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Bangladesh Bank (BB) has recently issued another circular relaxing the terms and conditions of loan rescheduling.
According to the new circular, half of the 2% downpayment on outstanding loans will be paid upfront, while the remaining half will be paid over six months with instalments.
Previously, there was a requirement of paying a 2% downpayment in one shot at the beginning. Additionally, BB has scrapped the requirement of obtaining approval from the central bank on rescheduling the loans, empowering the lending banks to decide thereon themselves.
To what extent the deferral of only half of the required down payment for six months will benefit the businessmen is not understandable.
If the borrower has an outstanding loan of Taka 100 crore, he will require Taka one crore upfront and another one crore for the next six months to reschedule outstanding loans, which, in the present situation, is very difficult.
The business community could not generate enough revenue due to economic hardship, stagnating investment and business slowdown, so their debt servicing has been impacted, resulting in the unusually rising NPL.
Although the political situation has changed with the elected government in power, economic hardship has not been over but rather has taken another ominous dimension following the Middle East escalation.
How businessmen will arrange funds for the down payment is a big question, and it is not clear whether BB has taken this factor into consideration while issuing this circular.
If the borrower cannot arrange adequate funds to make a down payment upfront and six instalments, the reschedule programme will fail again.
The NPL problem has taken a multi-dimensional shape, of which one situation is beyond recovery, while the other category can be repaired with special treatment and the big chunk has been classified due to stringent loan operation procedures followed during the previous governor’s tenure.
So, a vanilla-type straightforward strategy may not address the three-dimensional situation of NPL, as a separate measure is required for each type of NPL. At first, all borrowers should be classified into four broad categories.
The first category should include all trouble-free borrowers, who have been servicing debt satisfactorily without facing any difficulty.
The second category should include those borrowers who have been struggling to maintain debt servicing with the likely possibility of impairment at any time if special supporting measures are not taken.
The third category must include those borrowers whose loans have already been impaired with nonpayment over time.
However, they are either in business with a slowdown or have the scope to revive business or undertake alternative business, which either way may generate revenue to repay the loans.
The first category is not concerning an issue but rather a scope of growth prospects. However, the second and third categories of borrowers are very crucial, as they may turn either good or bad anytime depending on how banks handle them.
So, supporting through loan rescheduling is inevitably required for these borrowers. The objective of loan rescheduling for these customers is to support them in keeping their business running, generating revenue and then servicing debt.
In order to achieve these objectives, two specific measures are required, of which one is borrowers’ ability for downpayment while the other is cash-flow generation justifying loan repayment.
The condition of the downpayment should be made optional instead of mandatory so that borrowers facing acute fund crises can also be accommodated under the loan reschedule programme.
However, some sort of incentives may be offered with a view to encouraging down payment. For example, rescheduling with a downpayment can be offered with one per cent less interest than that of rescheduling without a downpayment.
The most important factor is the tenure of the loan reschedule, because the longer the tenure, the smaller the instalment size, which borrowers can repay, whereas the shorter the tenure, the larger the instalment size, which many borrowers may not repay as per the agreement.
Another important factor is the very high lending rate, which at present is 15% and higher, which makes the loan amount double in every five years.
Nowadays, the market is very competitive and cost-sensitive, so businesses can hardly make enough margin to bear excessively high interest expenses.
The necessity of reducing the interest rate should also be taken into consideration. At the same time, there should be another measure for restraining the banks from taking interest on rescheduled loans into income, and all repayment should be applied towards principal adjustment. This practice must continue till half of the principal loan amount is paid off.
For making the reschedule programme effective, borrowers must be educated and committed to adhering to the rescheduling terms at any cost, because the repayment schedule is prepared based on their means and comfort. The entire process must be digitally carried out without giving any scope for manual deviation or breach.
The fourth category of loans are, in fact, beyond recovery, as the borrowed money has been either defalcated or doled out, so getting rid of those loans would be a very costly move for both banks and the government as well.
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The writer is a certified anti-money laundering specialist and banker based in Toronto, Canada. He can be reached at [email protected]
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