Default loans to be curbed through NPL resolution guideline, BB tells IMF

The Bangladesh Bank will issue non-performing loan (NPL) resolution guidelines by December as part of its banking sector reform commitments under the proposed new loan programme with the International Monetary Fund (IMF), according to central bank officials.

The commitment was conveyed to an IMF delegation during a meeting at Bangladesh Bank yesterday (12 July), senior officials familiar with the discussions told The Business Standard. The meeting was attended by the central bank governor and deputy governors.

A senior official who attended the meeting said the central bank is preparing the guidelines primarily for banks with non-performing loan ratios above 10%. "If the guidelines are issued by December this year, they are expected to come into effect from 2027."

The official said the guidelines form part of Bangladesh's commitments under negotiations for a new IMF loan programme and are aimed at reducing bad loans in the banking sector. As of March this year, the country's overall NPL ratio stood at more than 32%.

The IMF delegation, led by Bangladesh Mission Chief Ivo Krznar, arrived in Dhaka yesterday for a five-day visit to assess the feasibility of the proposed $4.5 billion loan programme.

What were discussed at meeting

During yesterday's meeting, IMF officials also sought an update on the repeal of the controversial Section 18(ka) of the Bank Resolution Act. Bangladesh Bank informed the delegation that the government would remove the provision soon, according to officials.

The provision has drawn criticism because it could allow former owners of resolved or merged banks to regain ownership or control. Concerns have been particularly acute over banks previously controlled by the S Alam Group, especially several Islamic banks.

The IMF delegation also sought updates on Bangladesh's overall macroeconomic situation, including inflation, the exchange rate and the central bank's monetary policy stance.

According to officials, the IMF questioned why Bangladesh Bank's US dollar purchases through auctions were consistently clustered within a narrow price range. 

The central bank explained that the interbank exchange rate serves as the benchmark, with recent dollar purchases made between Tk122.60 and Tk122.75, while the prevailing interbank rate currently stands at Tk122.85.

The official said the IMF sought an explanation for the central bank's recent decision to lower the interest rate on trade finance. The IMF also asked whether banks would be able to access trade finance at SOFR plus 3% under the revised pricing framework. 

Bangladesh Bank officials replied that the decision had been taken after consultations with commercial banks and was intended to stimulate private sector credit growth.

Bangladesh Bank recently issued a circular reducing the interest rate ceiling on trade finance to SOFR plus 3%. Following the announcement, the Association of Bankers, Bangladesh urged the central bank to reconsider the decision in a letter.

The IMF delegation also raised concerns over restrictions on the foreign exchange forward market. Officials noted that during the Iran conflict, importers sought to hedge exchange rate risks by entering into forward contracts while opening letters of credit (LCs). 

At the time, Bangladesh Bank verbally instructed banks not to facilitate forward bookings, fearing they could fuel demand for dollars and push up the exchange rate.

The IMF, however, stressed that Bangladesh should develop a more active forward foreign exchange market, arguing that forward contracts are an essential risk management tool that allows businesses to hedge against future currency volatility. 

The delegation advised the central bank to facilitate, rather than discourage, the use of forward bookings in the dollar market.

Bangladesh Bank officials said the IMF would review the country's current economic conditions before formally considering the request for a new lending programme.

Bangladesh first secured a $4.7 billion IMF programme in 2023 to help address a foreign exchange reserve crisis. The programme later expanded to $5.5 billion after additional financing was approved under the Resilience and Sustainability Facility (RSF).

After disbursing $3.59 billion in five instalments, the IMF suspended further disbursements last December after Bangladesh failed to meet several programme conditions. 

Following the change in government, the BNP administration cancelled the previous programme and applied for a new IMF loan package under revised reform commitments.

Meanwhile, Finance Minister Amir Khosru Mahmud Chowdhury said Bangladesh will pursue the new IMF loan that safeguards public interest and the country's economic security.

The government will not participate in any loan programme that undermines the interests of the people, he said while speaking to journalists at the Secretariat yesterday.