Defaulters to get another lifeline

The country's loan classification rules, which were tightened in 2012 to comply with global standards, are set to be relaxed by the central bank as it engineers to bring down the large amount of default loans.

In 2012, the central bank had reduced a three-month time frame for treating the three types of classified loans – sub-standard, doubtful and bad – to shine out the banking sector in line with the global norms.

As per the rules, loans overdue for three, six and nine months are now classified as sub-standard, doubtful and bad respectively.

But now, the timeline has been pushed by three months for each category, meaning non-payment for six months would lead to the loan being classified sub-standard.

The loan would turn doubtful after non-payment for nine months and bad after 12 months.

“The wilful defaulters are compelling the central bank to revise the policy -- this is an ominous sign for the banking sector,” said Khondkar Ibrahim Khaled, a former deputy governor of the Bangladesh Bank.

The central bank has already prepared a draft guideline on the issue and its senior management team discussed the matter last week at a meeting.

The loan classification policy will become more logical because of the latest central bank move, said Md Serajul Islam, spokesperson of the BB. “It is just to shrink large amounts of default loans,” said Ahsan H Mansur, executive director of the Policy Research Institute. At the end of December last year, total default loans in the banking sector stood at Tk 93,911 crore, which is 10.30 percent of all outstanding loans.   

The move is a flex for the banking sector from the widely accepted global standards, so it sends out a wrong signal, Khaled said.

The central bank had revised the loan classification policy in 2012 as per Basel III guidelines, so thanks to the latest BB move foreign banks will think twice before doing business with Bangladeshi banks, said Mansur, also a former economist of the International Monetary Fund. He went on to warn that the financial health of banks will deteriorate further if the policy is revised.

Syed Mahbubur Rahman, chairman of the Association of Bankers, Bangladesh, acknowledged that the upcoming policy will help banks to bring down their default loans. “Lenders will also get a little bit of breathing space when it comes to keeping provisioning against their NPLs. This will give a boost to their profitability,” said Rahman, also the managing director of Dhaka Bank.