Published: 10:05 AM, 24 August 2026
Managing a Minsky Moment: The Logic Behind the Exit Policy
The recent trajectory of Bangladesh’s banking sector increasingly reflects the anatomy of what economists describe as a ‘Minsky moment’ - a point at which prolonged financial fragility suddenly becomes visible, forcing a system-wide recognition that accumulated debt cannot be serviced under existing structures. While the term originated in advanced financial markets, its underlying logic is strikingly relevant to the evolving credit dynamics in Bangladesh.
At the heart of the issue lies a fundamental mismatch between loan structures and the cash flow realities of borrowers. Over the past decade, credit expansion in Bangladesh has often been driven by optimistic projections, policy encouragement, and, at times, competitive pressures among banks.
Term loans, in particular, have been widely extended with fixed repayment schedules that assume stable and predictable income streams. In practice, however, many sectors - especially manufacturing, trade, and small enterprises - operate under volatile demand conditions, fluctuating input costs, and external shocks. As a result, repayment obligations frequently outpace actual earnings capacity.
This disconnect has gradually eroded asset quality across the banking system. Loans that initially appeared viable have transitioned into substandard, doubtful, or bad categories, not always due to deliberate default but often because of structural misalignment.
The repeated rescheduling and restructuring of such loans have masked underlying weaknesses rather than resolving them. In Minsky’s framework, this corresponds to a shift from ‘hedge finance’, where borrowers can meet both principal and interest payments, to ‘speculative finance’, where only interest is serviced, and eventually to ‘Ponzi finance’, where borrowers rely on further borrowing or regulatory relief to stay afloat.
Bangladesh’s recent experience suggests that a significant portion of the credit portfolio has drifted into this latter territory. The growing stock of non-performing loans (NPLs), coupled with declining recovery rates, indicates that the system has reached a point where conventional remedies are insufficient. It is in this context that Bangladesh Bank’s Special Exit Policy, announced on June 29, 2026, must be understood.
The policy represents a clear acknowledgment of systemic stress. By allowing banks to offer a one-time exit facility to borrowers with classified loans as of June 30, 2026, the central bank is effectively facilitating a balance sheet reset. Borrowers are given the opportunity to settle their obligations through negotiated arrangements, often involving concessions on accumulated interest and penalties. Banks, in turn, can clean up their books, reduce NPL ratios, and free up capital for fresh lending. From a pragmatic standpoint, such a policy is both necessary and timely. In a situation resembling a Minsky moment, insisting on full contractual repayment can be counterproductive. It may lead to prolonged litigation, further deterioration of asset values, and a freezing of credit flows. By contrast, a structured exit mechanism allows for an orderly resolution of distressed assets, minimizing losses for both lenders and borrowers.
However, the policy also raises important questions about incentives and long-term discipline. One of the recurring challenges in Bangladesh’s financial sector has been the expectation of regulatory forbearance. When borrowers anticipate periodic relief measures - such as rescheduling, interest waivers, or special exit facilities - they may have less incentive to maintain financial discipline. Similarly, banks may become less rigorous in credit appraisal, relying on future policy interventions to mitigate risks.
This is where the Minsky perspective offers a valuable caution. Financial instability is not merely the result of external shocks; it is often the outcome of endogenous behavior within the system. Periods of stability and growth can breed complacency, leading to riskier lending practices and higher leverage. Over time, the system becomes increasingly fragile, until a tipping point is reached.
In Bangladesh, several structural factors have contributed to this dynamic. First, credit growth has often outpaced the development of robust risk assessment frameworks. While regulatory guidelines exist, their implementation has been uneven, particularly in the case of large corporate exposures. Second, governance challenges within some banks have led to concentration of credit in certain sectors or groups, increasing vulnerability. Third, the legal and institutional framework for loan recovery remains time-consuming and uncertain, reducing the effectiveness of enforcement mechanisms.
The Special Exit Policy addresses the symptoms of this fragility but not its root causes. By design, it is a temporary measure, valid until December 31, 2026. Its success will depend on how it is implemented at the bank level - specifically, whether it is used judiciously to resolve genuinely distressed but viable cases, or indiscriminately to write off problematic exposures. Importantly, the policy places emphasis on sectors such as agriculture and CMSME, recognizing their critical role in employment and economic resilience. This prioritization is well-founded, as these sectors are often more vulnerable to cash flow disruptions yet have strong potential for recovery if given appropriate support. Nevertheless, the broader challenge remains: how to ensure that future lending to these sectors is structured in a way that aligns with their income cycles.
A key lesson from the current situation is the need to move away from rigid, one-size-fits-all loan structures. Instead, banks should adopt more flexible repayment schemes that are closely tied to the cash flow patterns of borrowers. For example, seasonal businesses may benefit from bullet or balloon payments, while project-based financing could incorporate grace periods and revenue-linked installments. Such approaches require more sophisticated credit analysis but can significantly reduce the risk of default.
Moreover, strengthening credit appraisal standards is essential. This includes not only financial analysis but also a deeper understanding of business models, market conditions, and risk factors. Banks must invest in capacity building, data analytics, and sectoral expertise to improve the quality of lending decisions. At the same time, regulatory oversight should focus on ensuring that these standards are consistently applied.
Another critical area is the enforcement of accountability. Both borrowers and lenders must bear responsibility for their decisions. For borrowers, this means adhering to agreed repayment terms and maintaining transparency in financial reporting. For banks, it means conducting due diligence and avoiding undue concentration of risk. Regulatory frameworks should reinforce these principles through appropriate incentives and penalties.
The legal infrastructure for loan recovery also warrants attention. Efficient and timely resolution of disputes is crucial for maintaining credit discipline. While alternative mechanisms such as arbitration and out-of-court settlements can play a role, the overall system must be strengthened to ensure predictability and fairness.
In the final analysis, Bangladesh’s current situation reflects a broader truth about financial systems: stability cannot be taken for granted.
Mehdi Rahman writes
on foreign trade and
monetary policies.
