What we can learn from other countries to tackle our NPL crisis

By now, it is common knowledge that Bangladesh’s banking sector has several fundamental problems, with non-performing loans (NPLs) being the major one. As of June 2026, the NPL ratio in Bangladesh has surged to a record of 32.78 percent, the highest in the world, surpassing the NPL rates of Chad (31.51 percent) and Equatorial Guinea (30 percent).

Bangladesh Bank took many initiatives to reduce NPLs by relaxing loan classification rules, repeatedly allowing loan rescheduling by requiring less down payment, permitting loan restructuring with abnormal durations of up to 15 years, granting a one-time exit policy and relaxing the loan write-off policy. Yet, NPLs continued to rise. This raises the obvious question: are NPLs in Bangladesh uncontrollable? To answer this question, it would help to look at how our neighbouring countries reduced their NPLs.

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The Asian Financial Crisis in 1997, triggered by the Thai baht collapse, spread across East and Southeast Asian countries. While the banking sectors in South Korea and Malaysia were affected badly, Japan and China’s financial sectors were also impacted.

After the crisis, Thailand’s NPL rate soared from under 10 percent in 1996 to over 50 percent, peaking around 1998–1999. With an IMF rescue package, Thailand created the Financial Sector Restructuring Authority (FRA), which divested the assets through bulk sales, focusing on restructuring as the main approach to resolving NPLs. The Thai Asset Management Corporation (TAMC) and the Corporate Debt Restructuring Advisory Committee (CDRAC) were founded. TAMC was given extraordinary legal powers to unilaterally amend loan terms, conduct debt-for-equity swaps, and foreclose on debtors’ assets—all without the debtor’s consent or court approval. It also granted the power for reorganisation, and its workout officers were granted immunity from prosecution.

The CDRAC was established to focus on out-of-court workouts. It adopted the more traditional approach of encouraging private negotiations between creditors and debtors. A specialised bankruptcy court was formed to expedite the legal hearing process, followed by the creation of new foreclosure laws that allowed most foreclosure cases to be completed within 12 to 18 months. Thailand also adopted securitisation—issuing financial assets against illiquid ones—for NPL disposal, facilitated by the 1997 securitisation act. Its NPL rate declined sharply, nearing 10 percent in 2003. Last year, the country’s NPL ratio was only 2.84 percent.

South Korea’s NPLs surged dramatically, rising by more than 10 percentage points between 1996 and 1997. The country established Korea Asset Management Corporation (KAMCO) to purchase NPLs at a discount and sell them off at high prices. Capital was injected into healthy banks through public bonds and insolvent banks were acquired through the Korea Deposit Insurance Corporation (KDIC). KAMCO’s NPL disposition methods included bulk/individual sales to domestic and international investors, asset-backed securities issuance, bankruptcy auctions, debt collection, and loan restructuring. It also conducted massive debt-for-equity swaps and mergers and acquisitions. Korea’s relatively mature legal framework and further reforms to its bankruptcy legislation contributed to KAMCO’s accomplishments. KAMCO’s success can also be attributed to political will backed by strong public interest in ensuring the right use of public funds. By 2001, the NPL ratio in Korea declined significantly. It stood at only 0.5 percent in March 2026.

The NPL rate in Malaysia peaked at over 20 percent in early 1999. Malaysia blacklisted defaulters and prohibited them from leaving the country. The government guaranteed depositors’ funds and decided that troubled institutions would not be closed. Three new state-run agencies were established in 1998: (i) Danamodal (recapitalisation), a subsidiary of the central bank to recapitalise, restructure, and monitor the performance of insolvent financial institutions; (ii) Corporate Debt Restructuring Committee to restructure corporate debts by creating a forum for lenders and borrowers; and (iii) Danaharta, an asset management company to buy, manage, restructure, or dispose of NPLs and assets attached as collateral, and to maximise the recovery value of the acquired assets. Subsequently, the NPL ratio dropped below 5 percent by the mid-2000s, reaching 2.1 percent by 2009. The country’s NPL ratio hovered around 1.4 percent in March 2026.

Japan’s NPL rate peaked at 8.4 percent in 2002 after the crisis. The government launched a major effort to clean up the banking sector, including injecting public funds to stabilise the system and facilitate NPL disposal. The Resolution and Collection Corporation (RCC) was established in 1999 to take over NPLs from the failed financial institutions. Initially, the RCC resorted to straight loan collection, but later it turned to restructuring. NPL securitisation was facilitated by important amendments to its legal framework. Reorganisation of companies has been facilitated by the Corporate Reorganization Law, effective since April 2003. This legislation was accompanied by the establishment of the Industrial Revitalization Corporation of Japan (IRCJ), a joint-stock company with government-guaranteed loans to focus on reorganisations. The IRCJ reviewed reorganisation plans and purchased loans from banks—that were not the principal lender of the debtor corporations—at the request of corporations with excessive debts. The country’s NPL ratios fell from a peak of 8.4 percent in 2002 to 1.8 percent in 2006. By 2025, the NPL ratio fell to 1 percent.   

China’s NPL ratio was over 25 percent following the 1997 financial crisis. In 1999, the government established four specialised AMCs to take over, manage, and dispose of bad loans from the big four state-owned banks. China also imposed heavy restrictions on loan defaulters enjoying some social benefits. Defaulters were not allowed to buy air and high-speed train tickets, to serve as executives of corporate entities, or to avail further credit; their personal ID cards used to avail hotel accommodation facilities were banned. Even though many politicians, legislative and government staff were among the defaulted borrowers, there was no exception to punishment. The court, in partnership with telecommunication operators, implemented a public shaming tactic whereby anyone calling the debtor would hear the message: “The person you are calling has been put on a blacklist by the courts for failing to repay their debts. Please urge this person to honour the legal obligations.” Between 2000 and 2011, China’s NPL rate declined from over 25 percent to around 1 percent. By June 2026, the country’s NPL rate reached only 1.5 percent.

Thailand, Korea, Malaysia, Japan, and China successfully reduced their NPL rates mainly through mergers and acquisitions, loan restructuring, recapitalisation, reorganisation, securitisation, debt-for-equity swaps, asset-backed securities, and out-of-court workout. Bangladesh can also reduce its NPLs by punishing wilful defaulters, making the money loan courts (aartha rin adalat) vibrant, stopping political interference in loan sanction and establishing good governance in the banking sector. For that political will, good intention and strong public interest are required; otherwise, NPLs will continue to pile up.

Dr Md Main Uddin is professor and former chairman of the Department of Banking and Insurance at Dhaka University. He can be reached at: mainuddin@du.ac.bd.

Views expressed in this article are the author's own. 

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