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.

Bangladesh Bank (BB) Urges Vigilance Against Counterfeit Notes During Ramadan

Bangladesh Bank (BB) has issued a circular to all commercial banks, urging heightened vigilance to prevent the circulation of counterfeit notes during the month of Ramadan. The circular, addressed to the managing directors of all commercial banks, instructs banks to take necessary measures to combat the spread of fake currency.

As per the directive, banks are required to broadcast a video clip showcasing the security features of banknotes for at least one hour after evening prayers in major public areas of the capital, divisional cities, and Bogra city throughout Ramadan.

Additionally, banks are instructed to thoroughly inspect notes before loading them into ATMs. Furthermore, all bank branches are mandated to display videos highlighting the security features of banknotes during banking hours.