Interest waivers by private banks rise 12-fold in Apr-June

Infographic: TBS

Private banks seem to be waiving interests too generously, which bankers say, to ease recovery of loans that remained unpaid for a long time.

In April-June this year, the waived loan interests registered a 12-fold jump to Tk2,557 crore from only Tk191 crore in the previous quarter, according to the Bangladesh Bank.

Industry insiders say it is quite usual that lenders will waive some interests to facilitate repayment of loans that have remained unrecovered for a long time.

But in some cases, private banks are now waiving interests in connivance with directors of other banks, which also is contributing massively to the swelling of the volume of waived loan interests, they add.

Md Serajul Islam, spokesperson and executive director of the Bangladesh Bank, told The Business Standard that following the withdrawal of flexible loan repayment facilities that borrowers enjoyed in the last two years, banks have waived interests on bad loans of pre-pandemic times to retrieve principal.  

The Bangladesh Bank will take appropriate action if any banks are found to have waived interest in defiance of its guidelines, he also said, adding that clients will lose this facility.

Data obtained from the central bank shows that the country's private banks waived interests on loans to the tune of Tk2,293 crore in 2019 when the country's overall economic activities remained normal before the Covid-19 hit. The figure dropped slightly to Tk1,578 crore in 2020, and it spiralled again to Tk1,855 crore last year.  

Dr Ahsan H Mansur, executive director of the Policy Research Institute and chairman of Brac Bank, told TBS that even though banks waive some loan interests on realistic grounds in specified special circumstances, on some occasions, they do it through shrewdness that allows influential customers to easily take advantage of this interest waiving facility.

Such practices will discourage other clients from repaying loans, causing erosion to banks' income.

According to central bank data, as of June this year, total loans of state-owned banks stood at Tk2,52,000 crore, of which Tk55,428 crore remained defaulted. At the same time, the loans of private banks amounted to Tk10,42,000 crore with Tk62,677 crore of it being defaulted.

In April-June, state-owned banks rescheduled loans of Tk822 crore with interest waivers of Tk19 crore, while the loans rescheduled by private banks stood at Tk2,211 crore, but interests they waived were Tk2,557 crore.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told TBS that his bank waives interests on a loan when it sees that the amount of collateral against the loan is low, because of which it will take a long time to recover the money by moving the court.

Therefore, the bank waives interests on such loans and recovers the principal amount, he added.

Regarding the interest waiving in connivance with directors of separate banks, he said, "I do not see any problem with this, but banks must be judicious in this respect."

The Bangladesh Bank this May offered an opportunity to waive the interest on written-off loans, although it had earlier told banks that the original loans could not be waived.

The central bank, however, said the waiver will not be applicable for intentionally defaulted loans and loans taken by fraud.

The waiver of interest on written-off loans must be approved by the board of the respective bank.

Meanwhile, banks in the April-June quarter of this year rescheduled loans of Tk3,706 crore, which is 64% higher than Tk2,254 crore rescheduled in the January-March quarter. 

In July, banks' boards were given full authority to reschedule defaulted loans. The boards of directors of non-bank financial institutions also were given the same power. 

Officials of the Bangladesh Bank have attributed the increase in loan rescheduling to this move by the regulator. 

Meanwhile, central bank data also show that the amount of written-off defaulted loans in the banking sector stood at Tk43,987 crore at the end of March this year, out of which Tk529 crore was written off in the January-March quarter.

During the same period, the recovery of written-off loans stood at Tk207 crore. 

On the other hand, Tk6,265 crore loans fell in default in the banking sector in the January-March quarter, while the volume of recovered default loans amounted to Tk1,585 crore during this period.

In view of this, the Bangladesh Bank wrote to the managing director of 10 banks asking them to explain the reason for the increase in loan defaults and write-offs.

Following this move by the central bank, the recovery rate from the written-off loans increased to Tk357 crore in the April-June quarter. During the period, however, Tk544 crore in loans were freshly written off.

But, the amount of non-performing loans of banks increased sharply in the June quarter. In these three months, defaulted loans increased by Tk15,490 crore, while the recovery of such loans stood at Tk3,857 crore.

Selim RF Hussain, managing director and CEO of Brac Bank Ltd, told TBS that there is nothing wrong with waiving loan interests as per the central bank's guidelines.

He, however, asked for monitoring by the policymakers so that the interest waiver facilities are not misused in collusion with bank directors.

The central bank introduced the loan write-off system for the banking sector in 2003. Banks are required to keep a provision of 0.25% to 5% of their regular loans. But the provision ranges from 20% to 100% on the classification of defaulted loans. However, in case of loan cancellation, the entire loan amount has to be kept as a provision.

Following the coronavirus outbreak, borrowers enjoyed a complete loan moratorium facility in 2020, meaning banks did not show anyone defaulters despite their failure to repay instalments.

The following year borrowers enjoyed the same facility with a repayment of 15% in all types of loans. The moratorium ended on 31 December 2021.

Borrowers have been given time till December this year to avoid their loans being classified as defaulted by paying 25-75% of their instalments for 2022.