Public money at risk

Non-performing loans, commonly known as NPLs, are often discussed as if they represent a moral failure of the banking system. In reality, they are a standard business outcome of lending, embedded in the structure of modern finance. Banking is not the business of certainty; it is the business of calculated risk. Banks lend against expectations of future cash flows, market stability, and borrower behaviour, none of which can ever be guaranteed. As a result, a portion of loans will inevitably fall into distress. This is neither abnormal nor undesirable. A certain level of NPLs is a natural outcome of economic activity and, paradoxically, a sign that banks are supporting growth rather than remaining overly risk-averse.
Globally accepted banking practice is built on this understanding. That is why tools such as loan rescheduling, restructuring, refinancing, and rehabilitation exist. These mechanisms are not extraordinary concessions; they are routine instruments designed to manage outcomes when credit does not perform as planned. Rescheduling addresses temporary liquidity stress, while restructuring aligns debt obligations with revised business realities. When applied prudently, these tools preserve economic value, protect bank balance sheets, and allow viable businesses to recover from shocks. In this sense, NPLs are part of the normal risk anatomy of banking, alongside credit, liquidity, and market risks. Expecting a zero-NPL banking system is not prudent; it is a denial of how economies function.
When loans become non-performing due to genuine economic or business reasons, they remain firmly within the scope of banking and regulatory management. Banks classify such loans, maintain provisions, intensify recovery efforts, and, when necessary, write them off transparently. Regulators define the rules, supervise compliance, and ensure losses are recognised rather than hidden. A healthy financial system is not defined by the absence of NPLs, but by its ability to identify stress early, absorb losses, and resolve problems efficiently. Excessive fear of NPLs often leads to extreme risk aversion, restricting credit to productive sectors and slowing economic growth. Supporting genuine NPL resolution is therefore not leniency; it is sound economic management.
This logic, however, collapses the moment default becomes wilful. A borrower who has the capacity to repay but deliberately chooses not to, or who diverts funds, falsifies information, or exploits regulatory loopholes, is not participating in a normal credit cycle. Such behaviour does not belong in the category of NPLs arising from business stress. Wilful default is fundamentally different in nature, and treating it as just another non-performing loan is a serious conceptual and policy mistake. It is not a banking inconvenience; it is a breach of trust and, in many cases, financial misconduct.
An NPL reflects inability to pay; wilful default reflects unwillingness to pay despite ability. When these two are grouped, accountability disappears. Repeated rescheduling or cosmetic restructuring of wilful default cases does not resolve the problem; it institutionalises it. It sends a dangerous signal that deliberate non-repayment carries limited consequences, turning default into a calculated business strategy rather than an economic failure. Once intent to evade repayment or misuse funds is established, the issue should move beyond balance-sheet treatment into legal and punitive domains. Without this distinction, the entire NPL framework becomes distorted.
This distinction becomes even more critical when one considers a basic but often overlooked fact: banks primarily lend public money. Deposits placed by individuals, businesses, and institutions form the core funding base of the banking system. When a borrower wilfully defaults, the loss is not borne by an abstract balance sheet; it represents misappropriation of public money. Depositors, taxpayers, and ultimately the wider public absorb the cost through weakened banks, reduced credit availability, and, in extreme cases, state-funded recapitalisation.
Viewed through this lens, wilful default is not merely a private dispute between a bank and a borrower. It is a matter of public interest. The protection of depositors’ funds and the integrity of the financial system impose a clear obligation on policymakers and the legal system to intervene decisively. Banks can initiate recovery actions, but they cannot investigate fraud, seize assets at scale, or impose criminal sanctions. That responsibility lies squarely with the state.
Bangladesh’s banking sector illustrates why this public-interest perspective is essential. Over the past decade, the country has experienced a persistent and now accelerating rise in defaulted loans. According to Bangladesh Bank data, total defaulted loans exceeded Tk 6.4 trillion in 2025, pushing default ratios to historically unprecedented levels. While global shocks and domestic economic pressures have contributed, the scale and persistence of the problem point to structural weaknesses rather than temporary stress.
This is not a purely cyclical phenomenon driven by inflation, exchange-rate volatility, or post-pandemic adjustment. The accumulation of bad loans over time reflects systemic gaps in credit governance, enforcement, and accountability. High NPL levels constrain banks’ lending capacity, erode profitability, and weaken confidence among depositors and investors. Over time, this undermines financial intermediation and slows economic growth.
Regional and global comparisons further highlight the seriousness of the issue. In most developing and neighbouring economies, NPL ratios are typically contained within a range of 2 to 6 per cent. Advanced economies often operate with ratios below 2 per cent. Even countries that have experienced severe banking crises have managed to reduce NPLs through decisive reforms, strong legal enforcement, and specialised resolution frameworks. Bangladesh’s significantly higher ratios suggest not just economic stress, but institutional tolerance for weak repayment discipline.
Within this broader NPL picture, the rise of wilful default is particularly damaging. Although precise data remain limited, multiple investigations and disclosures indicate that a substantial share of large defaults involve repeat borrowers, fund diversion, or strategic non-payment. These cases are often concentrated among borrowers with sufficient influence or access to exploit weak enforcement mechanisms. The result is a skewed system in which honest borrowers face tighter credit and higher costs, while deliberate defaulters face limited consequences.
The economic cost of this imbalance is significant. Wilful defaults lock up scarce capital, distort credit allocation, and weaken banks’ ability to support productive sectors. Depositors bear the risk indirectly through weaker institutions, while taxpayers may ultimately bear the burden through recapitalisation or implicit guarantees. Over time, this erodes trust in the financial system and damages the broader economy.
It is therefore essential to recognise that not all defaults are banking problems of the same kind. Genuine NPLs can largely be managed at the bank level with regulatory support. Improved credit appraisal, early warning systems, realistic provisioning, and transparent reporting can significantly reduce their impact. Regulators can strengthen supervision and discourage practices such as loan evergreening or repeated rescheduling without recovery prospects. These are technical and managerial challenges, and banks are structurally equipped to address them.
Wilful default, by contrast, cannot be resolved by banks acting alone. Banks are custodians of public funds, not enforcement agencies. Expecting them to recover misappropriated public money without strong legal backing is unrealistic. Once wilful intent is established, responsibility must shift decisively to policymakers, regulators, courts, and law enforcement agencies. Asset tracing, seizure, prosecution, and timely adjudication are essential to restore deterrence and public confidence.
Bangladesh’s NPL challenge is therefore not merely a banking sector issue; it is an economy-wide governance issue. Weak contract enforcement, prolonged legal processes, regulatory forbearance, and inconsistent policy signals create an environment where default is insufficiently penalised. Banks operate within this ecosystem; they do not define it. Expecting the banking industry to resolve a problem rooted in legal, political, and institutional structures is neither realistic nor fair.
Policymakers must shoulder primary responsibility. Strengthening insolvency and recovery laws, ensuring fast-track resolution of large default cases, clearly defining and publicly identifying wilful defaulters, and insulating credit decisions from undue influence are critical steps. Without strong legal and policy support, even the most disciplined banking reforms will have limited impact.
In conclusion, non-performing loans arising from genuine reasons should be recognised as a natural and manageable outcome of banking activity and supported through structured, transparent resolution mechanisms. Wilful default, however, is a clear case of public money misappropriation and must be treated as such. Bangladesh’s experience demonstrates the danger of blurring this distinction. Unless policymakers and the legal system take decisive ownership of the issue in the interest of the public, the NPL burden will continue to grow, threatening not only the banking system but the stability of the entire economy.

The writer is Professor, Bangladesh Institute of Bank Management (BIBM), Dhaka.
ahsan@bibm.org.bd