Can we fix the NPL problem?

The Bangladesh Bank has unveiled an 18-month roadmap to tackle mounting non-performing loans (NPLs). The plan combines stronger supervision, loan restructuring, faster recovery of distressed assets, legal reforms, capital restoration, and the new Bank Resolution and Deposit Protection Acts. It also introduces a much-debated one-time settlement scheme, allowing borrowers to repay only the principal while accumulated interest may be waived. The announcement has prompted cautious optimism, but it also revives a familiar question: is this a genuine break from the past, or another attempt to postpone a deeper problem? Our banking history offers reason for caution. Over the past decade, policymakers have repeatedly relied on rescheduling, forbearance and special restructuring facilities to contain defaults. In 2019, the then finance minister pledged that NPLs would not rise “by even a single penny”. Instead, they climbed to nearly Tk 5.9 lakh crore, almost a third of total outstanding loans. Rather than resolving the crisis, successive policies delayed recognising losses and masked banks’ true health.

Banking crises rarely emerge overnight. They build up through weak governance, political interference and poor credit discipline. When borrowers expect endless restructuring and banks fail to enforce prudent lending, bad loans become a systemic risk. The 2024 political changeover marked an important shift. The Bangladesh Bank launched Asset Quality Reviews (AQRs), exposed troubled banks’ true condition, identified capital shortfalls and began exploring consolidation. The new roadmap builds on those reforms. The most debated element is the interest waiver. There is some logic to it. Not every defaulter is wilful, and many businesses have struggled with economic shocks and rising energy and financing costs. A realistic path back into the formal financial system could improve recovery and revive investment. Yet one question remains: banks lend mainly depositors’ savings, alongside their modest equity. If interest income is waived, who absorbs the loss: shareholders, depositors or taxpayers? If weak banks later require recapitalisation, today’s relief could become tomorrow’s fiscal burden. Cleaning up balance sheets is necessary, but not at the expense of long-term financial stability.

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International experience shows successful reform never relies on a single instrument. After the Asian financial crisis, South Korea’s KAMCO and Malaysia’s Danaharta bought distressed assets, restructured viable businesses and recovered much of the public money invested. The Carlyle Group also helped clean up toxic assets in several Chinese banks. Not every initiative succeeded. Similar efforts in Indonesia and Nigeria were weakened by political interference and slow legal processes. The lesson is clear: an Asset Management Company is no cure on its own. It works only alongside independent supervision, efficient courts, transparent governance and the political will to pursue influential defaulters without favour. This matters as the Bangladesh Bank moves to establish its own AMC. Its success will depend less on legislation than on operational independence and freedom from political interference.

Encouragingly, the ADB, IMF and World Bank have tied support to measurable improvements in banking governance. External pressure cannot replace domestic leadership, but it does raise the cost of complacency. Bangladesh’s banking sector stands at a critical juncture. Success will depend not on ambition but on credible implementation. If political considerations override financial discipline, this roadmap will join a long list of missed opportunities. But if policymakers recognise losses honestly and enforce accountability without exception, it could become the country’s most meaningful banking reform in decades. Reducing NPLs is not simply about repairing balance sheets. It is about restoring public trust, protecting depositors’ savings and safeguarding long-term growth. The real test is not whether reported NPLs fall over the next 18 months, but whether the institutional failures behind the crisis are finally addressed.

The writer is an economic analyst and chairman of Financial Excellence Ltd