The Bangladesh Bank yesterday further relaxed its loan write-off policy as part of its roadmap to "artificially" reduce the higher volume of bad loans in the banking sector.

Banks use write-offs to remove loans from their balance sheets if they think that there are no realistic prospects of recovery.

The written-off loans are then transferred to the off-balance sheet records. This allows banks to show a lower amount of bad loans in their books. However, the liabilities still remain.

Banks are now allowed to write off from their balance sheet the default loans that have been in the bad and loss category for two years, down from three years previously, said the central bank in a new guideline yesterday.

In February 2019, the BB lowered the time-frame to three years from five years.

Non-performing loans (NPLs) in the banking sector stood at Tk 145,633 crore in 2023, which accounted for 9 percent of all outstanding loans, showed BB data.

Under the new guideline, lenders will not have to file any case with the Artha Rin Adalat (Money Loan Court) to write off a delinquent loan of up to Tk 5 lakh, up from a previous Tk 2 lakh.

Banks also can write off bad loans taken by a person, or in the name of his/her sole proprietorship who subsequently passed away, without filing any case.

If no legal action has been taken previously, banks have to file cases under the Money Loan Court Act 2003 before writing off the loans.

Banks have to keep 100 percent provisioning against the bad loans after deducting only retained deferred interest.

The BB guideline said no loan account can be written off partially and approval of the board of directors is mandatory to write off the bad loans.

Since the facility was introduced in 2003, a total of Tk 68,023 crore has been written off from banks' balance sheet, BB data showed.

The fresh relaxation will increase the tendency to write off bad loans in the upcoming days, said bankers.

The banking regulator also asked to form a written-off loan recovery unit, which will be written-off investment recovery unit for Islamic banks, to speed up the recovery.

Banks will have to form the unit within 15 days past the issuance of the notice.

They will have to appoint as the head of the unit an official who is no more than two positions below the managing director.

About 5 percent equivalent of the recovered written off loans will be disbursed as an incentive among the officials who are involved in the recovery process.

A maximum of 10 percent of the disbursed amount will be provided as an incentive to the managing director.