New loan recovery arrangement sweetened with incentives

Banks are directed to form a separate dedicated unit each in a latest drive--sweetened with perks--to recover their written-off loans in the wake of worrying NPL buildups.

Bangladesh Bank or the central bank of Bangladesh Sunday issued a slew of directives for the banks to go by in the clean-up move, evidently attuned to reforms in the banking sector.

A write-off loan is a loan that usually does not show in the bank company's balance sheet. Banks use such write-offs for window dressing to clean up their balance sheet from non-performing loans. It happens when there is little scope for recovery of the loan.

The central bank says this is being executed in line with the best international practices to realize the bad loans trapped away from the banking industry.

Its Banking Regulation and Policy Department in the latest circular-dubbed master circular--replaces all circulars previously issued on the most pressing matter for the banks as they heave under loads of bad loans.

A senior official of the Bangladesh Bank told the FE that this was designed in line with the recently announced NPL roadmap.

Now, after two years of a bad and loss of a loan, the bank concerned will write off the loan. The period was previously three years.

The unit will be incentivized after successful recovery of a bad loan, the BB says about the loan-recovery arrangement.

The unit will get 5.0-percent incentives from the realised bad loan.

Suppose, once the unit recovers Tk 1.0 billion, the unit will get Tk 50 million as a perk. Of the Tk 50 million, 10 per cent or Tk 5.0 million will go to the head of unit.

The banks will prepare elaborate terms of reference (ToR) for the unit and the unit must be formed within 15 days of the issuance of the circular.

The status of the chief of unit will not be less than two senior top positions..

There will be one law officer in the unit to be formed by the banks.

The unit will let the Board of Directors know about progress in the drive in each quarter.

"Good performance in realizing the bad loans should be treated as an essential criterion for renewing the CEO's tenure," says the circular.

Banks' CEOS welcome this as a good initiative as they think it will help raise the incomes of the banks.

They find the incentives for the team as also good for the people who will work with the unit.

Syed Mahbubur Rahman, CEO and managing director of the Mutual Trust Bank, bills this as a very important initiative for the industry.

"The unit formation and incentives to be given to the unit will encourage them to recover such loan," says the leading banker.

The net volume of written-loan between 2003 and 2022 stood at Tk 470 billion.

And NPL has ballooned to around 1.5 trillion. After the roadmap the classified loan is expected to come down by Tk 433 billion, says the central bank.

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