Rescheduling spree makes Tk22,000cr default loan disappear

The government's merciful rescheduling policy has apparently paid off as default loans fell drastically by Tk22,000 crore in three months till December last year, thanks to a loan rescheduling spree under a discounted down payment package.

Soon after taking charge in January last year, Finance Minister AHM Mustafa Kamal announced that default loan would not increase anymore.

Subsequently, the Bangladesh Bank relaxed its loan rescheduling policy that made it much easier for defaulters to turn their default loans into regular ones.

The central bank took the move with the expectation that it would bring down default loans significantly and that will pave the way for implementing single-digit interest rate. 

However, default loans ended up increasing by Tk22,377 crore in the first nine months of last year. As a result, banks did not implement the government instruction to bring down lending interest to single digit. 

The default loan soared because the eased rescheduling policy could not be implemented fully due to a stay order by the High Court. 

In November last year, the High Court cleared the implementation of the policy extending the deadline for three more months to avail the one-time exit policy until February 4.

Then the banks started massive loan rescheduling, causing drastic fall in default loan. 

The default loan rate, which went up to a decade high of 12 percent in September last year, came down to 9.19 percent in December, which was the lowest in the last four years.

The Bangladesh Bank has recently sent a letter to the finance ministry, informing it of the latest development in default loans. 

The total default loan stood at Tk94,422 crore in December, according to the letter. 

Of the reduced defaulted amount, the biggest amount was regularised under the relaxed loan rescheduling policy that the central bank formulated in May 16 last year. 

Under the policy, defaulters are allowed to pay only a 2 percent down-payment, a 10-year loan repayment period, and a one-year grace period. The rescheduled loans will have to be repaid at only 9 percent interest rate – the lowest range of rate.

A number of 13,368 defaulters applied for regularising their default loans until December last year and 6,632 of the cases were settled.

However, the Bangladesh Bank does not have data about loan rescheduling after December under the relaxed policy. 

Although the one-time exit policy has contributed to a substantial decline in default loans, industry experts doubt its sustainability. 

Previous experience shows that such cosmetic surgery did not last long. 

For instance, the Bangladesh Bank in January 2015 offered a special package of loan restructuring for large borrowers having default loan over Tk500 crore. 

The policy helped reduce default loans at a historic low of 8.8 percent in December that year. 

Eleven corporate groups have restructured loans of around Tk15,000 crore under the policy. But it did not last long as not a single client who availed the facility continued installment payment complying with policy conditions.

As a result, the default loan continued to increase further and prompted the government to offer another similar exit policy. 

The policy apparently helped banks reduce default loans from their accounting books, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank. 

Its sustainability would be clear once the one-year grace period is over, he said, mentioning the previous experience of large loan restructuring was not good. 

Though the volume of default loans has come down, it will not help banks implement single-digit interest rates because the rescheduling for 10 years has stuck money instead of easing liquidity pressure, he added. 

"Default loan has been reduced artificially by giving a mega discount to defaulters," said Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD). "And doing this the current risk has been passed over to the future."

She said apparently it is good that default loan has declined but the actual reflection will appear after a year or two. 

Mentioning default loans have been reduced artificially, Khondker Ibrahim Khaled, former deputy governor of Bangladesh Bank, said banks will have to be more cautious about regular payment of these loans.