BB's restructuring of large loans

RESTRUCTURING of large loans of large corporate groups facing repayment difficulties due to adverse circumstances beyond control is a routine practice in developed and developing economies, including neighbouring India. The restructuring process allows lenders and borrowers to arrive at mutually beneficial arrangements of keeping the businesses up and running to generate income flows for repayments of the loans at realistically written down values over realistically feasible repayment periods; saving lenders from much larger losses at the likely break up values of borrower business's assets, thereby also saving the economy from losses in output, income and employment from such break up.

Disruptions in economic activities in the prolonged spells of blockades and hartals in 2014 created numerous episodes of severe cash flow crunches in borrower businesses that couldn't be managed within the rigid down-payment and time period limits of the loan rescheduling guidelines prescribed by BB for normal situations. Some relaxations in these rigidities in loan rescheduling drills were therefore allowed temporarily by BB in 2014; which helped businesses large and small keep running in the face of disruptions, in turn helping uphold output and price stability in the broader economy.

However, dealing effectively with large exposures of banks to large business groups needs a more structured approach than the ad-hoc rescheduling criteria relaxations allowed temporarily in 2014; and as directed by BB's Board of Directors, a new large loan restructuring framework has been drawn-up in light of the restructuring frameworks in other developing economies in our region including India, Malaysia, Philippines etc. Introduced in January 2015 inviting restructuring proposals to be submitted by June 2015, the process is intended to begin with loan size of Tk 5 billion or higher to keep the initial number of restructuring proposals manageably small. Based on initial experience and actual need, the restructuring framework will be widened further with modifications and fine tuning in light of evolving international best practices.

The new large loan restructuring framework has been introduced not to extend undue favours to a handful of delinquent large borrowers, but to broaden the toolkit for more effective management of larger loan exposures to good borrowers in the growing economy. While BB's loan rescheduling and restructuring guidelines remain harshly discouraging for habitual delinquent borrowers, BB's March 2015 directive asks lenders to reward good repayment behaviour with rebates in interest payments.  

The writer is Deputy Governor, Bangladesh Bank.