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BB's default loan exit policy

July 11, 2024 00:00:00

When the default loan culture is posing a threat to the stability of financial sector in particular and macroeconomy in general, the central bank has come up with an 'exit policy' that allows the defaulting borrowers up to three years for loan repayment with a 10 per cent down payment. The policy, as explained by the central bank, is designed to provide support to 'unintentional' loan defaulters involved in projects or businesses facing shutdown or major disruptions due to reasons beyond their control. Such borrowers may apply to the bank for availing the facility by paying at least 10 per cent of the outstanding loan and the bank will decide the next step within 60 days. If approved, the repayment schedule will be re-fixed and the borrower will not get any fresh financing until full repayment of the current loan is made.

What prompts the central bank to issue the exit policy is not clear and there are also some valid questions about why such a policy is necessary. The amount of default loan, or non-performing loan (NPL), according to an official estimate, stood at Tk 1.82 trillion at the end of March this year. The amount was 25 per cent more than the amount recorded at the end of December last and 11.10 per cent of the total disbursed loans at the end of first quarter of the current year. The latest exit policy underscores that the mechanism will give some relief to the unintentional loan defaulters. The big question is who is going to determine the unintentional defaulters and what will be the yardstick to define the unintentionality so presumed? It will be a tricky task for the banks. Some wilful or habitual defaulters may exploit the ambiguities. A good thing is that the newly introduced exit facility will not be considered as loan rescheduling or restructuring.

Over the years, Bangladesh Bank has introduced, revised, relaxed and reintroduced a series of rules and steps regarding default loan making the whole exercisechaotic. From the large loan restructuring around a decade ago to 11-point roadmap to realise default loans early this year, the banking sector is now loaded with many plans, policies and regulations to cut down the NPLs. It seems that some of the policies and rules being overlapping along with frequent changes in some decisions, it creates confusions, too. For instance, three years ago the central bank allowed businesses to make a down payment of 2.5 to 6.5 per cent of their term loans instead of earlier 10 to 30 per cent to reschedule their loans and the repayment period was also extended to maximum eight years from the two years. It was, however, argued at that time that the decision was taken due to the Russia-Ukraine war and the Covid pandemic.

The actual outcomes of all these moves are also not clear as there is no comprehensive status report in this connection. What benefits have the controversial large loan restructuring mechanism brought for the banking sector? There are many more questions of this kind and their answers are in most cases vague and unclear indicating a troubling situation in the banking industry. One has to wait and see how the exit policy announced lately works in line with the expectations of the central bank.

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