Defaulted loans cross Tk 5.81 lakh crore, Bangladesh Bank takes three-term plan to bring them down

Photo: Collected

Bangladesh Bank has taken short-, medium- and long-term plans with three objectives: reducing defaulted loans in the banking sector, strengthening loan recovery and establishing good governance.

Through these initiatives, loan recovery will be speeded up, discipline will be restored in loan management and a culture of regular loan repayment will be built; it is believed that this will make the country’s banking sector stronger.

The plans include supervising banks’ activities in recovering defaulted loans, improving credit risk management, encouraging customers who repay loans regularly and the legal reforms needed to ensure good governance in the banking sector. These plans and initiatives of Bangladesh Bank were set out in a report that was presented at the fourth meeting of the parliamentary standing committee on the Ministry of Finance.

The meeting was held recently at the Jatiya Sangsad Bhaban; it was chaired by the committee’s chairman, Member of Parliament Mushfiqur Rahman. Emphasis was placed there on ensuring transparency, accountability and economic stability in the country’s financial institutions, especially in the banking sector.

What will be done within one year

According to the plan, over the next one year the central bank will sit in discussions every three months with the top management of those banks whose classified loan ratio is above 10 percent. The obstacles that stand in the way of loan recovery will be identified in the discussions. The banks concerned will also be instructed to draw up specific action plans to remove the obstacles.

In addition, how much progress has been made in recovering money from the top 20 defaulters or classified borrowers will be reviewed regularly at the bankers’ meeting.

There is a plan to draw up special guidelines on loan recovery strategy for the banks where the classified loan ratio is high. The existing credit risk management guidelines will also be updated.

To increase transparency and accountability in banks’ loan management, a plan has been taken to introduce a system of loan classification and provisioning under the ‘expected credit loss’ method; in this case the International Financial Reporting Standard (IFRS 9) will be followed. As a result, scope will be created to assess possible losses from loans in advance and to make credit risk management more effective. The legal aspects of publishing the lists of defaulters and wilful defaulters are also under review.

In this context, Jean Pesme, the World Bank’s division director for Bangladesh and Bhutan, said this discussion is important for gradually ending the existing tendency to grant forbearance in the banking sector. He also thinks more initiatives need to be taken to accelerate the process of resolving defaulted loans. In his view, incentives must be created that encourage both sides, banks and borrowers, to find effective solutions.

Incentive policy in the medium term

The period of the medium-term plan is the next two to three years. During this time, Bangladesh Bank will formulate a policy to give special incentives to bank officials who play an effective role in recovering defaulted loans. The aim is to make the officials concerned more active in loan recovery and to speed up recovery activities.

Alongside this, the policy that now exists for identifying good customers who repay loans regularly and giving them incentives will be reviewed and updated. It is hoped that this will increase customers’ enthusiasm for regular loan repayment and that a culture of responsible borrowing and repayment will develop in the banking sector.

Strengthening the framework in the long term

In the long-term plan for the next four to five years, an initiative has been taken to strengthen banks’ overall loan management framework. Along with establishing discipline at every stage, namely loan approval, supervision, recovery and classification, emphasis is being placed on removing the structural weaknesses that lie behind the creation of defaulted loans. That is, rather than merely stepping up recovery efforts after a loan has gone into default, the central bank wants to build a system for identifying and controlling credit risk from the outset.

Up by more than Tk 17,000 crore in three months

As the amount and ratio of defaulted loans have risen in recent times, the importance of such reforms has also increased further.

According to Bangladesh Bank data, defaulted loans in the country stood at Tk 581,237.56 crore as of 30 June, which is 31.41 percent of total loans. As of 31 March the amount was Tk 564,105.64 crore, that is, 30.92 percent of total loans. By that count, defaulted loans rose by Tk 17,131.92 crore in three months; the ratio of defaulted loans to total loans rose by 0.49 percentage points.

Reform of the legal framework

To cope with this pressure of defaulted loans, just as immediate recovery activities are under way, the work of modernising the legal and institutional framework of the banking sector is also being taken forward. To that end, a draft of the Bank Company (Amendment) Act, 2026 has been prepared. This draft, formulated with the aim of strengthening good governance in the banking sector, was revised following the decision of the inter-ministerial and stakeholders’ meeting of 22 April and the instruction of the Financial Institutions Division on 26 April.

The revised draft was sent to the Financial Institutions Division on 24 August. The latest inter-ministerial and stakeholders’ meeting on the matter was held on 20 September.

An initiative to formulate the Money Loan Court (Amendment) Act, 2026 to make the loan recovery process more effective is also under way. An inter-ministerial meeting has already been held at the Law and Justice Division of the Ministry of Law, Justice and Parliamentary Affairs to bring the law up to date.

Earlier, the Financial Institutions Division had formed a committee led by an additional secretary. That committee prepared a draft proposal and sent it to the Law and Justice Division for necessary action. At present another committee, which is also led by an additional secretary of the Financial Institutions Division, is working on preparing the draft of the amended law.

Work is also under way on formulating the ‘Distressed Asset Management Act, 2026’ to increase the recovery of defaulted loans. Along with that, an initiative has been taken to formulate the ‘Insolvency and Bankruptcy Proceedings Act, 2026’ by modernising the existing Bankruptcy Act of 1997.

The aims set for this proposed law are to modernise the insolvency system in line with international best practice, to strengthen the overall bankruptcy framework and to assist financial institutions in credit risk management.

The English draft of the new insolvency law has been finalised in a modern framework with the assistance of the International Finance Corporation (IFC) of the World Bank Group. The authorities concerned have also sought the IFC’s assistance in translating the draft into Bangla. After the Bangla version is finalised, it will be sent to the Financial Institutions Division for the next necessary steps.

If these initiatives are implemented, the scope for strengthening supervision of defaulted loan recovery, establishing discipline in loan disbursement and encouraging customers to repay loans regularly will increase. Through modernisation of the legal framework and improvement of credit risk management, an environment conducive to establishing good governance in the banking sector and strengthening financial stability may also be created.