Tightening of overdue loan classification will strain banks' near-term profitability: Moody's

Moody's, the international credit rating agency, yesterday said they expected the tightening of overdue recognition for fixed-term loans to result in increases in nonperforming loans and provisions.

This, they believe, will strain banks' profitability in the near term.

They made the disclosure in a report released today (20 April).

On 9 April, the Bangladesh Bank 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 a 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 will be the first phase of the new rule, which will come into effect from 30 September 2024.

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 IMF for the $4.7 billion loan.