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Bank & Finance - August 7, 2023

Default loan to be increased further

Repayment time reduced for IMF pressure

Mahfuja Mukul: Under the pressure of the International Monetary Fund (IMF), the definition of defaulted loans is being changed again. Under this, the default period of unpaid loans is being reduced to 3 months in almost all sectors. Currently, the loans defaulting within 6 months to 9 months of installments will be marked as defaulted within 3 months to 6 months. That is, the time of default will be reduced. As a result, customers will have less time to repay the loan. The amount of defaulted loans will increase further, experts fear that the ongoing crisis in the banking sector will intensify.
Although initiatives have been taken to change the definition of more discretionary defaulters, no steps have been taken to increase recovery from large and willful defaulters. Policies like imposing restrictions on foreign travel after defaulting, banning new loans in all sectors, preventing them from participating in government functions, and social boycott are not being implemented to put pressure on the defaulters. Those proposals were kept from the central bank in the proposal to amend the Bank Companies Act, but they were not kept at the final stage. On the contrary defaulters have been exempted. Principal defaulters have been disguised as willful defaulters. Earlier defaulters did not get loans. As a result of the new Bank Companies Act, defaulters can take loans in the name of a company other than the defaulting company. As a result, no initiative is being taken to recover the debt from those who have smuggled crores of taka abroad by sucking the banking sector. On the contrary, they are being exempted by various tricks of the law. Many have expressed fear that almost all the loans taken through fraud in the banking sector have turned into defaults. A large part of the defaulted loans have been smuggled abroad. And there is virtually no initiative to repatriate the smuggled money. Because of which the defaulters are getting away.
According to sources, the default loan definition has been repeatedly changed to give relief to the defaulters. Additional time has been given for defaulting on outstanding loans. In this the defaulters got additional benefits. Until early 2019, the default was done on international standards. Since then, the definition of non-performing loans has been relaxed, moving away from international standards.
Now the International Monetary Fund (IMF) is changing the definition of defaulted debt as one of the loan conditions. According to international standards, current loan installments will be marked as overdue up to 3 months from the last day of repayment. From then on it will be marked as defaulter. In case of term loan, the arrears will be up to 6 months. From then on there will be default. But in Bangladesh, current loans default after 6 months and term loans after 9 months. Customers are getting more time to repay the loan. As a result, even if the debt goes to the level of default, it is not defaulted. That is why the definition of defaulted loans in Bangladesh is getting more time than the definition of international standards. As a result, it is possible to show less defaulted loans. In this context, the former president of Bangladesh Economics Association. Moinul Islam said that Bangladesh has followed the international standards of non-performing loans till 2019. Since then, the definition of defaulted loans has been relaxed and deviated from the international norms. In this the debtors get an opportunity. There is an opportunity to show less defaulted loans. Although hiding the defaulted loans, statistically, the defaulted loans did not decrease. Rather, it has increased. That is, the more chance of defaulting loans are given, the more reckless the borrowers become. They hide defaulted loans with more facilities. This has affected the banking sector.
He further said that this is a good sign that Bangladesh is moving towards the definition of non-performing loans to international standards, even though due to IMF conditions. This will increase the amount of defaulted loans. But in the international arena, the acceptance of the account of defaulted loans of the banking sector will increase.
He also said that the amount of defaulted loans will be more than the change in defaulted loans. At present, the central bank is showing defaulted loans of Tk 1 lakh 34 thousand crores. It will actually be more than Tk 4 lakh crore. Because the banks have embezzled Tk 55 thousand crore. These are also in default. There is much more money outside of the defaulted loan ordered by the court. They are in default, but default cannot be shown due to sanctions. The amount of defaulted loans will also increase if the new rules are introduced and implemented effectively.
Executive Director of Policy Research Institute. Ahsan H. Mansoor said, taking the definition of defaulted loans to the international level will increase the acceptance of the calculation of defaulted loans of the country’s banking sector abroad. There is no doubt that this will increase defaulted loans. Now initiatives should be taken to reduce defaulted loans. Calling the decision to change the definition of non-performing loans correct, he added that the IMF has also imposed conditions to reduce non-performing loans. To reduce it, debt collection should be increased. It will not be right to reduce the rate of defaulted loans by increasing loan disbursement.
According to sources, the central bank has started working on changes in the current definition of defaulted loans to implement the loan conditions of the International Monetary Fund. A draft policy has already been prepared. It is now undergoing further testing.
Meanwhile, the second installment of the IMF loan is scheduled to be disbursed in November. An IMF mission will visit Bangladesh in October before the second round of loan waivers. They will review the progress of implementation of the conditions. The second installment will be released on their report.
For this reason, initiatives have been taken to implement the conditions of the IMF. Bankers, meanwhile, have opposed changing the definition of defaulted loans. They said, the shock of Corona has not yet been overcome. In this, the second round of global recession has started. There are still special discounts on loan repayments. The rise in defaulted loans has been kept down by discounting. Not only Bangladesh, but almost all the countries of the world have been exempted from debt repayment to deal with the impact of global recession. In this situation, under the pressure of the IMF, if the definition of defaulted loans is changed and made stricter, the overall amount of defaulted loans will increase. For this reason, the bankers have advised to consult with the IMF in the light of reality. Before this, the last change in the definition of defaulted loans was made in April 2019. According to that policy, currently any current loan, demand loan or term loan or any installment or part of installment is unpaid for a period of 3 months or more and less than 9 months then that loan is shown as sub-standard or Neuman classified loan by the banks. In this case, if the loan is unpaid for 9 months or more and if the age of the unpaid loan is not 12 months at the time of sending the information to the central bank, then the concerned bank classifies the loan as doubtful. Also, to be classified as bad or harmful, the debt must remain unpaid for more than 12 months.
Previously, the loan was classified as non-performing after 6 months and as doubtful after 9 months. The debt was classified as bad or non-performing if it remained unpaid for more than 9 months. Currently, the central bank is returning to this policy.
Meanwhile, central bank sources said that from 2013 to March, defaulted loans of around Tk 100 lakh crore have been renewed under special consideration. Some of these loans have been marked as defaults despite repeated renewals. The rest of the loan is now regular. If the loans are regular there is no problem. But again, default will fall under the new policy. Then they will be defaulted under the new rules. New rules have to be followed in case of renewal as well.

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