Bangladesh Bank goes back to tightening loan classification rules

The Bangladesh Bank has finally reinstated its loan classification rule of 2012 by cutting the overdue time of a term loan by three months in line with the international practice in response to the condition set by the International Monetary Fund (IMF) as part of a $4.7 billion loan package.

A term loan will be treated as overdue after three months of non-payment from fixed expiry date for repayment, down from existing six months, according to Bangladesh Bank circular.

Besides, the classification period after the overdue timeframe has been kept unchanged at three months, which means a loan will be treated as default in six months after the fixed expiry date for repayment from existing nine months.

This is the first phase of the new rule which will come into effect from 30 September 2024.

In the second phase, the loan will be treated as overdue from the following day of fixed expiry date of repayment from 31 March 2025, which means the account will come under classification in three months of non-payment.

However, in another circular, the central bank addressed the pressure of rising loan costs, instructing banks not to extend instalment size of borrowers.

Banks have also been asked to extend tenure of industrial term loans and house finance taken before July 2023 to adjust the increased loan costs caused by rising lending rates.

Mustafa K Mujeri, former director general of Bangladesh Institute of Development Studies, welcomed the decision, stating that it would encourage customers to pay in instalments. 

"However, the instalment amount should have been left to the bank-customer relationship. It will not work if the central intervenes in all cases. Banks should be given freedom over instalment amount and extension of loan tenure," he added.

Emranul Huq, managing director and CEO of Dhaka Bank, said banks stand to benefit from reducing loan overdue periods. 

"Extending deadlines often leads customers to delay repayments unnecessarily. Shorter loan durations facilitate quicker recovery, reduce Non-Performing Loans (NPLs), and enhance the banking sector's liquidity," he added.

The banker supported keeping instalment amounts unchanged, explaining that when arranging instalment payments for term loans, they consider factors such as the customer's cash flow. 

"Despite interest rate increases, our priority is to ensure that instalment payments remain manageable. If handled correctly over time and clients are financially stable, it will benefit the banking sector," he added.

The lending rate which was capped at 9% before July 2023 surged to 13.55% in April after introducing a new lending rate formula SMART (Six-months Moving Average Rate of Treasury Bills).

Moreover, the new tight loan classification rule that was eased in 2019 is feared by the Bangladesh Bank to increase non-performing loans by around Tk80,000 crore.

The total default loan in the banking industry stood at Tk1.45 lakh crore at the end of December last year which was 9% of total loans.

Changes in loan classification over the years

Earlier in 2012, the central bank adjusted loan rules to meet IMF conditions for a $1 billion ECF program. Loans used to be classified as overdue after nine months, but under the new rules, it was shortened to three months past the repayment date.

However, the Bangladesh Bank started to deviate from the international practice gradually from 2015 through offering a special loan restructuring facility for large loan borrowers with loans above Tk500 crore. Borrowers were allowed to regularise their loans under the one time restructure program with a 12 years repayment facility at only 2% down payment. 

Later, in 2019, the Bangladesh Bank eased the classification rule reinstating the provision of a nine months for treating a loan account as classified from fixed expiry repayment date.

In the same year, the central came up with a relaxed loan rescheduling policy allowing defaulters to reschedule their classified loans by making a down payment of only 2% instead of the existing 10%-50%.

However, a series of rules relaxation could not reduce default loans, rather it kept rising.

Default loans in the banking industry increased by Tk52,000 crore in five years from December 2018 to December 2023 even after rescheduling loans of Tk2,12,780 crore during this period under relaxed policies.

The Bangladesh Bank in its financial stability report published in August 2023 disclosed that the banking sector's distressed assets including default loans, rescheduled loans and written-off loans stood at Tk3.77 lakh crore at the end of 2022.

The total distressed amount was 25.5% of total loans of Tk14.77 lakh crore according to the report.

The Bangladesh Bank for the first time disclosed the distressed assets as part of the conditions agreed with the International Monetary Fund (IMF) for the $4.7 billion loan.

Borrowers will enjoy extended repayment period to adjust rising loan costs

In another circular issued yesterday, the Bangladesh Bank said borrowers' ability to repay loans has decreased due to higher interest rates on loans taken before July 2023. As a result, loan costs have increased based on SMART.

To address this issue, banks were asked not to increase the instalment size and adjust the increased loan cost through extending repayment tenure. 

The increased amount of instalment was instructed to keep separately in a blocked account which will be not charged. Later, the amount will be split in the same size of instalment that was set before 1 July 2023, according to the circular. Such extension of repayment period will not be considered as a rescheduled loan. 

Banks can transfer the money from blocked accounts soon after starting recovery, said the circular. The facility will be cancelled if any loan turns to classified despite availing the extended tenure benefit.

Only loans remaining regular based on 1 April 2024 will come under the facility, according to the circular.