The Bangladesh Bank has begun to rein in willful defaulters, who were previously enjoying loan waiver facilities from banks.
The unscrupulous people who took loans by forgery will not be allowed to get support from lenders, according to a notice issued by Bangladesh Bank on Thursday.
The decision of the central bank to rein in indiscriminate waiving of interest on loans by a section of banks has been long overdue. Unrestrained interest waivers and loan write-offs are viewed as two major problems the banking industry is facing.
Together, these factors have been cutting banks' profitability and depriving the government of a substantial volume of tax revenue at the same time.
The banks have been exercising full freedom to waive loan interest, ignoring the methods explained elaborately in a circular issued by the central bank almost three decades back. Now, the Bangladesh Bank has come up with a new circular that advises banks on what they should do with interest waivers.
In the circular, the central bank also specified which methods should be followed by banks to waive interest.
Before the circular, banks could waive all types of interest of borrowers irrespectively, but the latest circular has imposed an embargo on waiving all sorts of interest.
Banks are not permitted to waive the principal amount of the loans under any circumstances.
The funds that have already been transferred to the income segment of banks can not be waived.
Management of the respective banks will not be able to waive more than Tk10 lakh interest amount of a loan. In such cases, management has to take prior approval from the board of directors.
Banks will have to manage their cost of funds of loans while waiving any amount of interest. The cost of funds refers to how much banks spend in order to acquire money to lend to borrowers.
The central bank, however, said that banks would be allowed to avoid the instruction of ensuring the cost of funds in some cases.
The cost of funds will not be calculated for the projects which have been closed for three years in a row.
The central bank's latest move on the interest waiver, surely, would trigger a few questions. One may want to know from the Bangladesh Bank the reasons for being indifferent to the issue for such a long time. The central bank's inaction has given rise to a free-for-all situation as far as loan waiver by banks is concerned.
This is clear from the sizes of interest waivers and written-off loans. In 2020, the amount of interest waived (Tk1,587 crore) was almost twice the volume of bank loans written off (Tk970 crore). Banks have to keep 100% provision against the written-off loans from their operating profits. But such provisioning is not mandatory with interest waivers.
If banks do not get back the default loan despite the completion of all legal procedures, the formula of cost of funds can be sidestepped.
Banks usually face difficulties to return their funds if borrowers expire.
They also face difficulties to recover their loans if borrowers face natural calamities, pandemics and river erosion. So, banks can consider the issue for relaxation of the cost of funds.
