Bank directors’ demand for extending loan repayment tenure faces criticism

Directors of banks have urged the central bank to relax the repayment tenure for term loans and working capital further, a demand that was opposed by bankers and analysts as the banking industry is still reeling from the pandemic-induced slowdown.

The banking sector has been in a bad state of affairs for the last couple of years and the ongoing business slowdown caused by the coronavirus pandemic has exacerbated the situation.

Against the backdrop, the central bank should not entertain the proposal of the Bangladesh Association of Banks (BAB), an organisation of directors of private banks, in the interest of the banking industry, experts said.

The BAB wrote a letter to the central bank governor on February 4, requesting him to extend the existing relaxed repayment tenure by two to three years for term loans.

Credits that carry a repayment tenure of more than one year are considered term loans.

The central bank eased the repayment facility for term loans on January 31 to help them pay instalments at ease as the pandemic persists.

The loan moratorium facility granted to all types of borrowers throughout last year was not extended.

The instalments of the term loans that were scheduled to be paid last year will be added to the principal amount of borrowers. This may create trouble for borrowers as the instalment size will get bigger, prompting the central bank to come up with the latest move.

The BAB also requested the BB to reschedule working capital and demand loans by stretching the repayment tenure to three years from the existing one year.

In addition, the central bank has been requested to ask banks not to take any down payment while rescheduling the working capital.

Banks usually take down payment spanning from 15 per cent to 30 per cent in order to regularise working capital and demand loans.

A demand loan is a borrowing instrument that allows lenders to recall the loan on a short notice. Once notified, borrowers must repay the full amount of the loan and any associated interest.

This arrangement also allows the borrower to repay the loan at any time without an early repayment penalty.

Working capital is another short-term loan that banks give out to borrowers to operate their business. The repayment tenure of both working capital and demand loans is a maximum of one year.

The Daily Star talked to the managing directors of four banks about the BAB's proposal. All of them strongly opposed the BAB idea as the financial health of banks will deteriorate if the central bank accepts the proposal.

If banks are forced to convert demand and working capital loans into term loans, there will be a liquidity mismatch in the banking industry, the MDs said.

As much as 70 per cent of the total outstanding loans amounting to Tk 1,011,829 crore were term loans as of December last year, according to a BB official.

The existing surplus liquidity will not last forever as banks will face a probable fund shortage when the economic recovery picks up.

"The cash flow of banks will nosedive if working capital and demand loans are converted into term loans," said one of the MDs.

Some 25.24 per cent of the outstanding loans in the banking sector enjoyed the central bank's moratorium support.

This means a majority of clients had paid instalments despite the business slowdown, the MD said.

"So, why will the central bank relax the repayment tenure? The BAB proposal is completely illogical and will go against the interest of the banking industry," he said.

Directors of banks are trying to fulfill their vested interests as many of their enterprises are in dire straits because of their ill practices in operating businesses, he said.

For instance, they took loans worth Tk 171,666 crore as of September 2019, which is around 18 per cent of the total outstanding loans in the banking sector.

A good number of directors may become defaulters if they fail to manage the facilities.

The Association of Bankers, Bangladesh, a forum of managing directors of banks, earlier welcomed the central bank that allowed borrowers to repay loans by extending the repayment tenure by two years.

But, the BAB proposals have contradicted the ABB's stance, the MD said.

Defaulted loans, which decreased last year, may go up in the days ahead as the central bank lifted moratorium.

Non-performing loans (NPLs) stood at Tk 94,440 crore as of September last year, down 1.74 per cent from three months earlier and 18.73 per cent year-on-year, data from the Bangladesh Bank showed.  

Salehuddin Ahmed, a former governor of the central bank, said that the BAB was not authorised to submit such proposals to the central bank as there had been a conflict of interest.

"Directors are not allowed to be involved in the operation of banks. But the proposals have given a clear indication that they are engaged in the daily operations of banks, breaching rules," he said.

The central bank should strictly oppose the BAB recommendations, Ahmed said. If required, the central bank can sit with the ABB to take a decision to this end, he said.

Business chambers are supposed to raise such demands, so it is quite illogical for the BAB to submit the proposals, said Fahmida Khatun, executive director of the Centre for Policy Dialogue.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said that the central bank should not issue any notice based on the BAB recommendations.

"Some borrowers who have taken working capital may face troubles in the days ahead. So, the central bank may think of the matter positively. But, such an issue should not be generalised," he said.