Break the Forbearance Cycle: A Recapitalization-Conditioned Cleanup of Bangladesh's State Bank Loan Books

Diagnosis

Bangladesh has a two-speed banking problem. Per the curated characterization, non-performing loans at the state-owned commercial banks (SOCBs) run above 25 percent, while the system as a whole sits above 12 percent on the IMF definition. The gap between the two numbers is the diagnosis: this is not a diffuse, market-wide credit shock, it is concentrated rot in the banks the state itself owns and governs. The IMF-definition qualifier matters because it signals that the headline domestic figures understate the true stress, the system number is already above 12 percent only once forbearance, rescheduling, and lenient classification are stripped out.

A 25-percent-plus bad-loan ratio at SOCBs is not a liquidity hiccup, it is a solvency condition. Every taka parked in a defaulted, ever-rescheduled exposure is a taka not financing a working firm, and the implicit fiscal guarantee behind these banks means the loss is already on the public balance sheet whether or not it is recognized. This is why it matters now: the longer recognition is delayed, the larger the eventual recapitalization bill, and the more the SOCBs lend defensively to roll over bad credit rather than fund productive borrowers. The lead responsible body is the Ministry of Finance (MoF), which owns the SOCBs and writes the recapitalization cheques, so the fix is squarely within its authority.

Recommended actions

1. End classification forbearance and force honest recognition. Owner: MoF, acting through Bangladesh Bank's prudential circulars. Mechanism: instruct Bangladesh Bank to retire special rescheduling and relaxed-classification facilities so SOCB loan books are reported on the IMF definition, and require each SOCB board to publish a reconciled NPL figure. Observable signal: reported SOCB and system NPL ratios converge upward toward the IMF-definition levels (above 25 percent and above 12 percent) rather than diverging downward, confirming the books are now honest.
2. Condition every recapitalization taka on a cleanup contract. Owner: MoF, with the Internal Resources Division costing the fiscal envelope. Mechanism: a Memorandum of Understanding per SOCB tying any capital injection (a named budget line, not an open-ended subvention) to recovery targets, a freeze on related-party and director-linked lending, and management accountability. Observable signal: capital is released in tranches against met milestones, and no SOCB receives a second injection without hitting the first MoU's recovery target.
3. Stand up a dedicated recovery and asset-resolution track. Owner: MoF, supported by Bangladesh Bank supervision. Mechanism: a ring-fenced workout unit inside each SOCB (or a shared asset-management vehicle) to carve out and resolve the worst exposures, paired with a strengthened money-loan court referral pipeline so large willful defaulters face enforcement. Observable signal: the absolute stock of carved-out bad loans falls quarter on quarter and the SOCB NPL ratio trends down on the unchanged IMF definition.
4. Fix governance so the hole does not refill. Owner: MoF, through SOCB board appointments and Bangladesh Bank fit-and-proper rules. Mechanism: professionalize SOCB boards, ban evergreening of distressed credit, and tie senior bank-management tenure to fresh-NPL formation. Observable signal: new NPL formation at SOCBs slows even as recognition tightens, showing the inflow, not just the stock, is under control.
5. Publish a system-wide cleanup scorecard. Owner: MoF, with the General Economics Division and Bangladesh Securities and Exchange Commission for listed-bank disclosure. Mechanism: a quarterly public dashboard of NPL ratios, recoveries, and recapitalization spend by bank. Observable signal: sustained published movement of the system ratio back below 12 percent on the IMF definition.

Sequencing (first 12 months)

First, MoF directs Bangladesh Bank to end forbearance and force IMF-definition recognition, because nothing else can be measured until the books are honest. That recognition step unlocks the recapitalization-conditioning contracts (action 2), since you cannot size capital injections against a fictitious NPL number. In parallel, stand up the recovery track (action 3) so resolution capacity exists the moment exposures are correctly classified. Governance reform (action 4) and the public scorecard (action 5) follow once the first MoUs are signed, locking in the discipline.

Risks and constraints

The binding constraint is fiscal: honest recognition at SOCBs above 25 percent will surface a recapitalization bill the budget must absorb, and the Internal Resources Division's revenue position limits how fast that can be funded. The binding political constraint is that large defaulters and SOCB insiders benefit from forbearance and will resist both recognition and enforcement. Phased, milestone-gated capital injections manage the fiscal risk, public disclosure via the scorecard blunts the political one.

Bottom line

SOCB NPLs above 25 percent and a system above 12 percent on the IMF definition are a solvency problem the Ministry of Finance already owns through its banks. End forbearance, recognize the losses honestly, and make every recapitalization taka conditional on enforceable cleanup, or the public pays the same bill later at a higher price.