Bangladesh needs to recognise bank losses before deciding who pays

Bangladesh’s banking repair will be credible when it establishes the size of losses and allocates them in a way that protects payments and sound lending. In its January Article IV assessment, the IMF reports that real growth slowed to 3.7 per cent in FY2025 from 4.2 per cent in FY2024, that inflation remained elevated and that tax revenue weakened. The IMF calls for an assessment of undercapitalisation, clarity on fiscal support and credible restructuring and resolution plans. These are connected questions. When the budget is already constrained, the timing and form of support can determine whether a bank repair restores confidence or merely transfers hidden losses to the state. IMF Board’s Bangladesh Article IV assessment · World Bank’s October 2025 Bangladesh Development Update

A liquidity shortage and an equity shortfall require different remedies

A bank can hold sound long-term loans while facing withdrawals it cannot meet immediately. Short-term liquidity can bridge the timing gap if assets can ultimately cover liabilities. A bank whose assets are worth less than its liabilities has a deeper problem. Borrowing extra cash lets it pay some depositors now while creating another liability. It can buy time for an orderly response, yet it cannot restore equity on its own. Establishing which problem dominates requires a realistic estimate of recoverable asset values, related exposures and how quickly losses could be realised.

Take a hypothetical bank with assets recorded at 100, deposits and other debt of 92 and reported equity of eight. A review finds that expected recoveries on loans are 12 lower than the recorded values. At adjusted asset value 88 the bank is four short of covering its liabilities. A cash loan of five increases both assets and liabilities by five and leaves the shortfall unchanged. An injection of four restores equity to zero under these assumptions, which still leaves no capital buffer. The example ignores taxes, other adjustments and different creditor priorities. It shows why the size of a liquidity facility does not identify the cost of recapitalisation.

The budget can bear costs in forms that look different at first

The public cost can arrive through cash, government bonds used for recapitalisation, guarantees, or losses associated with continued support. These instruments have different payment dates and risks. A guarantee can have little immediate budget cost and become expensive later if recoveries disappoint. A recapitalisation bond can avoid a large cash payment at inception while creating interest and redemption obligations. Reporting the face value, expected loss and stress case for each commitment gives taxpayers a better picture of exposure. Protecting financial stability can justify public action, provided the cost and terms can be examined. IMF Board’s Bangladesh Article IV assessment

Weak revenue makes that transparency more important. The IMF says the FY2025 fiscal deficit was contained partly through under-execution of capital and social spending while the tax ratio fell. A low deficit attained by delaying expenditure can leave little room to meet a new recurring obligation. The distributional question is what services, investments or taxes change if public support is needed. Stabilising payments protects depositors and businesses that use banks every day. The case for support is weaker where earlier owners retain value despite losses or where assistance finances further lending on the same unsound terms. IMF Board’s Bangladesh Article IV assessment · World Bank’s October 2025 Bangladesh Development Update

How to protect the useful parts of the system

The strongest case for moving cautiously is that rapid recognition of losses, without a clear plan to protect payment services and eligible depositors, can deepen a loss of confidence. An asset review should be paired with liquidity arrangements for viable banks and a credible resolution route for institutions unable to recover. The timing should keep ordinary transfers and payroll functioning. It should also explain how exposures are valued, who is responsible for decisions and which institutions require ownership or management changes. Gradual execution can be justified by operational constraints. Repeated postponement without credible information leaves the fiscal and banking risks harder to price. IMF Board’s Bangladesh Article IV assessment

The cost of delay shows up in credit allocation. A bank that cannot recognise a loss may keep financing an existing borrower to avoid marking the loan down. A healthier business with fewer connections can be rationed even when it has a productive use for credit. That pattern can persist while aggregate credit volumes appear stable. A useful test is whether new lending becomes available to viable firms on transparent terms after a repair, and whether the volume of repeatedly restructured weak loans declines. The goal is a system that can take and price risk again. IMF Board’s Bangladesh Article IV assessment · World Bank’s October 2025 Bangladesh Development Update

A credible programme also needs a way to monitor what happens to the original loans after resolution. Recoveries may come from collateral, operating cash flows or a sale of claims. Estimating them at an optimistic value can make a public vehicle appear solvent on paper while taxpayers retain the downside. Publish recoveries against the initial valuation and disclose material changes. If the assets are sold, the comparison should include the cost and time of collecting them directly. The amount recovered, and when, matters to the final fiscal bill.

An asset review also needs rules for comparable loans. A borrower that can recover after a temporary shock should be assessed against a realistic cash-flow path. A firm whose loan has been renewed repeatedly without a viable business should not receive the same valuation. Publishing the assumptions and getting independent review can help ensure that asset quality is measured consistently across institutions. IMF Board’s Bangladesh Article IV assessment

Evidence that the repair is working

Track independently assessed capital, new non-performing exposures, recoveries, depositor confidence and access to sound credit. Report the cost and timing of public support separately from central-bank liquidity. Stronger reported capital would be more persuasive alongside credible asset valuations and better credit allocation. If weak banks remain dependent on support while losses are repeatedly deferred, a narrower fiscal deficit will provide limited reassurance. The January assessment makes clear why banking, revenue and growth have to be assessed together. IMF Board’s Bangladesh Article IV assessment · World Bank’s October 2025 Bangladesh Development Update