Rescheduled loans go too badly

Bangladesh Bank’s policy of allowing defaulters longer repayment terms and easy terms and access to new funds appears to have failed to reduce bad debts as even rescheduled loans turn sour.

In 2019, the central bank issued an easing policy on loan rescheduling and proposed a one-time exit policy to address the long-standing problem of bad debts.

Under the facility, customers can regularize delinquent loans by repaying a lower amount of their NPLs as a down payment than is usually required.

As a result, the amount of rescheduled loans ballooned: a record Tk 52,770 crore was rescheduled during the year.

Banks cleared delinquent loans to the tune of Tk 12,380 crore in 2021, of which 19.8% again fell into the impaired loan category, according to central bank data.

The defaulted rescheduled loan ratio stood at 18% in 2020 when lenders collectively settled NPLs of Tk 13,470 crore.

In December last year, delinquent loans in the banking sector stood at Taka 103,274 crore, or 7.93% of outstanding loans.

Anis A Khan, former chief executive of Mutual Trust Bank, says the rising trend in delinquent rescheduled loans is not a good sign for the banking industry as deliberate defaulters typically abuse the facility.

In July, the central bank significantly eased the rules for loan rescheduling.

Under the new policy, defaulters who have taken out term loans are now allowed to repay the funds in six to eight years, up from nine to 24 months previously.

Term loans, repayable in more than one year, are generally granted to companies to create new industrial units and expand existing ones.

Also, defaulters are now allowed to give only 2.5-6.5% of their NPLs as down payment instead of the previous 10-30%.

Prior to July, defaulters had to repay up to 30% of their NPLs to reschedule bad debts. In many cases, habitual defaulters have had their loans rescheduled by making a down payment below the requirement with prior central bank approval.

And after becoming a regular borrower, the voluntary defaulters had taken out new loans from several banks, but they did not repay the funds later, driving up the volume of loans classified in the banking sector.

“The easing policy has not brought any good to the banking sector. On the contrary, it has weakened the financial health of many banks,” Khan said.

He urged banks not to grant rescheduling facility to defaulting borrowers and said such customers should instead be made to book in order to restore governance in the banking sector.

“The new policy will further weaken the health of banks,” Khan warned, adding that banks should serve legal notices on willful defaulters and file lawsuits against them to recover the funds.

Rescheduled loans are considered stress assets because banks usually have difficulty recovering them.

Many weak borrowers do not make sincere efforts to improve the state of their businesses despite obtaining easy repayment terms and access to new funds.

“It makes them fail once again,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

Some banks rescheduled delinquent loans by easing rules and regulations during the coronavirus pandemic as the downturn in business hit borrowers hard.

“But many borrowers have recently gone into default. So the ratio of rescheduled loans in default may have increased in the last year,” said Emranul Huq, managing director of Dhaka Bank.

According to a document from the European Bank for Reconstruction and Development, NPLs are a burden on lenders and borrowers, constrict credit supply, distort credit allocation, deteriorate market confidence and slow economic growth .

“Economies that actively seek to solve NPLs do relatively well,” he said.

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