Defaulters to gain at small borrowers’ cost, say experts

Banks can now write off increased amount of bad loans without filing lawsuits after the issuance of new policy, experts said.

This will also help reduce troubled loans in the near future, they said.

The central bank on Wednesday issued the latest policy empowering banks to write off loans up to Tk 0.20 million instead of the previous ceiling of Tk 50,000 without filing cases for recovery.

The policy also allowed the banks to write off such loans after three consecutive years instead of the previous five years.

Senior bankers and experts said the banks stand to benefit from the policy as they will now write off small-sized loans without resorting to court.

But they said the new policy may not be effective for large loans.

Former governor of Bangladesh Bank (BB) Salehuddin Ahmed lamented the reduction of the time limit from five years to three years.

Dr Ahmed argued potential defaulters will benefit from the latest policy relaxation while small and medium entrepreneurs may face trouble in securing fresh loans.

He, however, said provisioning cost of the banks will be reduced after the relaxation of the policy.

Talking to the FE, Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh (ABB), said the amount of non-performing loans (NPLs) in the banking system is likely to go down if 100 per cent cash provisioning against the bad loans are written off.

Mr. Rahman, managing director and chief executive officer of Dhaka Bank Limited, said the new policy would help reduce the NPLs in retail credits, particularly of credit cards.

"Banks' benefit will be minimal as the ceiling for small bad loans will be written off," M A Halim Chowdhury, MD and CEO of Pubali Bank Limited, told the FE in reaction to the policy.

But the policy will not leave any significant impact on large loans' write-off, the senior banker noted.

"We've re-defined the amount of small bad loans for writing off to avoid additional expenses for legal purpose," a senior BB official told the FE.

The central bank has also specified some issues including time limit for writing off loans in the latest policy, he added.

"We've never relaxed the calculation on provisioning against the bad loans that are set to be written off rather than restricting," the central banker said.

Meanwhile, the banks have been able to recover less than a fourth of their written off loans in the last 15 years despite close monitoring by the central bank.

Banks were able to recover Tk 118.79 billion until September 30, 2018 against the aggregate amount of Tk 497.45 billion written off in the country's banking system.

Between January 2003 and September 2018, total outstanding of written-off loans stood at Tk 378.66 billion, according to the BB's latest statistics.

"We're now working on how to boost the recovery of written-off loans in the banking sector," another central banker said without elaborating.

The central bank introduced guidelines for writing off classified loans in 2003 aiming to improve loan recovery and make the financial statements of banks more transparent and accountable.

Writing off loans is a global practice. But it will depend on the capability of the banks concerned to write off its bad loans.

Before making any final decision in this regard, the bank management has to ensure 100 per cent provisioning against the amount to be written off.

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