Improving NPL management

Loan write-off policy can be a powerful instrument for the banking industry to bounce back from the pressure of rising non-performing loans, which have surged to approximately 36 per cent recently. The central bank has issued a revised circular amending the write-off framework, allowing loans classified as Bad/Loss, with very limited prospects of future recovery, to be written off after serving a notice to the borrower at least ten days prior to execution. Additionally, loans with the highest vulnerability and the lowest likelihood of recovery will receive priority in the write-off process.
Once these loans are written off with 100 per cent provisioning, they are removed from the balance sheet, thereby improving banks' NPL ratios. This shift will allow banks to concentrate on selecting higher-quality borrowers for future investments, potentially enhancing overall profitability. It is also noteworthy that the recovery of written-off loans must continue with renewed rigor, particularly as the central bank already introduced performance-based incentives to encourage recovery efforts.
This policy stands as a prudent and timely intervention by the central bank, offering much-needed breathing space to scheduled banks weighed down by the long-standing burden of non-performing loans. Depositors, too, are likely to gain renewed confidence, as improved asset quality and strengthened profitability enhance the perceived safety of their deposits.

Kawsik Azad Pronoy,
A banker