In a divisive move the central bank has relaxed its write-off policy, at a time when the default loans in the banking sector hit an all-time high.
Banks are now allowed to write off the default loans that have been hovering in the bad category for three years from their balance sheet, down from five years previously, according to a notice from the Bangladesh Bank on Wednesday.
Furthermore, lenders do not have to file any case with the Artha Rin Adalat (Money Loan Court) to write off a delinquent loan worth Tk 2 lakh, up from Tk 50,000 previously.
Experts said the new policy would allow banks to show lower default loans on their books -- artificially.
The central bank should have taken a strict stance against the banks seeing the default loans are crawling up, said Salehuddin Ahmed, a former BB governor.
“But it went the opposite direction,” he said, adding that the latest BB move would tempt banks to disburse loans without following the rules.
As of September last year, default loans in the banking sector accounted for 11.45 percent of all outstanding loans at Tk 99,370 crore -- the largest yet in Bangladesh's 48-year history.
The central bank introduced the write-off policy in January 2003 with the view to putting the brakes on the rising default loans then.
But the move turned out to be a disappointment as banks failed to recover the majority of the written-off loans.
Between January 2003 and September 2018, banks wrote off Tk 49,745 crore. As of September last year, Tk 37,866 crore remained outstanding, which is 76 percent of the sum.
Finance Minister AHM Mustafa Kamal yesterday told reporters after a meeting with business leaders at the NEC Auditorium in the capital that the central bank had revised the policy by informing him.
He went on to reiterate his earlier comment on January 10 that the total non-performing loans would not be allowed to go up under his watch.
“This sends a bad signal to the global community about Bangladesh's banking sector,” said Ahsan H Mansur, executive director of the Policy Research Institute.
The Association of Bankers, Bangladesh, a platform of private banks' managing directors, however, did not seem too enthusiastic about the revised write-off policy.
Banks will have to keep 100 percent provisioning in cash to write-off the bad debts, said Syed Mahbubur Rahman, chairman of ABB.
“So, it is not so easy for lenders to write-off their default loans.”
But the policy will help banks to write-off the small loans, which will help in bringing down the overall default loans, said Rahman, also the managing director of Dhaka Bank.
Banks with solid financial health and strong net profit stand to benefit from the revised policy, said Faruq Mainuddin, managing director of Trust Bank
“It is because they have enough provisioning capacity.”