Be tough on defaulters, or risk a mountain of debt

Offering rescheduling facilities to defaulters is a great initiative, which can provide borrowers a much needed breather, and help them repay classified loans. However, just as sometimes generosity is wasted on the ungrateful, rescheduling seldom works on habitual defaulters.

A report published by this daily on Sunday shows that a series of unrestrained rescheduling facilities – introduced by the Bangladesh Bank in the last decade – contributed to the skyrocketing amount of classified loans that exists till date.

Such generous facilities have made it nearly impossible for any borrower to be declared a defaulter.

From 2012 to 2021, the central bank reduced the down payment for availing loan rescheduling facilities from 25 per cent to 5 per cent, and increased the repayment tenure from three to a maximum of twenty-nine years.

Each time, while introducing a rescheduling facility, the banking regulator mentions that such moves will help reduce defaulted loans, but in reality, classified loans in the country’s banking system rose by nearly three times in a decade.

At the end of 2012, the amount of defaulted loans was Tk 42,725 crore, which skyrocketed to Tk 1,03,273 crore in 2021. Rising even further in 2022, classified loans stood at Tk 1,25,257 crore at the end of June.

It is clear that the rescheduling facility is being misused in the majority of the cases, which in turn is putting serious pressure on the country’s banking sector by pushing up the amount of classified loans.

At a time when Bangladesh, like most nations across the globe, is reeling under a financial crisis sparked by the Covid-19 pandemic, and exacerbated by rising inflation triggered by the Russia-Ukraine war – the government has no alternatives but to toughen its stance on loan defaulters.

Even Salehuddin Ahmed, former governor of the Bangladesh Bank, admitted that policies are being changed for the interest of stakeholders without consulting anyone, which is putting the financial sector in a difficult situation.

The banking regulator had issued a master circular regarding the rescheduling facility back in June 2012, allowing a defaulter to avail this benefit up to three times, for a maximum of three years depending on different types of loans.

Back then, the down payment was set at 25 per cent of overdue installments or 10 per cent of outstanding loan amount. The rules were amended for the second time in September 2012, increasing the repayment tenure to a maximum of four years and six months, and decreasing the down payment to 15 per cent of overdue installments.

Then in May 2013, the policy was changed for the third time and the loan repayment period was increased to a maximum of six years.

In the biggest change that came on July 18 this year, the regulator increased the reschedule facility to four times instead of three, and extended the repayment limit to a maximum of 29 years.

The Bangladesh Bank also cut the down payment to 5 per cent of overdue installments or 2.5 per cent of the total outstanding loan. Besides, the approval of the reschedule facility was diverted to the banks’ boards of directors.

Due to criticism from various quarters, the central bank again changed the policy for the fifth time on August 3 this year. Banks now cannot show interest of rescheduled loans in its income book if it is not actually collected that interest.

However, the loan rescheduling facilities currently available to the defaulters is still too generous. This mountain of unpaid debt clearly indicates that granting rescheduling facilities en masse remain largely unsuccessful in reducing non-performing loans.

This particular facility must be made available to defaulters on a case-by-case basis, and the terms and conditions must be stricter as well.