Bangladesh’s banking sector is living with a problem everyone knows about but too many prefer to look away from: non-performing loans (NPLs). By the end of 2024, distressed assets such as loans that are defaulted, rescheduled, or written off had ballooned to around Tk7.56 lakh crore. That is nearly half of all outstanding loans. Put differently, for every two taka lent out by the banking system, one taka is either stuck in default or on life support.

By Sadia Aktar Korobi

That is not just a number on a balance sheet. It is money that should be flowing into new businesses, jobs, and growth, but is instead trapped in a cycle of default and delay. Bad loans are not just a banking problem; they are a drag on the entire economy. If Bangladesh wants to sustain growth, attract investment, and create jobs for its young population, then dealing with NPLs must move to the top of the policy agenda.

For too long, Bangladesh has pretended that the problem is smaller than it really is. Official NPL ratios hover in the teens, while broader measures that include rescheduled or restructured loans push the figure far higher. The reason for the gap is simple: banks are allowed to endlessly roll over loans, often without genuine repayment, which creates the illusion of performance.

The IMF have urged a full “asset quality review” of major banks. That means independent auditors going through loan books and declaring which loans are truly recoverable and which are not. Unless we know the size of the hole, we cannot begin to fill it. Bangladesh Bank’s new rules tightening classification and provisioning are a good first step. But the real test is whether these rules are enforced consistently, without endless exceptions for powerful borrowers or politically connected banks.

Not all bad loans are the same. Some belong to businesses that hit genuine trouble, pandemics, inflation, and currency pressures. With smart restructuring, many of these firms can get back on their feet. For them, banks need fast, out-of-court settlements with clear rules and timelines.

But others are simply zombie loans, kept alive on paper through endless extensions. Those should be written off and, where possible, sold to asset management companies that specialize in recovering whatever value remains.

And then there are the willful defaulters: borrowers who can pay, but refuse to. They are the most corrosive, because they undermine trust in the system. For them, the answer is simple, no more sweet deals. Blacklist them from new loans, government contracts, and directorships until they pay up. Other countries routinely impose such restrictions; Bangladesh should too.

Some banks, especially state-owned ones, are so weighed down by bad loans that they are essentially undercapitalized. They will need new capital injections to survive. But recapitalization should never be a blank check. If taxpayers are paying the bill, they deserve better governance, independent boards, and strict conditions tied to performance.

Capital should come with strings attached: time-bound targets to reduce NPLs, professional management contracts, and clear paths for mergers or privatization where governance cannot be fixed. Protect small depositors at all costs, but stop protecting poor management practices that created the problem.

The current regulatory framework makes it too easy for banks and borrowers to play for time. Endless rescheduling, blanket amnesty programs, and weak credit bureau enforcement only deepen the culture of non-repayment.

This cycle has to end. Borrowers who default at one bank should not be able to walk into another and take fresh loans while their old debts remain unresolved. The credit bureau must be updated in real time. Large exposure rules such as limits on how much a bank can lend to a single client, must be enforced because too much of the system’s stress comes from a few big borrowers. And Bangladesh Bank should regularly publish comparative data on NPLs and recoveries so that depositors and investors can hold banks accountable.

Inside banks, officers are rewarded for growing loan books, not for keeping them healthy. That creates perverse incentives: loans are disbursed quickly, often without proper scrutiny, while the long-term risk is ignored. Bonuses and promotions should be tied to repayment performance over several years, not to the size of the loan portfolio.

Bangladesh’s legal and collateral systems make recovery painfully slow. Most loans rely on immovable property as collateral, but foreclosing on property can take years through the courts. In the meantime, asset values decline and borrowers lose any incentive to negotiate.

The solution is twofold: expand the use of movable collateral such as receivables, machinery, and inventory, and create faster judicial processes for loan disputes. Specialized commercial benches or arbitration panels could resolve cases in months rather than years. Justice delayed is not only justice denied it is value destroyed.

Ten banks hold the majority of bad loans. Some of them may not be viable on their own. Instead of keeping them alive artificially, Bangladesh should encourage supervised mergers or orderly closures, backed by a credible deposit insurance system.

At the same time, a functioning market for bad loans should be built. Specialized asset management companies, both domestic and foreign, can buy distressed assets, recover value, and restructure companies that still have potential. This frees up banks to focus on new lending instead of wasting resources chasing old defaults.

Perhaps the most important lesson is that time and momentum matter. The longer the problem is delayed, the harder it becomes to solve. A credible 12-month plan could make a huge difference. People will only trust the system again when they see visible progress.

Bangladesh has achieved extraordinary success in recent decades: lifting millions out of poverty, building a world-class garment industry, and weathering global shocks. But unlike many of our challenges, this one is entirely within our control if we have the courage to act. Fixing NPLs is not just a financial exercise; it is a test of governance and political will.

Sadia Aktar Korobi, University of Dhaka