Classified loans in the country's banking sector stood at around Tk. 961.15 billion accounting for 9.20 per cent of the total outstanding loan in June 2020. During the quarter (April-June) default loans in private banks reached Tk. 465.92 billion while default loans of state owned banks recorded at Tk. 429.39 billion. Defaulted loans during the period slid by Tk. 163.02 billion to Tk. 961.16 billion; this sizable down swing mostly is the result of restructuring and rescheduling of a number of previously classified loans. Rescheduling is done by down payments and in some cases way below the requirement, though with special permission from Bangladesh Bank.
From the past experience it is conceivable that banks and financial Institutions are required to give the repeated treatment of rescheduling or restructuring, which is not indeed an ideal situation. It rather indicates the inefficiency in handling such cases and the problems of the borrowers are not identified and addressed in the right earnest.
It is revealed from available statistics that in the year 2019, the amount of rescheduled loans edged up to a whopping Tk. 504.34 billion, an increase by 117.29 per cent over the rescheduled amount of Tk. 233.20 billion in 2018. State owned banks rescheduled Tk.152.86 billion while private commercial banks rescheduled Tk. 307.95 billion in the last year. The rescheduled amounts of specialised and foreign commercial banks were Tk 43.14 billion and Tk 0.37 billion respectively.
What is important is that the lending institutions should be convinced enough that the concerned borrowers seeking loan rescheduling are not in the category of wilful defaulters in order to avert financial or business debacles.
All borrowers irrespective of their exposure, identity and company formation are under the contractual obligation to pay off the debt in time or as per the prescribed repayment schedule. Restructuring is, however, a sort of facility extended by the lending institutions to the borrowers to settle financial obligations within the time period with comfort and in match with their actual or projected cash flow stream, In Bangladesh, the borrowers generally turn up to the banks at the fag end of the loan tenor and in most cases after having defaulted. The borrower should turn up to the lending institutions well in time rather than waiting until the default situation crops up. Early detection of the problem on the part of the borrowers and bringing it to the notice to the lending institutions also bear the testimony that the borrowers does not have any ulterior motive and want to pay off their debt obligations. The borrowers may even seek the waiver of interest or part of the principal amount. The lending institutions, however, will determine the extent of waiver on the basis of judicious appraisal as well as their respective policy direction.
Loan restructuring is an articulated mechanism to unearth the real problem hindering normal course of repayment and to advise remedial measures to borrowers so as to create enabling situation for them to make debt servicing.
One of the core loan restructuring principles is the voluntary act principle underpinning that individuals have the right to enter into contract within the purview of relevant laws. None of the parties might prevail upon the other party to accept its condition.
Borrower should not take restructuring as an obligation. It is a favour extended by the lenders. Initiative for restructuring may be taken when the lender believes that a stable repayment schedule may be framed on the convincible ground and the borrower concerned will be able to pay off the restructured loan in accordance with the revised terms and conditions.
Negotiation creates the basis for meaningful restructuring and must take place in good faith with the bottom line objective to find out the workable solution acceptable to both parties.
Lenders generally contact the borrowers if irregularity is detected in their repayment behaviour towards taking remedial measures. In the negotiation process the lenders should be adequately convinced regarding the causes of failure on the part of the borrowers to maintain regularity in loan repayment and the prospect to rebound their business and the capacity to maintain regular repayment momentum under the restructured arrangement.
Once the discussion on restructuring get started, the lender shall provide the borrower all relevant information related to the amount of liabilities, interest charge in the loan account, number of overdue instalments, required amount of down payment within the purview of the relevant circular of the central bank.
The bankers are also required to analyse the problematic loans in their portfolio. They need to identify performing or regular loans where the borrowers may face the problem to make repayment of future instalments. In this case restructuring yield better result.
Where business units face the hardship in loan repayment and the possibility of repayment from normal course of business is a matter of remote possibility, the bankers should not exercise the option of restructuring. Instead, they may go for legal recourse like foreclosure of the borrowers' mortgaged assets.
Restructuring techniques of credit lines can be grouped into three categories.
First, restructuring of payments and consolidating the debt and giving prescriptions of new repayment schedules. In other words, transforming of all facilities of the borrowing concern into one facility which would simplify the loan administration and monitoring cost.
Second, giving waiver of a part of the interest to give the borrower some financial comfort. In this case the banker will also consider the realisation of overdue loans by selling out the mortgaged assets and the decision of this kind is based on dispassionate judgment over the financial health of the borrower and business possibility prospect to turn around.
Third, debt equity swap can be done by converting the part of the debt into equity by mobilising the fund through inclusion of the strategic partner as part of deleveraging the borrowing concern with a view to making it financially viable.
Non-legal measures imply to resolve the defaulted loan cases outside the purview of legal recourse. Legal measure is protracted and cumbersome process. The bankers need to come to a solution by adopting all available measures like negotiation or re-negotiation, mediation or arbitration and restructuring and rescheduling. The legal measures have to be adopted as a last resort in the recovery drive. Bangladesh Bank also encourages adoption of non-legal measures for speedy solution.
Negotiation between the lending institution and its borrower is needed to find a constructive, workable and mutually acceptable solution. Negotiation should be guided by the good faith principle to work out pragmatic solution within the credit norms and as per the prudential guidelines of the central bank.
The lender and the borrower must discuss the causes of failure in repayment as per the agreed terms and conditions, financial set back of the borrower and the way out to rebound the business for resuming payments.
Rescheduling is one way to provide a borrower with relief when so needed. It is a widely accepted legitimate practice. But banks need to meticulously examine to ascertain the causes as to why loans, extended on the basis of ex-ante analysis or appraisal, have become non-performing or excessively burdensome for the borrowers. If it is detected from such review that the concerned borrower has diverted fund and there occurred major deviation from the purpose or end-use, the banks or financial institutions should not consider the application of loan rescheduling. Instead, they should take legal measures for recovery. It should be kept in mind that rescheduling for the sake of rescheduling does not make any professional sense and eventually it will weaken the balance sheet of the banks or financial Institutions and prove to be the single most cause of capital erosion of the lending institution.
The writer is Additional Managing Director, Midland Bank Limited.
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