Bangladesh Bank may initiate renegotiations with the International Monetary Fund (IMF) concerning its forthcoming loan classification policy, which is slated to be implemented on April 1. This decision arises from the vulnerabilities within the banking sector, which have become more pronounced following the regime change in August 2024, according to a senior official from the central bank.

The new policy stipulates that loans will be categorized as non-performing (NPL) after three months of missed payments, a reduction from the existing six-month grace period. This change is in line with the global Basel III banking standards, which Bangladesh Bank had previously committed to adopting as part of the $4.7 billion IMF loan agreement secured in 2023.

However, with the rise in default loans—now exceeding 20% of total disbursed loans as of December 2024, compared to 9% the previous year—the central bank is encountering difficulties in implementing this stricter policy. Adhering to global standards could further escalate NPL figures, complicating efforts to fulfill the IMF’s target of reducing NPLs to 10% for state-owned banks and 5% for private banks by 2026.

Regarding the IMF’s review and potential renegotiations, the fourth review mission is set to arrive in Dhaka from April 17 to 19, during which Bangladesh Bank is anticipated to explore possible policy modifications. The disbursement of the third tranche of IMF funds, originally scheduled for February 5, has already been postponed without an official explanation.

Additionally, Bangladesh Bank Governor Ahsan H Mansur is expected to address this matter at the Spring Meetings of the World Bank Group and IMF, which will be held in Washington from April 21 to 26.

Banking Sector Downgrade and Economic Consequences
Moody’s has revised its outlook for Bangladesh’s banking sector to negative, attributing this change to a decline in asset quality. The implementation of a more stringent loan classification policy may exacerbate the situation, potentially leading to increased defaults among businesses during a period of economic slowdown and elevated inflation.

Bangladesh is not the only country requesting delays in the implementation of Basel III. Regulatory bodies in the US, UK, and EU have also sought extensions, with American banks expected to start compliance in July 2025, followed by a phased transition over three years. The EU has deferred certain Basel III requirements to alleviate pressure on mid-sized banks. These global examples bolster Bangladesh’s argument for renegotiation.

In the past year, default loans in Bangladesh have surged by Tk2 lakh crore, reaching a total of Tk3.45 lakh crore by December 2024. Notably, Tk1.34 lakh crore of this increase was reported within six months after the change in government in August. The central bank’s recent monetary policy indicates that default loans could surpass 30% of the total disbursed credit, potentially exceeding Tk5 lakh crore. Factors contributing to this situation include regulatory shortcomings, systemic inefficiencies, and illicit financial activities such as money laundering and capital flight. A deepening crisis in asset quality could further tarnish the reputation of Bangladesh’s banking sector, making it increasingly challenging for local banks to obtain foreign credit lines, as warned by the central bank.