Why long-term rescheduling fails to reduce default loans

Highlights:

• Banks reject long-term rescheduling scheme, causing default loans to rise
• Central bank pushing forced implementation despite banker resistance
• Businesses say approvals meaningless as banks refuse cooperation
• Bankers warn grace period freezes funds and increases future defaults
• Politically linked cases pressured through mandatory rescheduling orders
• Central bank exploring alternatives like eased provisioning for write-offs

The long-term rescheduling facility approved for 300 defaulters to rescue their businesses and reduce non-performing loans in the banking channel is having no impact, as banks find the scheme unfavourable.

A selection committee, formed by the government in January to provide policy support to businesses impacted by the Russia-Ukraine war, floods, and other natural disasters, began granting rescheduling approvals in March. 

However, the results were not reflected in default loan statistics, because banks did not implement the approved proposals. As a result, despite offering a relaxed loan rescheduling package, default loans kept rising, reaching a historic high of Tk6.44 lakh crore at the end of September, nearly 36% of total loans. 

Earlier, default loans stood at Tk6.08 lakh crore (34.4%) at the end of June, up from Tk4.2 lakh crore (24.13%) in March.

In this situation, Bangladesh Bank is pushing banks to implement the 10-year rescheduling, with a two-year grace period, and just 1% to 2% down payment, aiming to reduce default loans by December.

Now, the long-term loan rescheduling scheme for big defaulters appears to have backfired. Bankers said it has instead triggered a new surge in bad assets and made recovery drives even harder.

Some bankers view the scheme as direct regulatory intervention in their business operations, as they have been forced to implement the rescheduling approvals.

Besides, businesses have expressed dissatisfaction, saying that they are not getting cooperation from banks even after receiving rescheduling approval from the policy committee.

Speaking to The Business Standard, Bangladesh Bank Governor Ahsan H Mansur said the central bank was negotiating with banks to implement the rescheduling facility approved by the policy committee.

He said the central bank would force banks to implement the rescheduling facility if needed, as they were signatories to the approved agreements.

He noted that every case was approved after tri-partite meetings, where banks also agreed to the terms. "If banks do not reschedule loans, they will get nothing from the defaulters."

He added, "We have to strike a balance for a win-win benefit for both borrowers and banks."

Infograph: TBS

Businesses cite unfair burden

When speaking to The Business Standard, a top manager of a business group, who wished to remain anonymous, said if banks are not implementing approved rescheduling decisions, there might be flaws in the policy that the central bank should address.

He added that businesses which rescheduled loans before the special package had to pay a 5% down payment and received no grace period, which created unfair treatment.

He said many of these businesses defaulted again due to the strict loan classification rule implemented in March, but were not receiving rescheduling benefits under the new scheme.

He added that businesses that paid a 5% down payment just before the special package was introduced were now being asked to pay another 2% down payment, which is an added burden amid the ongoing business crisis.

The executive said businesses had received no policy support to overcome the crisis in the past one and a half years since the regime change.

He added that while the special package was offered for the first time, banks were unwilling to implement it, making business continuity more difficult.

Another businessman, who also wished to remain anonymous and received rescheduling approval from the policy committee, said the relevant bank had not implemented the decision yet.

Sharing his experience, he said banks had agreed to the terms during the committee's tri-partite meeting, in which he was also present. However, after receiving the central bank's official letter, banks stated they could not provide the approved facilities.

Meanwhile, Bangladesh Bank extended the special rescheduling package to 30 November, instead of the previously announced 30 June, due to banks' unwillingness to implement approvals.

Companies with no possibility of survival should be put up for forced sale instead of being offered long-term rescheduling.

Muhammad A (Rumee) Ali, Former Deputy Governor of Bangladesh Bank

'Only support those have chance to survive'

Speaking to The Business Standard, former deputy governor Muhammad A (Rumee) Ali said many businesses had genuinely defaulted after 5 August due to the political situation.

He said private sector credit growth declining to 6% signalled an ongoing economic crisis. "In this situation, banks should offer policy support to businesses that still have a chance to survive," he said.

However, he cautioned that companies with no possibility of continued operation should be put up for forced sale instead of being offered long-term rescheduling. He also noted that upcoming LDC graduation is affecting businesses, as many sectors are set to lose trade benefits.

"Rescheduling is not the only solution," he said, suggesting that Bangladesh Bank should seek alternative strategies and prepare early for post-LDC impacts on businesses and banks.

Why bankers unwilling

At a meeting of the Association of Bankers Bangladesh (ABB), top bankers assessed the outcomes of the loan rescheduling scheme and expressed their unwillingness to implement it, describing it as ineffective and flawed.

Bankers, who wished to remain anonymous, said the two-year grace period would freeze public money, put depositors at risk, and further reduce lending capacity.

The platform also decided in early November to send a formal letter to the Bangladesh Bank Governor, expressing concern over the "undue pressure" being applied by the central bank's relevant department.

Senior bankers also said at the meeting that long-term rescheduling orders had made repayment negotiations harder, and politically influential clients were now bypassing banks and refusing direct discussions after obtaining approvals from the central bank.

They warned that companies with high debt-equity ratios would default again after the two-year moratorium, as rescheduling alone was not solving structural weaknesses.

They said the only solution for high debt-equity ratio businesses was fresh equity injection, not long-term rescheduling. Bankers also said the scheme would not rescue companies, but instead push them out of operation by worsening financial viability.

Bangladesh Bank also held a meeting with at least 20 managing directors where bankers again expressed dissatisfaction over the scheme. 

They said the central bank department head had criticised bankers for non-implementation.

"We could have reduced nearly Tk1 lakh crore in default loans through rescheduling approved by the policy committee," a banker quoted a central bank official as saying.

How banks are being forced

The central bank has been compelling banks through official letters to reschedule loans in specific cases linked to politically connected borrowers.

The Banking Regulation and Policy Department issued instructions covering 300 cases approved by the policy committee. The committee can recommend exemptions from standard rules and suggest rescheduling based on client relationships.

However, some letters explicitly instructed banks to reschedule loans with "mandatory compliance", removing discretionary authority. Bankers said most of these letters, signed by the department head, involved borrowers with political affiliations.

Although a general circular later allowed banks to make independent rescheduling decisions, the policy committee continued interventions for loans above Tk300 crore.

One example, they said, was the approval of Tk700 crore in default loans for Ring Shine Textile with five private banks for 10 years, including a two-year moratorium. The facility was approved on 18 September, one day after the circular was issued. Banks received the letter on 14 October.

The letter instructed 10-year rescheduling for both term loans and seven-year rescheduling for working capital loans, requiring a 2% down payment: 1% upon application and 1% within six months.

Bankers argued that long-term rescheduling of unsecured working capital – meant as short-term credit – was damaging for lenders. They also said political pressure from committee members was making implementation compulsory, even when financially unviable.

Cenbank seeking alternatives

Bangladesh Bank now appears to be rethinking its stance, exploring alternative ways to reduce default loans beyond rescheduling. One proposal involves easing provisioning rules for written-off loans.

At present, banks must maintain 100% provisioning for write-offs, affecting profitability, even when portions are backed by collateral.

International banking practice does not require full provisioning for collateral-secured portions. Banks urged the central bank to adopt global standards and require provisioning only for unsecured portions.

A recent circular allows immediate loan write-off after default, instead of the previous two-year waiting requirement. However, full provisioning rules continue to discourage banks from writing off loans due to the impact on profits.

In meetings, bankers repeated their call for international provisioning standards, arguing it would help improve balance sheets without damaging profitability.