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Dhaka Tribune

IMF’s condition on loan classification time

Businesses concerned IMF’s conditions will lead to a lack of access to finance

IMF’s prescription will increase the classified loans by a huge amount, bankers fear

Update : 07 Aug 2023, 10:43 PM

In compliance with the IMF's $4.7 billion budget support guideline, the central bank intends to reduce the overdue period for listing long-term debt as categorized from six months to three months. 

As a result of Bangladesh Bank's (BB) action, businesses' access to finance will not only be constrained, but it may also cause a mishap in Bangladesh's industrial sector, particularly the employment sector, said businesses, saying they are very concerned.

Bankers, on the other hand, believe that the IMF's prescription will significantly raise the classified loans.

Faruque Hassan, president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) told Dhaka Tribune: “Due to the impact of the global economy, especially the Russia-Ukraine war, our economy is also not in a very good condition. Still no new investment. If such a decision is taken in this situation, it will cause a calamity in Bangladesh's industrial sector, especially the employment sector. Because as a result, the access to finance will decrease.”

“Many industries may close down, even if they are in trouble with bank loans, but are still managing the business by paying their employees,” this business leader also said.

Federation of Bangladesh Chambers of Commerce and Industries (FBCCI) vice-president Md Amin Helali also agreed with the BGMEA president. 

He told the media that if the overdue loan classification period is reduced from six months to three months, there will be a negative impact on business and industry. 

The economy is already in bad shape due to the Russia-Ukraine war and among other factors, if the duration of classification of long-term loans is reduced from six months to three months while complying with the IMF's conditions, it will be difficult to sustain a business. The private sector will be threatened, he added.

Bangladesh Bank's plan to halve overdue loans classification time may increase classified loans and bankers fear but say that it is good to follow international practice. 

Syed Mahbubur Rahman, the managing director and CEO of Mutual Trust Bank, told Dhaka Tribune: “Now we used to do SS (supervisory statement) in six months now it has to be done in three months. As a result, the loan will be classified after three months. As a result of which the NPL will definitely increase a lot. On the other hand, businesses will be impacted. Their access to finance will be limited.”

“Yes, we should also follow international banking practices. Moreover, earlier we used to classify loans for three months only,” he also added.

According to international standards, the default loan rate is considered tolerable up to a maximum of 3%.

However, the IMF's other requirement for non-performing loans (NPL) is that by 2026, non-performing loans of state-owned banks should be reduced to 10%, and non-performing loans of private sector banks should be reduced to 5%.

As difficult as this would be, Tarique Afzal, president and managing director of AB Bank, told Dhaka Tribune that discipline and all tough measures will undoubtedly reduce NPLs.

Selim RF Hussain, Managing Director and CEO of Brac Bank, told Dhaka Tribune that the central bank's initiative is a positive one. It is an attempt to improve banking governance and connect our local practices and policies with international banking principles. There may be some short-term pain, but this type of strategy will assist improve our banking system in the long run. 

“This is exactly the kind of courageous reform we require, and I applaud the regulators for taking the initiative.”

Policy Research Institute executive director Ahsan H Mansur said that the Bangladesh Bank should be more active in recovering bad loans taken mostly by wilful defaulters.

However, since March 2023, renowned International credit rating agency Moody’s Investors Service downgraded its outlook on Bangladesh’s banking sector to “” “negative” from “stable” on the heels of various alleged scams, irregularities and piling up of massive non-performing loans in the banking system.

Requesting anonymity, a Bangladesh Bank official told Dhaka Tribune that the central bank has already implemented various measures to combat loan fraud and improve financial stability in the country. 

These include imposing penalty interest on overdue and classified loans, mandating fingerprint verification for loan guarantors, and removing special concessions for loan repayment.

BB’s new policy to reduce NPL, fraud

In a circular issued on August 2, the central bank directed the banks to ensure the verification of fingerprints from loan guarantors.

On July 27, the Bangladesh Bank introduced a new rule allowing banks to charge a maximum 1.5% penalty interest for overdue and classified loans.

During Covid-19, the central bank made a special concession, stating that borrowers would not default if they could repay a certain amount. Which was set to expire in June 2023. Currently, there are currently no specific loan repayment facilities.

However, the country's banking sector saw a Tk11,000 crore increase in default loans in the first three months of this year (January-March).

In March, the total default loan in the banking industry was at Tk1,31,620 crore, accounting for 8.8% of total outstanding loans.

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