The Bangladesh Bank says that extending time to borrowers and reducing down payments will slash the amount of defaulted loans in the banking sector.
The central bank held a press conference on Tuesday amid criticism over relaxing the policy for rescheduling defaulted loans.
The Bangladesh Bank is trying to ensure that the credit flow is adequate and that banks can play a role in the development of the economy, Md Serajul Islam, spokesperson and also executive director of the Bangladesh Bank, said in the press briefing.
According to the central bank's circular on Monday, a defaulter will be able to reschedule the loan four times with 2.5% to 5% down payments.
This will allow big defaulters with a loan of Tk500 crore and above a maximum of 29 years to make repayments.
The rescheduling policy relaxation by the central bank on Monday caused a stir among economists and sector people, compelling the Bangladesh Bank to hold the press conference to explain the move.
"We try to keep classified loans low, considering the local and international context. Our foreign lenders focus on loan classification. When classified loans go into double digits, donor agencies including the World Bank look down on us," said Islam.
While defending the down payment reduction, he also said rescheduling after paying 15% down payment of the total overdue was difficult, that is why it was reduced.
But this is not the same for all. This will be determined after considering the actual financial condition and cash flow of the borrower, he also said.
Saying that defaulters will not get 29 years to make repayments, the spokesperson said if a defaulter rescheduled once and became a defaulter again, they would not be entitled to reschedule again.
The circular also stated that legal action would be taken against anyone who was a willful defaulter.
According to Monday's circular, the board of directors of banks will decide how they would treat the defaulted loans.
Previously, the central bank's approval was required to regularize loans under special facilities. That power was now in the hands of the banks.
"Earlier, defaulted loans were sent to the central bank for rescheduling. But it is not the central bank's job to reschedule defaulted loans. Banks and financial institutions know their clients better, and they can make these decisions."
Serajul Islam said that bank boards from now on would have to take loan classification responsibilities as the central bank will act as the regulator.
"This will increase accountability and reduce defaults," the senior central bank official also said.
In response to the query whether the new circular was imposed by any particular group, the spokesperson of the Bangladesh Bank replied in negative.
After this circular, the influential businessmen will repay regularly and the volume of defaulted loans will come down. From now on, junior officers disbursing loans will also be held responsible. The bank boards have been empowered for the overall economic interest, he added.
