Dhaka, Wednesday, 17 July 2019

Loan defaulters should not be allowed irrational benefits

2019-04-20

Bangladesh Bank and a government committee have come up with a generous scheme to allow easy rescheduling of defaulted loans, which experts say will hurt the banking sector and the economy at large.

Once implemented, the scheme will also enable loan defaulters to obtain many other financial benefits.

Four years ago, a similar bailout offer was made to companies that had defaulted on large loans, allowing them to reschedule and repay loans on significantly relaxed terms.

But the special bailout scheme couldn’t yield desired results as most of the large loan defaulters, who availed themselves of the scheme, did not make any serious effort to pay back their huge loans.

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 percent of their outstanding loans, instead of the current requirement of 10 to 15 percent, for regularising their loans. In some cases, they won’t have to pay.

The interest rate will be 7 percent under the simple interest formula. But the defaulters with the BASIC Bank will enjoy a reduced interest rate as they have to pay only 2 percent interest along with costs of funds. Currently, the banks use compound interest formula for all loans. The defaulters have to pay instalments quarterly and failure to pay two consecutive instalments would result in cancellation of the rescheduling.

Economists and banking experts fear that if implemented, the scheme would throw the banks into more financial troubles. The proposal was readied by a committee led by Agrani Bank Chairman Zaid Bakht. In January this year, it was sent to the BB which included more lenient terms in it.

The finance ministry formed the committee in June last year to prepare a bailout package for loan defaulters in three sectors — trading, shipbuilding and steel — to help them revive their businesses.

The committee submitted its report to the ministry which sent it to the BB last month, seeking its opinion on the proposed package. In its opinion, the central bank recommended offering the package to all sectors, not only the three. Though the committee proposed excluding from the scheme the borrowers, who had availed themselves of large loan restructuring schemes in the past, the BB recommended including them in it.

The central bank said most of the borrowers who took advantage of the scheme did not pay back loans as per the restructuring conditions. As a result, non-performing loans in the banking sector was on the rise. Experts questioned whether the BB had thought deeply about the implications of such a policy on the health of the banks.

As of December last year, the amount of defaulted loans in the banking sector stood at Tk 93,911 crore — 10.30 percent of the total outstanding loans, and there are over 2.66 lakh loan defaulters, according to BB data. Khondkar Ibrahim Khaled, former deputy governor of Bangladesh Bank, said, “The policy will destroy the banks.”

The policy will have a serious “side effect” on the money market. When loans are not recovered for a long time, lending rates go up and hurt businesses.

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