Loan repayment further relaxed with banks under liquidity stress

• Loans cannot be classified if 50% of instalments are paid by December
• Rest half will have to be paid within one year after the maturity of the loans
• The facility was given to all types of loans throughout 2020
• In 2021, borrowers could avoid becoming defaulters by repaying only 15% of instalments
• This year, the central bank instructed repayment of 75% of instalments

The Bangladesh Bank has offered special concessions in the repayment of term loans given out to businesses despite the country's banking sector currently facing a liquidity shortage.

Term loans that are repayable between September and December this year cannot be classified if 50% of the instalments are paid during the quarter, while the remaining half of the instalments will have to be paid within one year after the maturity of the loans, says the central bank in a circular issued to the managing directors of scheduled banks on Sunday.

As per the previous instructions of the Bangladesh Bank, the borrowers were required to pay 75% of their loan instalments by December to avoid becoming defaulters.

Production costs in industries have increased in the country due to the negative impact of the prolonged war situation in the world outside, causing the real income of the borrowers to fall, says the circular. 

In this situation, the regulator has relaxed the repayment of loans to keep financial activities in the country vibrant, it adds.

When asked about this, the managing director of a private bank told The Business Standard, "Banks in the country have been going through a liquidity crisis since the beginning of the current fiscal year. Those who were prime lenders in the market also are now over-indebted. In such a situation, relaxing the repayments of business loans is not logical."

Loan repayment by businesspeople was nominal in the past two years due to Covid, he mentioned, adding, "In the first six months of this year, there was a massive increase in imports, which means trade has been good. Relaxing loan repayment even after that is pointless. If businesses continue to get facilities in this manner, banks will find it difficult to operate as they are now meeting their liquidity shortages by borrowing from the central bank."

He also warned that this facility will give the wilful defaulters an edge, as banks who were preparing to take legal action against such borrowers will have to wait another year.

Earlier on 12 December, FBCCI President Md Jashim Uddin, BGMEA President Faruque Hassan, BKMEA Executive President Mohammad Hatem along with top leaders of the organisations met with the central bank governor and placed a number of demands including a respite from loan repayment.

After the meeting, traders told the media exports were suffering as production was disrupted due to a shortage of gas and electricity.

"We will have to pay the instalments [of loans] to the banks, but it has already become difficult for us to pay the December salaries of workers. So, we have requested the central bank to extend our loan repayment period till 30 June," said the FBCCI president.

Asked why banks should extend the facility, he said, "Due to the increase in the raw materials and fuel prices, our situation is now worse than it was during the Covid period. The government is not able to import fuel due to a hike in its price and we are not able to run factories due to gas shortage. Now, if we cannot run the factory and open LCs to bring raw materials, how can we pay the loan instalments?"

The facility of non-payment of loan instalments was given to all types of loans throughout the last year of 2020 because of the pandemic. In the following year, borrowers could avoid becoming defaulters by repaying only 15% of the instalments. But, in the current year, the central bank reduced the concession slightly and instructed the repayment of 75% of the instalments.

Since the beginning of the current fiscal, deposit growth has slowed down due to rising inflation, while credit growth has been around 5% higher compared to deposit. Besides, banks have had to use cash money to buy additional dollars in the wake of a sharp rise in imports compared to export receipts.

All this has resulted in a liquidity crisis in the banking system.

Meanwhile, the erosion of the savings capacity of people is already reflected in the liquidity indicators of the banking sector.

Excess liquidity in the banking sector fell sharply by Tk33,000 crore in just three months to Tk1.70 lakh crore in September, according to the Bangladesh Bank.