BB Introduces New Model to Address Non-Performing Loans

This move is designed to bolster banks’ resilience against loan defaults, safeguarding the overall financial stability of the sector.

The initiative comes amid rising concerns over NPLs at several banks, including those tied to major business groups, which have caused severe liquidity issues. In September 2024, the provisioning shortfall at 10 leading banks exceeded Tk 50,000 crore, with two state-owned banks—Janata Bank and National Bank—accounting for 65% of this deficit.

To address these challenges, Bangladesh Bank has decided to implement the International Financial Reporting Standard (IFRS-9) Expected Credit Loss (ECL) model, which will gradually replace the existing provisioning framework. The ECL model, which was first introduced globally in 2014, mandates banks to account for potential credit losses earlier, based on a loan’s credit history, performance, and future outlook, instead of waiting for the loan to default.

This proactive approach aims to shield the banking sector from sudden liquidity shocks that occur when large numbers of loans go into default.

According to the roadmap released by Bangladesh Bank, the full adoption of the new system is set for December 2027. Over this period, banks are required to establish specialized teams, including risk and financial officers, to facilitate the transition to the new model. These teams will report their progress to the central bank, with the first update scheduled for April 2025. By July 2026, the new framework will be fully operational, and the final reports will be submitted by December 2027.

The transition will occur in phases, starting in September 2026 with 25% of loan portfolios automated under the ECL model. By June 2027, 75% of loan portfolios will be covered, with the entire banking sector aligned with IFRS-9 standards by the end of 2027.

Experts believe the ECL model will enhance transparency in the banking sector by preventing the concealment of underperforming loans and ensuring that banks’ financial positions are accurately reported. Mohammad Abdul Mannan, Chairman of First Security Islami Bank, recalled a similar provisioning model from the 1990s, which uncovered the true financial health of many banks that had previously hidden their weak positions.

However, Mannan emphasized that while the ECL model would improve the transparency of provisioning, it would not address the underlying causes of high NPLs, which are often linked to governance issues.

A senior Bangladesh Bank official noted that the ECL model would allow for automated, real-time reporting, reducing the risk of data manipulation. This shift will provide the central bank with a clearer, up-to-date view of each bank’s financial health, enabling more timely interventions when necessary.

The official also pointed out that banks will need to strengthen their IT infrastructure to manage the transition effectively, and Bangladesh Bank will closely monitor the capabilities of each bank’s implementation team throughout the process.

As Bangladesh faces ongoing challenges with NPLs, the introduction of the IFRS-9-based provisioning model represents a critical step toward improving financial transparency and stability in the banking sector. Experts stress that robust corporate governance and stronger oversight will be key to the success of the new system in the long term.