Bangladesh Bank has removed the time barrier for writing off defaulted loans, allowing banks to immediately write off classified “bad and loss” loans deemed irrecoverable, rather than waiting the previously mandated minimum of two years.
The central bank issued a circular on Monday through its Banking Regulation and Policy Department, stating that the new guideline is effective immediately.
Understanding Loan Write-Offs: A loan write-off refers to defaulted loans that have remained uncollected for a long period and are considered unlikely to be recovered.
While banks remove these loans from their balance sheets and record them in separate ledgers, their legal claim over the borrower remains intact, and efforts to recover the loans continue.
Previously, banks were required to wait at least two years before classifying and writing off such loans. Under the updated directive, any loan categorized as “bad and loss” with minimal prospects of recovery can now be written off without a fixed time restriction.
Key Guidelines: The circular specifies that banks may write off loans deemed bad or loss-classified where recovery is unlikely. Priority should be given to chronologically older bad loans. In addition, banks are required to notify borrowers at least 10 working days in advance of the write-off.
According to the 2024 circular from Bangladesh Bank’s Banking Regulation and Policy Division, “Loans that have been classified as bad and loss for two or more consecutive years may be written off.” The new directive essentially removes the two-year waiting period, giving banks more flexibility in managing non-performing assets.
Implications for Banks and the Financial Sector: Experts say that the policy change is aimed at improving banks’ financial health and balance sheet clarity. By removing long-standing, unrecoverable loans from accounts sooner, banks can better allocate capital, reduce non-performing loan ratios, and strengthen financial reporting.
A banking sector analyst at Daily Industry said, “This move allows banks to clean up their balance sheets more efficiently. It provides relief from regulatory constraints that previously delayed write-offs, helping banks focus on recoverable assets and future lending.”
Another finance expert noted, “While the write-off does not absolve the borrower from repayment obligations, it improves transparency and gives banks a clearer picture of their actual financial position. This could also encourage more prudent lending practices in the long run.”
Context in Bangladesh’s Banking Sector: Non-performing loans (NPLs) have been a persistent concern for Bangladesh’s banking sector. Many banks carry significant amounts of bad loans on their books, which affect profitability, capital adequacy, and overall financial stability. The removal of the minimum two-year restriction may help banks tackle this challenge more proactively.
A senior banker commented, “The ability to write off bad loans sooner helps banks maintain healthier balance sheets, reduces the burden of provisioning, and can improve investor confidence. At the same time, banks still retain the right to pursue recovery through legal means, so borrowers are not entirely absolved.”
Borrower Notification and Transparency: The requirement to notify borrowers at least 10 working days before a write-off ensures transparency and maintains accountability. This step is intended to prevent disputes and allows borrowers an opportunity to respond or settle their dues before the loan is formally written off.
Bangladesh Bank’s removal of the time restriction for loan write-offs marks a significant regulatory update, providing banks with increased flexibility in managing non-performing assets. By allowing immediate write-offs of irrecoverable loans, the measure is expected to strengthen the banking sector’s financial position, improve balance sheet accuracy, and enhance overall sector resilience, while still maintaining accountability toward borrowers.
