The central bank is set to relax the loan write-off policy once again in a space of nine months, bowing down to pressures from an influential quarter.
This time, banks are likely to be allowed to write off defaulted loans that have been hovering in the bad category for one year from their balance sheet, down from three years previously, said officials of the Bangladesh Bank.
On February 6, banks were allowed to write off defaulted loans that were marked bad for three years in a row instead of earlier five years, as the central bank wanted to show lower amounts of sour loans.
As of June, total defaulted loans in the banking sector stood at Tk 112,425 crore, up 20 percent from six months earlier, according to data from the BB.
The latest central bank move comes after the Association of Bankers, Bangladesh (ABB), a platform of private banks’ managing directors, sent a letterto the BB in the last week of August with a request for further easing of loan write off policy.
But banking sector insiders said the ABB was forced to send the proposal after getting instructions from influential sponsors of a handful of banks.
Banks should be allowed to write off their defaulted loans that have been hovering in the bad category for one year, Syed Mahbubur Rahman, chairman of the ABB, told The Daily Star.
“The central bank should consider the issue if banks are able to manage 100 percent provision against bad debt and file case with the court.”
Decreasing the term to one year from three years will help banks avoid the existing legal tangle while recovering the defaulted loans, said Rahman, also the managing director of Dhaka Bank.
A representative team of the ABB will meet with BB Governor Fazle Kabir today to discuss the issue.
Introduced in January 2003 by the central bank with the view to putting the brakes on the rising default loans then, banks have written off Tk 54,463.76 crore since then.
As of June, Tk 41,477.63 crore of the written off amount has remained outstanding, which is 76.15 percent of the sum.
Experts came down heavily on the latest central bank move as it could further weaken the financial health of banks.
“I am unable to welcome the initiative as it will only show a lower amount of defaulted loans artificially,” said Ahsan H Mansur, chairman of Brac Bank.
The central bank should follow the global best practice as the majority of the developed countries wait 3-4 years to write off their defaulted loans.
Cleaning up defaulted loans from balance sheet through using the write-off policy is not a good practice as it will give a wrong picture of the financial sector, said Mansur, also the executive director of the Policy Research Institute.
The central bank is now incapable of taking policy-related decisions freely thanks to a vested quarter, said Khondker Ibrahim Khaled, a former deputy governor of the BB.
“And this is another awful example on how the group is controlling the central bank.”
Banks will not give their all-out efforts to recover defaulted loans if they are allowed to write off their bad loans after just one year, Khaled said.
Salehuddin Ahmed, a former governor of the central bank, echoed the same, saying it would have an adverse impact on financial discipline in the banking sector.