The hardest test of banking reform is not how much relief is extended to distressed borrowers, but whether repayment discipline survives that relief. A sound banking system needs both: room for viable businesses facing genuine difficulty to recover and a clear incentive for responsible borrowers to keep paying on time.
Bangladesh is trying to strike that balance under the weight of a large stock of classified loans. Rescheduling, exit facilities and longer repayment periods have a place in the present circumstances. But their design and duration matter. A policy intended to solve one problem should not create a larger one. Loan restructuring may be necessary; restoring credit discipline is even more important.
In banking, I have seen how borrower behaviour responds to policy signals. If a customer who pays regularly begins to feel that greater benefits may be available after becoming classified, that is not a healthy signal for the credit culture. Support for distressed borrowers should therefore be matched by recognition for good borrowers, including appropriate rewards or rebates for consistent repayment.
Ultimately, the issue comes down to trust. Banks lend largely from other people’s money. Their greatest asset is therefore not simply the size of the balance sheet or the loan book, but the confidence of depositors. Depositor confidence is the lifeblood of banking. Preserving it requires a credible framework of responsibility and discipline across borrowers, boards, management and regulators.
Bangladesh’s banking problems cannot be explained by bad loans alone. Over time, corporate governance weakened at several levels. Lending decisions were at times subject to undue influence, the lines of responsibility between boards and management became blurred, and supervision was not always as strong as it needed to be.
I do not see this as the failure of one institution or one group. Boards, senior management, borrowers, regulators and, in the case of state-owned banks, the relevant public authorities all have responsibilities. Corporate governance is usually associated with integrity, transparency and accountability. I would add a fourth element: the will to do the right thing. Rules and guidelines matter, but they cannot protect an institution if those responsible for applying them lack that intent. Good governance is therefore not only about compliance; it is also about institutional culture.
Restructuring is necessary where viable businesses are hit by energy shortages, weak demand or other genuine disruptions. Giving such a business time to recover is part of banking. The difficult question is how much time.
In project finance, a two-year grace period on principal may be reasonable in many cases. A new project needs time to begin production and generate cash flow. But the sponsor should have enough equity and reserves to service interest during that period.
In my experience, 10 years is already a long repayment horizon. Rescheduling for 15 years deserves closer consideration. The longer the tenor, the longer bank assets remain tied up and the greater the risk that repayment discipline weakens. Policy should not be so rigid that it forces a viable enterprise to close, but nor should it become so generous that timely repayment loses its value.
When a large loan turns bad, accountability should not stop with the officer whose recommendation appears on the file. We must ask where the real decision was made, who had the authority, who set the policy and who approved the exposure.
The first responsibility lies with the board and chairman, followed by top management. The board should define policy: sectors, risk appetite, borrower eligibility, equity requirements and repayment structure. Professional management should implement it.
Governance weakens when boards become too involved in individual lending decisions or when management cannot exercise independent professional judgement. Regulators, likewise, should not become substitute credit committees. Their role is to ensure sound policy, risk management and prudential standards.
This makes the principle of “the right person in the right place” essential. Foreign exchange, treasury, risk management, technology and trade finance are specialised functions. Seniority alone cannot substitute for expertise.
A loan should ultimately be repaid from the cash flow of a business, not from collateral. Borrower character, capacity, capital, market conditions and projected cash flows should therefore carry at least as much weight as security.
Bangladesh has also seen cases where assets valued generously when loans were sanctioned fetched far less during recovery. Paper security is not the same as realisable value.
Asset management companies can help. Bad assets can be transferred through transparent valuation and competitive processes to specialised institutions, allowing banks to clean up their balance sheets. A Tk100 bad loan will not necessarily sell for Tk100; discounts are part of the reality. But holding an unproductive asset for years also carries a cost.
One of the clearest lessons from the past decade and a half is that a big loan is not necessarily good banking. Excessive exposure to a small number of corporate borrowers creates concentration risk. When one major borrower fails, the damage can equal that of thousands of small loans.
Banks should diversify more towards cottage, micro, small and medium enterprises. That would spread portfolio risk while supporting employment and broader economic activity.
Project finance also needs a stronger equity culture. In some projects, bank funding has reached around 80 per cent. Depending on the project, a structure closer to 50–60 per cent bank finance, with the rest from sponsor equity, would increase the borrower’s own stake and reduce risk for the bank.
Repayment structures should also reflect project reality. New ventures do not generate full cash flow from day one. In suitable cases, graduated or ballooning repayment may be more sensible than mechanically equal instalments. But interest servicing, monitoring and agreed milestones must begin from the outset. Restructuring should restore viability, not merely postpone a problem.
Private investment will not return simply because loans become cheaper or more available. Investors need reliable gas and electricity, easier access to land and approvals, efficient ports and logistics, and a predictable business environment. Progress on one-stop services, infrastructure and the reduction of informal barriers would strengthen confidence and help turn banking liquidity into productive credit.
The government and Bangladesh Bank have taken important steps towards banking reform. The task now is to make that reform deeper and durable. Some policies may need fine-tuning over time; that is not a weakness, but part of sound policymaking. What matters is whether policy creates the right incentives, how borrowers respond, and what the consequences are for bank liquidity and depositors.
Five years from now, success should not be measured by a lower NPL ratio alone. We should ask whether boards and management are genuinely accountable; whether lending decisions are based on commercial judgement; whether good borrowers benefit from remaining good; whether corporate concentration has fallen; whether credit is flowing to SMEs and productive sectors; and whether private investment has revived.
But the most important question will be simpler: do depositors once again believe, without hesitation, that their money is in the hands of a well-governed, responsible and safe institution?
Banking does not ultimately rest on buildings, balance sheets or loan portfolios. It rests on trust. The best way to protect that trust is to build a system that can support borrowers, allow flexibility and help viable businesses recover — without ever allowing the obligation to repay to lose its value.
That is why credit discipline will remain one of the decisive tests of Bangladesh’s banking reform.
Author is the Chairman of Agrani Bank PLC. The views expressed in this article are solely those of the author.
