The Bangladesh Bank (BB) has finalised the roadmap for bringing down default loans below 8% by June 2026 and for ensuring corporate governance in the banking sector.

The central bank has also prepared an action plan aiming at reducing nonperforming loans (NPL) of state commercial banks below 10% and private banks below 5% within the next two and a half years, said BB Deputy Governor Abu Farah Md Nasser while unveiling the roadmap at a press conference on Sunday.

Besides, the central bank has eased loan write-off policy under the new framework and will allow banks to write off loans in two years instead of the existing three years, which will help to cut default loans by 2.76% or Tk43,300 crore.

According to Bangladesh Bank data, default loans in the banking sector stood at Tk1.55 lakh crore at the end of September last year which was 9.93% of total outstanding, up from 9.36% in September 2022.

At the end of September last year, the NPL ratio of state banks was 21.7% of their outstanding loans. The ratio stood at 7.04% for private banks. The ratio of default loans was 10.11 % of the total outstanding loans in June 2023.

The deputy governor said the central bank will start working according to the roadmap as it has been approved in the board meeting.

He said a defaulted loan recovery unit will be formed under the supervision of the managing director (MD) of banks. Recovery of defaulted loans will be added to MD’s performance.

He also said private sector asset management companies will be formed to recover bad and defaulted loans. The recovered amount will be added to the bank account.

The facility for extending the repayment of term loans will not be provided to accelerate the loan repayment rate and alleviate liquidity crises in banks. Additionally, new credit flows are expected to increase, he said adding that the definition of term loan expiry will be revised to align with international standards.

Besides, by strengthening the legal department of the bank, Tk1,78,277 crore can be recovered by settling 72,543 cases pending in the Arthorin Adalat. Necessary policies will be amended and implemented to take action against wilful defaulters.

Bank employees will receive a special allowance for recovering defaulted loans. Collateral provided against loans through listed collateral institutions will undergo evaluation in addition to the bank’s valuation.

To uphold good governance, the central bank will develop new policies regarding the responsibilities and duties of shareholder directors in banks, as well as strengthen the current fit and proper test process for their appointment. Policies will address appointment procedures, remuneration, and directorial duties.

A stringent selection process for appointing and re-appointing MDs will be enforced. Instructions will ensure compliance with the single-customer loan limit. Weaker banks will merge with stronger ones under the condition that no employees are laid off within three years post-merger.

Mandatory basic training and passing of banking professional examinations will be required for bank officer promotions.

The central bank has devised a new roadmap to fulfil conditions set by the International Monetary Fund as part of its $4.7 billion loan package.