Hidden risks behind latest credit policies

Recently, Bangladesh Bank issued two circulars regarding the reduction of the overdue interest rate from 1.50 per cent p.a. to 0.50 per cent p.a. and the temporary suspension of the 15 per cent cap on funded exposure for groups, whereby the funded exposure for a group can now be a maximum of 25 per cent of the bank's total regulatory capital.

Apparently, these circulars seem to help borrowers manage repayment pressure, including obtaining sufficient industrial loans according to their requirements. However, there are deep apprehensions that irregular loans may also increase as a consequence.

By easing the repayment obligations through the reduction of the overdue interest rate, willful defaulters may also increase, which could create more vulnerabilities in the loan portfolio. Besides, by suspending the funded exposure cap under the single borrower exposure limit, portfolio diversification among lenders may decline. Rather, some groups may obtain the opportunity to establish greater control over the system.

Consequently, banks' dependence on a few groups may increase, which could further enhance the overall risk exposure. There is no doubt that these initiatives will help some clients revive their businesses. However, in most cases, these measures may work adversely.

To facilitate the industrial sector, a policy for reducing interest rates based on market conditions may primarily be initiated instead of these measures. At a time when Bangladesh is moving towards the implementation of risk-based supervision and other modern regulatory frameworks, apprehensions regarding the deterioration of loan portfolio quality may create a negative impact on the banking sector.

Kawsik Azad Pronoy

A Banker

kawsikdbbl@gmail.com