Bangladesh Bank gives loan defaulters a big break

Bangladesh Bank issued a circular on Monday restructuring its loan default policy with businesspersons getting a big break just five days after its new governor Abdur Rauf Talukdar took the office.

According to the new policy, the central bank allowed businesses to make a down payment of 2.5 to 6.5 per cent of their term loan instead of previous 10 to 30 per cent to reschedule their loans while payment tenure got an extension of 5 to 8 years from prevailing maximum 2 years. In the meantime, businesses can also avail new loan.

The new policy shift may see a drop in loan default temporarily though rise in loan recovery is unlikely and liquidity in banking sector will face more disorder. The new policy, according to the circular, is taken to maintain stability in financial sector and such decision was taken due to the Russia-Ukraine war and the coronavirus pandemic.

Bank’s board of directors have given full authority to decide what sort of facilities to be provided over defaulting loan, thus, the bank owners will determine what facilities loan defaulters will get. Previously, rescheduling of loans required approval of central bank under special privilege what the governor himself had approved. The new governor now left that authority entirely on banks.

Loan department officials of several banks said the new policy will make loan recovery harder and liquidity management will see a haphazard situation. Interest on deposit will have to be increased and banks may need to depend on other banks to return depositors’ money. Distribution of new loan will also slow down and opportunity to misuse will arise because of handing over the authority to banks.

Bangladesh Bank, however, said loan through fraud and deception would not be rescheduled under the new policy. Besides, loan that got rescheduling for four times can be regularised one more time and down payment will have to be settled within three months.

Loan payment capacity of client and reason for defaulting will have to be verified before rescheduling; loan of habitual defaulter will not be regularised and legal action will be taken to recover loan from such clients.

Speaking to Prothom Alo, former chairman of Association of Bankers Bangladesh Anis A Khan said businesses will be the gainers since such decision has been taken under their pressure but it will create huge pressure on bank and liquidity management of banking sector will fall in a crisis.

“New loan will drop and new entrepreneur will not get loan; foreign banks and lending agencies do not see such relaxation positively, so we have to wait to see whether foreign trade of local banks is affected,” he added.

Central banks officials, however, said various lobbying came to rescheduling loan under special privilege. That is why new governor gave the banks this facility.

The circular of Bangladesh Bank stated global economy faces instability because of long-lasting negative impact of coronavirus pandemic and recently prolonged war situations and since coronavirus outbreak prolongs, new policy was issued on rescheduling of loan for the sake of keeping financial sector stable and managing the classified loan properly.

Previously, defaulters who took term loans had to pay 10 to 30 per cent of their total loan to reschedule it and now they will have to pay 2.5 to 6.5 per cent only.

Earlier, borrowers would provide a down payment of 5 to 15 per cent, if they took working capital or demand loans and now the limit of down payments has been set at 2.5 to 5 per cent.

Previously, tenure of payment was 9 to 24 months for rescheduled term loan. The new policy set tenure of payment at 6 years for a loan less than Tk 1 billion (100 crore), 7 years for a loan less than Tk 5 billion (500 crore) and 8 years for a loan less than Tk 8 billion (800 crore).

Currently, a defaulter with any amount of long-term loan can get a maximum of six years to repay through rescheduling, while the repayment period is 3.5 years for a short-term loan.

Previously, defaulters were given 6 to 18 months to pay current and demand loans through rescheduling. Now the tenure has been set at maximum six years for a loan less than Tk 500 million (50 crore), maximum six years for a loan less than Tk 3 billion (300 crore) and maximum seven years for a loan above Tk 3 billion (300 crore).

Defaulter, who rescheduled loan under special privilege, can now take more loans. For this, common borrowers will have to pay 3 per cent of their loans instead of previous 15 per cent and for exporters it is 2 per cent, which was 7.5 per cent beforehand.

The central bank said term loan, which has been rescheduled, can also be restructured and its tenure can be extended to maximum 50 per cent of existing term instead of previous 25 per cent. ( এদিকে যেসব মেয়াদি ঋণ নিয়মিত রয়েছে, তা–ও নতুন করে পুনর্গঠন করা যাবে বলে জানিয়েছে কেন্দ্রীয় ব্যাংক। এতে বিদ্যমান মেয়াদের অবশিষ্টের সর্বোচ্চ ৫০ শতাংশ পর্যন্ত সময় বাড়ানো যাবে। আগে যা ছিল ২৫ শতাংশ।)

Speaking to Prothom Alo, Mutual Trust Bank managing director Syed Mahbubur Rahman said this policy will decrease loan defaulting as well as increase bank’s responsibility since they get the authority.

Loan default is on the rise following relaxation because of coronavirus pandemic, with new defaulters being added to the list. Besides, a big portion of Tk 1 trillion (1 lakh), which was lent to keep economy vibrant amid Covid-19, remain unrecovered.

As of March this year, default loans increased by Tk 100 billion (10,000 crore) to Tk 1.13 trillion (113,441 crore) from Tk 1.03 trillion (103,274 crore) in December 2021. That is why central bank wanted to control loan defaulting through relaxation.

Regarding overall issues, former governor of Bangladesh Bank Salehuddin Ahmed told Prothom Alo, “Currently, many countries are in trouble and we are witnessing situations in Sri Lanka. That is why Bangladesh Bank gave such facilities in advance and if these facilities had been given to good, small and medium clients it would have been better. Such mass scale facility never brings good result. It is necessary to take strong measure to recover defaulted loan and how the IMF takes this decision is also a matter to observe.”