BB relaxes loan repayment policy again
The Bangladesh Bank yesterday announced a more flexible loan repayment policy in response to the severe impacts of the Russia-Ukraine war on borrowers’ real incomes.
Under the new policy, borrowers who clear 50 per cent of their instalments payable in the final quarter of 2022 will not be classified as a defaulter, compared to the 75 per cent required previously.
Some experts have expressed concerns that the relaxes policy could worsen liquidity issues in the banking sector, as banks will not be able to recover the expected amount of funds from borrowers.
Banks in Bangladesh are already having difficulty attracting deposits, due to the negative returns on savings for higher inflation, and after recent loan scams left savers feeling angry and upset.
The new policy will be applicable for borrowers who took term loans with a repayment tenure of more than one year, as stated in the notice.
It has been noted by the central bank that in recent times, the cost of industrial production has surged due to the war. This is because the conflict has driven up commodity prices in the global market.
The relaxed facility will help keep economic activities vibrant and make paying instalments easy for borrowers.
As per the central bank’s previous announcement, borrowers who are able to repay at least half of their loans from the April-June period will be able to avoid being classified as defaulters. In order to maintain this status, borrowers must clear 60% of their unpaid loans in the July-September quarter and 75% in the fourth quarter of 2022.
The latest extension came less than a week after the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), the country’s apex trade body, pressed for a relaxed loan classification policy until June next year.
Borrowers enjoyed a full-year payment holiday throughout 2020 because of the coronavirus pandemic and could avoid slipping into the defaulter category by paying 15 per cent of the instalments payable for 2021.
The central bank discontinued the support from the beginning of 2022 as Covid-19 caseloads plummeted. This paved the way for the economy to rebound strongly, before coming under pressure after the Russian-Ukraine war began. Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, believes that the central bank has relaxed the facility further to entertain the FBCCI’s demand.
Although, Mansur states that “the central bank should have handed over the responsibility to banks to decide which default borrowers would be eligible for the facility and which would not.”
If borrowers do not repay their instalments in full, the lack of loanable funds will continue to grow deeper, said the managing directors of two banks. This is a concerning issue because it relates to the banking sector and has the potential to greatly affect many people. An increase in default loans could cause big problems for both banks and borrowers.
People who intentionally don’t repay their loans think they will be able to take advantage of this relaxed policy. However, usually people who are good borrowers try to repay their loans on time. Salehuddin Ahmed, a former governor of the BB, does not agree with offering a relaxed facility on a wholesale basis.
“The economy is still in trouble, so relaxing the loan repayment facility can be supported. But it should not be provided to all borrowers for the sake of the financial sector,” said the Governor.
“Only small and medium-sized borrowers should have been allowed to enjoy the relaxed facility.”
In recent times, deposit growth in banks has slowed as many people saw their capacity to save dwindle amid the higher cost of living.
After reaching a 10-year high of 9.52 percent in August, inflation has decreased in the last three months and was at 8.85 percent in November. However, central bank data shows that the weighted average rate of interest on deposits was 4.13 percent in the July-September quarter.
