Rescheduled loans too turning bad

The Bangladesh Bank's policy that allows defaulters longer repayment tenures and easy terms and access to fresh funds has appeared to have failed to make major inroad in bringing down bad debts as rescheduled loans are even turning sour. 

In 2019, the central bank issued a relaxed policy on loan rescheduling and offered a one-time exit policy to address the long-standing issue of bad debts.

Under the facility, clients can regularise defaulted loans by repaying a lower amount of their NPLs as a down payment than usually required.

As a result, the amount of rescheduled loans swelled: a record Tk 52,770 crore was rescheduled in the year.

Banks regularised defaulted loans to the tune of Tk 12,380 crore in 2021, of which 19.8 per cent has slipped into the bad loan category once again, data from the central bank showed.

The ratio of defaulted rescheduled loans stood at 18 per cent in 2020 when lenders collectively regularised NPLs of Tk 13,470 crore.

In December last year, defaulted loans in the banking sector totalled Tk 103,274 crore, which was 7.93 per cent of the outstanding loans.

Anis A Khan, a former managing director of Mutual Trust Bank, says the upward trend of the defaulted rescheduled loans is not a good sign for the banking sector as willful defaulters usually misuse the facility.

In July, the central bank relaxed the rules related to loan rescheduling to a large degree.

Under the new policy, defaulters who took term loans are now allowed to pay back the funds in six to eight years compared to the previous tenure of nine to 24 months.

Term loans, which are repaid in more than one year, are usually given out to businesses to set up new industrial units and expand the existing ones.

Besides, defaulters are now permitted to give only 2.5-6.5 per cent of their NPLs as the down payment instead of the previous 10-30 per cent.

Before July, defaulters had to pay up to 30 per cent of their NPLs down to reschedule bad loans. In many cases, habitual defaulters had their loans rescheduled by making a lower down payment than the requirement with prior approval of the central bank.

And after becoming a regular borrower, the willful defaulters had taken on new loans from several banks, but they did not repay the funds later, sending the volume of the classified loans in the banking sector higher.

"The relaxed policy did not bring any good for the banking sector. Rather, it has weakened the financial health of many banks," Khan said.

He urged banks not to extend any rescheduling facility to delinquent borrowers and said such clients rather should be brought to book in order to restore governance in the banking sector.

"The new policy will weaken the health of banks further," Khan warned, adding that banks should serve legal notices to the willful defaulters and file lawsuits against them in order to recover funds.

Rescheduled loans are considered stress assets as banks generally face difficulties in recouping them.

Many weak borrowers don't make sincere efforts to improve the condition of their businesses despite securing easy repayment terms and accessing fresh funds.

"This makes them defaulters once again," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

Some banks rescheduled defaulted loans by relaxing rules and regulations during the coronavirus pandemic since the business slowdown hit borrowers hard.

"But many of the borrowers have recently become defaulters. So, the ratio of the defaulted rescheduled loans might have increased last year," said Emranul Huq, managing director of Dhaka Bank.

According to a paper of the European Bank for Reconstruction and Development, NPLs are a burden for both lenders and borrowers, contract credit supply, distort the allocation of credit, worsen market confidence, and slow economic growth.

"The economies that actively seek to resolve NPLs do comparably well," it said.