A strategic exit policy for resolving non-performing loans

Bangladesh Bank (BB) has recently announced an ambitious 18-month strategy to tackle the country's mounting non-performing loan (NPL) crisis. According to the governor, the central bank is moving away from repeated loan rescheduling and instead adopting a comprehensive resolution framework aimed at restoring financial discipline and strengthening the banking sector.

The strategy includes several important reforms. These include setting annual NPL reduction targets for all banks, introducing a one-time exit facility with strict eligibility criteria, distinguishing genuine business distress from willful default, strengthening banking supervision through risk-based inspections and asset quality reviews (AQRS), establishing a national asset management company (AMC) to resolve legacy bad loans, and enhancing the early warning system (EWS) and Credit Information Bureau (CIB).

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Bangladesh Bank also plans to tighten loan classification and provisioning standards to discourage loan evergreening, improve governance in banks—particularly state-owned commercial banks—and accelerate loan recovery through reforms to the Artha Rin Adalat, mediation, and insolvency and bankruptcy procedures.

Successful implementation of these measures will require close coordination among the Ministry of Finance, the judiciary, the National Board of Revenue (NBR), the Bangladesh Financial Intelligence Unit (BFIU), the Anti-Corruption Commission (ACC), and other relevant institutions.

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These initiatives are timely. Bangladesh's banking sector is facing an unprecedented challenge. As of March 2026, NPLs stood at approximately Tk 5.89 lakh crore, accounting for 32.26 percent of total outstanding bank credit of Tk 18.25 lakh crore, up sharply from 24.13 percent a year earlier. Such a high level of impaired assets threatens financial stability, weakens banks' lending capacity, and undermines private sector investment.

As part of the new strategy, Bangladesh Bank has issued a circular introducing a one-time exit facility for loans classified as bad or loss as of June 30, 2026, including loans rescheduled between August 2024 and June 2026.

Under the scheme, borrowers may settle their obligations through a single lump-sum payment. Banks are allowed to waive both applied and unapplied (suspense) interest, and the normal requirement to recover the cost of funds has been relaxed.

Priority has been given to agricultural and cottage, micro, small and medium enterprise (CMSME) loans. Each settlement, however, must receive board approval based on the borrower's circumstances and the banker-client relationship. The facility will remain effective until December 31 of the current year.

If implemented with transparency, sound governance, and rigorous case-by-case assessment, the facility could substantially reduce the stock of NPLs, improve banks' liquidity and capital adequacy, and free resources for new lending to productive sectors, particularly agriculture and CMSMEs. It may also contribute to restoring investor confidence and supporting broader economic recovery.

The policy is particularly significant for state-owned commercial and specialised banks, which carry a disproportionate share of legacy NPLs and large amounts of suspense interest. Allowing banks to waive suspense interest could make negotiated settlements more practical and increase the recovery of principal and part of the accrued interest.

However, banks must carefully assess the financial implications of such waivers. Excessive write-offs may improve reported asset quality but could reduce future income if settlements are not negotiated prudently.

Strong safeguards are therefore essential. Bangladesh Bank must ensure that politically connected or influential borrowers do not receive preferential treatment. The scheme should remain a one-time opportunity for genuine borrowers rather than becoming another avenue for repeated regulatory forbearance.

Another issue that deserves clarification is the meaning of the phrase "entire outstanding liability." While the circular requires borrowers to repay all liabilities in a lump sum, it simultaneously allows banks to waive part or all of the interest. In practice, this suggests that the borrower is expected to pay the final settlement amount after the approved waiver, rather than the original gross outstanding amount.

To avoid inconsistent interpretation across banks, Bangladesh Bank should issue detailed implementation guidelines defining what constitutes "all liabilities" under the scheme.

Equally important is ensuring effective implementation. Bangladesh has announced several well-designed banking reforms over the years, but weak governance, regulatory delays, and inconsistent enforcement have often limited their effectiveness. The success of the new NPL strategy will therefore depend less on the policy itself than on its transparent and impartial implementation.

The one-time exit facility is an important step towards resolving Bangladesh's NPL crisis, but it is not a complete solution. Sustainable reduction of NPLs will ultimately require stronger governance, professional bank management, strict supervisory oversight, faster legal enforcement, and firm action against willful defaulters. If these reforms are implemented together, Bangladesh Bank's strategy could mark a significant turning point in restoring financial stability and rebuilding confidence in the country's banking system.

The writer is the CEO of BUILD, a public-private dialogue platform that works for private sector development