The number of defaulted loans could potentially double in the coming year

The volume of defaulted loans in Bangladesh is projected to double as the Bangladesh Bank (BB) prepares to implement stricter loan classification rules for all loan categories by March 2025 to fulfill the International Monetary Fund's (IMF) loan requirements. As of the end of September, defaulted loans in the country's banking sector reached a record Tk 2,84,977 crore, driven largely by loans issued irregularly to businesses linked to the Awami League. The surge followed the ousting of the Sheikh Hasina-led government on August 5. Between July and September, bad loans rose by a staggering 34.8 percent or Tk 73,586 crore, according to BB data.

The Banking Regulation and Policy Department of BB has drafted a new loan classification guideline aligned with international best practices. BB spokesperson Husne Ara Shikha stated that the guideline will be published soon and will come into effect by March 2025. Under the proposed rules, loans will be classified as overdue if borrowers fail to make installment payments within three months of the due date. Currently, loans are only considered overdue after six months of non-payment. 

The central bank is implementing the changes in two phases. In the first phase, introduced in September, term loans are now classified as overdue after three months instead of six. Term loans, which are fixed-amount loans with scheduled repayments and either fixed or floating interest rates, were the first to be affected. In the second phase, all loans, including those for agriculture and SMEs, will be subject to the revised rules by March 2025.

Industry experts anticipate that these stricter classification standards will cause defaulted loans to double. At present, nearly 17 percent of all loans in Bangladesh are non-performing, the highest ratio in South Asia. 

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, expressed concern that defaulted loans will continue to rise due to the tightened rules and anticipated defaults on large, irregular loans taken by Awami League-affiliated businesses. Former Association of Bankers Bangladesh chairman Mohammed Nurul Amin predicted that bad loans would surpass Tk 3,00,000 crore by December, with even higher figures likely if the new classification guidelines are enforced.

The World Bank is collaborating with BB on banking sector reforms and has urged the central bank to adopt international-standard loan classification rules by the deadline. Bangladesh had previously adhered to such practices but gradually moved away from them starting in 2015.