Bangladesh Bank Relaxes Loan Classification Rules

From 30 June, loans will be classified as ‘bad’ only once they have been overdue for at least 12 months, compared to nine months previously, among other changes. 

Bangladesh Bank in a new circular has extended the time allowed before overdue loans must be classified as doubtful and bad, in a bid to help banks manage non-performing loans on their books.

The circular amends 2012 rules that required banks to classify defaulted loans as ‘sub-standard’ once they were overdue for six months, ‘doubtful’ after six months, and ‘bad’ after nine months.

Instead, banks can now classify loans as ‘sub-standard’ when they are overdue for more than three months and less than nine months. Loans overdue for between nine and 12 months can be classified as ‘doubtful’. Loans will be classified as bad only once they are overdue more than 12 months.

The amendments were made based on recommendations of a Bangladesh Bank committee formed on 31 January this year, and will effectively reduce the provisions banks have to hold against defaulted loans, thereby increasing their capacity to issue fresh loans.

Under existing loan classification rules, banks must hold provision of 20 percent against sub-standard loans, 50 percent against doubtful loans, and 100 per cent against bad loans.

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According to Bangladesh Bank data, total loans classified as sub-standard or worse grew to BDT 939.1 billion (USD 11.2 billion) in 2018, up from BDT 224.8 billion in 2009. Over 85 percent of these loans are ‘bad’.

Observers say the policy relaxation will increase the vulnerability of the Bangladesh’s banking sector, potentially serving to encourage defaulters and increase non-performing loans in the banking system, rather than bringing qualitative change to loan origination or recovery processes.

In February this year, Bangladesh Bank also relaxed its policies on loan write-offs, allowing loans worth up to BDT 200,000 to be written off, compared to the previous limit of BDT 50,000.

In April 2018, the government reduced commercial banks’ mandatory cash reserve ratio to 5.5 percent of deposits, down from 6.5 percent, and asked state agencies to deposit 50 percent of their funds in private commercial banks, up from 25 percent previously.

The new loan classification rules enter into force on 30 June.

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