Bangladesh Bank has adopted a stricter strategy to tackle the country’s rising non-performing loans (NPLs), setting a target to reduce the default loan ratio to 20% by the end of 2026 and further to 10% by the end of 2027.

According to an internal action plan, the central bank has outlined 21 short-, medium-, and long-term measures to address the problem. The banking sector’s NPL ratio currently stands at 32.26%, one of the highest in the world.

As part of the initial phase, Bangladesh Bank will adopt a relatively flexible approach to facilitate loan recovery. Under the Exit Policy issued on June 29, banks will prioritize recovering the principal amount of loans, with provisions allowing interest waivers and the exemption of certain fund management costs in eligible cases.

However, the central bank has made it clear that no new special loan rescheduling policy will be introduced. Borrowers will be able to settle their loans under the relaxed framework until December 2026, after which legal action against defaulters will be intensified.

To strengthen the recovery process, Bangladesh Bank plans to introduce a Distressed Asset Management Act, amend the Money Loan Court Act, and accelerate the disposal of loan default cases.

The action plan also proposes publicly disclosing the identities of borrowers who fail to repay despite receiving relief under the flexible policy. In addition, banks will be required to maintain provisions and capital based on their actual non-performing loans and address any capital shortfalls within a specified timeframe.

Banks that fail to eliminate capital deficits within the deadline could face stringent regulatory action. Directors of such institutions may lose ownership rights and be barred from serving on the boards of any bank for the next five years.

If a bank’s financial condition deteriorates significantly, Bangladesh Bank may place it under a resolution framework that could involve sale, merger, or liquidation, depending on the circumstances.

Bangladesh Bank Executive Director and spokesperson Arif Hossain Khan said reducing default loans is one of the central bank’s top priorities. He said the regulator will initially pursue supportive recovery measures but will later take strict legal action against persistent defaulters and those responsible for irregularities.

The central bank is also moving forward with the establishment of an Asset Management Company (AMC) to improve the management of distressed loans. The AMC will be able to acquire collateral-backed troubled assets in exchange for cash. However, borrowers will remain liable for any outstanding debt that exceeds the proceeds from the sale of the collateral.

Bangladesh Bank officials believe that a combination of flexible recovery policies, stricter supervision, legal reforms, and stronger corporate governance in banks will significantly reduce default loans over the next two years.