Questionable exit policy for loan defaulters

Bangladesh Bank has decided to facilitate borrowers with bad loans through an exit facility. Accordingly, it has decided that the applied and unapplied interest on those loans may be waived in accordance with Bangladesh Bank's guidelines. At a first glance, this appears to be a positive initiative for reducing non-performing loans (NPLs). If implemented effectively, the NPL ratio may decline from around 30 per cent to approximately 25 per cent.

According to the circular, no portion of the principal amount may be waived. Banks' liquidity may improve if the policy is implemented effectively. However, a major concern is that regular borrowers with good repayment records may view this initiative unfavourably, as they continue to cope with severe business challenges and high interest rates while maintaining timely loan repayments. If such incentives are extended to defaulters, other borrowers may lose their motivation and willingness to remain regular in repaying their loans.

Another important issue is the distinction between genuine defaulters and wilful defaulters. Under this circular, habitual defaulters may also receive the same facilities, which could undermine credit discipline in the banking sector. Furthermore, reducing NPLs through such measures is not a sustainable solution. The circular also allows loans that were rescheduled between August 2024 and June 2026 to qualify for the exit facility. This is questionable because, before rescheduling, the applied and unapplied interest had already been taken into account based on the borrowers' projected financial recovery and repayment capacity.

Loans are primarily financed through public deposits. Therefore, protecting the interests of depositors should remain the highest priority. Deferral of interest payments may be considered, but an outright waiver is not advisable. Otherwise, depositors may become reluctant to participate in the formal financial system. Although reducing the NPL ratio is important, it should be achieved through sustainable reforms rather than by relying on interest waiver incentives.

Kawsik Azad Pronoy

A Banker and economic analyst

kawsikdbbl@gmail.com