highest default rates in the system. Janata alone reported a capital shortfall of BDT170.25bn in mid-2025, Agrani BDT76.98bn and Rupali BDT41.73bn, dwarfing anything on the private side bar the S Alam-era casualties.

With corporate borrowers from Beximco to Nassa Group idled or in default, new lending has stalled and banks have shifted their earnings to government securities, booking treasury-bill and bond income in place of loan interest — comfortable for now, but the mark of an economy in which private credit has seized up.

Easing into the wreckage

Into this the new government has begun to loosen policy. In its first move under governor Md Mostaqur Rahman — Mansur's successor after February's election handed the Bangladesh Nationalist Party a parliamentary supermajority — Bangladesh Bank cut its repo rate to 9.5% in early August, its first reduction in six years, as inflation slipped back below double digits.

The external picture is steadier than the domestic one. Foreign-exchange reserves rose about $6.2bn in the last fiscal year to $32.9bn and remittances climbed almost a fifth, even as a US tariff of 10% on Bangladeshi goods hangs over the garment industry that earns most of the country's hard currency. Both S&P and Fitch nonetheless cut their outlook on Bangladesh's 'B+' sovereign rating to 'negative' this year, each naming the banking sector first among their worries.

That is why the fund matters. Dhaka is negotiating a fresh IMF programme worth $4.5bn-5bn, successor to a $5.5bn arrangement of which only $3.64bn was drawn, and the lender has made cleaner loan classification, realistic provisioning and a working resolution regime explicit conditions of its money.

For now the winding-up of a few finance houses is the easy part: their deposits are small and government cash will cover insured savers. The harder test — recapitalising the state banks, recovering the S Alam loans and proving that Sammilito Islami Bank and its peers can be sold or run down without triggering a run — will decide whether Bangladesh's most ambitious banking reform in a generation holds, or joins the long list of those that came before it.