Banks rescheduled a record amount of defaulted loans in the first nine months of 2019 as part of their efforts to contain bad debt and manage hefty profit. But the new technique has failed to click. It seems almost impossible to rein the upward trend of defaulted loans for want of corporate governance in the banking sector. As of September, cumulative defaulted loans stood at Tk 116,288 crore, up 23.82 per cent from December last year. The rescheduling of loans will escalate in October-December quarter because of the relaxed policy offered by the central bank. Bangladesh Bank had earlier extended the deadline for defaulters several times to have their non-performing loans rescheduled under the relaxed policy, which allows defaulters the opportunity to regularise their loans for 10 years, including one year’s grace period, at 9 per cent interest rate, just by making 2 per cent down payment.
Rescheduling is a global practice and helps businesses when they are in dire straits. But here, many of the businesses are using the tool to mitigate their problems on a temporary basis resulting in inflating the amount of defaulted ones frequently. The rescheduling of defaulted loans will allow banks to show higher profits. This relaxed policy has given a wrong signal to the financial sector and also created a moral hazard. Many good borrowers feel discouraged to repay their loans on time because of the easy repayment policy. Meanwhile, the record amount of rescheduling will hit banks’ profitability as funds remain stuck for long because of the tool. Banks could have earned a good income and profit if they had recovered the funds on time. This also would have given them chances to provide fresh loans.
What’s true is that the large-scale rescheduling of loans may force the banks to face liquidity crisis. Although government and the central bank have taken initiatives to disburse loans to the industrial sector at single-digit interest rate, the rescheduling trend will put the brakes on their fresh lending. It’s crystal clear that impractical rescheduling policy has further weakened the banking sector.
