BB to allow waiver of Tk1 lakh crore interest on default loans to clean balance sheet
In a circular issued on Monday, banks were allowed to waive both charged and uncharged interest of borrowers, relaxing the condition of ensuring recovery of the cost of funds before waiver.
The Bangladesh Bank has come up with a mega offer of waiving interest for defaulters as most loans regularised under special rescheduling policy for 10 to 12 years since 2024 turned defaulted again.
In a circular issued on Monday, banks were allowed to waive both charged and uncharged interest of borrowers, relaxing the condition of ensuring recovery of the cost of funds before waiver.
As of December 2025, uncharged interests against default loans amounting Tk1 lakh crore remained in interest suspense accounts of banks, according to central bank data.
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The central bank came up with the new mechanism to clean up the balance sheet by removing bad loans permanently, helping defaulters to come out from the default status.
The latest circular mentioned that defaulters who received the special rescheduling facility from 6 August 2024 to 30 June 2026 will be also entitled to interest waiver.
The policy can affect the strength and stability of banks, and ultimately that affects depositors as well.
Under the new circular, defaulters are also allowed to go for a one-time settlement by paying only the principal amount which means they will not need to repay any interest.
If banks waive Tk1 lakh crore uncharged interest from interest suspense account, the total default loan rate will decline to 25% from 30.60% recorded in December 2025.
An interest suspense account is a temporary holding account used by banks to record interest that is owed but cannot yet be officially recognised as earned income.
When a borrower stops making payments after stipulated time, the loan is classified as a Non-Performing Loan (NPL). The bank must stop recognising this uncollected interest as profit. Instead of putting it in the profit and loss account, the bank parks the uncollected interest in an interest suspense account.
Before issuing the circular, Governor Mostaqur Rahman held a meeting with all top executives of banks where both principal and interest waiver options were discussed to reduce default loan volume in the balance sheet of banks.
The options were raised by the central bank on the grounds that most rescheduled loans approved under the policy committee turned defaulted again, several top executives told The Business Standard.
However, banks opposed waiving principal loans as it goes against the Banking Company Act but accepted the option of waiving interest in suspense accounts as those are not taken in income.
I think Bangladesh Bank is doing something highly unethical. No one has the authority to forgive depositors' money.
Waiving charged interest will be considered on a case-by-case basis, as doing so would directly reduce banks' income in 2026, one executive said.
The central bank came up with the new option as it was desperate to reduce default loans due to pressure from the IMF (International Monetary Fund), he added.
Bangladesh Bank is going to have a meeting with the IMF for a new loan package very soon and before that they want to bring down the default loan rate by any means, he added.
The country's total distressed assets including default loans, rescheduled loans and written off loans rose to Tk10.87 lakh crore at the end of 2025 which was 60% of total loans in the banking industry.
Criticising the central bank's move, Dr Toufic Ahmad Choudhury, former Director General of Bangladesh Institute of Bank Management (BIBM) said, "I think Bangladesh Bank is doing something highly unethical.
"No one has the authority to forgive depositors' money. Who are these banks to waive interest? The real owners of the money are the depositors. The depositors have not forgiven these debts, yet the banks are being allowed to waive the interest. How can that be justified?"
He said the defaulters will be even more encouraged as a result of this. "We have continued to provide one benefit after another to loan defaulters, but nothing has improved."
Muhammad A (Rumee) Ali, former deputy governor of Bangladesh Bank said, "If banks waive interest that has already been booked as income, they will have to absorb the loss in future years. The impact will depend on the size of the affected loan accounts. If large bad loans receive significant interest waivers, the banks' earnings and capital positions will be adversely affected," he said.
"The policy can affect the strength and stability of banks, and ultimately that affects depositors as well," he said.
He also pointed to the tax implications of the move. In many cases, banks have already paid taxes on interest income that they later may have to waive. "It remains unclear whether banks will receive any tax benefit or adjustment for such waivers. The tax treatment of these forgiven interests is an important issue that still needs clarification," he noted.
He said, the central bank has effectively delegated the authority to banks to decide on interest waivers without prior approval from Bangladesh Bank. While this may provide flexibility, it also increases risks, particularly for financially weak banks.
"Definitely, there is a risk for depositors, especially in banks that are already in poor financial condition. If such banks have to write off more income and show larger losses, their financial strength will deteriorate further," he said.
Ali also questioned the continued policy of granting concessions to large defaulters, arguing that many of them possess substantial assets that could be liquidated to recover bank loans.
He argued that assets built with borrowed money, including those held abroad, should be traced and subjected to legal claims before further concessions are granted.
How waiving interest will hit banks' profit
The new circular relaxes the rules for waiving interest that has been kept in suspense accounts, said a top executive of a private commercial bank.
He said banks agreed that these suspended interests are not considered actual income for banks, as they have not been realised.
If the suspended interest has already been provisioned, the waiver would primarily result in a provision adjustment and would not significantly impact profitability. However, if no provision exists and the interest had previously been recognised as income, the waiver would reduce the bank's profit, he said.
When asked why banks had not been permitted to waive these interests in the past, he said banks still pay depositors the cost of funds regardless of whether borrowers repay their loans. Therefore, excessive interest waivers could adversely affect banks' profitability.
Nevertheless, removing these amounts through one-time settlements could reduce the overall volume of classified loans, he said.
He said that simply rescheduling loans repeatedly only postpones the problem rather than solving it.
He said the primary benefit of the policy appears to be the potential waiver of accumulated interest, making it easier for distressed borrowers to exit the banking system and for banks to recover at least part of their outstanding loans.
He, however, said sustainable resolution of banking sector problems will require broader structural reforms, particularly the creation of an Asset Management Company (AMC) and more effective mechanisms for dealing with distressed assets and chronic defaulters.
He said asset management companies could purchase distressed assets from banks at discounted prices, helping banks clean their balance sheets and improve financial health.
Why reschedule mechanism fails
Bangladesh Bank data shows that banks rescheduled over Tk2.56 lakh crore in just two years during 2024 and 2025 of which 40% turned into default again.
A top executive of another private commercial bank told TBS it was because the root problems of the default companies were not addressed.
Most of those default companies were not in position to operate as their debt equity ratio crossed 100% which means they don't have any capital. Capital injection and asset liquidation could save them but they were allowed to continue to take further loans which exacerbated the burden, he added.
Citing an example of his bank, he said they did not comply with a single rescheduling case according to policy committee approval. "Rather we forced clients to go for asset liquidation to pay off loans, mortgaging assets for further loan facilities and squeeze business operations, which helped them to survive.
He said because of strict measures, those companies are still servicing debt after rescheduling loans for a maximum of 8 years without even taking a grace period.
He said the policy committee approved a 2-year grace period which ballooned their installment making them unable to continue payment and eventually turned default again.
