If loan installments are not paid on time, banks will now be able to impose penalty interest at a lower rate than before.
According to the new decision, if a loan or loan installment is overdue, a maximum penalty interest rate of 0.5% can be charged. Earlier, this rate was 1.50%.
On Wednesday (May 13), Bangladesh Bank issued a circular and sent it to all scheduled banks in the country.
The circular came into effect immediately after its issuance. Earlier, in May 2024, the central bank had given instructions setting the penalty interest rate at 1.50%.
The new directive states that if a loan or loan installment is identified as fully or partially overdue, a maximum penalty interest rate of 0.5% can be imposed on the entire balance in the case of current and call loans and on the overdue installment in the case of term loans.
According to bankers, the penalty interest rate is usually kept high to encourage customers to repay loans on time. If the penalty interest is high, there is pressure on borrowers to pay installments.
As a result, they fear that a sudden reduction of this rate by 100 basis points may have a negative impact on the banking sector.
A top official of a private bank said that the current loan interest rate is around 14.5%.
Due to the reduction in penalty interest, many banks may increase the prime interest rate to 15.5%. This will ultimately put additional pressure on borrowers.
The managing director of another bank said that such a policy will put pressure on the bank's profits.
At the same time, those who do not repay loans regularly may also be encouraged by it.
Another senior bank official said that the current amount of defaulted loans in the banking sector is already worrying. Among them, the tendency of late repayment may increase further due to the reduction in penalty interest.
He also said that in line with international practice, the loan expiry period has been set at three months from 2024. But a section of businessmen is demanding that it be extended to six months, which could further increase defaulted loans.
He also said that if the International Financial Reporting Standard (IFRS)-9 is fully implemented, banks will have to reserve the account for possible losses in advance.
Then the pressure on risky loans will become more evident. “Those who are really good businessmen do not want such concessions. They regularly repay loans on time,” the official added.
IFRS-9 is an international financial reporting standard formulated by the International Accounting Standards Board (IASB), which sets out the principles for classifying, measuring and accounting for possible losses on financial assets and liabilities.