In the world of finance, sometimes a quick fix can create a false sense of security, and that's precisely what's happening in the banking sector of Bangladesh. The recent surge in profits for Sonali Bank, the country's largest state-owned lender, is a perfect example of this. On the surface, it seems like a success story, but dig a little deeper, and you'll find a worrying trend that could have serious implications for the future.
The Profit Puzzle
Sonali Bank's net profit for 2025 was an impressive Tk1,313 crore, a massive jump from the previous year. However, this achievement is not as straightforward as it seems. The bank's core businesses, including interest income and loan disbursement, actually took a hit during this period. So, what's the secret behind this artificial profit?
The Magic of Rescheduling
The key lies in a relaxed policy introduced by the central bank in September 2025, which allowed for massive loan rescheduling. This move helped Sonali Bank reduce its default loans by a whopping 22.32% in just three months. The result? A significant drop in provision maintenance costs, leading to a record profit, despite negative business growth.
A Temporary Fix with Long-Term Risks
While this rescheduling policy provided temporary relief, it also carried serious risks. By deferring interest payments for two years and locking bad loans under a long-term rescheduling policy, banks were essentially kicking the can down the road. This approach might have improved financial indicators in the short term, but it also delayed the recognition of bad loans and disrupted cash inflows, creating a potential time bomb for the sector.
A Widespread Practice with Dire Consequences
Sonali Bank is not alone in this practice. Bangladesh Bank data shows that default loans across the country's banking sector declined by a staggering Tk87,298 crore during the final three months of 2025, primarily due to debt rescheduling under relaxed central bank policies. This trend is not sustainable, as it fails to address the root causes of default and merely postpones the problem.
The Human Factor
What makes this particularly fascinating is the human element involved. In many cases, such facilities were granted on political considerations or to keep businesspeople off the defaulters' list. This raises a deeper question about the role of politics in financial decision-making and its potential impact on the economy.
A Warning from the World Bank
Even the World Bank has expressed concerns about this trend. In its latest Bangladesh Development Update, it warned that the recent relaxation of loan rescheduling and restructuring rules, along with continued regulatory forbearance, could delay the full recognition of banks' asset quality problems and slow balance-sheet repair.
The Impact on Profit and Depositors
The impact of this practice is twofold. Firstly, it affects the bank's profit. Sonali Bank's unaudited financial report initially showed a 200% jump in net profit, but this figure was revised downward due to higher provisioning requirements imposed by the central bank. Secondly, it sends misleading signals to depositors. With cleaner balance sheets and lower default loans, depositors might be encouraged to place more funds, only to see their money eroded when these loans turn default again.
The Future of Lending Capacity
The two-year grace period granted under the rescheduling policy could also squeeze lending capacity. Banks will not receive repayments during this period, and they cannot take interest incurred against rescheduled loans in their income statements. This will impact profits in the next two years and put pressure on cash flows, constraining lending capacity.
A Call for Action
Arfan Ali, former managing director of Bank Asia, warns that the banking sector's stress has been effectively pushed into the future through repeated deferment and rescheduling. It's time for the sector to move away from this long-standing practice and address the root causes of default. Otherwise, the consequences could be severe, with asset quality further weakened and a sharp deterioration in balance sheets in the coming years.
Conclusion
The story of Sonali Bank's profit highlights a worrying trend in Bangladesh's banking sector. While rescheduling loans might provide temporary relief, it fails to address the underlying issues and could have serious long-term consequences. It's a classic case of short-term gains leading to potential future losses, and it serves as a reminder that sometimes, the easiest solution might not be the best one.
