Defaulted loans may double next year

The defaulted loan figure is set to double as the Bangladesh Bank is set to tighten the classification rules for all types of loans by March next year to meet the International Monetary Fund's loan conditions.

At the end of September, defaulted loans in Bangladesh's banking sector hit a record Tk 2,84,977 crore as loans disbursed through irregularities to Awami League-affiliated businesses turned sour at an alarming pace following the ouster of the Sheikh Hasina-led government on August 5.

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Between July and September, bad loans soared 34.8 percent or by a staggering Tk 73,586 crore, according to data from the BB.

The Banking Regulation and Policy Department of the BB has already prepared a draft guideline for loan classification following the international best practices.

The guideline will be published soon and will take effect by March 2025, said BB spokesperson Husne Ara Shikha.

As per the draft guideline, lenders will treat any kind of loan as overdue if a borrower does not make an instalment payment within three months after the due date of repayment.

At present, if a borrower fails to repay an instalment on time, the loan is considered overdue six months after the repayment date.

The central bank is tightening the classification rules in two phases.

In the first phase, the tenure of a loan being marked overdue has been reduced to three months from six months in the case of term loans.

A term loan is a loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate.

The BB implemented the first phase in September this year.

All types of loans including agriculture and SME loans will come under the tightened classification rules, which will have to be implemented in the second phase by March next year.

If the new loan classification rules are followed, the defaulted loan figure will likely double, according to industry insiders.

Bangladesh now has the highest ratio of defaulted loans in South Asia, with nearly 17 percent of the country's total disbursed loans having gone bad.

"No doubt, the defaulted loans will increase in the upcoming days," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank, citing the tightening loan classification rules and the impending loan default by the Awami League-affiliated businessmen who took out huge amounts from banks violating rules and regulations.

Bad loans will surpass Tk 3,00,000 crore by December, said Mohammed Nurul Amin, a former chairman of the Association of Bankers Bangladesh (ABB), the forum of banks' managing directors and chief executives.

If the loan classification rules are tightened, the number will be higher, said Amin, the chairman of Global Islami Bank.

A team of the World Bank is now in talks with the central bank to support banking sector reforms and they urged the BB to implement the international standard loans classification rules by the deadline.

BB once followed the international practice while classifying loans but it gradually deviated since 2015.