Default loans drop by Tk13,740cr in Oct-Dec on relaxed policies

Between October and December of last year, the banking sector saw default loans significantly decline by Tk13,740 crore thanks to a new loan rescheduling policy and relaxed repayment options offered by the central bank.

According to the Bangladesh Bank, the total amount of default loans fell to Tk1.20 lakh crore in December, after reaching a record high of Tk1.34 lakh crore in September last year. In December last year, the rate of default loans fell to 8.16% from 9.36% in September.

Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, attributed the drop mainly to an easy rescheduling policy. 

"Now bank boards can regularise the long defaulted loans on their own. The rescheduling earlier required around 8%-10% down payment, but the amount is now only 2%-4%," he told The Business Standard.  

According to the MD, banks usually emphasise the financial indicators at the end of a calendar year just before the annual regulatory inspections. At this time, bankers make numerous efforts to reduce defaulted loans, while the clients also want to regularise their loans to avail of new credits in the upcoming year.

Additionally, loan repayments were largely relaxed in the past two years due to the pandemic, said Mirza Elias, adding that the repayment was relaxed even in 2022 as businessmen insisted. The central bank also allowed deferred payment and half of the instalment of the term loan, eventually resulting in the default loans drop.

Syed Mahbubur Rahman, managing director & CEO of Mutual Trust Bank Limited, also echoed the same. He emphasised assessing the cash recovery by banks.

Though huge loan rescheduling helped banks to bring down default loans, the International Monetary Fund (IMF) identified such loans as distressed assets and prescribed the Bangladesh Bank to report the rescheduling loan amount along with defaulted loan statement from June this year.

The Bangladesh Bank will have to adopt international best practices in loan classification by June this year, according to the IMF country report on $4.7 billion loan approval for Bangladesh.

The IMF set the performance criteria for the Bangladesh Bank to prepare a holistic and time-bound non-performing loan (NPL) – which is also known as defaulted loan – resolution strategy by June this year to address weaknesses in the bank balance sheet.

The central bank also committed to the IMF that it will reduce average NPL ratios to below 10% for state-owned commercial banks and below 5% for private commercial banks by 2026.

At the end of December, state-owned commercial banks accounted for 20.28% of total default loans when the share of private commercial banks was 5.13%, foreign banks 4.91% and specialised banks 12.80%, central bank data shows.  

The loan rescheduling has surged nearly 50% after the Bangladesh Bank relaxed the policy in July last year by reducing the down payment and extending the repayment period.

According to a circular issued on 18 July last year, defaulters were also allowed to reschedule their loans by making a down payment – a minimum of 2.5% and a maximum of 4.5% – of their outstanding overdue.

Previously, the required down payment was a minimum of 10%-30%, but defaulters would take a discount from the Bangladesh Bank under special consideration.

Salehuddin Ahmed, a former governor of the Bangladesh Bank, believes the non-performing loans have decreased on paper thanks to various facilities by the central bank.

"What matters is how much money is recovered against loans that have been regularised," he told The Business Standard. 

According to the former governor, the central bank now needs to revise its rescheduling policy as defaulters are exploiting the easy repayment terms.    

"Many customers are defaulting on loans for one firm, while their other businesses are doing well. But because there is nothing clear in the law, the assets of other businesses of that customer cannot be confiscated. In this case, the central bank should not solely bank on circular issuances, instead, it needs to carry out changes to the banking law," Salehuddin Ahmed told The Business Standard.

According to the central bank, the defaulted principal amounts to Tk1.20 lakh. But Tk92,929 crore is stuck in legal disputes as Tk60,402 crore has been wiped off the books.

Moreover, banks previously could allow defaulters to reschedule loans for a maximum of three times, but they are now allowed to do so up to four times now.

The new policy also gave the power to grant facilities and reschedule defaulted loans to the board of directors of the bank concerned.

As a result, bank owners are now deciding which loans will get rescheduling benefits. Earlier, approval of the central bank was required in case of loan rescheduling.

Banks rescheduled Tk5,551 crore of their defaulted loans in the July-September quarter last year, which is nearly 50% – or Tk1,845 crore – higher than the previous quarter.  

Banks have rescheduled nearly Tk12,000 crore in the first nine months of the last year.

Earlier in 2019, the Bangladesh Bank offered a special loan rescheduling policy at a 2% down payment which is also known as a one-time exit policy under which more than Tk 50,000 crore was rescheduled that year. This huge loan rescheduling helped the central bank to bring down default loans to 9.32% in December 2019 from a decade-high 12% in September that year.

However, if this rescheduled amount was considered, the country's default loan would shoot up to 16.49%.

In its Financial Sector Stability Review on Bangladesh in 2020, the IMF commented that the actual size of bad loans is more than double the officially recognised figure.

The figure will be much more than the official data if loans remained unclassified taking a stay order from the High Court and the rescheduled amount is counted, according to the IMF.

The relaxed loan repayment facility offered by the Bangladesh Bank last year also contributed to reducing default loans in December.

The borrowers were offered to keep their accounts regular by paying 50% of their loan instalments from September to December.

With this repayment facility, borrowers avoided being defaulted by paying half of their instalment amount.