Defaulted loans could double next year

The figure for defaulted loans is expected to double as the Bangladesh Bank is set to tighten classification rules for all types of loans by March next year to meet the International Monetary Fund’s lending conditions.

In late September, bad loans in Bangladesh’s banking sector reached a record Tk 284,977 crore, as loans disbursed due to irregularities to Awami League-affiliated companies deteriorated at an alarming rate after the The ouster of the government led by Sheikh Hasina on August 5.

Between July and September, bad loans soared by 34.8 per cent to a staggering Tk 73,586 crore, according to BB data.

The Banking Regulation and Policy Department of the BB has already prepared draft guidelines for classification of loans in accordance with international best practices.

The directive will be issued soon and will come into force by March 2025, said BB spokesperson Husne Ara Shikha.

As per the draft guidelines, lenders will treat any type of loan as delinquent if a borrower fails to make an installment payment within three months of the repayment due date.

Currently, if a borrower fails to repay an installment on time, the loan is considered delinquent six months after the repayment date.

The central bank is strengthening the classification rules in two phases.

In the first phase, the duration of a loan marked as overdue was reduced from six months to three months in the case of term loans.

A term loan is a bank loan of a specific amount with a specified repayment schedule and a fixed or variable interest rate.

The BB implemented the first phase in September this year.

All types of loans, including agricultural loans and SME loans, will be subject to strengthened classification rules, which must be implemented in the second phase by March next year.

If the new loan classification rules are followed, the amount of defaulted loans will likely double, according to industry insiders.

Bangladesh now has the highest rate of defaulted loans in South Asia, with almost 17 percent of the country’s total disbursed loans having become uncollectible.

“There is no doubt that defaults will increase in the coming days,” said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

He cited the tightening of loan classification rules and the impending default of Awami League-affiliated businessmen who took huge amounts of loans by violating rules and regulations.

Bad loans will cross Tk 300,000 crore by December, said Mohammed Nurul Amin, former president of the Association of Bangladesh Bankers (ABB), the forum for managing directors and chief executives of banks.

If loan classification rules are tightened, this number will be higher, said Amin, president of Global Islami Bank.

A World Bank team is currently holding a meeting with the central bank to support banking sector reforms and has urged the BB to implement international loan classification rules before the deadline.

BB previously maintained loan classification rules following international practice, but gradually began to deviate from this practice in 2015.