Starting from the pandemic in 2020, Bangladesh as a nation has gone through a number of incidents in the last five years followed by the Ukraine war, interest rate capping, dollar crisis, high inflation, sluggish GDP growth, banking sector exploitation, intense corruption in different layers and lastly the political changeover in August. In between this roller-coaster timeline, we have seen many different circulars and policies to regulate prevailing difficult situations. Sadly, some were driven by specific interests and some were prescribed. As a result of these inconsistencies and contradictory guidelines, the national economy has heavily been affected in the long run. 

Nevertheless, after the appointment of the new governor of the central bank, Bangladesh is going through a transformative phase with a number of significant policy reforms in the last three months. Among these, the recent circular on tightening the loan classification policy has generated extensive attention. Experts foresee that this change will double the volume of classified (non-performing) loans by June 2025, intensifying both macroeconomic and microeconomic challenges. Banks especially will face immense pressure due to the sudden rise in NPL as they will need to take more provisions to reduce their ability to invest more among the entrepreneurs. This will also shrink liquidity in the market making things difficult.   

Yes, the move is essential to restore financial discipline, but it will pose immediate challenges for businesses, particularly small and medium enterprises (SMEs). Many of the SMEs who have been trying to absorb shocks from the pandemic period to date due to various reasons stated above will find it difficult to survive. The rise of NPL volume will result in reduced credit availability and higher borrowing costs, while many may struggle to maintain operations or expand. Some might even be forced to downsize or shut down. Ultimately, SMEs may lead to increased defaults, as most of them operate on thin margins. Bigger companies might continue better but they will also face challenges as cash flow disruptions and restricted access to bank loans could slow their growth and investment plans as well.

Inflation, which is already a big headache for the interim government, may worsen even due to the rise of the country's NPL percentage. Considering less credit availability, production will certainly slow down and due to the supply chain disruption, the price of commodities and services might go up.

In addition, the rise of NPLs will increase distrust in the banking sector and create doubts in depositors' confidence, which might form a liquidity crisis. With such a financial strain on the face of entrepreneurs, layoffs will increase creating more unemployment with social unrest. The impact on employees and their families could exacerbate economic inequality more in the coming days. 

Despite many challenges, this strict NPL policy will have definite long-term benefits, which will lead us to a stronger and more resilient economy. Banks for example will practice more prudent credit assessment exercises with a robust monitoring system, which will bring back the lost confidence among the depositors. Over time, this will result in improved banking operations, reduced systemic risks, and enhanced investor confidence in the sector.

Entrepreneurs on the other hand will also be cautious enough for stable growth and better financial governance rather than overleveraging. This might be a major cultural shift which will lead us to a more robust entrepreneurial ecosystem and a stronger economy.

The author is a banker