Separate supervision units at banks to handle demand loans

The Bangladesh Bank Sunday issued a guideline on demand loans, mandating a number of measures such as separate supervision units at banks, the highest individual credit ceilings, with repayment and rescheduling periods.    

The separate units at banks to oversee the demand loans will be led by a banker of at least a deputy managing director (DMD) rank, said the central bank.      

Earlier, there was no specific guideline for demand loans. Bankers hope the new guideline will help discipline borrowing meant for short term business purposes such as importing essentials, or industrial raw material imports.

Demand loans are required to be repaid on the call of the lender. The credit and repayment period of such loans are decided by the lender, and are usually negotiable. The loans are sanctioned against tangible assets or other securities.      

The central bank notification said all loans for bringing in essentials or industrial raw materials will be called post import financing (PIF).  

Currently banks call these short-term loans "loans against trust receipts," and "Murabaha trust receipts" in Shariah banking.

According to the guideline, banks will have to have their PIF policies approved by the board of directors. There will also be an individual credit ceiling for such loans.       

As per the central bank, the repayment periods will be 90 days for imports of essentials, and 180 days for industrial raw materials. Banks cannot wait any longer for loan paybacks although previously, the repayment periods were flexible, based on a bank-client relationship.         

If the loans require refinancing or rescheduling, banks will do it only once. The rescheduling will be 30 days at most for essentials, and 60 days for industrial raw material imports. However, the need for refinancing or rescheduling will have to be assessed first.        

The PIF monitoring units will recruit skilled manpower as the units will be responsible for ensuring loan approval terms and processes.   

The central bank says banks will have to formulate specific action plans for recovering PIFs that are classified or converted into term loans. Reports on recovery progress will have to be submitted to the boards' risk management committees every three months.

Complete reports on loan recovery will also have to be submitted to the central bank every three months as the loan approving assets and securities will have to be verified properly too.

"A substantial number of the demand loans go into default. The central bank guideline will help change the picture," a banker preferring not to be named, told The Business Standard.

"If a bank's demand loan defaults, it will no longer be covered up," he said, adding that the measures would help reduce demand loan defaults.