Does generosity pay, always?

A little bit of generosity on the part of the central bank in the matters of loan rescheduling has, apparently, helped a section of banks and their errant borrowers reap benefits. It also has the potential to benefit the government and shareholders of the banks.
The Bangladesh Bank in the face of strong demands from the businesses, particularly from their apex representative body, on December 23 relaxed its loan rescheduling rules for six months, allowing banks to reschedule the non-performing loans on the basis their relationship with the clients concerned.
During the week following the central bank's relaxation of the rule, a section of banks and loan defaulters, including a few big and infamous ones, allegedly, became hyperactive to take advantage of the situation as much as possible.
Many errant borrowers, who were not ready to reschedule their classified loans making mandatory cash payments equivalent to certain percentages of the same, took the advantage of the latest BB circular. They got their loans rescheduled either without making any down-payment or by paying small amounts.
Prior to the December 23 relaxation, in the case of loan rescheduling, the banks were required to secure cash payments in varying amounts, ranging from 10 per cent to 50 per cent, against overdue instalments or the total outstanding loan amount. The cash deposit requirements were more in the case of borrower seeking frequent rescheduling.
The central bank in September last, in view of the rising volume of non-performing loans (NPLs) in the country's banking sector, made the classification rules even stricter. It asked the banks to send loans overdue for three months to the Special Mention Account (SMA) and not to allow loan rescheduling for more than three occasions. The measures had put the banks in more trouble with their NPL.
However, the BB's loan rescheduling relaxation that has been put into effect to help businesses overcome the onslaught of political unrest for months has proved to be a real blessing to the banks and errant borrowers and, of course, the government.
Besides, it has helped a good number of banks to make a cosmetic improvement in the NPL situation.
For instance, the share of the NPLs in the total outstanding loans of the banking sector was more than 13 per cent in September last year. The share came down to 9.0 per cent at the end of last December.
In fact, had there been no such relaxation in the case of loan rescheduling, the NPLs would have been much higher in amounts and also as a percentage of aggregate loan portfolios (otherwise known as assets) of the country's banking sector at the end of December last, leading to a substantial fall in the profitability of banks in the year, 2013.
It is said that a number of banks would have been in the red had there been no change in the rescheduling rules on the part of the central bank. Besides, the fall in profit would mean fall in government revenue that comes as corporate tax.
A few statistics would also show how the BB move has helped a section of banks to turn their otherwise unpalatable NPL figures into respectable ones.
The share of the NPLs in the total loan portfolio of a first generation private commercial bank was 17 per cent at the end of September, 2013. But at the end of December, 2013, it came down to 3.0 per cent. The largest and the second largest public sector commercial banks experienced 10 per cent and 9.0 per cent drop in their respective NPLs. Under normal circumstances, banks could hardly think of such downsizing of their default loan figures.
One chronic loan-defaulting big business house, reportedly, got its default loans, amounting to nearly Tk. 9.0 billion, with one private and two public sector banks rescheduled following the latest BB move on the issue. Many banks made available similar the opportunity to some other top defaulters.
However, it is not known whether the banks concerned could ensure some down-payments from the borrowers concerned or not. If yes, that is good and, if not, it would only help further deterioration of their asset quality.
It now remains the job of the central bank to look into the issue and find out whether the facility offered with an honest intention to help the trouble-hit businesses was abused or not.
However, any abuse of the facility would only make the situation more difficult for the banks concerned in the coming days and the central bank would think twice before extending any such support to the businesses during their troubled-times.
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