Bangladesh Bank is considering whether to revise the definition of a loan default as it seeks to reduce the country’s high level of non-performing loans (NPLs).
Under a classification system aligned with international standards, the interim government brought previously underreported bad loans into official figures. By the end of June, non-performing loans in Bangladesh’s banking sector had reached Tk 606,000 crore, or about one-third of total outstanding loans.
The central bank has already introduced several measures to help borrowers repay their loans. However, Bangladesh now has one of the highest levels of bad loans in its banking sector. Officials are considering whether to return to an earlier classification approach under which certain term loans would be classified as defaulted only after nine months of missed payments. Under the current system, such loans can be classified as non-performing after three months.
Bangladesh Bank spokesperson Arif Hossain Khan said the existing restrictions on defaulted borrowers’ access to financing may need to be reconsidered because of their impact on the economy. He suggested that policymakers could review whether the current loan-classification standards remain appropriate.
Economists and banking experts, however, warn that changing the definition could reduce the reported amount of bad loans without actually improving loan recovery.
Dr. Toufiq Ahmad Choudhury, a former director general of the Bangladesh Institute of Bank Management (BIBM), said changing the classification rules could make the figures appear better while leaving the underlying problem unresolved.
Former World Bank Dhaka office chief economist Dr. Zahid Hussain also warned that weaker classification standards could create serious risks for banks. If banks are allowed to avoid adequate provisioning against loans that are unlikely to be recovered, some financial institutions could move toward insolvency, he said.
Banks are already struggling to maintain adequate provisions against bad loans. By the end of June, the banking sector’s provisioning shortfall stood at Tk 222,000 crore.
The debate highlights a key challenge for Bangladesh’s banking sector: reducing the reported level of NPLs is not the same as recovering bad loans. Any change in classification rules could therefore have significant implications for the transparency and financial health of the banking system.
