Are defaulters getting more benefits from BB’s new policies?

Economists and IFIs are concerned as Bangladesh Bank and the government have been giving benefits one after another to the defaulters on various pretexts 

Bangladesh Bank has yet again announced another new set of facilities for loan rescheduling for its borrowers.

Earlier, on June 22, Bangladesh Bank (BB) extended the loan moratorium until December 31. On the other hand, the Ministry of Finance has reduced the default loan target of state-owned banks (SoBs) from the initial target of the current fiscal year.

Meanwhile, at the end of the first quarter of this year, the banking sector, which was on the brink of a new record of non-performing loans (NPLs), became a matter of concern among International Financial Institutions (IFIs) like IMF and the economists.

Big borrowers are relieved as BB on Monday quite liberally relaxed their loan rescheduling liabilities in an effort to facilitate overall business activities in Bangladesh amid the global inflation, extending time and slashing costs.

Regarding the matter, Ashikur Rahman, senior economist at the Policy Research Institute (PRI) and a member secretary of Bangladesh Economists' Forum (BEF), told Dhaka Tribune: “The governance policy in the banking sector of Bangladesh is not in a very healthy condition for the last 10 years. It needs to be rearranged as soon as possible. In this situation, the central bank needed to take a stronger stand but such a decision may send the wrong message.”

However, considering the current global economy, he thinks that the benefit of loan repayment tenure and the percentage of NPL down payments given here can be discussed. 

“The first one is good governance and the second one is the current global situation. The global economy is not in very good shape. Its influence on Bangladesh is also increasing. 

“Inflation is rising along with the price increase of many products in the international market. Moreover, the situation of new Covid-19 outbreaks is also a matter of concern. 

“In this situation, the benefit of loan residuals may give some relief to businesses. However, the discount amount and time could have been more thought out. It is not desirable to impose a weak plan on the banking sector to save businesses.

“The prices of products have increased both in the country and in the international market. In this situation, reducing inflation is really a big challenge. But I think imported inflation can be reduced a bit if in this case Bangladesh Bank can increase the LC interest rate. Imports will decrease as well as imported inflation.”

The issue is while inflation is almost always extremely painful for the poor and low-income groups, business elites often oppose interest rate hikes, arguing that it will cost them more under such a tight monetary scenario, he added.

Asked about the steady rise of inflation, AB Mirza Azizul Islam, economist and former financial adviser to the caretaker government, told Dhaka Tribune: “The demand for both food and non-food items in the market are increasing after the Covid-19 economic shock. Meanwhile, the value of the taka has declined against the dollar as well. I think all these factors have been continuously affecting the inflation rate of the country for the last few months.”

BBs master plan on loan rescheduling and restructuring

Under the policy, the time limit for first and second-time rescheduling of term loans has been extended to six to eight years, including a grace period instead of the previous nine to 24 months, according to a notification issued days after a new governor took over.

In the case of continuous demand for loans, the time limit for first and second-time rescheduling has been jacked up to five to seven years, including a grace period, from six to 18 months.

Besides, the borrowers were also allowed to get their classified loans rescheduled for the fourth time instead of three times earlier for the sake of recovery of the bad loans, the notification explains.

The timeline for third-and fourth-time rescheduling of all types of loans is reduced by one year from the maximum timeframe set by the central bank.

"We relaxed the policy to facilitate the country's overall business activities considering the ongoing Russia-Ukraine war as well as the Covid-19 pandemic," a top central banker told the media.

Now all the scheduled banks are at liberty to reschedule loans without prior approval from the BB, he added.

Under the new provisions, the banks will have to settle the cases of loan rescheduling and restructuring upon approval by their board as well as the executive committee on the basis of the bank-client relationship.

In that case, there is no need to receive prior approval from the central bank, according to the notification.

However, the time limit for the rescheduling of agriculture loans and micro-credit has been re-fixed at a maximum of three years instead of two.

Under the fresh provisions, the down-payment amount for the first and second-time rescheduling of term loans has been cut down to a minimum of 2.5% to 4.5% from 15% to 50% previously of the overdue installments or 5% to 7% of the total outstanding amount of a loan, whichever is less.

Regarding loan restructuring, the maturity date may be extended by a period of time not exceeding 50% instead of 25% earlier than the current remaining time to maturity.

Compromised amount, applicable to receiving a fresh loan after completing the rescheduling process, has been slashed to 3% from 15% for general borrowers while exporters may be granted further credit facility on payment of 2% of the outstanding balance instead of 7.5% previously.

The latest moves come against the backdrop of a rising trend in the NPLs in the banking sector despite close monitoring of the central bank.

The number of classified loans grew by 9.85% to Tk113,4.4 crore during the January-March period of 2022, from Tk103,274 crore in Q4 of 2021.

At the beginning of this new FY23, Bangladesh Bank has been giving benefits one after another to the defaulters on various pretexts. And the more significant the defaulter, the heavier the benefits.

Default loans status in Q1 (January to March) 2022

Non-Performing Loan (NPL) has reached Tk1,13,441 crore and economists and bankers think it's driven by the withdrawal of the relaxed loan classification policy.

According to the Bangladesh Bank’s latest data, default loans in the banking sector surged 19.3% year-on-year in the first quarter of 2022, which is just short of Tk2,847 crore to reach the amount of the country’s highest-ever defaulted loans.

In September 2019 default loans amounted to Tk116,288 crore and Tk95,085 crore in March 2021.

At that time, after the Q1 data was published, economists and bankers think the measures taken previously, including easing the loan rescheduling and classification rules, in order to get rid of NPLs have largely failed to produce expected results and restore the financial discipline in the banking sector, which reflected in the higher default loans in the first quarter of this year.

Loan moratorium facility extended till December

Borrowers have been given time till December this year to avoid their loans being classified as defaulted by paying 25% to 75% of their installments for 2022.

The Bangladesh Bank issued a circular on June 22 extending the loan moratorium facility for all borrowers.

Under the new facility, large industrial borrowers are allowed to repay their term loans, which became unclassified on April 1, in phases – 50% by June, 60% from July to September, and 75% from October to December – without becoming a defaulter.

The remaining amount of the benefited installments will have to be repaid in the same installment one year after the expiry of the loan period.

In addition, unclassified term loans disbursed to the cottage, micro, small and medium enterprises (CMSMEs) and the agricultural sector cannot be classified if 25% of a loan is repaid from April to June, 30% in July-September, and at least 40% in October to December of this year.

Besides, the demand loans of large-scale industry, CMSME and agriculture sectors, which became unclassified as of April 1 cannot be shown as default if they are repaid in three installments by December.

According to the circular, the central bank has given such special facilities as borrowers are facing difficulties in repaying their loans due to the recent rise of Covid infections, huge flood damage in the north and northeast parts of the country, and rising prices of various commodities including raw materials and transportation costs in the international market.

In addition, term loans disbursed to the CMSME sector in these districts can be saved from being defaulted if 25% of the installments are paid from April to December this year.

Following the coronavirus outbreak, borrowers enjoyed a complete loan moratorium facility in 2020.

The following year borrowers enjoyed the same facility with a repayment of 15% in all types of loans. The moratorium ended on 31 December 2021.

Reduced target for SoBs 

The Ministry of Finance has set a target of reducing the defaulted loan status by about Tk2500 crore in the current fiscal year 2022-2023 as six state-owned banks (SoBs) are unable to reduce their defaulted loans.

According to the relevant sources of the Ministry of Finance, according to the respective estimates of the banks, at the end of the recently concluded fiscal year 2021-2022, the amount of defaulted loans of six state-owned commercial banks was Tk48,166 crore.

In contrast to this, the target of the defaulted loan status of the banks at the end of the current financial year is Tk45,700 crore.

AB Mirza Azizul Islam emphasized the goodwill of the banks when asked how it was possible for state-owned banks to reduce the growing default, contrary to the regular directives of the Bangladesh Bank and the FID.

Speaking to Dhaka Tribune earlier, he said that the goodwill of the state-owned banks is primarily important to increase the recovery of defaulted loans, otherwise, the instructions will not work.

“First of all, they have to focus on the quick recovery of these loans. Considering their ability, they have to decide for themselves how much progress they will make at a given time.”

In addition, the cases that have been stuck in the finance court for years need to be expedited, the economist opined. 

“If necessary, sit down with each stakeholder and the debt collection guideline needs to be tightened. I think if these measures are taken first, it is possible to speed up the recovery of defaulted loans,” he added.

IMF concerned over high NPLs

A visiting International Monetary Fund (IMF) delegation expressed concern over the weakness of Bangladesh's banking system and the high rate of non-performing loans (NPLs). A senior official of the Ministry of Finance gave this information on July 18.

The IMF raised its concerns in a meeting with the banks and Financial Institutions Division (FID) at the Secretariat earlier this week. The organization called for good governance to restore order in the banking sector.

IMF also wants to know the current situation of the banking sector in discussions with FID.

He said: "Even after the government gave various facilities to control the defaulted debt, it has not decreased. Instead, it has increased more than before." The IMF wants to know why this is happening.

According to sources, in response, banks and financial institutions said that the government is trying to reduce defaulted loans and that its effort will continue.