Loan rescheduling in the banking sector declined further in the second quarter of the year on the back of the ongoing loan moratorium facility introduced to help borrowers weather the fallouts of the coronavirus pandemic.
Between April and June, banks rescheduled defaulted loans amounting to Tk 2,658 crore, down 30.60 per cent from three months earlier and 481 per cent from a year ago, according to data from the central bank.
But there is no scope to be complacent because of the falling rescheduling as loan classification has come to a halt due to the moratorium facility, said experts.
Both the volume of classified and rescheduling of loans will escalate exponentially once the moratorium is lifted, they warned.
On March 19, after the country was struck with the pandemic, the banking regulator asked lenders not to consider businesspeople as defaulters if they fail to repay instalments until June 30. As the crisis prolongs, the deadline has been extended initially to September 30 and then to December this year.
For instance, defaulted loans to the tune of Tk 52,770 crore were regularised last year — the highest in a single year — based on the relaxed loan rescheduling rules. Under the policy, defaulters were allowed to regularise defaulted loans for 10 years by making 2 per cent down payment.
The move helped banks bring down the defaulted loans in 2019, when it stood at 9.32 per cent of their total outstanding loans, down from 10.30 per cent a year earlier.
Despite the moratorium, non-performing loans went up to Tk 96,116.65 crore in the first half this year. It was Tk 94,313 crore in December last year.
Some indicators of the financial sectors, including exports, remittances and foreign exchange reserve, have shown an excellent trend in recent months, but the victory from the ongoing economic hardship is still far away, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.
“We do not know what will happen in the days to come as the pandemic is yet to be contained,” he said.
“Both NPLs and loan rescheduling will accelerate when the moratorium facility is withdrawn. Against the backdrop, lenders should take precautionary measures to bolster their financial health.”
Banks are now transferring the interest of the loans, which is yet to be realised, to their income books enlarging the profit artificially.
Such interest is treated as an accrued interest in banking norms. Banks are allowed to show the accrued interest as income, but such amounts have to be treated as an interest in suspense if loans become defaulted.
This has helped banks inflate their net profit, which soared 33.60 per cent year-on-year to Tk 2,424 crore in the first half of 2020.
Banks should calculate their income based on the actual recovery of loans so that they can address future challenges, Rahman said.
In addition, banks should preserve extra provisioning against both classified and unclassified loans to strengthen their financial health, or else they will face dire straits, said Rahman, also a former chairman of the Association of Bankers, Bangladesh, a forum of managing directors of banks.
“Distress in the banking has deepened for years and the ongoing slowdown has pushed this further,” said Zahid Hussain, a former lead economist of the World Bank’s Dhaka office.
Some good banks have already started taking measures to tackle future crisis as NPLs may increase massively soon after the moratorium ceases to exist, he said.
Regulatory support will require for a long period to diminish the distressing state of affairs in the banking sector, Hussain said.
The moratorium support is one kind of loan rescheduling, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.
Borrowers now enjoy the loan rescheduling automatically and they are not required to pay any down payment to do so, he said.
“But this will not give any solution as the central bank has extended the facility to all borrowers.”
The borrowers who faced a crisis due to the business slowdown should be considered for the facility, said Mansur, also a former senior official of the International Monetary Fund.
India has taken measures only for consumer loans and self-employed borrowers, he said, adding that loan moratorium should be dictated by the relationship between bankers and clients.
