Rethinking our NPL crisis thru Minsky's lens

The Bangladesh Bank's Monetary Policy Statement (MPS) for the first half of FY2026�"27 portrays the recent decline in the country's non-performing loan (NPL) ratio as an encouraging sign of financial stabilisation. According to the statement, the gross NPL ratio rose sharply from 20.20 percent in December 2024 to 35.73 percent in September 2025 before easing to 32.26 percent by March 2026. At first glance, this numerical improvement appears to indicate that policy interventions are beginning to yield results. However, the more important question is whether this reduction reflects genuine structural improvement in asset quality or merely a statistical adjustment resulting from regulatory concessions. Banking history suggests that headline figures often conceal deeper vulnerabilities, and unless accompanied by meaningful institutional reforms, modest improvements in NPL ratios may provide only an illusion of stability.

Few economists have explained this paradox more convincingly than Hyman P. Minsky through his Financial Instability Hypothesis. Minsky argued that financial crises are not random events but the inevitable consequence of prolonged periods of stability. He classified borrowers into three categories: hedge borrowers, who can comfortably repay both principal and interest from their cash flows; speculative borrowers, who can meet interest obligations but depend on refinancing to repay principal; and Ponzi borrowers, who cannot even service interest payments without obtaining new credit or relying on continuously rising asset prices. His central argument was that prolonged economic stability gradually encourages both lenders and borrowers to underestimate risk. Credit standards weaken, leverage increases, and speculative financing progressively replaces prudent lending until the financial system becomes inherently fragile. Ironically, therefore, stability itself becomes the seed of future instability.

Viewed through Minsky's framework, several recent policy measures adopted by Bangladesh Bank deserve closer scrutiny. The revised restructuring framework now allows classified loans to be rescheduled for up to ten years with grace periods extending to two years. At the same time, lower provisioning requirements for agricultural and CMSME loans have been extended until December 2026. These initiatives undoubtedly provide temporary breathing space for distressed borrowers and reduce immediate pressure on banks' balance sheets. Nevertheless, they also raise an important policy concern. If distressed loans continue to be repeatedly rescheduled instead of being recognized as impaired assets, the banking system may gradually institutionalize what international banking literature describes as the "extend and pretend" strategy. Rather than resolving financial distress, this approach merely postpones its recognition. The apparent decline in reported NPLs may therefore reflect regulatory accommodation rather than genuine improvements in borrowers' repayment capacity.

Another important dimension of Bangladesh's recent banking reforms concerns the government's recapitalization of the newly consolidated Islamic Bank through a Tk 20,000 crore capital injection, increasing its paid-up capital to approximately Tk 35,000 crore. From the perspective of financial stability, restoring depositor confidence was perhaps unavoidable. However, this intervention simultaneously revives one of the most enduring debates in banking economics: the "Too Big to Fail" problem. Nobel Laureate Joseph Stiglitz has repeatedly argued that repeated government rescue of distressed financial institutions creates moral hazard by encouraging excessive risk-taking. When bank owners and managers believe that future losses will ultimately be absorbed by taxpayers, incentives for prudent lending and responsible governance weaken significantly. Minsky himself made a similar observation, arguing that repeated central bank interventions gradually transform financial discipline into dependence on state support. Unless recapitalization is accompanied by stronger governance, greater accountability and meaningful management reforms, the banking sector may become increasingly reliant on public resources whenever financial distress emerges.


Bangladesh's newly enacted Bank Resolution Act 2026 and Deposit Protection Act 2026 therefore represent welcome institutional reforms. Yet legislation alone cannot guarantee financial stability. Their effectiveness will ultimately depend upon transparent implementation, regulatory independence and the willingness of authorities to enforce corrective measures even against influential financial institutions. Otherwise, repeated recapitalization risks becoming a recurring fiscal obligation rather than a one-time stabilization measure.

The Monetary Policy Statement also highlights growing vulnerabilities beyond the banking sector. Among the country's thirty-five non-bank financial institutions, twenty are reportedly under financial stress, while nine institutions have already been identified with severe capital deficiencies and placed under structural resolution procedures. This is not merely an isolated institutional problem but a signal of broader systemic weakness. Charles Kindleberger, in his classic work Manias, Panics and Crashes, argued that financial crises become systemic not because one institution fails, but because interconnected balance sheets transmit fear and liquidity shortages throughout the financial system. Once confidence begins to deteriorate, problems rarely remain confined to a single institution. Given the growing interconnectedness between banks, NBFIs, corporate borrowers and capital markets in Bangladesh, these developments deserve considerably greater policy attention than headline NPL statistics alone.

Equally significant is Bangladesh Bank's decision to complete the transition to the IFRS 9 Expected Credit Loss (ECL) framework by 2027. Unlike the traditional incurred-loss provisioning model, IFRS 9 requires banks to recognize expected future credit losses before borrowers actually default. This forward-looking approach has become an international standard following the Global Financial Crisis because delayed recognition of credit losses was widely regarded as one of the factors that amplified financial instability. 

Ultimately, Bangladesh's banking reforms should not be judged by how successfully bad loans are rescheduled or temporarily removed from balance sheets, but by how effectively they are resolved through transparent recognition of losses, stronger governance, efficient legal enforcement and improved credit discipline. The challenge before policymakers is therefore not simply to reduce reported default ratios but to restore confidence in the integrity of the financial system itself. Unless structural weaknesses are addressed with transparency, accountability and timely risk recognition, today's apparent stability may become the foundation of tomorrow's financial instability�"a warning that Hyman Minsky articulated decades ago and which remains strikingly relevant for Bangladesh today.