The central bank has tightened rules for classifying and rescheduling loans in a bid to improve banks’ financial health and ensure better discipline in the sector.
But bankers said the move will swell the amount of default loans at banks and hurt profitability.
In line with the latest directive of the Bangladesh Bank, banks will have to start treating loans that are overdue for more than three months as ‘substandard’. The timeframe was for six months before.
Such timeframes for treating loans under ‘doubtful’ and ‘bad or loss’ categories have also been reduced by three months for each type of classification.
For example, loans will fall in the ‘bad or loss’ category if these are overdue for nine months and above.
In the past, a loan overdue for one year was marked as bad loan.
As a result, banks will have to keep aside more of their incomes against these newly classified loans in addition to the money they already maintain against the existing classified ones.
However, rules to classify overdue farm loans and micro-finance remain unchanged. In another directive, the BB asked banks not to reschedule loans for more than three times.
The new policy became effective from yesterday.
Banks will have to submit loan-classification statement to the central bank starting from the next quarter, ending in September 30, following the new classification and provisioning format.
Bankers found the timing of issuing the directive inappropriate as the economy faces a slowdown due to falling exports.
The move is also likely to hurt liquidity flow in banks, they said.
Reduced classification time also risks more borrowers to become defaulters and thus face bar to get loans, they added.
“It appears that the amount of classified loans in banks may go up suddenly because of the reduced timeframe for loan classification,” said Mohammed Nurul Amin, chairman of Association of Bankers Bangladesh, a platform of chief executives of banks.
Amin, also the managing director of NCC Bank, said the new rule will increase their provisioning requirement and thus affect profitability.
“It would have been good for us had the new rule been made effective from the first quarter next year,” he said, adding that they would share their observations with the central bank after going through the new directives.
“I am yet to go through the directives. But it seems that conditions for loan rescheduling have become strict,” he said.
The central banks’ directives came at a time when default loans are piling up in the banking sector due mainly to sluggish business.
Default loans rose 11.68 percent to Tk 25,298 crore in the first quarter to March from Tk 22,644 crore on December 31, 2011, according to BB data.
“It will make banks more resilient to face unwanted risks and shocks,” said Md Anwarul Islam, deputy general manager of Banking Regulation and Policy Department of the BB.
The central bank said the directive was given in line with ‘international best practices’ for loan classification and provisioning.
“Lending to unproductive sectors will drop due to the changes in the rules for classification, provisioning and rescheduling,” said the BB in a press statement.
Also, the reluctance among borrowers to repay loans will be reduced to a great extent, it said.
“This will help banks to look at accounts with potential problems in a focused manner and will capture early warning signals for accounts showing first sign of weakness,” the central bank said.
The BB also said the move will widen access for efficient entrepreneurs to financial services and increase credit flow to the productive sectors.
However, Anis A Khan, managing director of Mutual Trust Bank, said the reduced time for loan classification might affect banks’ non-performing loan ratios, profitability and access to finance by businesses.
Source: The Daily Star