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Rescheduling the soaring default loans: Banks'

M S Siddiqui | May 05, 2019 00:00:00

Default loans have increased by three-and-a-half times in the past nine years due to
rampant violation of the rules and regulations for loan sanction and disbursement. This has
worsened the overall state of the country's financial sector. As of December 2018, the
amount of defaulted loans in the banking sector stood at Tk 939.11 billion. This is 10.30 per
cent of the total outstanding loans. According to Bangladesh Bank data, there are over
266,000 loan defaulters in the country.

Alongside the state-owned banks, the condition of some private banks has been
deteriorating over the last couple of years. These banks include Bangladesh Commerce
Bank, National Bank, Padma Bank (formerly Farmers Bank) and NRB Bank. Bangladesh
Bank (BB) did not take any steps against the changes of ownership in the private sector
banks. As a result, panic is widespread among the depositors.

Officials involved in the banking sector have alleged that the directors of the private banks
are the main beneficiaries of the loans. Mostly, the loans are not used for purposes they
were meant to be. Funds from some loans are also being siphoned off to other accounts and
even outside the country. A number of top bankers are reportedly involved in this. The
central bank appointed observers at 13 banks. Even then, the situation has not improved.

The rate of recovery of banks' non-performing loans (NPL) was much lower than the rate at
which their NPL increased last year, according to the statistics of BB. In 2018, banks
recovered Tk 133.92 billion of NPLs, up by 5.86 per cent from a year earlier. But delinquent
loans in the sector soared 26.38 per cent to Tk 939.11 billion, according to the central bank
data. Several weaknesses of banks have been identified as reasons behind the growing
number of NPLs. These include poor governance, bad selection of borrowers, inadequate
monitoring of loans, insufficient collateral against loans and lacklustre recovery efforts.

The default loan in the private sector local banks increased to Tk 339.73 billion from Tk
317.28 billion last June. During this period, the default loans increased in a number of
banks including the National Bank and Farmers Bank. However, the default loans in the
foreign banks have decreased. The cash recoveries of private banks are inadequate
considering their volume of default loans.

Recently, Bangladesh Bank and a government committee have come up with a generous
scheme to allow easy rescheduling of defaulted loans. The committee has asked to prepare
a bailout package for loan defaulters in three sectors -- trading, shipbuilding and steel - in
order to help them revive their businesses. The committee submitted its report to the
ministry which sent it to the BB, requesting its opinion on the proposed package. In its
opinion, the central bank recommended offering the package to all enterprises in the three

According to the new proposal, loan defaulters will get 13 to 15 years, with a grace period of
up to two years, to pay back their loans. All they will need to do is make a down payment of
maximum 2 per cent of their outstanding loans, instead of the current requirement of 10 to
15 per cent, for regularising their loans. In some cases, they would not have to pay

Under the simple interest formula, the rate will be seven per cent. But loan defaulters with
BASIC Bank will enjoy a reduced interest rate as they have to pay only 2.0 per cent interest
along with cost of funds. At the moment, the banks use compound interest formula for all
loans. The defaulters have to pay instalments on quarterly basis. Failure to pay two
consecutive instalments will result in cancellation of the rescheduling.

In 2015, a similar bailout package was considered, allowing defaulters to reschedule and
repay loans on significantly relaxed terms.

Back then, BB offered a special package for borrowers who had bank loans of at least Tk
5.0 billion each. It relaxed the loan rescheduling policy for the borrowers, who were required
to make a down payment of just 1-2 per cent, instead of the usual 10-15 per cent. But that
scheme did not yield desired results as most of the large loan defaulters could not avail the
opportunity to pay back the loans.

But this time the rules are more flexible for the banks. Banks can write off debts that have
been marked bad for three years from their balance sheet, according to the decisions
announced on February 6, 2019. Earlier, banks had to wait for five years to write-off bad
debts. BB is also allowing banks to write-off loans of up to Tk 200,000. According to a 2013
facility provided to banks, till now, they did not need to initiate a case to write-off loans of
up to Tk 50,000. Moreover, they will not need 100 per cent provisions for the write-off as

Following the changes in policy, banks have been instructed to form a separate unit to
collect written off loans. Third-party service providers can be appointed for collection of
default debts and quick disposal of cases. If a borrower's loan is written off, he will be
classified as loan defaulter until repayment. BB's permission will be needed to write-off
loans taken by the current or former bank directors, or organisations related to them. Before
writing off loans, the banks will need to try and collect the money by selling mortgaged
properties or from the guarantors.

"Only those with genuine reasons for becoming defaulters can avail the facility," Finance
Minister AHM Mustafa Kamal told reporters after the meeting where the decision to amend
the rescheduling rules was made. The definition of 'genuine reasons' was however not
explained. According to experts, the discretionary measure to write-off loans will only widen
the scope for unethical bankers to facilitate delinquent borrowers in exchange for favours.

The situation is very alarming. Time has come for overhauling the selection of borrowers
and monitoring of loans after disbursement to prevent diversion of loan amounts from
business accounts. Bankers are reluctant to monitor and supervise the use of loan amount
being actually applied in businesses. They also rely on recovery process of loans through
cases filed under the loan recovery act, The Artho Rin Adalat Act, 2003. Banks are also not
willing to take advantage of Bankruptcy Act of 1997. The shifting of responsibility of
recovery of loan by court seems like a convenient escape route for bankers from default
loan crisis.
The rescheduling and provisioning policy of Bangladesh Bank was always very strict. But in
2012, BB recognised that in some cases, a legitimate banking practice may allow for the
renewal of a continuous loan or line of credit. Occasionally, even a term loan is renewed or
extended under circumstances beyond the control of the borrower and do not signify that the
borrower's willingness or ability to repay has deteriorated the loan. However, BB is
concerned that rescheduling may sometimes result in an overstatement of capital, when
loans that have a low probability of repayment are carried at full value on banks' balance

The capital of banks has been reduced due to compulsory provisioning against increased
default loan. Banks prefer rescheduling and restructuring of default loans for their own
'breathing space' and smooth running of their businesses. As such, now banks need to
improve their capacity to manage loans and recovery process rather than depending on
legal actions.

MS Siddiqui is a legal economist. mssiddiqui2035@gmail.com