You are right, the bang was caused by the drivetrain binding, then suddenly releasing. And it isn't unusual to have to back up a bit to unload the drivetrain so it can change back to 2WD.
With that out of the way, for driving around on grass and such, while slippage (which is necessary) is present, there just isn't enough to be using 4LO (or part time). You'll find that full time 4WD is more than sufficient to tow a jet ski across the yard, even the boat ramp would have to be too slimey to walk on before I would use Part Time.
Researching this TC I have found that the chain driven NP242 is a full time transfer case with a 48/52 torque split front and rear. It is possible to lock it into four low so it behaves like a part-time transfer case. When it is locked in, power will be split regardless of traction. Low range is 2.72 and high is 1.00. Older units (probably much older than yours), used a limited slip kind of set up, where vacuum was applied to the front differential to disengage it and allow the drivetrain to slip between the front and rear. Since your chain driven TC appears to be constantly locked (it does get confusing reading about this particular TC) I imagine the drivetrain slip is still introduced through the differentials in some way. Hopefully, a Selec-Trac owner will step in and clarify this.
I doubt your selector is out of adjustment, since it uses a cable, the detents you feel are in the TC, and I presume your indicator lights are functioning properly. If the dash says 4LO and you felt it click into 4LO, but the bezel says Neutral, then your selector is out of adjustment.
Black 1996 5.2L ZJ Limited