The Bangladesh Bank (BB) last week announced a corporate debt restructuring (CDR) policy that aims at extending help to big borrowers in distress.
That such a policy would soon be announced was in the air for the past few months. A large business conglomerate, which is already infamous for its loan default culture, has been pushing hard to get such a restructuring policy in place.
In fact, the business house in question did not have any other option left since it has already exhausted all the avenues for rescheduling its overdue loans with a number of banks, public and private. However, it was not possible for the central bank to offer CDR facility to one particular borrower since there are many other large borrowers who have also defaulted on loan repayments. And a number of banks are in serious difficulty because of their failure to recover such loans.
The proposals to get its default loans restructured were first submitted to a number of banks by that business house. The banks, in turn, sought opinion of the central bank in this connection. Allegations have it that the political connections were used to get things done as planned.
The central bank took its time to prepare a CDR policy that is usually put into effect in many countries at the time global recession and severe domestic economic hardship. The main objective of the CDR is to help both borrowers and lenders concerned.
The CDR policy approved by the central bank allows a single borrower or a group to get the loans restructured, individually or on formation of a consortium. 'No borrower will be eligible for such restructuring facility if he or she is found involved in any forgery and malpractice, says the central bank's CDR policy.
A restructured loan will be treated as 'special-mention account (SMA) that would require provisioning of only 2.0 per cent.
The borrowers will be allowed to repay their restructured term loans for a maximum period of 12 years while both restructured continuous and demand loans would have to be cleared within a maximum period of six years.
To get the large loans restructured the borrowers would be required to make a down payment at the rate of 2.0 per cent of the credit amounting less than Tk 10 billion and 1.0 per cent for loans amounting more than Tk 10 billion. The interest rate of the restructured loans will be fixed by the banks concerned. However, it will be 1.0 per cent higher than bank's cost of fund.
The BB policy also bars the borrowers taking the restructuring facility from declaring any cash dividend for three consecutive years.
However, the loan restructuring policy announced by the central bank has given rise to a number of questions that need to be answered.
The first question involves the quality of the accounts to be allowed to have the restructuring facility.
It does appear that the central bank has given the banks the freedom to choose borrowers for the CDR facility. It is expected that the banks would give priority to non-problematic or standard accounts. However, substandard and doubtful accounts could also be granted the facility, if they are found viable. Will the banks need any clearance from the central bank while selecting any errant borrower?
The second issue relates to the classification of accounts concerned after those are granted the restructuring facility. In the event of restructured accounts, the original terms and conditions would undergo changes. In that case a loan rated as classified would not be so anymore after restructuring and both the borrower and the lender are supposed to get clean chits.
No matter what happens finally as far as the recovery of loans is concerned, the banks would be happy to offer restructuring facility to large borrowers as they (banks) would have to maintain a paltry 2.0 per cent provisions against those. This would, thus, help the banks to increase their profitability and mask bad loans.
The CDR mechanism, once enforced, would be hard to discontinue in the future. The facility is very much in place in many countries and has been helping scores of companies to come out of the debt trap where sponsors were really serious in reviving their business instead of stonewalling their bankruptcy. But there are bad experiences also. In neighbouring India where restructured standard advances grew at a rate of 40 per cent between March 2009 and March 2012 when gross advances of the total banking system grew at a rate of 20 per cent. Many experts in that country have found the CDR mechanism not appropriate one for dealing with bad debt issue.
Even the best of intentions gets defeated when a facility is abused both by the borrowers and the lenders. Given the widespread default culture in this country, one has reasons to be sceptical about the success of a facility that has all the potential to discriminate against medium and small borrowers. The lending rate to be fixed in the case of a restructured loan is one glaring example of discrimination.
The central bank is expected to closely monitor the new facility that, it seems, is aimed at salvaging the large bank loan defaulters. Hopefully, it would stick to its decision to cancel the facility if the borrower/s concerned failed to repay two consecutive instalments and apply the provisions of the bankruptcy law whereever necessary.
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