Foreign banks fret over relaxed loan rescheduling policy

Foreign banks that deal with Bangladeshi banks for international trade are worried about the relaxed loan rescheduling policy offered to defaulters by the government.

At the Sibos conference, arranged by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in London last month, the international banking community expressed disappointment over the move.

According to foreign banks, easing up on loan rescheduling will weaken the national banking system of Bangladesh as a whole, and cripple the export-import business of the country. 

Foreign banks addressed this issue during bilateral meetings with Bangladeshi bankers at the Sibos conference, which was attended by around 11,500 delegates –of whom around 8,000 were bankers.

When contacted, three bankers who attended the event confirmed that all foreign banks with which they held meetings raised the issue, saying that it will increase cost of exports and imports for Bangladeshi banks in the future.

One of the bankers told The Business Standard that they usually hope to develop their networks with foreign banks through these bilateral meetings. But this year, the relaxed loan rescheduling policy was the most discussed topic at the meetings.

"It is alarming, as this will affect the confidence of foreign banks, which will eventually weaken the credit line for local [Bangladeshi] banks," he said, quoting the foreign bankers.

This year, the approach by foreign banks toward their Bangladeshi counterparts was mostly negative due to the relaxed policies, as they are expecting future risk here, he added.

In its report titled "Bangladesh Development Update," released in October, the World Bank addressed the issue of the easing the standards of loan classification and rescheduling and restructuring. 

It said that this move has affected the confidence of foreign suppliers on the ability of domestic banks to honour letter of credit (LC) payment obligations.

As a result, LCs issued by domestic banks commonly require confirmation by a correspondent bank to be acceptable to overseas suppliers, which has increased the financing cost of import transactions, the report said.

Due to their poor ratings, domestic banks currently need confirmation from correspondent banks most of the time.

When an LC is issued, the issuing bank may request the advising bank to add its confirmation on the LC. By agreeing to add the confirmation, the advising bank will become the confirming bank and commits to pay the seller if all the terms and conditions of the letter of credit are complied with.

Local banks have to spend 2-2.5 percent of the total LC value as commission, which is relatively higher than that in other countries. In India, the charge for adding confirmation is less than 1 percent of the total LC value.

Total exports and imports in Bangladesh amounted to $70 billion in the previous fiscal year, according to central bank data.

"It is good news that despite high LC costs, Bangladeshi banks never defaulted in foreign settlement. However, they could not take the price benefit due to deviation from international standards of loan classification and rescheduling policies," said Md Arfan Ali, managing director of Bank Asia.

If foreign banks, anticipating future risk of relaxed policies, reduce the credit limit for letters of credit, it will cripple the export-import business of Bangladesh, he added.

Earlier in April this year, the Bangladesh Bank extended the loan classification period by six to nine months – deviating from the international standard – to reduce the rate of default loans.

In May, the central bank announced a relaxed loan rescheduling policy, allowing defaulters to regularise loans by paying 2 percent down payment instead of the regular 10-15 percent. The repayment tenure will be 10 years and the policy can be availed only once.

The application period to avail this policy was extended thrice and will remain open till November.

After the High Court extended application for the deadline on Monday, small defaulters rushed to state-owned banks to reschedule their loans under the special facility. 

All banks received a total of 4,000 applications till Sunday, which was the previous deadline for application.