Dhaka City has been suffering from many environmental problems including flooding, water logging and other related problems. Urbanization, which is occurring very fast and with larger magnitude in Dhaka, is the intrinsic reason behind these problems. High rate of urbanization causes extensive urban area expansion and as a result canals, wetland and other water bodies are quickly vanishing from the landscape. This study shows the present physical condition of the canals; identifies the processes of canal encroachment; represents the consequences of canal encroachment. 13 canals of 50 were surveyed; local people were surveyed to identify the impact and processes of encroachment. According to this study, canals of Dhaka city are under serious threat of extinction and require immediate recovery actions. Canals are being encroached in various styles and this study identifies five: unauthorized land filling, illegal construction over canal, expansion of slum, solid waste dumping, taking advantage of lack of awareness of local people as well as government agencies. However, this study also discusses the grave consequences of canal encroachment: increasing flood vulnerability, wane of ground water recharge area and ground water level, collapse of natural drainage system, loss of local ecology and biodiversity.