In response to the negative impact of prolonged blockade and strike during the last year on the repayment of loans, the Bangladesh Bank, the regulatory authority of banks operating in Bangladesh, allowed the scheduled banks to reschedule. In loan rescheduling, a borrower is required to pay specific portion of his loan as down payment and then the term of the loan is extended so that the size of installments becomes lower. This way a loan, which might have the risk of being defaulted, could be regularised.
The political turmoil faced by the country last year deteriorated the economic performance for which the business people urged the Bangladesh Bank to do something so that those who took loans for doing businesses could save themselves from being loan defaulters. Sometimes the country-specific risks may jeopardise the banking sector performance which may call for deviating from the set rules and standards of doing banking business. The Bangladesh Bank did not deviate from the international standards of loan classification. It allowed the banks discretion in rescheduling loans depending on their bank-customer relationships. However, such a move of the Bangladesh Bank might create some problems for the overall banking sector performance of Bangladesh.
As long as financial discipline, for example, taking loans and giving them back on time, is concerned, this move demands a critical review. Under the existing rule of the Bangladesh Bank, a borrower whose loan has already been classified is not allowed any fresh loan considering that he is already burdened with his existing liabilities and giving him further loan will accelerate the probability of default. Yet, a borrower may be allowed a fresh loan even if his previous loan is classified only when some preconditions are met and there is guarantee that the new loan will help to recover the previous as well as the current loans.
The history of loan default culture in our country indicates that some large borrowers with strong political power take loans with an intention to skip their repayment. As their intention is bad, naturally they will not endeavour to use the loans sincerely. Somehow they become successful in skipping the repayment of the loans. Given this history of default culture, the recent initiative of the Bangladesh Bank might go against sound practices of banking because the opportunistic borrowers will try to manoeuvre this initiative. There is little scope to believe that all borrowers will reschedule their loans with an intention that they will endeavour their best to use loans successfully and repay them regularly. There must be some borrowers who will take this move of the Bangladesh Bank as a chance to make their loans unclassified and then apply for fresh loans.
The move may discourage the sincere borrowers to be financially disciplined. Such borrowers, who made their loans successful even in the face of the political turmoil and paid them back on time, may be disappointed because they will not be benefitted from this action of the Bangladesh Bank. They may think that regular repayment of loans was a price they paid for being sincere.
More importantly, making classified loans unclassified ones by rescheduling depending on the bank-customer relationship will unreasonably show the profit of a bank high. Under the prevailing rule, banks cannot show the interests due on classified loans in their profit and loss account. At the same time, they have to keep provisions from profit against the classified loans. Provisions are kept from profit which implies that a bank with more classified loans will have to take more provisions that will reduce the amount of profit. However, no such impact on profit and loss account will be found after the recent action of the Bangladesh Bank. Moreover, the classified loans will be shown as unclassified ones and the interests due on them will be shown in the profit and loss account. Thus, the amount of profit will be high. In both ways, keeping provisions which would have required if loans remained classified and showing interests of previously classified but now unclassified ones as profit, the profit of the banks might seem unusually high.
Making classified loans unclassified may technically increase the amount of profit of a bank. But question may be raised as to the quality of the loans. There was no qualitative change in the classified loans for which they graduated to unclassified ones. It is only the discretion allowed to the banks for making classified loans unclassified through rescheduling. The quality of the loans remains same as they were.
There will also be a serious impact on the balance sheet of a bank. All the scheduled banks in Bangladesh are required to maintain a certain amount of capital according to an international accord known as Basel Accord. All banks are required to maintain a certain amount of capital against their risky assets because it is the capital which will absorb the loss of assets. The amount of capital needed for a bank depends on both quantity and quality of its assets. The higher the quality of assets, loans and other assets for a bank, lower is the amount of capital in that a quality loan is less risky with low probability of default. Hence, capital against such loans is not largely required. But a less quality asset is very risky as it has high probability of default. In order to safeguard against such default, a bank must maintain a higher amount of capital.
Given this relationship between asset quality and capital requirement, what will happen to the balance sheet of a bank which records assets, liabilities and capital? The total assets of a bank are financed by capital contributed by the owners and deposits and other liabilities collected from common people. The loss of assets is borne by the owners of a bank. Neither depositors who keep their money in banks in different accounts nor creditors who supply loans to banks through the purchase of bonds and debentures are legally bound to bear the loss of assets. If the recent discretion of loan rescheduling were not allowed, the banks would have to increase their capital as classified loans being less quality assets require higher amount of capital. Making previously classified loans unclassified ones through rescheduling will exempt the banks from increasing their risk-based amount of capital. Hence, the financial statements of banks will look better based on accounting procedure. However, the real picture of banks will remain unchanged.
Dr. Md. Main Uddin is an Associate Professor in the Department of Banking and Insurance, Faculty of Business Studies, University of Dhaka. main_mr2000@yahoo.com
The impact of loan rescheduling
Md. Main Uddin | Published: February 20, 2014 00:00:00 | Updated: November 30, 2026 06:01:00
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