Banks can now write off bad loans immediately to keep balance sheet strong. But at what cost?
Previously, a loan could only be written off after remaining classified as a bad loan for two consecutive years. The new central bank circular removes this mandatory two-year waiting period.
A leading private bank in the country, currently burdened with a 14% non-performing loan (NPL) ratio, expects to bring it down to just 6% within 30 days after the central bank permitted immediate write-offs of bad loans.
The lender, which has maintained 100% provisioning against its classified loans, plans to act swiftly under the new rule.
The managing director of the bank said the Bangladesh Bank's recent circular on loan write-offs would help reduce reported defaults and strengthen its balance sheets.
Previously, a loan could only be written off after remaining classified as a bad loan for two consecutive years. The new central bank circular removes this mandatory two-year waiting period.
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A senior central bank official said the decision was made in response to a request from the Association of Bankers Bangladesh (ABB), the chief executives' organisation for banks. Banks will now be required to notify borrowers of the write-off at least 30 working days in advance.
However, not all banks will be able to write off loans. "This is because many banks are not profitable, and those banks will not be able to take advantage of this facility," he said.
A shift welcomed by bankers and economists
Bankers and economists have generally welcomed the move, describing it to TBS as a positive step that aligns Bangladesh's banking practices with international standards.
Mohammad Ali, managing director of Pubali Bank Limited, said: "This method will allow banks to write off bad loans immediately. The balance sheet will be much cleaner than before. Although a 100% provision must be made from profit, this will reduce the bank's profit. We bankers are more interested in improving and cleaning up the balance sheet than giving higher dividends to shareholders."
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, welcomed the move, stating, "We had been asking for this for a long time."
Zahid Hussain, former lead economist at the World Bank's Dhaka office, however, cautioned that "banks must not use this rule as a shield." He added, "Writing off loans to clean up balance sheets is not enough. Proper recovery efforts and legal action must follow. The Bangladesh Bank should also consider recovery rates and provisioning gaps when assessing a bank's rating."
Incentives for recovery
The circular also allows banks to offer cash incentives to employees involved in recovering written-off loans. Institutions that do not already have such a policy must develop one with board approval.
As of June 2025, NPLs in Bangladesh's banking sector stood at Tk5,30,428 crore – equivalent to 27.09% of total outstanding loans – meaning that more than a quarter of all disbursed credit has turned bad.
Pressure on profits and dividends
While the reform is expected to improve transparency, it could also put downward pressure on bank profitability. Since writing off loans requires 100% provisioning, the expense directly affects profit margins and, consequently, dividend payouts.
"The more banks write off, the more their profits will come under pressure," said former Bank Asia Managing Director Md Arfan Ali. "Even if it reduces short-term profits, this process is essential for long-term health and international compliance."
Zahid Hussain echoed this, saying that the write-off requirement would prompt bank boards to focus on loan recovery. "When profits take a hit, boards will have a stronger incentive to pursue recoveries," he said.
International alignment and potential risks
Central bank officials said the change brings Bangladesh in line with global practices, as most countries do not require a two-year delay before writing off bad loans. "Banks don't want to keep bad loans on their books for two years," said a senior Bangladesh Bank official. "The sooner they can write them off, the faster they can improve their balance sheets."
Sohail RK Hussain, managing director of Bank Asia, explained, "Good banks maintain full provisioning for bad loans, but previously had to carry them on the balance sheet for two years, which created a negative perception. Allowing quicker write-offs will help reduce reported NPLs and improve financial health."
However, experts also warned of potential misuse. "If banks start lending irresponsibly, assuming they can quickly write off losses, the system could be abused," one central bank official noted. "Proper oversight will be essential to prevent such behaviour."
