BB’s chummy rules for big borrowers made defaulting easy, creating major banking turmoil

Infographic: TBS

Loan rescheduling was the major tool that was used to shield defaulters, hiding their default status despite non-payment, during Sheikh Hasina's autocratic regime to window-dress banks' health.

The Bangladesh Bank issued a series of rescheduling and restructuring policies to hide default loans since 2012, which eventually created a non-payment culture among borrowers.

Moreover, the loan classification rule relaxed in 2019 extended the repayment period for nine months from the fixed expiry date, deviating from international practice and encouraging defaulters to delay payments, spelling a major disaster for the banking sector.

Chickens come home to roost

All those bad assets, which were kept hidden under the carpet through policy support, are now surfacing after the fall of the Hasina government, as banks have been reporting real default loans to the central bank after the formation of the interim government in August.

For instance, Janata, one of the largest state-owned banks, reported a 61% default loan rate in September this year, which was only 19% in December last year. The unusual rise was due to the non-payment of its big influential borrowers, Beximco and the S Alam Group, which account for more than 30% of the bank's total loans and have turned to default.

Despite not having regular payments, these two groups, which account for 50% of the bank's total default loans, were kept regular for years through restructuring and rescheduling to hide real default loans.

Total default loans in the banking sector increased by over Tk1 lakh crore in June and September quarters due to real reporting by banks after the regime change, reaching Tk2.84 lakh crore, equivalent to $24 billion.

The Hasina government started to facilitate defaulters in 2015 by introducing various special schemes for restructuring and rescheduling loans. However, the government became more aggressive in shielding defaulters from 2019, soon after Hasina came to power for the third time.

Under the interim government, the Bangladesh Bank strengthened the loan classification rule in line with international best practices, bringing back the 2012 circular.

This allows banks to classify loans as overdue the day after the payment expiry date. Overdue loans are treated as classified loans within three months of the overdue period, according to the new circular issued on 27 November.

The tight loan classification may increase the default loan rate to 25% in the coming months, but it will expose the real scenario of the financial sector's health, said Governor Ahsan H Mansur in a recent press conference.

He said the real default loan picture will come to light in the next six months, which will help the central bank take corrective measures based on the real situation.

Series of loan restructuring, rescheduling policies

Soon after taking office on 7 January 2019, the then finance minister AHM Mustafa Kamal held a meeting with bank owners on 11 January, where he announced that default loans would not increase by a single taka. He also vowed to bring down the lending rate to single digits in that meeting.  

After the announcement, the Bangladesh Bank came up with a series of relaxed policies favoring defaulters.

The major move was easing the loan classification rule by extending the repayment period for nine months from the expiry of the payment date.

The circular was issued in April 2019 when Fazle Kabir was governor and Abu Farah Mohammad Nasser was the executive director of the respective department who later was appointed as the deputy governor. 

He was the most junior executive director chosen as deputy governor in 2021. Both the relaxed loan classification rule and the one-time exit policy for rescheduling loans were prepared by him in 2019.  

He was the seemingly the most fortunate central banker, hired by the Bangladesh Bank's then-governor Abdur Rouf Talukder as a policy adviser in 2024 after the expiry of his deputy governor contract.  

Earlier in September 2012, the Bangladesh Bank issued a loan classification rule in line with international best practices under the pressure of the IMF setting the rule of treating a loan as overdue from the following day of the expiry date of the installment payment. The overdue loan would be classified if payment was not made within six months.  

However, according to the revised circular issued in 2019, a loan would be overdue six months after the expiry of the repayment date. The overdue loan would be classified if payment was not made within nine months.  

A month after this relaxed classification rule, the Bangladesh Bank issued another incentive scheme for defaulters, allowing them to regularise loans by paying only a 2% down payment instead of the then requirement of 10% to 50%.

In a circular issued in May 2019, a defaulter could regularise their loans for ten years and be charged only a 9% interest rate.

The scheme was prepared by a committee led by Agrani Bank's then-chairman Zaid Bakht.

Atiur's rescheduling formula

A similar bailout offer was made in January 2015, soon after the Hasina government came to power for the second time, when Atiur Rahman was governor of Bangladesh Bank.  

Atiur was the architect of the rescheduling formula, which he first introduced in 2012 back-to-back with the tight loan classification rule.  

When the loan classification rule was tightened under the pressure of the IMF, Atiur introduced a new rescheduling policy to allow defaulters to regularise their loans. This rescheduling policy was relaxed from time to time to keep default loans hidden through restructuring and rescheduling.

Under the restructuring scheme, also known as the one-time exit policy, issued in 2015, defaulters with loans over Tk500 crore were allowed to restructure loans for 12 years and repay loans on significantly relaxed terms by paying a down payment of only 1% to 2% instead of 10% to 50%.  

A total of 11 borrowers, including the Beximco Group, availed the scheme, restructuring over Tk15,000 crore in loans but no one could comply with the conditions laid down in the policy.

Beximco flouts rule

When the central bank offered the restructuring facility in 2015, one of the conditions was that the borrowers would be marked as defaulters if they failed to pay two consecutive installments, their benefits would be withdrawn, and they would be barred from any rescheduling facility in the future.

However, halfway into the rescheduled loan tenure, Beximco, which restructured loans of Tk430 crore with Sonali Bank, got further approval for rescheduling in 2019 by Bangladesh Bank, breaking its own rule.  

Though the special bailout scheme couldn't yield desired results as most large loan defaulters who availed themselves of the scheme did not continue payments, the Bangladesh Bank offered another package in 2019.  

A startling Tk50,186 crore in loans was rescheduled in 2019, more than one-third of it under the relaxed exit offer for defaulters, which helped push the total soured loan figure down to a four-year low of 9.19% at the end of that year.

IMF's warning

However, the IMF raised questions about the real default loans concealed through rescheduling.  

In its Financial Sector Stability Review on Bangladesh released in 2020, the IMF commented that the actual size of bad loans would be much higher than the official data if loans remained unclassified due to stay orders from the High Court and rescheduled amounts were included.

Lenient package to reduce default loans 

The first job Talukder did a week after joining Bangladesh Bank on 12 July 2022 was restructuring the loan rescheduling policy by widening the repayment period by nearly five times and reducing down payments by four times, marking the biggest incentive for big defaulters in history.  

A circular issued on 18 July 2022 allowed defaulters with loans above Tk500 crore to reschedule their loans a maximum of four times for a total period of 29 years, with the down payment set at 4.5%.  

Under the first rescheduling circular issued in 2012, defaulters were allowed to reschedule loans a maximum of three times for 4.5 years, with the highest down payment set at 50% on the third rescheduling.  

Talukder issued the new restructured policy, granting lenders full authority to provide the rescheduling facility to their clients without even consulting Bangladesh Bank officials.  

Talukder was more aggressive than his predecessor in favouring defaulters. When his first initiative raised huge criticism, he forced bankers to campaign in favor of the policy, bankers told The Business Standard.

Bankers raised concerns that the new policy would affect cash flow to banks as borrowers would lose interest in repaying loans.  However, state bank heads were advised by the central bank to speak positively to the media about the policy.

For instance, Mohammad Shams-Ul Islam, then managing director of Agrani Bank, and one of the most privileged bankers during Hasina's regime, told the media at the time: "State-owned banks will benefit more from the new policy as their customers are the worst in the industry. Some customers repay loans regularly to private banks, but they do not want to pay to state-owned banks."  

Moreover, borrowers enjoyed a payment deferral for a long three years from March 2020 to June 2023 due to the pandemic and the global crisis caused by the Russia-Ukraine war.  

With these policy measures, the Bangladesh Bank kept default loans low at 9%, presenting an artificial picture of the banking sector's health.  

How IMF forced to show real figures

The Bangladesh Bank lifted the single-digit lending rate in July 2023 under pressure from the IMF, as a condition of its $4.7 billion loan package approved in January that year.  

The IMF also forced the central bank to stop money printing through devolvement and instructed it to classify rescheduled loans as stressed assets, along with default loans, to reveal the true health of the banking sector.  

Following the IMF's instructions, the central bank published distressed assets, including rescheduled and written-off loans along with default loans, which stood at Tk4.75 lakh crore, equivalent to $40 billion, at the end of December 2023 - 32% of total loans.  

Bank Company Act amended to favour defaulters, bank owners 

The government amended the Bank Company Act thrice over the past 10 years, but instead of improving corporate governance, these changes worsened the default loan crisis and deteriorated governance in the banking sector. 

Each amendment has favoured bank directors, strengthening their families' control over the banks' boards while disregarding the interests of depositors.  

In the latest amendment in 2023, the government introduced two major changes including extending directors' tenure on the board to 12 years and allowing sister companies of any business group, classified as defaulted, to secure loans.  

After the amendment, banks were allowed to extend loans to companies associated with groups that have defaulted on loans until they are classified as wilful defaulters.

According to Bangladesh Bank's definition, if a borrower utilises the loan facility for any purpose other than the intended one for which it was obtained from a bank or financial institution, and subsequently defaults, they will be classified as a wilful defaulter.

The government introduced this change of allowing loans to wilful defaulters immediately after ruling party lawmaker Ahsanul Islam Titu, who was holding the state minister position, proposed an additional amendment in parliament.  

Moreover, the government amended the Bank Company Act, deviating from international best practices.  

The government had removed the bar on directors' six-year tenure in the 2003 amendment of the Bank Company Act. However, in 2013, the provision was reinstated in line with the IMF's suggestion, allowing directors who were already on the board to continue for another six years. 

Directors' tenure is considered from the year of implementation of the amended Bank Company Act.  

Five years after the bar was restored, the government extended the tenure to nine years in 2018, allowing directors to continue for another nine years. The number of board members from a single family increased to four from two in that amendment.