BB Cracks Down on Bad Loans, Bank Directors Face Loss of Ownership

Directors of commercial banks that fail to bridge capital shortfalls caused by unrecovered defaulted loans will ultimately lose their ownership stakes under Bangladesh Bank's toughest-ever strategy to restore discipline in the country's crisis-hit banking sector.

The unprecedented measure forms part of a comprehensive roadmap unveiled by the central bank to tackle the country's ballooning stock of classified loans, which has climbed to Tk 588,704 crore, or 32.26 per cent of total outstanding loans. Bangladesh Bank has set an ambitious target of reducing the official non-performing loan (NPL) ratio to 20 per cent by the end of 2026 and 10 per cent by the close of 2027.

The new strategy adopts a phased approach. Banks will initially be encouraged to recover loans through flexible measures, including waivers of accrued interest and fund management costs under the Exit Policy, which will remain in force until December this year. From 2027, however, the central bank will shift to stringent enforcement, backed by sweeping legal reforms and bank resolution measures.

Under the new framework, provisioning shortfalls will be calculated on the basis of actual classified loans, while banks will be given strict deadlines to restore capital by reducing NPLs. Directors who fail to meet capital requirements within the stipulated timeframe will forfeit their ownership and will be barred from serving as directors of any bank for the following five years.

If recapitalisation efforts fail, Bangladesh Bank will invoke bank resolution measures, including mergers, acquisitions, asset sales or liquidation of troubled institutions.

Central bank officials said the reform package comprises 21 short-, medium- and long-term action plans, personally overseen by Governor Md Mostaqur Rahman, to restore financial stability and strengthen corporate governance. Officials also confirmed that no new special loan rescheduling facilities would be introduced, marking a decisive break from past practices.

The central bank's latest assessment paints a grim picture of the sector's health. Although the official NPL ratio stands at 32.26 per cent, total distressed assets reached Tk 10.88 trillion, equivalent to 59.73 per cent of all outstanding loans. 

The banking sector's capital adequacy ratio slipped into negative territory at minus 2.64 per cent, with 20 banks suffering a combined capital shortfall of Tk 278,000 crore. Of the country's 52 domestic banks, only 17 reported profits last year.

The crackdown follows years of weak loan recovery despite repeated concessions. Between 2013 and 2024, loans worth Tk 441,000 crore were rescheduled under special facilities, while another Tk 170,503 crore was rescheduled in 2025 alone. Yet unpaid balances on rescheduled loans still stood at Tk 446,894 crore, underscoring the limited success of earlier restructuring programmes.

As part of the tougher enforcement regime, Bangladesh Bank plans to enact a Distressed Asset Management Act and amend the Artha Rin Adalat Act to require disposal of loan recovery cases within six months. It also plans to publish the names and photographs of chronic defaulters who fail to settle dues under the Exit Policy, displaying them at airports and outside bank head offices and branches.

The central bank will further strengthen accountability by fully enforcing the long-delayed Prompt Corrective Action (PCA) framework, introducing IFRS 9 Expected Credit Loss (ECL) standards, deploying Early Warning Systems for credit risk monitoring and linking the appointment and reappointment of bank chief executives to their performance in recovering classified and written-off loans.

Banks with NPL ratios exceeding 10 per cent will be required to report recovery progress directly to the Governor every three months, while the recovery status of the country's 20 largest loan defaulters will be reviewed at every Bankers' Meeting.

Other reforms include mandatory independent valuation of mortgaged assets, incentives for officers recovering bad loans, tighter borrowing limits for large corporate groups, compulsory corporate bond issuance for exposures exceeding Tk 1,000 crore, and legal amendments to accelerate loan recovery litigation.

"Reducing non-performing loans is now Bangladesh Bank's highest priority," said Arif Hossain Khan, Executive Director and spokesperson of the central bank. "We are giving borrowers one final opportunity to repay under a flexible framework. Those who fail to do so will face stringent legal and regulatory action."