Bad for five years, write them off

In a major move to streamline the banks' portfolios, the central bank yesterday instructed the commercial banks to immediately write off bad debts of over five years old which are fully provided for.

But it does not make life easier for defaulters as before doing that, the banks will file cases against the borrowers and they will continue their efforts to recover the bad debts.

The Bangladesh Bank (BB) also issued a new guideline for loan rescheduling and instructed the banks to scrutinise the reasons for loans becoming classified before considering any rescheduling proposal.

If the banks find that the borrower did not use the loan for the purpose it was taken for and used it for a different purpose, or if the borrower is a habitual defaulter, the banks would not consider the request for rescheduling.

Under the new policy, the banks will be in a position to write off around Tk 14,000 crore of the staggering over Tk 25,000 crore defaulted loans.

Default loans now account for about 32 per cent of the total portfolio. The new policy would help bring it down to around 12 per cent, according to banking sources.

BB Governor Dr Fakhruddin Ahmed yesterday announced the measures at a press briefing and explained the issues at the BB's conference room.

"The loan rescheduling guideline will bring down the extent of defaulted loans to an acceptable level. The write-off provision will make financial statements transparent and acceptable," Dr Fakhruddin said.

"Internationally, writing off of bad debts which are full provided for is a recognised practice. However, as the country's banks are reluctant to use this practice, their books of accounts are becoming unnecessarily and artificially inflated," said the governor.

Meantime, the bankers welcomed the move, saying it would bring a positive change in the banking system.

Managing Director of Mercantile Bank Ltd. M Taheruddin said, "The write-off provision would help the banks have a healthy portfolio. Also, the provision to pursue legal actions against defaulters even after writing off loans would help restore discipline in the banking system." He also termed the new guideline for loan rescheduling a reasonable one.

The BB said the banks will immediately have to start the process of writing off bad debts and the oldest bad debts will have to be disposed off first.

If the bad debts are not fully provided for, then the banks may deduct required funds from their current year's income to write them off, the BB instruction said.

Even after the write-off, the borrowers would still be identified as defaulters and the banks will have to have a constant effort to realise the loans. The banks will set up their own 'debt collection units' to realise the written-off bad debts and may also appoint other institutions to realise them.

Also, the banks will continue legal procedures against the borrowers. And if cases do not exist against any bad loan, the bank will file one before writing it off.

The banks will have to maintain separate ledgers for the written-off loans to be shown in the annual reports.

In its new guideline for rescheduling term loans, the BB said while rescheduling loans for the first time, the borrower will have to deposit 15 per cent of the defaulted instalments or 10 per cent of the total outstanding amount, whichever is less, in cash as down payment.

For the second time loan rescheduling, the borrower will have to deposit 30 per cent of the defaulted instalments or 20 per cent of the total outstanding amount, whichever is less, in cash. And in case of rescheduling more than twice, the borrower will have to deposit 50 per cent of the defaulted instalments or 30 per cent of the total outstanding, whichever is less, again in cash.

Earlier, there was a provision to reschedule loans time and again paying only 10 per cent of the defaulted dues in cash.