Bank-Insurance
IMF Approves $689m for Bangladesh in Second Tranche of $4.7bn Loan
In a significant development, the International Monetary Fund (IMF) has given the green light for the disbursement of $689 million in the second tranche of a $4.7 billion loan package earmarked for Bangladesh. This announcement comes after Finance Minister AHM Mustafa Kamal confirmed the approval, which was granted during a recent meeting of the multilateral lender’s board.
Officials from the Bangladesh Bank and the finance ministry anticipate that the second instalment will be made available on Wednesday. The approval follows the completion of the first review by the IMF Executive Board, covering the Extended Credit Facility (ECF), Extended Fund Facility (EFF), and Bangladesh’s Resilience and Sustainability Facility (RSF) arrangements.
With this approval, the total disbursements under the ECF/EFF amount to approximately $936.6 million, while disbursements under the RSF reach around $221.5 million. Additionally, the Executive Board concluded the 2023 Article IV consultation with Bangladesh.
The approval addresses a period of uncertainty arising from Bangladesh’s non-compliance with specific IMF directives tied to the loan. These directives included measures such as increasing foreign exchange reserves, a 0.5% uptick in the tax-GDP ratio by June, and the adoption of a formula-based price adjustment mechanism for fuel oils by December. However, these actions were not implemented within the stipulated timeframe.
Ahsan H Mansur, Executive Director of the Policy Research Institute of Bangladesh, acknowledged the government’s effective communication with the IMF regarding the challenges faced in meeting these requirements. However, he expressed concerns about the difficulty in securing the third instalment of the loan in June, emphasizing the need for the government to enact specific policies to avoid the IMF withholding the loan, especially after the elections.
The IMF had previously approved the first tranche of the loan package on January 30, with Bangladesh receiving $447.8 million on February 2. The entire $4.7 billion IMF loan is set to be released to Bangladesh in seven instalments over three and a half years, concluding in 2026.
Zahid Hussain, former lead economist of the World Bank’s Dhaka office, noted that the IMF recognized the challenges posed by the conditions related to foreign exchange reserves, leading to revisions. While acknowledging the satisfaction of IMF staff with the government’s steps to increase revenue collection in the budget, he refrained from commenting on the possibility of receiving the third instalment, citing potential changes in the loan agreement.
In October, an IMF delegation visited Bangladesh for a two-week review of the loan program, providing a positive assessment at the staff level. After concluding the review, the mission stated that the IMF staff and Bangladesh authorities had reached a staff-level agreement on the policies required to complete the first review. The IMF staff commended the progress in reform implementation and the authorities’ continued commitment to decisive policy actions amid a challenging economic environment.
Among the IMF conditions, six quantitative targets were set for the first half of 2023. Notably, one of the unmet preconditions was the maintenance of a minimum net international reserve (NIR) of $24.46 billion by the end of June. The NIR target was missed by approximately $3 billion, attributed to the government dipping into reserves to cover essential imports of fuel, fertilizer, and foodstuff. Similarly, the minimum tax revenue target was not achieved, with the government falling short by Tk17,946 crore, collecting Tk3,27,664 crore against the goal of Tk3,45,630 crore in tax revenue for FY23, as per a Finance Division report.
Prime Bank PLC has recently received Bancassurance Business commencement approval from Bangladesh Bank.
Mohammad Shahriar Siddiqui, director, BRPD, Bangladesh Bank handed over the approval letter to Nazeem A Choudhury, deputy managing director – consumer banking of Prime Bank PLC, at a ceremony held at Bangladesh Bank recently.
Mohammad Ashfaqur Rahman, additional director, BRPD, Bangladesh Bank, Ashraful Alam, joint director, BRPD, Bangladesh Bank, Miah Mohammad Rabiul Hasan, chief bancassurance officer, Prime Bank PLC were also present at the ceremony.
Bancassurance is a partnership between a bank and insurance company that will allow a Bank to sell insurance products of the insurance company through its distribution channels.
To offer a wide range of products to its customers and ensure best in class service, Prime Bank has partnered with leading insurance companies National Life Insurance Company Ltd. and Reliance Insurance Ltd.
Being one of the leading banks of the country, Prime Bank hopes to cater to the needs of insurance requirements of its customers through Bancassurance, in Bangladesh market.
The Bangladesh Bank has 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 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 is the first phase of the new rule which will come into effect from 30 September 2024.
In the second phase, the loan will be treated as overdue from the following day of fixed expiry date of repayment from 31 March 2025, which means the account will come under classification in three months of non-payment.
However, in another circular, the central bank addressed the pressure of rising loan costs, instructing banks not to extend instalment size of borrowers.
Banks have also been asked to extend tenure of industrial term loans and house finance taken before July 2023 to adjust the increased loan costs caused by rising lending rates.
Mustafa K Mujeri, former director general of Bangladesh Institute of Development Studies, welcomed the decision, stating that it would encourage customers to pay in instalments.
“However, the instalment amount should have been left to the bank-customer relationship. It will not work if the central intervenes in all cases. Banks should be given freedom over instalment amount and extension of loan tenure,” he added.
Emranul Huq, managing director and CEO of Dhaka Bank, said banks stand to benefit from reducing loan overdue periods.
“Extending deadlines often leads customers to delay repayments unnecessarily. Shorter loan durations facilitate quicker recovery, reduce Non-Performing Loans (NPLs), and enhance the banking sector’s liquidity,” he added.
The banker supported keeping instalment amounts unchanged, explaining that when arranging instalment payments for term loans, they consider factors such as the customer’s cash flow.
“Despite interest rate increases, our priority is to ensure that instalment payments remain manageable. If handled correctly over time and clients are financially stable, it will benefit the banking sector,” he added.
The lending rate which was capped at 9% before July 2023 surged to 13.55% in April after introducing a new lending rate formula SMART (Six-months Moving Average Rate of Treasury Bills).
Moreover, the new tight loan classification rule that was eased in 2019 is feared by the Bangladesh Bank to increase non-performing loans by around Tk80,000 crore.
The total default loan in the banking industry stood at Tk1.45 lakh crore at the end of December last year which was 9% of total loans.
Changes in loan classification over the years
Earlier in 2012, the central bank adjusted loan rules to meet IMF conditions for a $1 billion ECF program. Loans used to be classified as overdue after nine months, but under the new rules, it was shortened to three months past the repayment date.
However, the Bangladesh Bank started to deviate from the international practice gradually from 2015 through offering a special loan restructuring facility for large loan borrowers with loans above Tk500 crore. Borrowers were allowed to regularise their loans under the one time restructure program with a 12 years repayment facility at only 2% down payment.
Later, in 2019, the Bangladesh Bank eased the classification rule reinstating the provision of a nine months for treating a loan account as classified from fixed expiry repayment date.
In the same year, the central came up with a relaxed loan rescheduling policy allowing defaulters to reschedule their classified loans by making a down payment of only 2% instead of the existing 10%-50%.
However, a series of rules relaxation could not reduce default loans, rather it kept rising.
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 International Monetary Fund (IMF) for the $4.7 billion loan.
Borrowers will enjoy extended repayment period to adjust rising loan costs
In another circular issued yesterday, the Bangladesh Bank said borrowers’ ability to repay loans has decreased due to higher interest rates on loans taken before July 2023. As a result, loan costs have increased based on SMART.
To address this issue, banks were asked not to increase the instalment size and adjust the increased loan cost through extending repayment tenure.
The increased amount of instalment was instructed to keep separately in a blocked account which will be not charged. Later, the amount will be split in the same size of instalment that was set before 1 July 2023, according to the circular. Such extension of repayment period will not be considered as a rescheduled loan.
Banks can transfer the money from blocked accounts soon after starting recovery, said the circular. The facility will be cancelled if any loan turns to classified despite availing the extended tenure benefit.
Only loans remaining regular based on 1 April 2024 will come under the facility, according to the circular.
Cenbank Bangladesh Bank has announced the interest rate on bank loans for April based on the ‘Six-Month Moving Average Rate of Treasury Bills’ (SMART) system.
The Banking Regulation and Policy Department of Bangladesh Bank (BB) issued a circular in this regard on Sunday.
In March, the SMART increased by almost 1 percent to 10.55 percent, up from 9.61 percent in February and 8.68 percent in January.
The stock markets ended on a high note Sunday amid price increases.
Banks will be permitted to add a maximum of 3.0 percent to the SMART number when signing loan agreements in April, down from 3.5 percent in March.
As a result, the maximum interest rate on bank loans will be 13.55 percent in April, while the maximum interest rate on consumer loans will be 14.55 percent, as banks can charge a 1.0 percent supervision fee for consumer loans.
In March, the interest rate on bank loans was 13.11 percent, while it stood at 14.11 percent for consumer loans. In February, the rates were 12.43 percent and 13.43 percent, respectively. In January, the rates were 11.89 percent and 12.89 percent.
As the SMART rate increased more than expected in March, Bangladesh Bank reduced the ‘SMART’ margin rate that banks are allowed to add by 0.50 percent in the interest of consistency with the monetary policy. The BB had previously cut the margin by 0.25 percent in February.
According to the new guidelines, the margin added for pre-shipment export loans and agricultural and rural loans will be a maximum of 2.0 percent in April, down from 2.50 percent in March.
Loans taken from banks for purchasing personal and consumer goods such as car loans, housing loans, and education loans, including refrigerators, TVs, and computers, are generally considered consumer loans.
Dr. Ahsan H. Mansur, Executive Director of the Policy Research Institute, commented to UNB that the central bank has no choice but to increase interest rates to control inflation.
He explained, “The interest rate hikes will continue until the inflation rate comes down to 5-6 percent. Only then will the interest rate stabilize.”
During this period, industries and personal borrowers will face challenges, but they must confront reality. Through this adversity, the economy will gain strength and stability.
