A file photo shows the Bangladesh Bank headquarters at Motijheel in Dhaka. Bangladesh Bank has relaxed rules regarding defaulted loan classification by extending the time for treating overdue loans as doubtful and bad, giving further breaks to banks in this connection. — New Age photo

Bangladesh Bank has relaxed rules regarding defaulted loan classification by extending the time for treating overdue loans as doubtful and bad, giving further breaks to banks in this connection.

To this end, the central bank on Sunday issued a circular amending its earlier rules issued in 2012.

Experts said the new rules would help banks clean their financial statements.

Due to the new rules, banks’ requirement to keep provision against defaulted loans would fall drastically and their capacity to issue fresh loans would increase with ‘artificially’ created space, they said.

Further misuse of the policy relaxation would lead banks into more dangerous state, they warned.

The amendments were made based on recommendations of a central bank committee formed on January 31 this year following an instruction of finance minister AHM Mustafa Kamal to contain defaulted loans.

BB officials said that more benefits for loan defaulters were in the offing as the government had decided to relax loan rescheduling policy.

As per the previous rules, banks were supposed to classify loans as sub-standard immediately after the loans became overdue for three months.

The loans that remained overdue for six months were treated as doubtful and the loans that remained overdue for nine months as bad.

As per Sunday’s circular, banks are now allowed to classify loans as sub-standard after those remain overdue for more than three months and less than nine months.

And, the loans remaining overdue for more than nine months and less than 12 months would be allowed to be classified as doubtful and the loans would be treated as bad/loss only after being overdue for more than 12 months.

As per the existing loan classification rules, banks are supposed to keep 20 per cent provision against sub-standard loans, 50 per cent against doubtful loans and 100 per cent against bad/loss loans.

As per the latest BB report, the amount of bad loans grew to Tk 93,911.4 crore in 2018 from Tk 22,482 crore in 2009.

Of the Tk 93,911 crore, loans worth Tk 8,780 crore were classified as sub-standard, Tk 4,434 crore as doubtful and the rest Tk 80,696 crore as bad.

Former adviser to an interim government AB Mirza Azizul Islam told New Age, ‘Such policy relaxation would escalate vulnerability of the country’s banking sector.’

‘This is liberalisation of policy for defaulters,’ said Azizul, adding that the facility came when the government had initiated a move to announce bad loan rescheduling with just 2 per cent down payment.

The move would also work as a stimulus for being defaulters instead of brining any qualitative change to the banking sector, he said.

He also cautioned that the defaulted loans in the country’s banking sector would increase further due to the policy relaxation.

‘Once the new defaulted loan classification rules become effective, banks’ requirement for keeping provision against such loans would decline significantly without giving efforts on loan recovery,’ former Bangladesh Bank governor Salehuddin Ahmed told New Age.

Policy relaxations were offered on several occasions earlier but those relaxations failed to put any positive impact on the defaulted loan recovery, he said.

Instead, such relaxations made defaulters more reluctant to pay back money to banks as well as weaken the central bank’s authority over the sector, he said.

Due to the new rules, banks would be able to portray better financial state ‘artificially’ for time being without paying attention to recovery, Salehuddin said.

If banks continue to provide loans indiscriminately with the extended capacity, the situation in the banking sector would worsen, he said.

Before Sunday’s policy relaxation, the central bank in February this year relaxed loans write-off policy by extending banks capacity to write-off loans worth Tk 2 lakh. Previously the limit was Tk 0.5 lakh.

In April last year, the government reduced commercial banks’ mandatory cash reserve ratio to 5.5 per cent of their deposits from 6.5 per cent.

State agencies were also asked to deposit 50 per cent of their funds in the private commercial banks. The previous limit was 25 per cent.

Although the facilities were offered to bring down lending rate to 9 per cent and deposit rate to 6 per cent, the rates are yet to be come down to that levels.