Good borrowers in Bangladesh operate in a banking system where fiscal discipline is systematically undervalued and, in many cases, quietly punished. While policymakers routinely speak of financial inclusion and credit discipline, the lived reality for honest borrowers is shaped by soaring non-performing loans (NPLs), weak governance and a deeply entrenched culture of wilful default, largely driven by politically connected large borrowers.

According to officially reported data, NPLs in the banking sector surged to around 34 percent by late 2025, the highest level in roughly 25 years. Even conservative estimates that exclude rescheduled and restructured loans point to a deeply stressed system. This means that more than one-third of bank loans are either not being serviced properly or are at serious risk. Such a level of distress is not merely a technical problem; it fundamentally distorts incentives across the entire credit market.

The Bangladesh Bank (BB) has struggled to counter this distortion. A decade ago, good borrowers were promised tangible rewards, including a mandated 10 percent interest rebate. That policy was later withdrawn, with the argument that low single-digit interest rates themselves constituted sufficient incentive. As interest rates rose again, however, no equivalent benefit was restored. Today, banks are largely instructed to "honour" good borrowers through annual recognition events. While symbolically positive, such gestures offer little protection against higher borrowing costs, tighter collateral demands or shrinking credit lines.

The financial burden of systemic default ultimately falls on those who do repay. As NPLs erode bank profitability and capital adequacy, commercial lenders respond by raising effective interest rates, increasing fees and demanding excessive collateral. In many cases, borrowers with spotless repayment records face lending terms similar to those imposed on risky clients. The result is a form of silent cross-subsidisation, where disciplined borrowers absorb the costs created by habitual defaulters.

The impact on credit availability is equally damaging. Private sector credit growth has repeatedly lagged behind targets, reflecting banks' growing risk aversion. When a large share of loan portfolios is tied up in bad or litigated assets, banks naturally become cautious. This shrinks the overall space for lending, making it harder and more expensive for even viable businesses to access finance. Small and medium enterprises, which account for the majority of employment, are often the first casualties of this credit squeeze.

Guarantors face an especially harsh reality. Under the legal framework of Bangladesh, guarantors are frequently treated almost as co-borrowers. When powerful borrowers default, guarantors, typically middle-class professionals or relatives, are exposed to lawsuits, asset seizures and prolonged harassment. In many cases, guarantors face faster and harsher enforcement than the primary defaulters themselves. This has made people increasingly reluctant to stand as guarantors, further restricting credit access for genuine entrepreneurs who lack political connections.

The repeated rescheduling, restructuring and effective regularisation of large defaulted loans, often involving the same borrowers, has created a widespread perception of injustice. Honest borrowers see that compliance brings few rewards, while default can be negotiated, delayed or forgiven. This perception corrodes trust in the banking system and weakens the social contract that underpins financial discipline.

The legal system offers little relief. Hundreds of thousands of loan recovery cases clog the courts, with some disputes dragging on for a decade or more. These delays trap capital, discourage settlement and impose psychological and financial costs on borrowers and guarantors alike, while defaulters exploit the inertia of the system.

The banking crisis of Bangladesh is therefore not only about bad loans; it is about bad incentives. As long as governance failures allow wilful defaulters to operate with impunity, good borrowers will continue to pay the price through higher costs, reduced access to credit and eroding trust. A financial system that punishes responsibility cannot sustain stability, growth or fairness. Until this imbalance is corrected, Bangladesh risks discouraging the very behaviour its economy most urgently needs.

The writer is a former president of the Dhaka Chamber of Commerce and Industry (DCCI)