Can friendly revisions in loan rescheduling policy serve home?

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, and made it nearly impossible for any borrower to be declared a defaulter.

The central bank, in the given period reduced the down payment for availing loan rescheduling facility from 25 per cent to 5 per cent, and increased the repayment tenure from three to a maximum twenty-nine years, an investigation by The Business post finds.

Each time, while introducing a rescheduling facility, the banking regulator mentioned that such moves will help reduce defaulted loans, but the reality is quite different. Classified loans in the country’s banking system rose by nearly three times between 2012 and 2021.

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

A number of experts say 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.

Speaking to The Business Post, former senior banker Anis A Khan said, “The loan rescheduling facility was extended recently under the pressure of business groups. The businessmen pressured the government, and the central bank was forced to implement such a measure.

“Due to giving so many benefits to the defaulters, chaos has been created in the financial sector. This is because many have misused this facility. Such misuses of the loan rescheduling facility should be stopped.”

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

Gradual increase in rescheduling facility

The central bank 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 3 years depending on different types of loans. And the down payment was 25 per cent of overdue installments or 10 per cent of outstanding loan amount.

The Master Circular was amended for the second time in September 2012, increasing the repayment tenure to a maximum of 4 years and 6 months, and decreased the down payment to 15 per cent of overdue installments or 10 per cent of the outstanding loan.

The number of times this opportunity can be availed remained unchanged – a maximum of three times.

Then in May 2013, the policy was changed for the third time and the loan repayment period was increased to a maximum of 6 years and the down payment was kept unchanged.

The biggest change came on July 18 this year. In this, the reschedule facility is increased to 4 times instead of 3 times. Along with this, the loan repayment limit has been extended to a maximum of 29 years.

The down payment has been brought down 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 sides, the central bank again changed the policy on August 3 this year. It is said that, banks cannot show interest of rescheduled loans in its income book if it is not actually collected that interest.

Commenting on the matter, Anis A Khan said, “This is too much, a little increase in such facilities would have been fine. Besides, the responsibility for classified loans has now been handed over to the banks’ boards.

“But how much can the board of a bank properly and honestly implement the policy? Because we know there can be four members from the same family who might be sitting on the board.”

The policy was changed for the fifth time on August 3, and the central bank tightened the rules a bit. Under this revision, until the actual collection of interest, the banks will not be able to show those in their accounts.

“Granting rescheduling facilities en masse has been 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 should be stricter as well,” said Salehuddin Ahmed.

Who are the beneficiaries?

According to industry insiders, there are two aspects of a loan rescheduling facility – one is the tenure and another is down payment. Banks are in favor of extending the tenure, as this reduces the banks’ default loan rate, allows keeping lower provisions and increases profitability.

In this context, Anis A Khan said, “The rescheduling facilities turn non-performing loans into regular ones, which decreases the amount of classified loans. So in such cases, banks need to keep lower provisions. This is why banks are welcoming the rescheduling facilities.

“Bankers are very happy, as they can give good dividends. It makes the shareholders happy. Banks’ share prices also increase in the stock market.”

Meanwhile, Salehuddin Ahmed said, “Only the willful defaulters are taking advantage of the loan rescheduling facilities. Through this policy, they will get fresh loans with a lesser amount of down payments than before. Such moves are destroying the discipline of the financial sector.

Structural issues key concern

Experts say that if the good governance in the financial sector in Bangladesh is not improved and the structural issues are not removed, it will not be possible to reduce defaulted loans only by increasing the rescheduling facility.

“Banks take deposits for short term but lend for longer periods,” they added. The records show a mismatched balance sheet in the banks. We have to get out of this situation,” said Anis A Khan.

Regarding the latest rescheduling facility, experts pointed out that if a business cannot turn around after eight years after taking the rescheduling facility for the first time, then it should be clear that the business will never recover.

In such a situation, such a weak business should not be given three more opportunities for 8 years, 7 years and 6 years – which totals up to 21 years.

“Whether a business would perform well or bad can be identified within two/three years. It does not take that much time to figure this out. I do not understand why the loan rescheduling tenure has been extended so much,” said Salehuddin Ahmed.

What is the way forward?

Experts and central bank officials say the ongoing situation in the country’s banking system must be changed for the better in order to reduce pressure on the banks. This in turn would help reduce the amount of defaulted loans and big refinancing facilities will be unnecessary.

They added that it should be monitored whether the loan rescheduling facilities are boosting the defaulters’ tendency to repay loans, and whether these loans are being used productively.

Experts also spoke in favour of promoting the venture capital system to help reduce new business ventures’ dependence on banks for start-up capital. Besides, the capital market should be more vibrant to support businesses in raising capital.

There is a law for companies with more than Tk 50 crore in capital to be listed in the capital market. This law should be implemented strictly.

Measures should be taken about the large amount of money accumulated by the insurance companies, so that the money can be used as long-term capital. It will also strengthen the insurance sector.

Former governor Salehuddin urges reform in the financial sector to address the structural problems. “I think the government should establish a banking commission and take suggestions from experts,” he said.