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BB’s roadmap for loan recovery promising  

Published : Thursday, 21 March, 2024 at 12:00 AM  Count : 677
Md Abdul Mannan
The Bangladesh Banks recent roadmap on bringing discipline in the banking sector appears to be silver line in dark cloud for commercial banks. The central bank suggests write-off defaulted loans, suggests few measures to step up banks chief executive officers involvement, engaging asset management companies, separating interest income on stressed assets, compulsion of valuation of collateral security by enlisted surveyor, no extension of time for earlier rescheduled loan, forming alternative dispute resolution, increasing cash flow by recovering default loans and discouraging willful defaulters.

 It talked about writing off bad loans. It is positive but there could be few problems in banks operating profits due to the burden for keeping huge amounts of money from current year profit as provisions. As per recent Bangladesh Banks directives, market value of collateral security against bad loans will not be considered for write-off bad loans, interest suspense amount & provision kept would be deducted from loan outstanding. Banks claim & legal action for recovery of write- off loan will be continued through "Write- off loan recovery Unit" under direct supervision of Chief Executive Officer of the bank. Bangladesh Bank also declared lucrative cash incentives among the employees including CEO of the bank for recovery of write-off loan.
 
Earlier Banks can consider the value of collateral securities against those bad loans in case of write-off. The amount from banks capital or profit has to be debited in the write-off provision account as a result a banks profit will fall and the government will get less corporate tax from the banks. Requiring 100 per cent provision on written-off loans will strain banks profitability & resources.
        
Furthermore, writing off bad loans allows financial institutions to cleanse their balance sheets, thus bolstering their asset quality and overall financial health. By clearing away non-performing assets, banks can redirect their focus towards more fruitful endeavors, such as recovering other viable loans and investments. Moreover, it aids in regulatory compliance and ensures accurate reporting of financial positions, fostering transparency and accountability within the banking sector.
 
However, the practice of loan write-offs is not without its drawbacks. For Banks, writing off loans translates into significant financial losses, impacting profitability and capital reserves. This erosion of financial resources can have ripple effects, potentially undermining the stability and creditworthiness of the institution in the eyes of investors and the market at large. So, the market value of collaterals against bad loans should be considered where the bank has genuine right to claim over mortgage property in case of writing-off a bad loan.

In the context of Bangladesh, the banking sector is grappling with a pressing issue: the mounting burden of default loans. This predicament poses a significant challenge to the stability and vitality of the countrys financial system, with far-reaching implications for economic growth and development.

At the heart of this crisis lies the proliferation of non-performing loans (NPLs), which have surged to alarming levels in recent years. Despite concerted efforts by regulatory authorities and financial institutions to address this issue, the problem persists, casting a shadow of uncertainty over the banking landscape.
 
Moreover, the prevalence of default loans undermines the integrity and credibility of the banking sector, denting investor confidence and tarnishing Bangladeshs reputation in the global financial arena. Foreign investors and international stakeholders may view the countrys banking system with skepticism, potentially deterring much-needed foreign direct investment and impeding efforts to foster a conducive business environment.
 
Furthermore, the persistence of default loans perpetuates a vicious cycle of financial distress, exacerbating the plight of borrowers and hindering their ability to participate meaningfully in the economy. Small and medium-sized enterprises (SMEs), in particular, bear the brunt of this crisis, as they struggle to access credit and navigate the challenges of operating in an environment plagued by liquidity constraints and risk aversion.

The BB roadmap also focuses on enhancing loan recovery mechanisms through separate cells and CEO involvement which is commendable. These steps could streamline the recovery process and mitigate future defaults. BB also instructed the Banks for strengthening its legal team for faster settlement of pending case against default borrowers.  
 
 Introducing an asset management company (AMC) could indeed aid banks in cleaning their balance sheets by offloading non-performing assets. However, the efficacy of such initiatives depends on their implementation and operational efficiency of AMCs.
 
Compulsion of valuation of collateral security by central banks enlisted surveyor is a realistic approach. In some cases over valuation of collateral security cause huge damage for banks. Proper valuation of collateral security will help the bankers to take appropriate credit decision as well as recovery of default loan. BBs enlistment of surveyors needs to be materialized soon.           
 
The directive to segregate stressed assets in banks balance sheets until interest recovery is a prudent move. By preventing regular loans from being classified as stressed assets, this measure could help in accurately assessing the health of banks loan portfolios.
 
Accelerated action for loan recovery may indeed prompt borrowers to prioritize timely repayments, potentially improving banks cash flows & it could also lead to decrease of loan classification, necessitating careful monitoring.
 
Aligning definition of expired term loan with international standards is a step towards global best practices, enhancing bankers skills and operational standards. Nonetheless, theres a risk of increased defaults as borrowers may struggle with tighter repayment schedules.
 
The emphasis on alternative dispute resolution for quick responses to loan disputes is a positive move. Resolving disputes efficiently could expedite loan recovery processes and reduce the burden on banks resources.

 Banking sector is hopefully waiting for a fruitful result of BBs recent initiatives.

The writer is an Executive Vice President & Head of Credit, SBAC Bank PLC.



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