Appetite for loan rescheduling shrinks dramatically

Loan rescheduling in the banking sector declined to a great extent in the first quarter, a curious development given that defaulted loans also dropped.

Between January and March, banks rescheduled loans amounting to Tk 3,830 crore, down 82.26 per cent three months earlier and 34.40 per cent from a year earlier, according to data from the central bank.

Historically, high loan rescheduling helps banks contain default loans, but it is rare that both rescheduled loans and default ones come down simultaneously in a particular quarter.

Default loans in banks stood at Tk 92,510 crore at the end of March, down 1.93 per cent from three months earlier.

The central bank had asked lenders on 19 March not to consider businesspeople as defaulters if they fail to repay instalments until 30 June. This is responsible for the incredulous indicator for the banking sector, said two central bankers who are directly involved with the loan rescheduling process.

The deadline for not considering the borrowers as defaulters was later extended to September to help businesses tide over the economic hardships brought on the global coronavirus pandemic.

Both the central bank and banks, on the whole, complete the rescheduling process of the major amount of defaulted loans in the last month of a quarter, the central bank officials said.

The rescheduling process of the default loans was just stopped when the central bank declared the moratorium facility for all types of borrowers irrespectively, they said.

Defaulted loans amounting to Tk 52,770 crore were regularised last year -- the highest in a single year -- riding on relaxed loan rescheduling rules offered by the central bank.

Under the policy, defaulters were allowed to reschedule their defaulted loans for 10 years by way of paying a 2 per cent down payment.

The move helped banks bring down their defaulted loans in 2019, when the amount stood at 9.32 per cent of their total outstanding loans, down from 10.30 per cent a year earlier.

But Bangladesh Bank officials said banks now await dire consequences as both loan rescheduling and defaulted loans dropped due to the central bank's instruction not to classify any loans until September.

"The central bank could not but go for the moratorium as it was the best option to protect the financial sector from the ongoing economic meltdown," said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

In addition, banks have to continue to give out loans such that businesses could remain afloat amid the worst-ever recession in the country's history.

Both rescheduled and default loans will go up exponentially when the central bank will lift the moratorium facility, Mansur said.

"In times of recession, this is a common phenomenon for the banking sector of all nations. But the question is, how they will tackle the crisis skilfully."

Lenders should bear in mind that the required down payment might not be easy to come by when they would start to reschedule the defaulted loans after the pandemic.

Businesses are now gradually losing their financial strength because of the ongoing crisis. And this will eventually erode their capacity to give the down payment.

As per the central bank's rules, clients have to give down payment between 10 per cent and 50 per cent of their defaulted loans.

Against the backdrop, banks should extend the repayment tenure of the stressed loans for the time being replacing the existing rescheduling model.

"This will help businesses bounce back from the crisis," said Mansur, also a former senior official of the International Monetary Fund.

None could fathom the gravity of the recession as the pandemic has spread across the globe like a wildfire putting the banks on their toes.

Banks have to deal with the situation with caution and keeping adequate provision is key to running their operations smoothly in the days ahead, said Mansur, also the chairman of Brac Bank.

Banks around the world have already adopted the model to keep unexpected shocks at bay: three of the largest American lenders -- Wells Fargo, JPMorgan Chase and Citigroup -- have set aside a total of $28 billion to tackle both the ongoing and future loan losses.

"The ongoing lull in economic activities is the prelude to a full-blown storm," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

He, however, said the central bank might extend the existing moratorium support until December.

"Whatever happens, both the rescheduled and default loans will increase significantly due to the economic meltdown," said Rahman, also a former chairman of the Association of Bankers, Bangladesh, a forum of private banks' chief executive officers.

"So, we have to pull out all the stops to get us prepared," he said.