Central bank steps in to tighten loan interest waiver

The central bank, in a bid to rein in generous waivers of interest, has reminded the banks that they can waive interests on loans only in special circumstances like death of the borrower, natural calamity and misfortune, and cannot forgo the principal amount.

Though a circular issued three decades ago clearly stated the special circumstances for partial or full waiver of interest, banks are frequently offering interest waivers to clients ignoring those instructions, the Bangladesh Bank noted.

Such practices go against overall loan discipline in the banking sector and may "discourage clients to repay loans in time to take advantage of interest waiver," the central bank said in a  circular yesterday.

The new circular clarifies that the loan interest waiver facility has to be approved by the board of directors of a bank. The managing director of a bank can decide to waive interest on loans up to Tk10 lakh.

The central bank circular said there is scope of full or partial waiver of interest on loans due to natural calamities, epidemics, river erosion, catastrophic causes or closed projects.

However, it has recently been observed that interest waiver facilities are often being provided to some customers in spite of the absence of special circumstances as described.

This may lead to reluctance among the customers to repay the bank dues within the stipulated time, which is contrary to the discipline in the banking sector. Therefore, the latest instruction was given to create awareness in debt repayment.

Although business activities have been quite normal over the last one year, customers have not shown willingness to repay their loans. Rather, they have taken advantage of interest waiver facilities.

In 2020, Tk1,578 crore interest on customers' loans were waived due to the outbreak of Covid-19, while around Tk1,855 crore the interest was waived in 2021. That means the amount of interest waived has increased by Tk277 crore in one year.

The circular was issued to clarify what kind of interest on loans can be waived as the amount of waived interest in the banking sector has been gradually increasing, said a senior official of the central bank.

According to the circular, interest on loans disbursed through fraudulent activities, and on loans given to intentionally defaulting borrowers cannot be waived. It will be necessary for the bank to ensure recovery of fund expenditure before waiving interest.

Moreover, the conditions for recovery of fund expenditure are relaxed in some cases, which are: a project that has been closed for three years, failure to recover loans despite taking necessary measures, death of the borrower, and loss due to natural calamity, epidemic, river erosion.

The banks will have to review the borrower's financial statements for the last three years for waiving interest on loans for which such statements are required. Interest cannot be waived if the owners' equity is positive according to the latest audited financial statements.

The circular also said the banks have to consider the impact of waiving interest on their own financial position. The bank's capital, profitability and other important financial indicators need to be reviewed too.