New policy guideline on bank loan write-off

The circular issued by the country's central bank late last week on revision of the policy guideline for writing off loans is unlikely to produce any impact on an otherwise deplorable situation concerning banks' soured loans. Yet the guideline, if adhered to, might help banks hide a part of the actual volume of bad loans and present relatively healthy pictures in their financials. The size of non-performing loans (NPLs) in the banking sector would also get reduced, to some extent, if all the banks write off their bad loans simultaneously.

The provisions in the new guideline that allow banks to write off loans classified as bad/loss for three consecutive years and small-size loans, up to Tk 200,000, without any court case might prove to be handy tools for achieving that purpose. However, the meeting of provisioning requirement against the written-off loans might appear a major problem for many banks. Banks having problems with their financial health may not be interested to initiate any large-scale write-off move. For instance, nearly 44 per cent of the written-off loans belong to the state-owned banks that need immediate capital replenishment.

There is no denying that cancellation of non-recoverable bad loans from the balance sheets by banks and other financial institutions is an internationally-accepted norm. But the act of writing off bad loans does not absolve either banks from recovering or borrowers from repaying the same. Rather, the process eats up a part of the profits earned by banks as they have to provide for an amount equivalent to the written-off loans. Moreover, banks are legally bound to continue efforts to recover the written-off loans. However, the practice of writing off bad loans---banks wrote off nearly Tk 500 billion in bad loans until September last--- comes as an encouragement to the bank loan defaulters. The main problem with the written-off loans is that banks are not found serious about recovering the same. Though the banks, in most cases, file cases with the money loan courts against delinquent borrowers, the process is a lengthy and expensive one. That is why borrowers concerned do have reasons to celebrate banks' decision to write off their borrowed amounts. There are also legal ways to stall execution of verdicts delivered by the money loan courts by the delinquent borrowers.

The central bank with a view to enabling banks to take right moves in written-off loan recovery has, in the new guideline, asked the banks to form 'debt-collection unit'. It has also reminded the banks of the existing provision of appointing third parties (recovery agents) for collecting written-off loans. The banks, unfortunately, have not been enthusiastic enough about getting back their money using the services of recovery agents. The latest guideline on loan write-off is, in fact, one of the prescriptions that the central bank writes from time to time either to control or cure the symptoms of a disease, named, loan default. The banking industry, seriously affected by it, is gasping for an effective and early remedy. The causes of the ailment and their cure are known to all concerned. Unless and until measures are taken to find a durable cure, piecemeal steps are unlikely to produce anything tangible.