IFRS 9 Must End Bangladesh’s Culture of Delayed Loss Recognition

Bangladesh’s banking sector can no longer afford to hide bad loans behind delayed recognition, repeated rescheduling and weak provisioning. The move towards IFRS 9 and the Expected Credit Loss (ECL) model is therefore more than an accounting reform. It is a reality check for the entire banking industry.

The most important change is simple: banks will have to recognise expected credit losses before the loss actually happens. Under the old approach, banks largely waited for a loan to become visibly problematic before making adequate provisions. IFRS 9 turns that approach around. Banks must look ahead, assess the risk of default and maintain provisions according to expected losses. For a banking sector already carrying a heavy burden of non-performing loans, this change will hurt. But the pain is necessary. A bank cannot become healthy simply by postponing recognition of its sickness.

Bangladesh’s banking industry has accumulated serious structural weaknesses over the years. High NPLs, concentrated lending, distressed assets, repeated rescheduling and inadequate recovery have weakened balance sheets. In many cases, regulatory forbearance and repayment deferrals have delayed recognition of the real condition of loans. IFRS 9 will make this practice harder to sustain. This is why banks, shareholders, regulators and borrowers should understand the reform clearly. IFRS 9 is not simply another compliance requirement from Bangladesh Bank; it changes how a bank assesses and manages credit risk.

Under the ECL framework, loans are divided into three broad stages. Performing loans remain in Stage 1 and require provisions based on expected losses over the coming 12 months. When credit risk increases significantly, a loan moves into Stage 2 and banks must recognise lifetime expected credit losses. Stage 3 covers credit-impaired assets, where lifetime ECL applies and interest income is calculated on the net carrying amount after provisions.

A banking system cannot remain strong if its profits partly depend on income that may never be collected. IFRS 9 can help end the culture of paper profits. Once a loan becomes credit-impaired, banks will have less room to treat uncollected interest as genuine income, making financial statements more realistic. 

This may sound like a technical accounting exercise, but it can directly affect a bank’s profit, capital and lending capacity. The ECL calculation is based on the Probability of Default, Loss Given Default and Exposure at Default. In simple terms, a bank must ask three basic questions: how likely is the borrower to default, how much could the bank lose if default occurs, and how much money is exposed?

For years, the banking industry has focused heavily on loan growth and disbursement. IFRS 9 demands a stronger focus on the quality of that growth. A Tk100 crore loan is not necessarily a good loan simply because it increases the size of the balance sheet. If the probability of default is high and recovery prospects are weak, it can become a major burden.

This is where Bangladesh’s banking sector faces a major challenge. Many banks do not have sufficiently strong historical databases to calculate reliable Probability of Default and Loss Given Default. ECL requires years of quality data, while many banks still struggle with fragmented or incomplete credit information. Banks also need reliable economic forecasts covering GDP growth, inflation and interest rates. These are not merely technological issues; they are basic foundations of modern credit risk management.

Collateral recovery is another concern. A bank may have collateral on paper, but the real question is how much money it can recover and how quickly. Lengthy legal proceedings and delays in collateral liquidation can increase actual losses. Therefore, improving recovery is as important as improving loan underwriting.

The first visible impact of IFRS 9 is likely to be pressure on profits. When large numbers of risky loans move into Stage 2 or Stage 3, banks may have to make higher provisions, reducing reported profit. Weak banks may also see their capital positions come under pressure because higher provisions reduce capital buffers.

Some banks may therefore have to raise fresh capital, reduce dividends, strengthen recovery or slow lending to risky borrowers. There is no easy escape. However, this should not be viewed only as bad news. A banking system cannot remain strong if its profits partly depend on income that may never be collected. IFRS 9 can help end the culture of paper profits. Once a loan becomes credit-impaired, banks will have less room to treat uncollected interest as genuine income, making financial statements more realistic.

Bangladesh Bank therefore has an important responsibility. The regulator needs to ensure that IFRS 9 is implemented consistently across banks and that transitional arrangements do not become another excuse for postponing recognition of genuine losses. The transition period can help banks absorb the capital impact gradually, but it should not become a permanent shelter for weak balance sheets.

Bank managements also need to change their mindset. Credit appraisal must move away from relationship-based lending and become more objective and risk-based. Credit officers should be judged not simply by how much they disburse, but also by how well those loans perform.

Banks must invest in clean data, modern core banking systems, ECL engines and skilled risk professionals. They also need serious recovery teams. A loan that has already become distressed should not remain on the balance sheet for years while management waits for another restructuring opportunity.

Capital planning must also become proactive. Banks with provisioning shortfalls should not wait until the last moment. Equity injections, subordinated instruments and other legitimate capital-restoration measures may be needed to protect solvency.

The banking sector should remember one basic truth: recognising a loss does not create the loss. The loss already exists when a loan cannot be recovered. Delayed recognition merely hides the problem from shareholders, depositors, regulators and the public.

IFRS 9 will therefore test the honesty and strength of Bangladesh’s banks. Some balance sheets may look weaker after the reform. Some profits may fall, some banks may have to raise capital, and lending to risky borrowers may tighten. But a smaller and more realistic profit is better than a larger profit built on doubtful income. A properly provisioned bank is better than one that looks healthy only because losses have been pushed into the future.

Bangladesh now needs a banking culture where credit quality matters more than loan volume, recovery matters more than repeated rescheduling, and transparent provisioning matters more than cosmetic profitability. IFRS 9 can help bring that culture. The regulator and banks must make sure it does not become just another rule on paper.