Loan restructuring: Will it help?

At the end of September last, top 20 borrowers owed Tk 430 billion to the banking sector, accounting for nearly 9.0 per cent of the sector's total outstanding loan.
One of them, reportedly, having diverse business interests alone owes Tk 70 billion, the highest amount, followed by another owing Tk 60 billion.  A substantial part of the loans taken by top borrowers have fallen overdue.
And if the top three borrowers of each bank default on the repayment of their loans, the banking sector's total credit adequacy ratio (CAR) is likely to drop 2.69 per cent, pulling down the CAR below the critical level of 10 per cent. At the moment it is little above that ratio.
In fact, the country's banking sector is now a hostage to inefficient public sector banks, a few ill-managed private sector banks and a band of old and new errant borrowers.
Notwithstanding the bold-face being put up in public, the central bank honchos, it seems, are deeply worried by the way the unabated rise in default loans in the banking sector in recent months.
At the end of September last the non-performing loans accounted for 11.6 per cent of the total outstanding loans in the banking sector. Some years back it was over 14 per cent, and a couple of decades ago it was over 35 to 40 per cent. But the non-performing loan (NPL) problem then was the doing of the public sector banks, including the ones involved in development financing.
Now the situation prevailing in the banking sector is altogether different. The private sector banks now have elbowed out the public sector banks to take the lead-role. The high incidence of default loan was more or less a problem of the public sector banks. But the problem is increasingly getting into the private banks. That is where the worries lie. It is most likely the share of NPL in the total outstanding loans in the banking sector would be even bigger at the end of the current calendar year.
The non-performing loans swelled by over Tk 160 billion in nine months of 2014 to Tk 572 billion. It is assumed that due to the failure of big borrowers to service their debts properly, the NPL grew bigger in size in the past three months and the trend, in all likelihood, would continue in the upcoming year unless something is done immediately.
The central bank is also concerned. Its top notches met the high officials of banks a few days back and asked the latter to do whatever necessary within the bounds of laws and rules to expedite the recovery of loans. The bankers too promised to do the needful.
But the situation is a little bit precarious now and the usual formula such as loan rescheduling would not work for many large borrowers either have exhausted that facility or do not have the capacity to make down payments necessary to avail that facility.  Some of the top borrowers have taken loans from a number of banks and defaulted on their repayments.
The top borrowers included a few who are branded habitual defaulter and known for using their 'high' connections either to avail bank loans or getting the same rescheduled. However, there are borrowers who are not willful defaulters. They are the victims of major fluctuations in the prices of food items in the international markets and also political troubles that rocked the country in the second half of 2013.
Now the board of directors of the central bank is mulling measures beyond loan rescheduling. It might soon come up with a plan to restructure some big loans. The central bank move has come following proposals submitted by a financially-troubled big business house to its banks for loan restructuring. The banks concerned reportedly sent the proposals to the central bank seeking its opinion.
It is most likely the central bank instead of granting the facility to a particular borrower would prepare a well-defined loan restructuring policy that can be applied in the cases of all the relevant borrowers.
The lending banks are also interested in restructuring, mainly because it would help them remove a large load of NPL from their shoulder, at least, for sometime and enable them to present relatively healthy financials.
But the job of restructuring debts is not that easy. Prior to restructuring a debt it has to be determined whether the debt it eligible for concessions granted under the facility. Besides, a lender has to evaluate issues such as interest income recognition and conduct a sound risk management exercise.
The process of loan-restructuring though a very much known process was never put in place in Bangladesh except for once in 2002. But the 2002 experience was not that palatable. If the central bank decides to offer the loan restructuring facility to troubled large borrowers, only the genuine ones should get it. Under no circumstances, any borrower having very dubious track record should be granted the facility that, in fact, discriminates against other borrowers who faithfully and regularly service their debts.  
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