Bangladesh Bank has stepped up monitoring of banks with high levels of classified loans, placing 29 banks under special supervision and giving them until December to reduce their default loan ratios.
According to sources at the central bank, 23 of the 29 banks have been instructed to bring their classified loan ratios below 20%, while the remaining six banks must reduce the ratio to below 10%.
The initiative aims not only to reduce the reported volume of non-performing loans (NPLs), but also to recover long-overdue loans, take action against wilful defaulters, strengthen banks’ recovery capacity and prevent new loans from turning bad.
Bangladesh Bank is holding regular meetings with the senior management of the affected banks to review recovery progress, particularly regarding large defaulters, and to assess the implementation of bank-specific recovery plans.
The central bank is also placing greater emphasis on accountability at the board level. Meetings with bank chairmen and heads of audit, executive and risk management committees are being considered as part of efforts to strengthen oversight of loan recovery.
Bangladesh Bank’s assessment shows that a significant portion of the banking sector’s classified loans is concentrated in a relatively small number of banks. High NPL ratios are putting pressure on capital adequacy, liquidity management and the banks’ ability to extend new loans.
At meetings chaired by Governor Mostaqur Rahman, bank executives and officials responsible for loan recovery have been instructed to pursue legal action, negotiate settlements with borrowers where appropriate and use special exit facilities when necessary to recover funds.
The central bank has also stressed that banks should not rely solely on rescheduling loans to reduce their NPL ratios. Instead, it wants greater emphasis on actual cash recovery and effective settlement of outstanding loans.
Bangladesh Bank introduced a special exit policy on June 29 to facilitate the recovery and settlement of overdue loans. The facility is intended to allow banks to recover funds from potentially viable borrowers facing financial difficulties through one-time settlements, subject to prescribed conditions.
However, officials have stressed the need for strict scrutiny to ensure that the facility does not become a means of providing relief to wilful defaulters.
Alongside recovering existing bad loans, the central bank is working to prevent fresh defaults. Weak collateral, inflated asset valuations, related-party lending and inadequate assessment of borrowers’ repayment capacity have contributed to the accumulation of classified loans.
Efforts are therefore underway to strengthen banks’ credit risk management, including more rigorous assessments of borrowers’ repayment capacity, business cash flows, collateral values and related-party risks before loans are approved.
The authorities are also considering legal reforms to accelerate the recovery and disposal of non-performing assets, including amendments to the Money Loan Court Act, 2003, and finalisation of a draft Non-Performing Loan Management Act-2026.
Bankers and analysts say legal action alone will not be sufficient to resolve the NPL crisis. A coordinated approach involving litigation, negotiated settlements, asset sales, special exit facilities and, where necessary, specialised asset management will be required.
Analysts also point to weak enforcement, influence of powerful borrowers, lengthy legal proceedings and weaknesses in banks’ internal controls as major reasons behind the persistent rise in default loans.
The success of the special monitoring initiative will therefore depend largely on how strictly Bangladesh Bank supervises the banks’ recovery plans. Actual cash recovery and visible action against wilful defaulters, rather than merely lowering NPL ratios through rescheduling or accounting adjustments, are expected to be the key measures of progress.
