Highlights:

• BB unveils 18-month roadmap to tackle soaring bad loans
• NPLs hit record Tk5.89 lakh crore, one-third of bank loans
• One-time settlements allow full interest waiver for defaulters
• Analysts warn interest waivers could weaken banks' capital positions
• Governor plans AMC, legal reforms and stronger supervision by 2027
• Economist says previous loan rescheduling only worsened bad loans

The Bangladesh Bank has unveiled yet another exit strategy to tackle the country's ballooning non-performing loans, promising to bring them under control within 18 months through stronger supervision, loan restructuring, legal reforms and quicker recovery of distressed assets.

Similar promises were also made before. Successive governments and central bank governors relied on repeated loan rescheduling and regulatory relaxations, yet bad loans climbed to a record Tk5.89 lakh crore, a third of total bank loans. The question now is whether this roadmap marks a genuine break from the past – or, merely another attempt to buy time without fixing the banking system.

Taking office as finance minister of the now deposed Awami League government in January 2019, AHM Mustafa Kamal had said non-performing loans would not grow even by "a single penny from today". He had also promised of an exit plan to stop new loans from turning default. But NPLs continued to soar. And the measures taken by him and two governors during his time rather gave bad borrowers a safe exit and helped banks hide their real health under the carpet.

After the political transition in 2024, the Bangladesh Bank during the interim government's period uncovered the true scale of distress in several banks and launched emergency measures, including asset quality reviews, bank mergers, and efforts to recover stolen assets.

Before those measures could see preliminary success, the new government took office earlier this year. New central bank governor Mostaqur Rahman, in his first half-yearly monetary policy statement made on 30 June, outlined a long-term roadmap to tackle NPL within the next 18 months. His plan combines stronger supervision, capital restoration, restructuring for viable borrowers, quicker loan recovery through courts, emergency liquidity support, and implementation of the new Bank Resolution and Deposit Protection Acts.

The day before, the central bank announced a mega offer. As part of its bid to bring NPL under control to comply with the International Monetary Fund's new loan requirements, the central bank will now allow banks to waive interest on loans entirely in case of one-time settlement, meaning that defaulters would not have to pay any interest if they repay the principal amount only.

Analysts have cautioned such an offer might adversely affect capital positions of banks, particularly the cash-strapped ones.

Banks lend depositors' money, not their own. Waiving interest may clean up balance sheets, but it also erodes income. Who will bear that loss? Depositors? Shareholders? Bankers? Or, ultimately taxpayers if public money is used to recapitalise banks?

Countries that successfully brought down NPLs after banking crises rarely relied on a single measure. Instead, they combined swift recognition of bad assets, bank recapitalisation, specialised asset management companies (AMCs), legal reforms, and strict accountability. Experience from Asia, Europe and the United States shows that governments were often able to recover much of the public money used to rescue banks.

Following the Asian financial crisis, South Korea created its AMC named KAMCO to purchase distressed loans, while Malaysia established Danaharta to restructure viable borrowers and dispose of unviable assets. Both helped banks clean up balance sheets and resume lending.

Similar steps helped Sweden, Ireland and the USA overcome their banking crises in the 1990s.

But not every AMC did see similar success. Such initiatives in Indonesia and Nigeria did not yield much due to weaker governance and legal challenges.

International experiences suggest that the AMC is not a cure by itself if it is not backed by a comprehensive national strategy involving strong bank supervision, operational independence, legal reforms, out-of-the-court debt restructuring and development of a market for distressed loans.

These instruments succeed only when governments are willing to recognise losses, pursue influential defaulters and insulate the recovery process from political interference.

For Bangladesh, all these principles are yet to be tested, though Governor Mostaqur expects AMCs to become effective by 2027. Experience of Ukraine and Turkey in tackling bad loans has made him hopeful about the success of his exit plan, which, he said, will be supported by necessary legal reforms and strong monitoring.

Economist Dr M Masrur Reaz says the latest exit plan announced by the central bank is a welcome step, compared with previous bad practice of loan rescheduling that only kept NPLs soaring. "All defaulters are not wilful. The one-time settlement will provide good borrowers an exit."

Masrur, who is chairman of the think tank Policy Exchange Bangladesh, said the central bank should now sit with lending banks to discuss how they would implement the new scheme successfully and what support they might need.

The government needs to make the AMC a reality. Such initiative worked well in countries like the Philippines and India, he pointed out.

Masrur attributes "policy inertia" and abuse of political and business power to failure of previous steps to contain bad loans in Bangladesh.

He hoped it might work this time. "Those who abused power in the past have lost their business. Many of them even had to flee the country. These should be a strong safeguard against such abuses in future," he said.

Besides, he added, development partners such as the IMF and the World Bank have strictly attached NPLs and bank governance to their budget support packages, obliging the government to "walk the talk".