BB allows partial write-off to mask soaring default loans

As the true scale of long-hidden non-performing loans (NPLs) began to emerge following the fall of the Sheikh Hasina-led government last year, the Bangladesh Bank has now allowed banks to partially write off bad and loss-category loans with a slim recovery chance, aiming to reduce the stated size of NPLs on their balance sheets.

The instruction, issued in a circular today (4 December), is effective immediately and amends a previous regulatory circular that did not include this facility.

Rationale and global precedent

The central bank's new circular states that the previous requirement to display a significant portion of unrecovered bad and loss-category loans on the balance sheet inflated the reported size of NPLs, making it difficult to determine the true quality of a bank's assets.

The Bangladesh Bank justified the move by noting that the partial write-off of loans is an acceptable practice under Basel principles and International Financial Reporting Standards (IFRS) standards, and is widely used in many countries, including India, Pakistan, and Sri Lanka.

Default loans hit record high

The new directive comes amidst a severe crisis in the banking sector, with NPLs hitting their highest level in the country's history.

The latest policy shift comes amid unprecedented deterioration in the banking sector following the fall of the Hasina government. NPLs stood at Tk2.11 lakh crore, or 12.5% of total loans, in June prior to the government's collapse. By December, the figure rose to Tk3.45 lakh crore, equivalent to 20.20%.

According to the central bank's latest data, NPLs surged further to Tk6.44 lakh crore at the end of September this year, representing 35.73% of all outstanding loans – the highest level in the country's history.

Governor's warning on sectoral corruption

Bangladesh Bank Governor Ahsan H Mansur, who has held the position since August 2024, had previously warned that the NPL rate could exceed 35%.

He further stated: "The amount of irregularities, corruption, and looting that occurred in the banking sector over the last 15 years is rare in world history." He added that certain large groups, including S Alam and Beximco, have reportedly taken nearly Tk2.5 lakh crore.

The central bank's Monetary Policy Statement also warned of the NPL rate crossing 30%, attributing the crisis to systemic weakness, regulatory failure, money laundering, and exploitative practices.

Requirements for partial write-off

Under the new policy, banks may partially write off loans classified as bad or loss where recovery prospects are minimal. The component of the loan backed by eligible collateral must be considered recoverable, with only the remaining unsecured portion eligible for write-off.

Banks may determine the market value of collateral internally or through certified professional valuers.

In executing a partial write-off, the imposed interest component must be written off first, while unrealised interest must be separately accounted for on a proportional basis.

Any funds recovered from borrowers, excluding collateral, must first be adjusted against the written-off amount. Should recoveries exceed the written-down balance, the surplus must be used to settle outstanding dues.

Following a partial write-off, banks may reschedule or grant an exit facility to recover the remaining balance.

Bankers welcome

Top bankers largely welcomed the introduction of the partial write-off facility, citing its use in developed economies.

Sohail R K Hussain, managing director of Bank Asia, said the move is aligned with international standards followed in developed countries such as the US, UK, and Australia.

He also said allowing banks to write off the loans ensures a more accurate reflection of their balance sheets, as the amounts being written off are already fully provisioned.

He added that the rule is consistent with international frameworks like IFRS 9 and will present a truer picture of the banks' financial position.

Md Anwarul Islam, managing director of Agrani Bank, agreed, calling the policy "positive" and internationally recognised. He stressed that while the move will ease the NPL pressure on bank balance sheets, "transparency and strict monitoring are extremely important" during the process.

However, Syed Mahbubur Rahman, managing director of Mutual Trust Bank, pointed out potential practical complexities related to the specific requirements of the circular. He noted that the directive to write off the accrued interest portion first, followed by the principal, could complicate matters in early settlements and limit the ability to grant waivers to customers under a partial settlement plan.

Economists for clear guidelines

While welcoming the adoption of international best practice, economists warned that the central bank must ensure clear governance in the policy's implementation.

Towfiqul Islam Khan, senior research fellow at the Centre for Policy Dialogue (CPD), stated that if the new policy adheres strictly to international standards, it would be beneficial and moderately helpful in reducing NPLs.

However, he urged the central bank to provide clear guidelines on who qualifies for the partial write-off and stressed that it is critical to prevent the policy from being used to offer undue advantages to any group, particularly with elections anticipated.