Why is loan rescheduling becoming unsustainable for banks?

Bangladesh's banking sector has recently shown an apparent improvement in default loan figures due to large-scale loan rescheduling under relaxed central bank policies.

Several banks have posted higher profits and lower classified loans after rescheduling bad debts over long repayment periods.

However, economists and bankers warn that these improvements may be temporary and could create deeper risks for the banking sector in the future. They say the policy is weakening banks' financial health while also encouraging a culture of non-repayment among borrowers.

Two reasons why experts say it is unsustainable

Zahid Hussain, former lead economist at the World Bank's Dhaka office, identified two major risks behind the continued reliance on loan rescheduling.

Firstly, it weakens banks' financial health. According to him, repeated rescheduling hurts banks' balance sheets and gradually erodes their capital base.

He compared the process to "continuous bleeding" in the human body, saying it slowly weakens financial institutions over time.

Bankers say the problem becomes more severe when borrowers are given long grace periods, during which banks receive neither loan repayments nor interest income.

At the same time, banks must continue paying depositors, creating pressure on cash flow and limiting their ability to provide fresh loans.

Secondly, it creates a "moral hazard". Experts also warn that repeated concessions encourage irresponsible borrowing behaviour.

When borrowers see that loans can repeatedly be rescheduled despite non-payment, some may become less interested in repaying debts or investing productively.

Instead, borrowed money may be diverted to luxury spending or non-productive purposes.

According to Zahid Hussain, this discourages honest borrowers while emboldening wilful defaulters, ultimately weakening discipline and long-term sustainability in the banking sector.