Will loan rescheduling work this time?
Repeat rescheduling without meaningful restructuring erodes credit discipline and incentivises strategic default behaviour
Bangladesh Bank (BB) formed a five-member committee in January to assess rescheduling applications of defaulted loans of Tk50 crore or more. About 1,250 firms — including leading conglomerates — have sought relief.
By 10 August, the committee had recommended rescheduling to 250 firms, allowing them repayment periods spanning 5 to 15 years, with down payments ranging between 1-5% and grace periods reaching up to three years.
In theory, rescheduling is meant to be bank-initiated.
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Banks would put forward recommendations, the committee would evaluate which borrowers "genuinely" faced "uncontrollable" circumstances, and BB would act chiefly as overseer and facilitator.
The ground reality diverges sharply from this script. Businesses are petitioning the committee directly, with the committee then instructing banks on eligibility — defining who is genuinely affected by forces beyond their control.
This has prompted calls from various quarters to enhance the committee's capacity, so the rescheduling pipeline can move faster.
Does the revival of a regulator driven loan rescheduling policy truly chart the right course?
A retrospective
Loan rescheduling in Bangladesh traces its roots to 1991, when a government-published list of 171 major loan defaulters set the stage for accommodating loan defaults.
At that time, borrowers could regularise their accounts by making an initial down payment of 10%, followed by two subsequent instalments of 20% and 30%.
However, from 2003 to 2006, BB adopted a more stringent stance, raising down payment requirements and prohibiting rescheduled borrowers from obtaining new loans for a year.
In 2009, BB extended rescheduling benefits to all export-focused sectors and temporarily suspended down payment requirements.
The 2012 Master Circular allowed up to three rescheduling, each with repayment tenures of two to three years. By 2013, permitted tenures had increased to six years, but the three-times rescheduling cap remained.
A major shift came in 2019, with the advent of One-Time Exit Facilities and aggressive rescheduling options. Defaulters could now regularise their loans with a meagre 2% down payment and enjoy up to a decade for repayment.
The "exit policy" of 2019, intended as a temporary measure, soon evolved into an annual routine.
The years 2020 to 2022 brought further relaxation. Loan forbearance expanded in 2020 on the back of Covid-19. A Master Circular in 2022 allowed borrowers to reschedule up to four times and access tenures stretching to 29 years!
Facing severe criticisms, BB cosmetically tightened policy, mandating that loans rescheduled for a fourth time be reclassified as non-performing if the borrower defaulted again within six months. Banks were also prohibited from recognising interest income unless payments were actually received.
The empirical verdict
The empirical verdict is sobering. Nonperforming loans (NPLs) and unclassified rescheduled bank loans have been on a steady upward trajectory during 2019-24 (see chart).
There are spikes in 2022-23, linked to macroeconomic stressors and extended post-Covid regulatory forbearance.
The absolute size of NPLs suggests persistent asset quality deterioration. Unclassified rescheduled loans are not officially classified as NPLs but counted as "distressed". The substantial volume of rescheduled loans exceeded the NPL stock during 2019-23 when the impulse from the generous Master Circular 2022 passed through the system.
Within just a year of rescheduling, the majority of borrowers fell back into default.
According to BB data, by the close of 2024, Tk3.48 lakh crore in rescheduled loans existed, of which a remarkable 38.4% had once again become non-performing.
Almost two out of every five rescheduled loans relapsed, despite the relaxed repayment terms. By comparison, in 2020, about 23.8% of rescheduled loans reverted to default status.
The apparent correlation (see chart) between rising NPLs and rescheduled loans reflect regulatory leniency.
When loan rescheduling becomes an expected norm, borrowers often postpone repayments, anticipating further leniency in the future. This behaviour fuels the growth of nonperforming loans (NPLs) and triggers a recurring cycle in which restructured loans inevitably slip back into default.
The pattern becomes self-perpetuating: the surge in rescheduled loans from 2019 to 2023 is closely tracked by a swell of fresh NPLs in 2024.
The decline in rescheduling during the final quarter of 2024 hints at a possible break from regulatory capture following the August 2024 regime change.
However, this shift may prove short-lived if the Rescheduling Committee's initiatives ultimately succeed. Repeat rescheduling without meaningful restructuring erodes credit discipline and incentivises strategic default behaviour.
It also deepens unhealthy interdependence between persistent defaulters and regulatory authorities.
South Asian practices
While Bangladesh's loan rescheduling strategy resembles those of its South Asian peers, the specific frameworks differ markedly from country to country. Among these, Nepal sets the highest bar for borrower discipline.
Borrowers pay at least 25% of accrued interest up front, excepting "sick industries" who pay 12%, and demonstrate two consecutive years of punctual repayments before a loan is considered performing again. Nepal's 3% NPL ratio, while elevated from the 1.3% in 2022, is moderate by regional standards.
Nepal Rastra Bank (NRB) offered targeted relief without opening the floodgates to repeat or indiscriminate rescheduling.
India's Reserve Bank imposes no fixed upfront payment for rescheduling. It prioritises loan viability and provisioning practices over rigid cash requirements. During the pandemic, extensions for retail and MSME borrowers were limited to two years.
Conditions are largely determined by lenders within RBI guidelines. India's broader experience with loan rescheduling (2008–2015) led to a massive evergreening problem. This triggered a banking crisis, leading to the Insolvency and Bankruptcy Code being implemented to resolve large debts through legal process rather than endless restructuring.
In Pakistan, each bank defines financial difficulty and rescheduling criteria in its own board-approved credit risk policy, but these must align with the State Bank of Pakistan's prudential regulations.
There are no blanket grace periods or ultra-low down payments. SBP mandates that if a restructured loan fails, it should be immediately classified and no further rescheduling granted.
Typically, a six-month period of satisfactory repayment is needed before a loan can be upgraded. As of early 2023, Pakistan was dealing with new strains (flood impacts, high inflation). Banks were struggling to convert NPLs into performing assets.
Sri Lanka targeted distressed SMEs. Eligible borrowers can reschedule loans for up to ten years, with no nationwide minimum down payment. Depending on loan size, different commencement deadlines for repayment were set to ensure not all payments get pushed far into the future.
Larger ones have earlier deadlines. Terms are decided individually. It is early to judge the final outcome of this SME rescheduling program. The true test will be by the end of 2025 and 2026, when the rescheduled loans should have resumed payments.
These examples illustrate a spectrum: at one end, stringent systems require substantial immediate payments and long periods of proven performance (as in Nepal); at the other, more lenient models accept minimal upfront cash and allow lengthy repayment terms or grace periods (Sri Lanka). Neither strictness nor leniency guarantee success.
Lesson for posterity
Over the years, Bangladesh's policy has drifted from moderate rigidity to extreme leniency—a shift that the BB Committee recommendations appear to resurrect following a pause in the last quarter of 2024. An ancient Chinese poet Li Bai wrote: "He who neglects to drink of the spring of experience is likely to die of thirst in the desert of ignorance." Our spring of experience on loan rescheduling is toxic. The financial system may unravel in the desert of malpractices if rescheduling frameworks revert to the legacy of excessive leniency.
Rescheduling can buy time for real corrective actions on both the borrower's and lender's side to ultimately cure a loan. Countries where financial regulators, courts, and banks have the expertise, autonomy, and enforcement power to assess credit risk and exit paths for distressed loans tend to manage NPLs more effectively regardless of whether their rescheduling terms are rigid or flexible. Failure is assured when rescheduling becomes a blanket policy or a politically driven tool.
Zahid Hussain is former lead analyst at The World Bank, Dhaka Office
