Default loans hit the brakes

Default loans soared just Tk 1,551 crore in the second quarter of the year -- in contrast to a record Tk 16,692 crore in the previous quarter -- in the most heartening development for the banking sector battling a runaway trend in bad loans.

At the end of June, the banking sector’s total default loans stood at Tk 112,425 crore, up 1.40 percent from the preceding three months, according to data from the Bangladesh Bank.

When AHM Mustafa Kamal took charge of the finance ministry in January, he had announced that default loans would not increase by a single taka.

In the first six months of his tenure as the finance minister, default loans increased Tk 18,513 crore.

The reason for the increase, Kamal says, was many borrowers stopped paying their instalments on time in the hope of availing the relaxed rescheduling facilities he had announced earlier with a view to showing a lower default loan figure.

Earlier on May 16, the Bangladesh Bank unveiled a special rescheduling policy, under which defaulters will be allowed to reschedule their classified loans by providing only 2 percent down payment instead of existing 10-50 percent.

A maximum of 9 percent interest rate will be charged on the rescheduled loans, which is much lower than the existing interest rate of 12-16 percent.

The tenure for repayment is 10 years with a grace period of one year, which is much longer than the existing duration for any loan at present.

Based on banks’ relationship with clients, the accrued interest on the default loan can be waived, leaving the defaulters to only pay the principle amount and the new 9 percent interest rate. 

This came on the heels of the BB’s moves to ease the loan classification rules giving borrowers more time to pay their instalments and relax loan write-off policy.

But the latest data suggests the moves backfired. Of the total default loans, the six state-run commercial banks accounted for Tk 53,745 crore and the 40 private banks Tk 51,924 crore.

The two specialised banks have default loans amounting to Tk 4,699 crore and foreign banks Tk 2,058 crore.