Big facility for banks to increase consumer loans

Consumer financing has been made less costly for banks as the Bangladesh Bank has decreased the rate of loan provisioning against unclassified consumer loans.

This may result in an increase in granting such loans to the consumers, say experts.

Bankers think that the central bank has taken the decision to boost the consumers' demand in an economy that is hurt by the Covid-19 pandemic.

Commercial banks' general provision against all the unclassified consumer finances, except the house finance and loan to professionals, has been decreased from 5% to 2%, In a circular from the Banking Regulation and Policy Department of the central bank on Tuesday.

However the provisioning for the defaulted house loans will be 1% as before.

Meanwhile, provisioning for unclassified loans taken through credit cards has been 2% already.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said as a result of the central bank's decision the commercial banks will make less provisions compared to earlier periods while they will grant more loans than they did before. This in turn will allow the banks to make more profit.

As an example, the former chairman of Association of Bankers Bangladesh (ABB) Syed Mahbubur Rahman said, "Earlier, the banks had to keep Tk5 crore as provisioning for Tk100 crore unclassified consumer finances. But now they will need to provision Tk2 crore for the same amount of loans, which means they will make Tk3 crore profit."

He told The Business Standard that, "Interest rate for consumer financing is 9%. After provisioning 5% when these are considered as unclassified loans and bearing other costs, the banks do not make no profit. So, banks have been showing a reluctance to interest in consumer financing so far. Demand for loans was also low due to the coronavirus crisis."

As a result of the new decision, banks will make around 1%-1.15% profit, which will increase the bankers' interest consumer financing and the consumer will be more eager to take loans, said Syed Mahbubur Rahman .

According to the Bangladesh Bank, in the first quarter (January-March) of this year, the amount of consumer finance was Tk68,254 crore, and in the second quarter (April-June) it was Tk66,491 crore.