Bangladesh Bank eases write-off rules to cut loan defaults

The central bank has come up with an easy way to show the mounting default debt issue look less bad than what it is now by relaxing the policy for loan write-off.

Banks can write off debts that have been marked bad for three years from their balance sheet, according to new decisions announced on Wednesday.

They had to wait for five years to write off bad debts until now.

Bangladesh Bank is also allowing banks to write-off of up to Tk 200,000 loan without starting any case.

The banks did not need to initiate any case to write-off loans to the tune of up to Tk 50,000 until now, according to a 2013 facility accorded to them.

They will not need 100 percent provisions for the write-off as well.

Finance Minister AHM Mustafa Kamal has been vocal against the rise in loan defaults since he took charge after the Dec 30 elections. File Photo

Economists and bankers believe the new central bank decisions will help cut default loans by a huge amount.

Loan default has been the biggest problem plaguing Bangladesh’s banking sector.

AHM Mustafa Kamal, who has been vocal against the rise in loan defaults since he took charge as finance minister after the Dec 30 elections, raised the issue at a programme of state-owned Rupali Bank earlier in the day.

Policy Research Institute Executive Director Ahsan H Mansur, however, has questioned the “sudden” central bank move.

“It’s okay if the international practice is followed in decreasing the term to three years from five years and making other changes. Then again, why now? Why had the international practice not been followed until now?” he asked. 

It will be “unfortunate” if the policy has been changed to “cut loan defaults in papers only”, according to Mansur.

Every bank will have to form a separate unit to collect written-off loans following the changed policy.

Third-party service providers can be appointed for collection of default debts and quick disposal of cases.

Written-off loans cannot be rescheduled or restructured in anyway.

If a borrower’s loan is written off, they will be classified as loan defaulters until repayment.

Bangladesh Bank’s permission will be needed to write off loans taken by current or former bank directors, or organiations related to them.

Before writing off loans, the banks must try to collect the money by selling mortgaged properties or from the guarantors.

As of September last year, default loans in Bangladesh’s banks totalled around Tk 1 trillion, more than Tk 826 billion or 83 percent of which make up bad debts, according to the central bank.  

The figures were on top of Tk 378.66 billion in debts written off from 2003 but yet to be collected. Banks have collected Tk 118.79 billion written-off loans since then.

Including the written-off loans, the default loans totalled over Tk 1.37 trillion, or 15.81 percent of the total money lent by the banks.

The amount of default loans, however, was shown 11.45 percent of the total loans, excluding the written-off debts.