New policy on defaulted loans

Banks are set to implement a new loan default policy from next month and under this policy, if a loan remains unpaid for a period ranging from three months to one year, it will be classified under different categories of default.

Previously, various types of loans could remain unpaid for up to two years before being classified as NPLs (non-performing loans). The new policy has halved this timeframe.

Industry experts have expressed concerns that the implementation of this policy could lead to an increase in non-performing loans within the banking sector.

According to Bangladesh Banks’s latest figures, as of December last year, non-performing loans had risen to nearly Tk 3500 billion, accounting for 20 per cent of total disbursed loans.

The revised classification system says, a loan that remains unpaid for three months will be classified as substandard. A loan that remains unpaid for six months will be categorised as doubtful. A loan that remains unpaid for twelve months will be deemed a bad or loss loan.

However, business leaders have urged that the implementation of this policy be postponed by six months, citing deteriorating law and order conditions and geopolitical uncertainties. Several business associations have already held discussions with Bangladesh Bank, while others have submitted formal proposals requesting a delay.

Business organisations argue that, given the current economic climate, the implementation of this new loan classification policy could result in many businesses becoming defaulters, pushing several industrial enterprises towards financial distress.

The Dhaka Chamber of Commerce and Industry (DCCI) recently sent a letter to the governor of Bangladesh Bank, highlighting several economic challenges that have affected entrepreneurs’ ability to repay loans. These include high interest rates on loans, rising inflation, a shortage of foreign exchange reserves, exchange rate volatility, deteriorating law and order conditions and overall economic uncertainty. In light of these difficulties, the organisation has emphasised the need for greater flexibility in loan repayment deadlines.

In the letter, DCCI president Taskin Ahmed stated that the new loan classification policy is scheduled to come into effect on 1 April. However, given the current economic climate, many large enterprises, as well as small and medium-sized industries have been unable to repay their loans on time. Therefore, in addition to loan rescheduling facilities, an extension of repayment deadline is essential. The Dhaka Chamber has proposed postponing the implementation of the new loan classification policy by six months, arguing that this would benefit both large industries and small and medium-sized industries.

The Oil Mill Owners’ Association has submitted a letter stating that, over the past 50 years, none of its member companies have ever defaulted on loans or even applied for interest waivers. However, in recent years, the COVID-19 pandemic and the Russia-Ukraine war have led to a surge in global inflation and an abnormal rise in the US dollar exchange rate in Bangladesh. As a result, this import-dependent industry has suffered significant financial losses, leaving many business struggling.

Additionally, during the tenure of the previous government, certain businesses allegedly exploited their political influence to secure preferential banking facilities, which ultimately weakened the financial stability of several banks. Consequently, genuine businessmen have faced severe financial difficulties. In light of these challenges, the Oil Mill Owners’ Association has urged Bangladesh Bank to postpone the implementation of the new loan classification policy.

At present, the classification of loan defaults is determined based on the type and sector of bank loans. Borrowers are granted a grace period of up to one year before a loan is classified as defaulted. In the case of cottage, micro, small and medium enterprises (CMSME), loans are categorised as defaulted after nine months of non-payment beyond the maturity date.

For agricultural loans, farmers are not classified as defaulters even if installments remain unpaid for up to 15 months. Industrial loans, including working capital loans, term loans and demand loans are classified as defaulted based on different timelines. Under the new policy, all types of loans will be considered overdue the day after the designated repayment deadline.

In addition to reducing the timeframe for loan default classification, Bangladesh Bank has increased the provisioning requirements for non-performing loans. Loan provisions are deducted from a bank’s profit, raising concerns that banks’ profitability may decline following the implementation of this policy. Under the new rules, standard loans will require a 1 per cent provision of the loan balance. Loans classified under ‘Special Mention’ will require a 5 per cent provision. Loans overdue by two to three months will fall under the ‘Special Mention’ category.

Additionally, under the new regulations, the provisioning requirements for non-performing loans will be- substandard loans: 20 per cent provision of the loan balance. Doubtful loans: 50 per cent provision of the loan balance. Bad or loss-classified loans: 100 per cent provision of the loan balance. Under pressure from politically connected businesses and large loan defaulters, the former Awami League government had relaxed loan classification policies.

Banking professionals have expressed concerns that the new regulations could double more than the amount of classified non-performing loans. Additionally, the requirement for higher loan provisions is expected to have a substantial negative impact on bank profitability.

According to Bangladesh Bank’s latest data, as of December, the total volume of non-performing loans stood at Tk 3457.65 billion compared to Tk 2849.77 billion in September. This indicates an increase of Tk 607.87 billion in just one quarter (October-December). At the end of December, 20.20 per cent of the total loans disbursed across the banking sector were classified as non-performing. The actual extent of non-performing loans has become increasingly evident following the assumption of office by the interim government.