The Bangladesh Bank has made it clear that borrowers will not be allowed to use fresh loans to repay or adjust their previous debts, and instructed banks to monitor this properly through their internal audits.
"We have observed that borrowers are using loans to pay or adjust their previous loans, which is not in compliance with loan discipline," the central bank said in a circular on Wednesday.
The Bangladesh Bank instructed banks to comply with the guidelines on credit risk management.
The central bank had issued a circular in June 2018, asking banks to take action to prevent fund diversion and ensure that the borrower utilises the previous loan instalment properly before disbursing the next instalment of a loan.
A central bank official told The Business Standard, "We have observed that fund diversion could still have occurred despite our previous instructions to banks to prevent it. Now, we have specified our previous instructions so that banks can follow them properly."
After the reopening of economic activities, businesses have started taking loans under various stimulus packages to recover their losses caused by the novel coronavirus pandemic.
This has contributed to the private sector's credit growth and, in July, the growth increased to 9.20 percent year-on-year from 8.61 percent in June.
Ali Reza Iftekhar, managing director of Eastern Bank and chairman of the Association of Bankers, Bangladesh (ABB), told The Business Standard, "It is a fundamental task of a bank to ensure a loan is being utilised for the right purpose. But some borrowers have a tendency of taking loans to renovate buildings, buy a car or other purposes. So, the main purpose is not served.
"If banks cannot check fund diversion properly, the risk of a loan being default will increase."
He said, "Banks must monitor fund diversion for their own interests. Because, if a borrower diverts a loan, their business may not grow properly."
Ahsan H Mansur, executive director of the Policy Research Institute, said, "There is a proverb: Money is tangible. So, it will be spent here and there. If we can analyse cases of defaulted loans in our banking sector, it is seen that most default loans started with fund diversion."
He said, "The latest instruction of the central bank is nothing new. The instruction may have been issued so that the loans under stimulus packages are not used for other purposes."