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Bangladesh Bank relaxes loan classification policy

  • Published at 09:28 pm April 22nd, 2019
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The Bangladesh Bank building at Motijheel Mehedi Hasan/ Dhaka Tribune

Economists warn it will encourage defaulters

Bangladesh Bank has relaxed loan classification policy extending time for repayment with a view to bringing down the huge amount of defaulted loans, which has reached nearly Tk100,000 crore for the first time in the country’s 48-year history.

The central bank issued a circular on April 21 to the managing directors and chief executive officers of all scheduled banks in this regard. This circular will come into force on June 30, the circular said.

In 2012, the loan classification policy was tightened in compliance with global standards, reducing to three months from the previous six months the timeframe beyond which non-repayment of a loan would be classified as sub-standard.

As per the current policy, loans overdue for six and nine months are classified as doubtful and bad respectively. 

But, in the new policy, the timeline has been pushed by three months for each of the categories. 

According to the new regulation, in case an installment or part of an installment of a fixed- term loan is not repaid within the fixed timeframe, the amount of unpaid installment will be treated as overdue after six months. 

After six months, any installment or part of installment of a loan which will remain overdue for a period less than nine months, the entire loan will be treated as sub-standard. 

The same loan, if overdue for a period of none months or beyond, but less than 12 months, the entire loan will be treated as doubtful while if the loan remains past due or overdue for a period of 12 months or beyond, the entire loan will be considered as bad/loss.

Loans have to be treated as defaulted as per section 5 (GaGa) of the Banking Companies Act, 1991 and to be reported accordingly as per formats given in Banking Regulation and policy department circular no.08 dated August 2, 2015. 

Even a portion of the sub-standard loans will be reported as defaulted loan, according to the new policy. 

Talking to the Dhaka Tribune, former adviser to a caretaker government AB Mirza Azizul Islam said that there was no logic for giving one after another benefit to the defaulters. 

He expressed his frustration saying that relaxing loan classification policy would bring no benefit rather the borrowers would be encouraged to become defaulters. 

“The central bank had revised the loan classification policy in 2012 as per Basel III guidelines. The new policy, which will benefit the weak banks only, will violate the global standards. Bad borrowers will be encouraged by the policy,” warned Ahsan H Mansur, executive director of the Policy Research Institute. 

He observed that the new policy would just make the large amount of defaulted loans look small but such loans would actually increase further. 

Through this policy, banks would get some time for provisioning against their non-performing loans, said Association of Bankers, Bangladesh Chairman Syed Mahbubur Rahman, expressing his hope that this will bring good results for the banking sector. 

The Bangladesh Bank circular says that the instructions have to be followed for facilitating the existing business environment and aligning with the economic cycle. 

In 10 January, 2019, Finance Minister AHM Mustafa Kamal said in a meeting “from today no more money will be added to the defaulted loans and it will gradually decrease from now on.” 

At the end of December last year, the total default loans in the banking sector stood at Tk93,911 crore, which is 10.30% of all outstanding loans.