Bangladesh Bank's new policy aims to help defaulters clear debts

New policy says defaulters can pay 10 percent of the loan and repay the rest within three years

Bangladesh Bank has introduced a new policy enabling defaulters to become 'debt-free' by depositing 10 percent of the loan and repaying the remainder within three years.

However, if a part of the loan is repaid, there is no scope to regularise the loan as before.

Until the entire loan is repaid, the borrower will continue to be identified as a 'defaulter' and will not be eligible for any new loans during this period.

Bangladesh Bank's Banking Regulation and Policy Department, or BRPD, issued a notification on Monday introducing the 'exit policy,' which allows loans to be repaid in one or more instalments.

For loans repaid in multiple instalments, the repayment schedule should be based on the banker-customer relationship, typically not exceeding two years.

However, the board of directors can extend this period by one additional year for valid reasons.

A senior central bank official told bdnews24.com: "Many people want to leave their businesses but struggle with loan repayment due to a lack of policy, often facing pressure to repay the entire amount.

“The new policy will benefit banks and help businessmen repay loans conveniently, allowing them to wrap up their businesses."

According to the central bank, banks use different methods to collect loans due to the absence of a policy on 'exit,' highlighting the need for a uniform policy.

Prof Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, or CPD, is not convinced.

He believes such 'facilities' will not help banks recover defaulted loans.

He told bdnews24.com: "Bangladesh Bank should identify and punish loan defaulters instead of giving them opportunities. This trend of concessions for loan defaulters has continued, which is not good for the banking sector. To fix the banking sector, willful defaulters must be brought under the law."

As of March 2024, defaulted loans in the banking and financial sector totalled Tk 1.82 trillion, accounting for over 11 percent of the loans disbursed.

KEY POLICY POINTS

The financial sector regulator specified that under the exit facility, the loan quality remains unchanged until the entire loan is repaid, with customers ineligible for new loans during this period. Borrowers must fully repay the loan within a maximum of 3 years if utilising this option.

Choosing this facility prevents customers from being labelled as 'wilful defaulters'.

According to Bangladesh Bank policy, business closures, industry downturns, or project failures beyond the borrower's control can disrupt cash flows needed to repay loans. Such defaults, resulting from these circumstances, are not classified as wilful defaults.

Bangladesh Bank has instructed commercial banks to devise and enforce their own policies accordingly.

The regular loan exit facility can be provided when projects or businesses are closed due to reasons beyond the borrower's control or when the borrower voluntarily closes them, with little likelihood of future recovery, according to the central bank.

The borrower must initially pay at least 10 percent of the current loan amount in cash. The bank is required to take steps to process the application within 60 days of its submission.

Approval for this facility must come from the bank's board of directors or executive committee.

However, the authority to approve exit facilities up to a maximum of Tk 1 million of the principal loan can be delegated to the bank's management.

If interest is waived under this facility, the interest must be transferred to a separate blocked account. The interest held in the blocked account will be considered as finally waived once the loan is fully repaid or adjusted.

Under the exit facility, the loan amount for traders remains unchanged until the entire loan is repaid. Therefore, if a borrower defaults, they will be classified as a 'defaulter borrower' until full repayment, and the loan account information must be reported to the Credit Information Bureau of Bangladesh Bank based on its previous classification.

However, if the exit facility is applied to regular loans, only the exit status needs to be reported.

Anyone using this facility cannot apply for new loans until the existing loan is fully repaid or adjusted. Collateral held against the loan cannot be released until the exit facility's loan is settled.

However, if mutually agreed upon by the bank, customer, and buyer, the loan can be settled through the sale of the mortgaged property under a tripartite agreement.

If the customer fails to meet their obligations after receiving the exit facility, the bank will take appropriate legal actions to recover the loan.