Plan rolled out to cut defaulted loans

The Bangladesh Bank (BB) has unveiled a comprehensive medium-term strategy to address the country’s mounting non-performing loans (NPLs), combining tighter supervision, faster loan recovery, legal reforms and the adoption of international credit loss standards as part of broader efforts to restore confidence in the banking sector.

The central bank said the persistently high level of defaulted loans remains one of the most significant challenges facing the financial sector, undermining banks’ profitability, capital adequacy, liquidity management and the effective transmission of monetary policy.

The assessment was published in Bangladesh Bank’s Monetary Policy Statement (MPS) for the July-December period of 2026, released on Tuesday.

According to the MPS, the gross NPL ratio rose sharply from 20.20 per cent in December 2024 to 35.73 per cent in September 2025 before easing to 32.26 per cent by March 2026.

The net NPL ratio followed a similar trend, increasing from 10.57 per cent to 26.40 per cent over the same period before declining to 15.01 per cent by the end of March 2026.

In value terms, classified loans increased by Tk31,487 crore to Tk588,704 crore at the end of March from Tk557,217 crore in December, according to Bangladesh Bank data.

The central bank attributed these fluctuations to changes in borrowers’ debt-servicing capacity, the adjustment period for short-term working capital facilities and interest accrual patterns on stressed loan accounts.

To improve asset quality, Bangladesh Bank introduced a series of regulatory and supervisory reforms during FY2025-26.

These included allowing banks to write off bad debts with limited recovery prospects, enabling them to present a clearer picture of their balance sheets.

The regulator also revised its framework for stressed borrowers, allowing classified loans of financially viable businesses to be restructured for up to 10 years, with a grace period of up to two years.

The special support measures under the framework remain in place until June 2026.

In December 2025, Bangladesh Bank updated its loan classification and provisioning guidelines to strengthen credit discipline across the banking sector.

To ensure credit continues to flow to productive sectors, banks have been allowed to maintain lower provisioning requirements for standard and Special Mention Accounts (SMA) in agriculture and cottage, micro, small and medium enterprises (CMSMEs) until December 2026.

A key element of the central bank’s medium-term strategy is the transition from the existing rules-based provisioning system to an Expected Credit Loss (ECL) framework under IFRS 9, with full implementation targeted for 2027.

Under IFRS 9, an internationally recognised accounting standard, banks are required to estimate and recognise expected credit losses before loans default, replacing the traditional practice of making provisions only after signs of impairment emerge.

The approach is intended to provide a more timely and transparent assessment of banks’ financial health by requiring lenders to set aside provisions against potential losses at an earlier stage.

Looking ahead, Bangladesh Bank said its roadmap focuses on structural reforms aimed at achieving sustained reductions in bad loans rather than relying on temporary regulatory forbearance.

The strategy rests on four key pillars. First, the regulator will strengthen Risk-Based Supervision (RBS) and conduct institution-specific Asset Quality Reviews (AQRs), particularly at banks with governance weaknesses or concentrated credit exposure.

Second, banks’ capital restoration and provisioning plans will be linked directly to measurable improvements in loan recovery.

Supervisory measures, including restrictions on dividend distributions, will be imposed where recovery targets are not achieved.

Third, loan restructuring facilities will be limited to financially viable businesses, while borrowers failing to meet repayment commitments will face legal and regulatory action.

Fourth, Bangladesh Bank will accelerate the recovery of large defaulted loans through specialised recovery units within banks, stronger legal departments, faster disposal of cases in the Artha Rin Adalat and more effective collateral enforcement mechanisms.

Separately, the central bank is establishing a structured Emergency Liquidity Assistance (ELA) framework to ensure liquidity support for solvent banks remains clearly separated from the capital restructuring of financially weak institutions.

The roadmap is also supported by two newly enacted laws — the Bank Resolution Act 2026 and the Deposit Protection Act 2026 — which are intended to strengthen the authorities’ ability to resolve distressed banks, protect retail depositors and reduce moral hazard in the financial system.

Finally, Bangladesh Bank plans to strengthen data infrastructure and enhance banks’ credit risk modelling capabilities to support the implementation of the ECL framework and enable earlier identification of deterioration in borrowers’ credit quality.