Loan rescheduling hits new high

December 26, 2019

Loan rescheduling hits new high

Banks rescheduled a record amount of defaulted loans in the first nine months of 2019 as part of their efforts to contain bad debt and manage hefty profit, albeit artificially.

Between January and September, non-performing loans (NPLs) amounting to Tk 31,175 crore were regularised, the highest on record even for a single year.

The previous record was set in 2018, when banks rescheduled Tk 23,210 crore.

But the record amount of loan rescheduling has failed to rein in the upward trend of defaulted loans for want of corporate governance in the banking sector, analysts said.

As of September, cumulative defaulted loans stood at Tk 116,288 crore, up 23.82 percent from December last year.

The rescheduling of loans will escalate in the October-December quarter because of the relaxed policy offered by the central bank, said Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh, a forum of private banks’ managing directors.

As per a High Court instruction, the central bank had earlier extended the deadline for defaulters several times to have their NPLs rescheduled under the relaxed policy. The last deadline was October 20.

Under the policy, defaulters got the opportunity to regularise their loans for 10 years, including one year’s grace period, at 9 percent interest rate, just by making 2 percent down payment.

Rescheduling is a global practice and helps businesses when they are in dire straits, Rahman said.

“But, many of our lenders are using the tool to mitigate their problems on a temporary basis. As a result, a good amount of rescheduled loans turn into defaulted ones frequently,” said Rahman, also the managing director of Mutual Trust Bank.

He said rescheduling usually goes up in keeping with the rising trend of NPLs.

“So, we should check NPLs on a mandatory basis to contain the stressed assets.”

The rescheduling of defaulted loans will allow banks not to keep provisioning, meaning they will be able to show higher profits, a central banker says.

The relaxed policy on rescheduling has given a wrong signal to the financial sector and may create a moral hazard, said Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue, a think-tank.

Many good borrowers may feel discouraged to repay their loans on time because of the easy repayment policy, he said.

A reform programme should have been taken to improve the financial health of banks, he said, adding that the latest initiative will rather undermine the corporate governance.

“The record amount of rescheduling will hit banks’ profitability as funds remain stuck for long because of the tool,” Rahman said.

“Banks could have earned a good income and profit if they had recovered the funds on time. This also would have given them chances to provide fresh loans.”

The large amount of rescheduling indicates that banks will face liquidity crisis in the days ahead, said Salehuddin Ahmed, a former governor of the central bank.

Both the government and the central bank have taken initiatives to disburse loans to the industrial sector at single digit interest rate, but the rescheduling trend will put the brakes on their lending, he said.

“The random rescheduling has weakened the financial norms in the banking sector and eroded business confidence as well. The private sector credit growth has been sluggish for long and it will not get a boost if the trend persists,” Ahmed said.

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