LISBON--Portugal's Novo Banco, which kept the good assets of collapsed Banco Esprito Santo SA, will propose that retail clients holding certain bonds of its former bank convert their investments into deposits so they can recover them in full, according to people familiar with the offer.

The move is the first from Novo Banco to reimburse retail clients who invested in debt from Espirito Santo entities that are now bankrupt.

The bonds in question were issued by Banco Espirito Santo, incorporated into different financial products and sold at higher prices to retail clients of the bank. The operations were described by Bank of Portugal as part of a fraudulent funding scheme between companies within the Espirito Santo empire.

Under the proposal, which is expected to be presented to clients next week, Novo Banco will offer customers who decide to sell their investments in the market to convert that revenue into a deposit that offers an average 2.75% interest rate over three years, with clients being allowed to take their money after the first year. Then, it would convert 75% of the difference between their initial investment and the revenue from the sale into a deposit that offers a 4.25% interest rate over 10 years.

Bank of Portugal and the Portuguese markets regulator have approved the offer, according to the people. Amounts involved in the offer weren't disclosed.

Banco Espirito Santo's troubles started in May, when it disclosed an audit ordered by the Portuguese central bank found irregularities in the accounts of its parent, Espirito Santo International SA. The conglomerate and some of its units filed for creditor protection in July.

Portuguese regulators have since found Banco Espirito Santo's exposure to the parent and units was bigger than expected, triggering a 3.6 billion-euro ($4.6 billion) first-half loss that ate up a considerable part of the lender's capital, spurring its rescue.

In early August, Banco Espirito Santo was split into a "good bank," called Novo Banco, and a "bad bank." Novo Banco took the deposits, good assets and a capital injection totaling EUR4.9 billion from a domestic resolution fund run by the Bank of Portugal and the government. The "bad bank" received the toxic assets of the lender, including its exposure to souring loans and securities from its troubled parent.

Write to Patricia Kowsmann at patricia.kowsmann@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires