Banks get facility to balloon profits

The Bangladesh Bank has yet again allowed banks to show unrealised interest income from loans under the moratorium facility into profits this year, which will help strengthen the sector’s shock absorbing capacity.

A central bank notice issued in this regard on Thursday stated that the instruction will be effective immediately. The regulator had offered this mega discount last year as well.

Borrowers from large industries, CMSMEs and the agriculture sector are enjoying different types of relaxed loans repayment facilities during 2022.

Borrowers of large industries will have to pay 50 per cent of their installments payable in the final quarter of 2022 to avoid classification as default. Meanwhile, CMSME and the agriculture sector borrowers will have to pay a minimum 40 per cent of their payable installments.

The lenders will also have to keep an additional 2 per cent general provisions against the loans under a relaxed repayment facility, as per the central bank notice. This additional provision will have to be 1 per cent for CMSME borrowers.

Those additional provisions will have to be transferred in “Special General Provision Covid-19.”

The central bank notice said the interest income would not transfer to the profits without cash recovery against rescheduled and restructured loans under the BRPD Circular-4, 2015 and Circular-5, 2019 respectively. Central bank officials say despite the regulatory instruction, some banks had shown unrealised interest from the rescheduled loans to their income, thereby violating banking rules.

This malpractice has been impacting banks negatively, weakening the capital base and hampering the credit discipline in the banking sector, industry insiders say.

In April this year, the central bank warned banks not to show any unrealised interest gained from rescheduled loans as their income. However, banks are now allowed to transfer unrealised interest from loans under the moratorium facility, into their income account.

Islamic banks can also take initiatives in this regard as per this circular.

Industry insiders told The Business Post that putting unrealised income into profits is risky if borrowers fail to pay the rest of the amount, which pushes up defaulted loans.

Latest data from the Bangladesh Bank reveal that the country’s NPLs stood at Tk 1,34,396 crore until the end of September this year, a significant year-on-year increase of 32.86 per cent. September’s figure is the highest since Bangladesh achieved independence in 1971.

The moratorium was first introduced in March 2020 amid the Covid-19 pandemic, enabling borrowers to avoid having their loans classified. Then, it continued to be extended in different formats.