Bangladesh Bank has allowed partial write-off for the first time to reduce the pressure of long-term defaulted loans accumulated in the country's banking sector.
The new directive issued on Thursday (December 4) announced the implementation of this policy.
Bangladesh Bank said that many bad and damaged loans are not fully recoverable. As a result, the reflection of the real financial condition of the banks was being distorted as the uncollectible and unsecured part of such loans remained on the balance sheet.
As a result of the new policy, banks will now be able to clearly disclose the real level of risk by removing the uncollectible part from the balance sheet.
The new directive states that the interest part should be written off first. Uncollected interest should be shown separately. If necessary, the market value of the collateral can be revalued.
The unsecured part of the money paid by the customer will be adjusted against the previously written off part.
After the written-off dues are fully adjusted, the remaining money will go to reduce the outstanding loans on the balance sheet.
In addition, even if the loan account is partially written off, the related loan account can be rescheduled or given exit facilities, so that the remaining portion can be recovered easily.
Banks will have to calculate the total outstanding of the customer by adding three elements: the outstanding loan shown on the balance sheet, uncharged interest, and the written-off but still unpaid portion.
As a result of the new directive, the previous rule—where there was no scope for partial write-off—has been canceled.
Bangladesh Bank hopes that partial write-off will make the bank's balance sheet transparent, reduce the unnecessarily inflated non-performing loan account, and strengthen overall defaulted loan management.
