Bad Loans Cannot Be Merged Away

Bad loans do not remain inside bank files. Their pressure moves quietly into the wider economy. A manufacturer may postpone production because working capital has become harder to obtain. For an exporter, a letter of credit can become slower and more expensive. Even a careful borrower may face higher credit costs created by someone else’s default. Reckless borrowers often receive time, negotiation, and political cover. Honest borrowers face the other side: tighter terms, higher costs, and more suspicion. Bangladesh has allowed this imbalance to grow for too long. Rescheduling delayed recognition, while liquidity support reduced the pressure for a while. Forced mergers were then presented as a rescue, although no merger can erase unpaid debt. If a weak bank is merged with a healthier one before losses are priced in, the weakness simply travels. The balance sheet may look larger, but the wound remains. A banking crisis cannot be solved by changing the container. It has to begin with the asset itself: who borrowed, why the loan was approved, what can be recovered, and which loss has to be written down. Until these questions are answered, reform will stay cosmetic.
The scale of the problem no longer permits soft language. Bangladesh Bank’s Monetary Policy Review states that the gross non-performing loan ratio reached 32.26 per cent at the end of March 2026, compared with 24.13 per cent a year earlier. Classified loans rose to Tk 588,704 crore by March 2026, while total outstanding loans stood at Tk 1,824,668 crore, according to Bangladesh Bank data. These figures point to a breakdown in credit discipline. Capital data makes the warning sharper. The overall capital-to-risk-weighted assets ratio stood at negative 2.64 per cent in December 2025. Private commercial banks recorded a 3.82 per cent decline, while specialised banks were much further into negative territory. A negative capital ratio means losses have already eaten through the cushion meant to protect depositors and absorb shocks. Some banks may still be compliant, so the system is not uniformly broken. Even so, the aggregate position tells a serious story. Parts of the sector are carrying losses that should have been recognised earlier. Delay has now become expensive. Each postponed loss weakens confidence, the first currency of banking.
Bad loans damage the real economy because credit is the route through which money becomes production. It turns into machinery, inventory, wages, exports, and jobs. When banks carry large volumes of unrecovered loans, their behaviour changes. New lending slows. Safer instruments begin to look more attractive than productive risk. Good borrowers are then asked to prove more than they should. A stressed bank may still have liquidity but lack the confidence to engage in productive lending. Bangladesh Bank recorded private-sector credit growth at only 4.7 per cent in April 2026, compared with a June projection of 8.5 per cent. The review linked this historic low to lower corporate credit demand, banks’ preference for treasury bills and bonds, slowing investment, uncertainty, tight monetary policy, and uneven liquidity conditions. Bad loans do not explain the entire slowdown, yet they worsen the lending environment. Banks turn inward. Survival begins to look safer than lending, and the burden falls on the wrong people. The defaulter returns to the table for another round of negotiations. Productive firms, meanwhile, wait for credit. No country can build a modern industrial base while its banking system carries yesterday’s unpaid debts.
The proposed Distressed Asset Management Act can become a serious reform, provided it does not become another shelter for powerful defaulters. Its central logic is sound. Bad loans should be removed from bank balance sheets, valued professionally, transferred through a formal market and recovered by specialised institutions. The reported draft would allow private distressed-asset management companies to buy bad loans from banks, seize mortgaged assets, and, in some cases, take control of indebted companies. It also proposes a Distressed Asset Management Unit under Bangladesh Bank’s oversight. Licensed firms could handle restructuring, asset tracing, borrower communication, and legal procedures. This would mark a real shift from leaving bad loans trapped inside institutions that failed to recover them. Still, the design has to be strict. Proxy ownership by habitual defaulters would defeat the law before it begins. Inflated valuations would make banks appear cleaner while hidden losses remained. A fire sale without transparency would create suspicion that reform had become another transfer of value. The draft reportedly bars habitual defaulters and their associates from owning recovery firms or buying assets sold under the law. Without clean ownership, the framework will recycle the same corruption under a new label.
Bangladesh now has to choose between appearance and repair. Appearance is familiar. Extend repayment timelines, merge weak banks, announce stability measures, and hope that confidence returns on its own. Repair requires loss recognition, independent valuation, legal recovery, stronger capital, and consequences for wilful default. This path will create resistance, since bad credit has beneficiaries. Borrowers treated loans as a private entitlement. Bank boards approved risk without enough accountability. Regulators, at times, allowed delay to stand in for discipline. That chain has to be broken. Distressed asset management can help, but it cannot carry the reform alone. Recovery cases need faster movement through the courts. Related-party lending should be controlled in actual banking practice. Bank owners and directors who approved reckless loans should face real consequences. Asset managers have one job: to recover value, not to protect old networks. The central bank, meanwhile, requires enough independence to classify loans and enforce capital rules without political bargaining. Above all, the system has to send a message that borrowers can no longer treat default as a business model. Bangladesh needs a clean ledger, a credible banking system, and a credit culture that rewards repayment instead of influence. The longer bad loans remain hidden, the more their costs spread to investment, employment, trade and public trust.
_____________________________________
The writer is an Assistant Professor in the Department of Philosophy at IUBAT and is currently on study leave, residing in Oslo, Norway