Revisiting loan account rescheduling essential

According to a recent newspaper report citing reliable sources, the banking sector has regularized two and a half lakh crores taka of defaulted loans over the past five years through rescheduling. Notably, on the eve of the last national parliament elections, 93 thousand crores were regularized in just a few months. This trend of converting significant amounts of defaulted loans into regular loans is concerning.

Economists and bankers believe that such facilitation of rescheduling undermines the recovery process for defaulted loans. Economists and banking professionals believe that providing blanket rescheduling benefits is actually disrupting the process of recovering defaulted loan installments. Therefore, they argue that the loan rescheduling process should be made more stringent. At the same time, measures need to be taken to ensure that loan accounts do not receive rescheduling benefits repeatedly. Those who are not well-informed about banking activities may become confused by the term "loan account rescheduling." Thus, a discussion on this matter could be beneficial.

Loan account rescheduling occurs when a borrower applies to the bank for an extension on the repayment schedule due to the possibility of missing installments. The bank's board reviews the applicant's situation and current circumstances, and may agree to extend the repayment period. However, it’s important to note that rescheduling does not only refer to extending the repayment deadline; it can also mean advancing the repayment schedule. In our country, though, rescheduling is primarily understood as extending the repayment period, as borrowers can repay their loans at any time before the due date, and banks generally encourage this.

In developed countries, borrowers are often given the opportunity to ease their repayment obligations based on their financial situation and business circumstances through loan account rescheduling. Conversely, in our country, borrowers who are not financially or politically influential often find it difficult to access rescheduling benefits. Those with financial and political power can typically reschedule their loans at will, using various justifications. Once a loan account has been rescheduled, it cannot be classified as defaulted until the new deadline, allowing the borrower to enjoy the benefits of a non-defaulted status.

For instance, under Bangladeshi law, a candidate with defaulted loans cannot run in local or national elections. However, if such a candidate can reschedule their loans before the elections, they would face no barriers to participation. Recently, prior to the 12th national parliamentary elections held on January 7, a total of 93,000 crore takas in defaulted loans were rescheduled. This indicates that candidates intending to participate in the elections managed to have their defaulted loans rescheduled en masse during this period.

Loan account rescheduling occurs when a borrower applies to the bank for an extension on the repayment schedule due to the possibility of missing installments. The bank's board reviews the applicant's situation and current circumstances, and may agree to extend the repayment period. However, it’s important to note that rescheduling does not only refer to extending the repayment deadline; it can also mean advancing the repayment schedule. In our country, though, rescheduling is primarily understood as extending the repayment period, as borrowers can repay their loans at any time before the due date, and banks generally encourage this.

In developed countries, borrowers are often given the opportunity to ease their repayment obligations based on their financial situation and business circumstances through loan account rescheduling. Conversely, in our country, borrowers who are not financially or politically influential often find it difficult to access rescheduling benefits. Those with financial and political power can typically reschedule their loans at will, using various excuses. Once a loan account has been rescheduled, it cannot be classified as defaulted until the new deadline, allowing the borrower to enjoy the benefits of a non-defaulted status.

For instance, under Bangladeshi law, a candidate with defaulted loans cannot run in local or national elections. However, if such a candidate can reschedule their loans before the elections, they would face no barriers to participation. Recently, prior to the 12th national parliamentary elections held on January 7, a total of 93,000 crore takas in defaulted loans were rescheduled. This indicates that candidates intending to participate in the elections managed to have their defaulted loans rescheduled en masse during this period.

Bangladesh Bank typically does not include waived loan amounts and claimed defaulted loans in litigation when formally reporting the amount of defaulted loans. Therefore, the banking sector's defaulted loans can be classified as displayed and covered. Although Bangladesh Bank does not explicitly define this, they artificially conceal a significant portion of defaulted loans. An economist has described this situation as an attempt to "clean the room while keeping dirt under the carpet." For the sake of discussion, we can categorize defaulted loans in the banking sector as displayed and undisplayed, even though this is not an official banking term.

In Bangladesh, extensive discussions about defaulted loans in the banking sector began during the rule of the Jatiya Party. The issue came to the forefront in the mid-1990s when banking sector reforms were initiated with the support of the World Bank. It is noteworthy that there is no country in the world where defaulted loans in the banking sector do not exist. However, the amount of defaulted loans in Bangladesh is abnormally high, and their nature is also unusual. Generally, borrowers are unable to repay their loans on time due to various adversities. Cases where borrowers have the ability to repay but choose not to are rare; yet, the situation in our country is quite different. Here, those who have the capacity to repay their loans are often the ones defaulting at higher rates, indicating intentional default.

In our country, obtaining loans requires financial and political power, and the same applies to becoming a defaulter. In the late 1980s, the amount of defaulted loans in the banking sector was around 6,000 crore takas. Since then, the amount of defaulted loans has been increasing at an unstoppable pace. Banking sector reforms were conducted based on the advice of the World Bank and the International Monetary Fund (IMF), which led to the revelation of the defaulted loan amounts. However, regardless of which government is in power, Bangladesh Bank and the authorities have been reluctant to disclose the true extent of defaulted loans. Instead, they seem more focused on concealing these loans through various means.

Awami League's tenure has seen a significant increase in the amount of defaulted loans, as can be understood by looking at the statistics. Former Finance Minister AHM Mustafa Kamal had claimed upon taking office that the amount of defaulted loans would not increase by even a single taka. However, he was unable to keep his promise. During his time, instead of recovering defaulted loans through installments, efforts were made to conceal them through various legal maneuvers, but ultimately, this proved futile.

When the Awami League government came to power in 2009, the reported amount of defaulted loans in the banking sector was 22,481 crore takas. By the time of their second term in 2014, this amount had risen to 50,160 crore takas. In 2018, during their third term, the amount reached 93,920 crore takas. As of June 2024, the amount of reported defaulted loans has escalated to 2,11,391 crore takas. This figure represents the visible or reported defaulted loans. When including rescheduled, litigated, and waived loan amounts, the total amount of defaulted loans is estimated to be around 6 lakh crore takas. One of the most effective ways to show a lower amount of defaulted loans is through the loan rescheduling process. Since 1991, every government in power has continued this rescheduling practice.

Defaulted loan accounts were extensively rescheduled during the BNP government in 1991. On May 20, 1991, Bangladesh Bank published a list of 171 major defaulters through the newspaper, with outstanding defaulted loans amounting to over 2.5 crore takas. At that time, it was stated that strict actions would be taken against the individuals and institutions listed, and that more such lists would be published in the future. However, the publication of this list caused great dissatisfaction among the defaulters, leading them to begin cooperating less with the government, with many feeling aggrieved.

To appease the defaulters, the government later provided an opportunity for regularization of defaulted loans through rescheduling, under the condition that they would deposit 10% of the total defaulted amount as a one-time cash payment. Since then, every government has continued to offer rescheduling options for defaulted loans. Initially, for the first rescheduling, borrowers had to deposit 10% of the defaulted amount as a down payment; for the second rescheduling, it was 20%; and for the third time, 30%.

However, there was a loophole in the law, as it did not specify how many times a loan account could be rescheduled. Consequently, many borrowers managed to reschedule their defaulted loans multiple times after paying the 30% down payment. For example, a powerful businessman from Narayanganj rescheduled his loan account 12 times. Later, Bangladesh Bank issued a notification limiting the rescheduling of loan accounts to a maximum of three times.

Loan account rescheduling allows an entrepreneur or borrower to shed the scandal of being a defaulter. When a loan account is rescheduled, the borrower cannot be classified as a defaulter for a specified period. The law governing loan rescheduling was particularly weakened during the last government when AHM Mustafa Kamal served as Finance Minister. At that time, borrowers were given the opportunity to reschedule defaulted loans with just a 2% down payment, along with a one-year grace period for a duration of ten years.

As a result, 38,000 individuals and institutions took advantage of this opportunity to regularize their defaulted loans. However, when the rescheduling period ends, a substantial amount of defaulted loans will likely remain burdening the banks.

The opportunity to reschedule loan accounts with just a 2% down payment and a one-year grace period for ten years should be revoked. Additionally, a regulation should be implemented to prevent any loan account from being rescheduled more than once. If a borrower fails to make payments after taking advantage of a rescheduling opportunity, they should not be granted such an opportunity again.

Moreover, for those participating in national or local elections, rescheduling should be prohibited starting one year prior to the election. If such a law is enacted, candidates will need to regularize their loan accounts through rescheduling or timely installment payments at least a year in advance. Typically, those who contest in various levels of elections tend to have a higher incidence of rescheduling their defaulted loans. Individuals who take loans from banks and do not consistently repay their installments should be considered ineligible to participate in elections.

Such a policy would ensure that individuals with a history of defaulting on loans are not seen as suitable candidates, as those who engage in such behavior cannot be regarded as good human beings.

Those who take loans from banks and fail to make repayments on time are considered swindlers of deposits. Therefore, they should not be granted any leniency. If necessary, the process of rescheduling defaulted loans can be completely halted. A mindset must be established that loans can never be misappropriated. It is essential to ensure that fulfilling loan obligations is upheld.

MA Khaleque: Retired General Manager, Bangladesh Development Bank PLC, and writer on economic affairs.