A Bangladesh Bank plan to halve overdue loans classification time may increase classified loans to a great amount, fear bankers.
As per the guidelines agreed with the International Monetary Fund to avail of its $4.7 billion budget support, the central bank plans to reduce the overdue period for classifying long-term loans to three months from six months in its efforts to contain non-performing loans and address irregularities in the banking sector.
"Another big directive is coming. All types of term loans must be classified within the next three months after becoming overdue, which is one of the conditions of the IMF," a high-ranking official of the central bank on condition of anonymity told The Business Standard.
While the move is intended for faster resolution of defaulting loans and many bankers have welcomed these measures as a step in the right direction, some have remained sceptical about their effective implementation.
Syed Mahbubur Rahman, the managing director and CEO of Mutual Trust Bank, told TBS that the central bank can take such steps as per the IMF prescription but it will increase the classified loans by a huge amount.
"The lion's share of the country's loans are term loans. The current economic condition is in stress due to the Russia-Ukraine war. If loans become classified after three months, defaulted loans will increase significantly," he added.
According to the existing rules of the central bank, after the six-month overdue period, a term loan is classified as "substandard" and it is classified as "bad/loss" after nine months.
The managing director of a state-owned bank wishing to remain unnamed told TBS, "No matter how much facilities are provided to businesses in our country, their demands keep coming. Even after granting so many concessions, default loans are on the rise."
During an inspection of the central bank last year, it was found that the banks concealed default loans to the tune of nearly Tk10,000 crore, he pointed out, adding, "If term loans are classified after three months of remaining overdue, the volume of defaulted loans will surge further. Then, the tendency of the banks to hide defaulted loans will increase."
In response to these concerns, Sarwar Hossain, assistant spokesperson of the Bangladesh Bank, assured that the recent measures taken by the central bank would improve governance and accountability in the banking sector.
The central bank has already implemented various measures during July and August of this year to combat loan fraud and improve financial stability in the country. These include imposing penalty interest on overdue and classified loans, mandating fingerprint verification for loan guarantors, and removing special concessions for loan repayment that were previously offered to help borrowers cope with challenges arising from the Covid pandemic and the Ukraine war-induced setbacks.
The mandatory fingerprint verification of loan guarantors is expected to play a crucial role in reducing loan fraud, said Sarwar Hossain.
Furthermore, the penalty interest imposed on overdue and classified loans is meant to act as a deterrent for those who might consider defaulting on their obligations intentionally, he added.
"Besides, considering the country's overall economic outlook, we will take a timely step regarding the IMF's guidelines on the timing of classifying long-term loans," he added.
A former managing director of a private bank on condition of anonymity told TBS, "Earlier we used to classify a loan after three months of overdue. The central bank has extended the period to six months on big businessmen's request. But, we have to stay in line with international practice."
"Before doing business with our banks, foreign banks usually examine whether there is any kind of weakness in our international practices. Hence, we should bring our banking regulations in par to international standards. Otherwise, our default loans will increase," he added.
The country's banking sector has witnessed a rise in default loans by Tk11,000 crore in the first three months (January-March) of this year.
The total default loan in the banking sector stood at Tk1,31,620 crore in March, which was 8.80% of the total outstanding loans.
Mandatory fingerprint verification for loan guarantors
In a circular issued on 2 August, the central bank directed the banks to ensure the verification of fingerprints from loan guarantors.
A number of writ petitions have been filed to the courts in recent times, wherein borrowers and loan guarantors claim to not have endorsed the loan and guarantee agreements, according to a Bangladesh Bank.
Consequently, this directive has been issued to mitigate potential legal entanglements in the process of debt recovery, it said.
Officials of the central bank said that this directive will play an active role in preventing irregularities and fraud in the banking sector.
The managing director of a private bank, seeking anonymity, told TBS that in many cases, with the connivance of bank officials, borrowers take loans by forging the guarantor's signature. Later when the loan defaulted, the guarantor said that his/her signature was forged. The central bank directive will play an effective role in preventing this type of fraud.
The central bank circular also mentioned that bank officials should verbally communicate the loan's purpose and the contents of the documents to the borrower, guarantor, and any relevant third party or group involved.
According to Supreme Court sources, in the last 5 years, loan guarantors have filed 13,641 writs against settling banks' dues by selling their properties at auction. Around 80% of the time, the court ruled in favour of the petitioners. The writs filed involve unpaid loans of around Tk40,000 crore.
No special concession for loan repayment
In 2020 due to covid, businessmen were exempted from their obligations to repay any kind of loans. In 2021, they get through paying off only 15% of their loans.
The central bank withdrew this loan repayment concession at the beginning of 2022. But due to the Ukraine-Russia war, the businessmen appealed to the central bank for extending the concessions.
In view of that appeal, the central bank offered concessions in the repayment of industrial loans, agricultural loans and CMSME loans from April to December 2022. This facility was withdrawn by the central bank at the beginning of 2023, but only for three months.
Because the businessmen made the same demand again, a special concession was given by the central bank saying borrowers will not default if they can repay 50% of all working capital and term loans from April to June this year. Although this facility has been withdrawn from July this year. Currently, there are no special facilities for loan repayment.
Penalty interest back on overdue, classified loans
On 27 July, the Bangladesh bank introduced a new rule allowing banks to charge a maximum 1.5% penalty interest for overdue and classified loans.
Central bank officials said banks requested the central bank to reinstate the penalty interest against defaulted loans to encourage good borrowers and discourage bad ones or wilful defaulters.
As per the central bank circular, for any overdue loan or instalment, a maximum penalty interest of 1.5% will be charged on the entire outstanding balance for ongoing or demand loans, and on the overdue instalment for term loans.