BB cuts penalty interest on overdue loans

The central bank has reduced the maximum penalty interest and profit rate on overdue loans and investments in a move aimed at easing financial pressure on businesses and encouraging investment amid prolonged economic sluggishness.

Under the broader policy objective, Bangladesh Bank (BB) on Wednesday issued a circular instructing commercial banks to implement the directive immediately.

According to the circular, if any loan, investment or instalment becomes fully or partially overdue, banks will be allowed to impose a maximum penalty rate of 0.5 per cent for the period the amount remains unpaid, instead of the existing 1.50 per cent. The directive also outlined separate application methods depending on the type of credit facility.

For continuous and demand loans or investments, the penalty will be charged on the total outstanding amount.

In the case of term loans or investments, the penalty will apply only to the overdue instalment amount, ensuring the charges remain proportionate to the extent of default.

A BB official said the banking regulator had set a maximum penalty ceiling of 2.0 per cent when the lending rate was capped at 9.0 per cent to create pressure on borrowers to repay loans on time during that relaxed lending regime.

But a couple of years ago, he said, the central bank removed the lending rate cap and aligned rates with market conditions.

"So, keeping a high penalty ceiling on borrowers is no longer justified. That's why it has been reduced gradually to 0.50 per cent," he added.

According to the central bank, the revised ceiling is intended to ease financial pressure on borrowers and investors, encourage business expansion and help sustain productive economic activities during a challenging global economic environment.

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