Rescheduling the soaring default loans: Banks' responsibilities

Default loans have increased by three-and-a-half times in the past nine years due to rampant violation of the rules and regulations for loan sanction and disbursement. This has worsened the overall state of the country's financial sector. As of December 2018, the amount of defaulted loans in the banking sector stood at Tk 939.11 billion. This is 10.30 per cent of the total outstanding loans. According to Bangladesh Bank data, there are over 266,000 loan defaulters in the country.

Alongside the state-owned banks, the condition of some private banks has been deteriorating over the last couple of years. These banks include Bangladesh Commerce Bank, National Bank,  Padma Bank (formerly Farmers Bank) and NRB Bank. Bangladesh Bank (BB) did not take any steps against the changes of ownership in the private sector banks. As a result, panic is widespread among the depositors.

Officials involved in the banking sector have alleged that the directors of the private banks are the main beneficiaries of the loans. Mostly, the loans are not used for purposes they were meant to be. Funds from some loans are also being siphoned off to other accounts and even outside the country. A number of top bankers are reportedly involved in this. The central bank appointed observers at 13 banks. Even then, the situation has not improved.

The rate of recovery of banks' non-performing loans (NPL) was much lower than the rate at which their NPL increased last year, according to the statistics of BB. In 2018, banks recovered Tk 133.92 billion of NPLs, up by 5.86 per cent from a year earlier. But delinquent loans in the sector soared 26.38 per cent to Tk 939.11 billion, according to the central bank data. Several weaknesses of banks have been identified as reasons behind the growing number of NPLs. These include poor governance, bad selection of borrowers, inadequate monitoring of loans, insufficient collateral against loans and lacklustre recovery efforts.

The default loan in the private sector local banks increased to Tk 339.73 billion from Tk 317.28 billion last June. During this period, the default loans increased in a number of banks including the National Bank and Farmers Bank. However, the default loans in the foreign banks have decreased. The cash recoveries of private banks are inadequate considering their volume of default loans.

Recently, Bangladesh Bank and a government committee have come up with a generous scheme to allow easy rescheduling of defaulted loans. The committee has asked to prepare a bailout package for loan defaulters in three sectors -- trading, shipbuilding and steel - in order to help them revive their businesses. The committee submitted its report to the ministry which sent it to the BB, requesting its opinion on the proposed package. In its opinion, the central bank recommended offering the package to all enterprises in the three sectors.

According to the new proposal, loan defaulters will get 13 to 15 years, with a grace period of up to two years, to pay back their loans. All they will need to do is make a down payment of maximum 2 per cent of their outstanding loans, instead of the current requirement of 10 to 15 per cent, for regularising their loans. In some cases, they would not have to pay anything.

Under the simple interest formula, the rate will be seven per cent. But loan defaulters with BASIC Bank will enjoy a reduced interest rate as they have to pay only 2.0 per cent interest along with cost of funds. At the moment, the banks use compound interest formula for all loans. The defaulters have to pay instalments on quarterly basis. Failure to pay two consecutive instalments will result in cancellation of the rescheduling.

In 2015, a similar bailout package was considered, allowing defaulters to reschedule and repay loans on significantly relaxed terms.

Back then, BB offered a special package for borrowers who had bank loans of at least Tk 5.0 billion each. It relaxed the loan rescheduling policy for the borrowers, who were required to make a down payment of just 1-2 per cent, instead of the usual 10-15 per cent. But that scheme did not yield desired results as most of the large loan defaulters could not avail the opportunity to pay back the loans.

But this time the rules are more flexible for the banks. Banks can write off debts that have been marked bad for three years from their balance sheet, according to the decisions announced on February 6, 2019. Earlier, banks had to wait for five years to write-off bad debts. BB is also allowing banks to write-off loans of up to Tk 200,000. According to a 2013 facility provided to banks, till now, they did not need to initiate a case to write-off loans of up to Tk 50,000. Moreover, they will not need 100 per cent provisions for the write-off as well.

Following the changes in policy, banks have been instructed to form a separate unit to collect written off loans. Third-party service providers can be appointed for collection of default debts and quick disposal of cases. If a borrower's loan is written off, he will be classified as loan defaulter until repayment. BB's permission will be needed to write-off loans taken by the current or former bank directors, or organisations related to them. Before writing off loans, the banks will need to try and collect the money by selling mortgaged properties or from the guarantors.

"Only those with genuine reasons for becoming defaulters can avail the facility," Finance Minister AHM Mustafa Kamal told reporters after the meeting where the decision to amend the rescheduling rules was made. The definition of 'genuine reasons' was however not explained. According to experts, the discretionary measure to write-off loans will only widen the scope for unethical bankers to facilitate delinquent borrowers in exchange for favours.

The situation is very alarming. Time has come for overhauling the selection of borrowers and monitoring of loans after disbursement to prevent diversion of loan amounts from business accounts. Bankers are reluctant to monitor and supervise the use of loan amount being actually applied in businesses. They also rely on recovery process of loans through cases filed under the loan recovery act, The Artho Rin Adalat Act, 2003. Banks are also not willing to take advantage of Bankruptcy Act of 1997. The shifting of responsibility of recovery of loan by court seems like a convenient escape route for bankers from default loan crisis.

The rescheduling and provisioning policy of Bangladesh Bank was always very strict. But in 2012, BB recognised that in some cases, a legitimate banking practice may allow for the renewal of a continuous loan or line of credit. Occasionally, even a term loan is renewed or extended under circumstances beyond the control of the borrower and do not signify that the borrower's willingness or ability to repay has deteriorated the loan. However, BB is concerned that rescheduling may sometimes result in an overstatement of capital, when loans that have a low probability of repayment are carried at full value on banks' balance sheets.

The capital of banks has been reduced due to compulsory provisioning against increased default loan. Banks prefer rescheduling and restructuring of default loans for their own 'breathing space' and smooth running of their businesses. As such, now banks need to improve their capacity to manage loans and recovery process rather than depending on legal actions.

MS Siddiqui is a legal economist. [email protected]