IMF pushes for declaring defaulters in 90-day past-due

The International Monetary Fund (IMF) has pressed Bangladesh for declaring the borrowers defaulted if they do not pay the loan instalments within 90 days of the stipulated time, according to central bank documents. 

The international financial institution wants the string, attached to $4.5 billion prospective budget support to Bangladesh, be applicable for all – even for the farming and small and medium enterprise (SME) sectors who now enjoy government policy support.

But the Bangladesh Bank does not agree over the "default based on 90-days past-due" rule, as the central bank in a position paper to the finance ministry argued the definition changing is subject to amending the Bank Company Act.

Besides, the central bank says the IMF rulebook for lending to the farming and SME sector conducts the national policy.

Terming the IMF condition inclined towards the Expected Credit Loss (ECL) based provision rule, the central bank noted the implementation would take at least five years.

On Wednesday, an IMF team arrived in Dhaka on a 15-day visit to discuss the terms and conditions of a prospective $4.5 billion loan for Bangladesh. The team held meetings with Finance Secretary Fatima Yasmin and various wings of the Finance Division.

Finance Ministry officials said the IMF delegation may meet with the central bank officials on Thursday. The team will hold a meeting with Finance Minister AHM Mustafa Kamal on 9 November.

The IMF meeting with the central bank may feature a wide range of topics including balance of payment, exchange rate development, recent exchange rate development, balance of payment in FY22 and outlook for FY22-25 and foreign direct investment projection. 

Challenging terms tailored for Basel-III

Terming the implementation of the "default based on 90-days past-due" rule right now will be challenging, bankers objected to the uniform provisioning treatment to agriculture and small ventures.     

However, economists said Bangladesh had pledged to implement Basel-III by 2019 and was working accordingly. Then there were 90, 180 and 360-day deadlines for default labelling. But changes after 2018 to top posts of the finance ministry and the central bank doubled the deadlines.

By imposing various conditions now, the IMF is pushing Bangladesh towards the implementation of Basel-III – a set of reform measures intended to improve regulation, supervision, and risk management in the international banking sector. 

According to the Bangladesh Bank, currently loans are treated as non-performing (NPLs) based on 90-days past due rule or there is subjective evidence to indicate that a loss may be incurred with a few exceptions. 

The central bank defines "default" on six months past-due. According to the central bank, banks are prohibited from extending loan facilities to defaulters, as loans are classified as substandard as soon as it becomes 90 days overdue.

Banks have a Tk30,911 crore farm loan disbursement target in the current fiscal year – up from Tk28,391 crore in FY22. State-owned commercial and specialised banks set their own loan disbursement targets, while private and foreign commercial banks disburse farm loans at 2.50% of their net loans and advances.

Bank lending to the SME sector was Tk207,395 crore in the last fiscal year.

Bankers said crop loans turn substandard after two years, while it is 15 months in case of other agri-loans. If the instalments of medium-term loans distributed to the SME sector are not paid, the banks label them substandard after one year.

Mohammad Shams-Ul Islam, former CEO of Agrani Bank, told The Business Standard that the current repayment facilities to agriculture and SME are logical. It will not be appropriate to bring any change under the pressure of the IMF. 

"But in the long run, the Bangladesh Bank may consider implementing those," he noted.

Zahid Hussain, former lead economist of the World Bank, said there are no alternatives but to be strict to defaulters as numerous government facilities have so far failed to discipline the financial sector.  

"If farmers or small businesses owners cannot repay the loan, then that reality should be accepted. All sectors need to have similar policies," he told The Business Standard. 

"If the government feels additional benefits should be offered to the agriculture and SME sector, then the loan period can be extended or the interest rate can be reduced further," he said.

Push for ECL-based provisioning 

According to rule-based loan loss provisioning, banks have to maintain general provision ranging from 1% to 5% against unclassified loans and specific provision ranging from 20%-100% against non-performing loans. 

The expressed minimum percentages of provisions are absolute minimums and banks are encouraged to set aside higher provisions of expected losses on the loan pools or individual loans.  

The Bangladesh Bank said to implement ECL based provisioning rules, a huge amount of historical data is required. Before Covid period, an initiative was taken to analyse the feasibility of implementation of ECL based provisioning in Bangladesh.

"It was found that a number of scheduled banks, especially state-owned commercial banks, have incorporated automation in the banking system only a few years back. So, the required amount of historical data may not be available right now to implement the ECL based loan loss provisioning rule.

BB officials said the Bangladesh Bank has stopped the initiative due to the pandemic situation. Besides, several incentive packages are now in place, so it will be difficult to resume the initiative unless the Covid situation has come to an end.

At present, Sri Lanka and Malaysia have implemented ECL based loan loss provisioning policy, while India and Pakistan follow rule-based provisioning method.

The Reserve Bank of India wants banks to adopt the ECL regime for provisioning of loan assets and it will shortly come out with a discussion paper on the transition, said Governor Shaktikanta Das last September.  

The concept of ECLs put in practice after the 2007-08 global financial crisis, means that banks need to foresee future economic conditions and possible credit risks, and accordingly account the loss expected from default events calculated on a 12-month or lifetime basis from the loan. The Indian central bank is planning to switch over to "expected loss" from "incurred loss" framework.

Mohammad Shams-Ul Islam said considering accounting and banking systems of Bangladesh, it is not possible to comply with the ECL provisioning rules for now. 

At the moment, it is not possible for any banks to calculate profits and loss immediately. But over time, the new system has to be implemented, he also said.

But Zahid Hussain thinks the Bangladesh Bank's argument is an "evasion strategy". Since 1990, there is information on default loans. Studies by BIBM, World Bank and IMF are also available.

Finance secretary upbeat about the loan

After the meeting with the IMF team, Finance Secretary Fatima Yasmin told reporters that she is optimistic about getting a loan from the IMF. 

There will be no problem in getting this loan, she said, adding, "Today was the first meeting and there will be more meetings."

Finance Division officials said the IMF delegation held a separate meeting with the division's Treasury and Debt Management Wing, the Budget Wing on Wednesday. 

Besides, IMF officials held a separate meeting with the Macroeconomic Wing headed by the finance secretary.
Several officials of the Finance Division, who were present in the meetings, said the development lender suggested increasing revenue collection. 

In addition, the IMF emphasised withdrawing the lending rate cap, controlling inflation by activating monetary policy, and ensuring the market-determined exchange rate.