Dhaka, Bangladesh (BBN)- Bangladesh Bank (BB), the country's central bank, has introduced a new large loan restructuring policy not to extend undue favors to a handful of delinquent large borrowers, but to broaden the toolkit for more effective management of larger loan exposures to good borrowers in the growing economy.
"It is quite unfortunate that the central bank has been blamed for being selective rather than universal in its regulatory approaches by some quarters. On the contrary everybody knows that the BB has been championing financial inclusion and providing support for all. Indeed, we work for all not for a certain quarter or group,” BB Governor Dr. Atiur Rahman said in the backdrop of a recent controversy on the issue of restructuring of large loans.
The central bank chief also said the BB has already tightened its loan rescheduling and restructuring guidelines to discourage for habitual delinquent borrowers.
“We’ve already tightened our loan classification, provisioning and rescheduling policies in line with international standard to ensure stability in the country’s banking sector,” BB Governor Dr. Rahman told BBN in the capital Dhaka on Monday in an exclusive interview.
He also said the central bank has also introduced a policy for good borrowers for the first time aiming to establish a sound credit culture in Bangladesh.
Under the new policy, the good borrowers will enjoy 10 per cent rebate on interest, paid by them, in the third year. Such facility will remain effective in the following years if the borrowers continue to be good ones.
Besides, the good borrowers will be eligible for getting enhanced credit facility to meet their requirements, the BB governor added.
A borrower will be considered as good one if his or her loan accounts -- continuous, demand and term -- are unclassified-standard for consecutively three years.
The borrowers will not be considered as good ones if any loan of his or her affiliated business entities identified as classified in previous three years.
Restructuring of large loans of large corporate groups facing repayment difficulties due to adverse circumstances beyond control is a routine practice in developed and developing economies, including neighboring India.
The governor said the restructuring process allows lenders and borrowers to arrive at mutually beneficial arrangements of keeping the businesses up and running to generate income flows for repayments of the loans at realistically written down values over realistically feasible repayment periods; saving lenders from much larger losses at the likely break up values of borrower business’s assets, thereby also saving the economy from losses in output, income and employment from such break up.
Disruptions in economic activities in the prolonged spells of blockades and strikes in 2014 created numerous episodes of severe cash flow crunches in borrower businesses that couldn’t be managed within the rigid down payment and time period limits of the loan rescheduling guidelines prescribed by the BB for normal situations, he explained.
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Some relaxations in these rigidities in loan rescheduling drills were therefore allowed temporarily by the central bank in 2014; which helped businesses large and small keep running in the face of disruptions, in turn helping uphold output and price stability in the broader economy.
However, dealing effectively with large exposures of banks to large business groups needs a more structured approach than the ad-hoc rescheduling criteria relaxations allowed temporarily in 2014; and as directed by the BB’s Board of Directors, a new large loan restructuring framework has been drawn up in light of the restructuring frameworks in other developing economies including India, Malaysia and Philippines, according to the BB governor.
Introduced in January 2015 inviting restructuring proposals to be submitted by June 2015, the process is intended to begin with loan size of BDT 5.0 billion or higher to keep the initial number of restructuring proposals manageably small.
“Based on initial experience and actual need, the restructuring framework will be widened further with modifications and fine tuning in light of evolving international best practices,” Dr. Rahman noted.
He also said the BB will act professionally after receiving application for restructuring the large loans. “The banks will have to face the consequences if they do not prudently manage such loans after restructuring.”
The central bank chief forewarned no borrowers would be eligible for such restructuring facility if they were found involved in any forgery or malpractice.
After restructuring, if any borrower fails to repay two consecutive installments of their loans, such facility will be cancelled.
"The policy will help increase the profitability of banks through curbing the amount of classified loans," the BB governor said, adding that it will also help create employment opportunities.