This writer was working at a branch of a private bank in 1996 in Bangladesh when the national election was held in the country. Prior to the deadline of submission of nomination papers, we had to work round the clock in the branch as many proposals for rescheduling NPL (Non-Performing Loans) of the companies and business enterprises owned by contesting candidates had been sent to Head Office for adjudication. The day immediately before the deadline was extremely hectic. In fact, we were confined at the branch premises as supporters of an MP candidate were blocking the entrance so that we could not leave the bank without handing over NOC (No objection certificate) to that candidate. Around 11:30PM, we received approval from the Head Office and accordingly issued NOC mentioning that there is no NPL in the name of companies where that MP candidate was directly or indirectly involved.
After more than two decades, recurrence of the same situation was witnessed in the banking sector this year. Many bankers had to work round the clock and till late night before the last date of submission of nomination papers for 11th parliamentary election.
When the national election approaches, Bangladesh's banking sector becomes busy alongside the Election Commission, government administration and Law Enforcing Agencies, though the banking sector has no relation with politics. Still, most of the contesting candidates are directly or indirectly involved with business enterprises that has outstanding loans with the banks in NPL state. Therefore, the outstanding NPLs need to be rescheduled so that it can be shown in the nomination papers that the candidate has no NPLs with banks.
Bangladesh Bank has been allowing commercial banks this loan rescheduling method for decades as a part of NPL treatment though this has produced no fruitful results. Loan rescheduling has not brought about any benefits in the country's NPL sector. On the contrary, the businessmen-cum-politicians have been immensely benefited by this provision which has made it easy to mark themselves as clean borrowers instead of as loan defaulters.
This rescheduling technique has deteriorated the country's NPL situation. Rescheduling of loans is not considered a standard approach of turning bad loans into good loans. Rather it creates a big loophole that keeps NPL in disguise for years. Rescheduling of NPLs may be applied as a last resort of allowing default borrowers to pay off the loan, if there is consistency in the cash flow over a period of time. Since, rescheduling of NPLs is a kind of repayment of bad loans, payment is first used to pay off the principal and not the interest. As a result, borrowers' default status never changes. On the other hand, restructuring of loans is considered as a standard approach of keeping loans in all time good condition and in some situations turn bad loans into good ones. It may be mentioned here that there is a fundamental difference between rescheduling of loans and restructuring of loans. Under any circumstances, rescheduling of loans should not be considered as an acceptable approach as it causes more problems in bank's loan operations. Politically-biased loan rescheduling is more dangerous for the whole banking sector and the country's economy. Paying certain percentage of down-payment is the precondition of loan rescheduling. But in many situations, borrowers can hardly manage the amount of down-payment from their own sources. So, they borrow new loans from other accounts to arrange required amount for down-payment. Very soon this new borrowing also turns into a NPL that eventually contributes to the country's overall NPL amount. At the same time, rescheduled loans also go back to NPL state as the borrower forgets to maintain repayment schedule after the election is over. This so-called rescheduling of loan is simply a window dressing that does not bring any benefits.
Rescheduling of loans, especially politically-biased NPL rescheduling, does not help recover the country's longstanding bad loans. Still the country's politicians, banks and bankers are benefited by this loophole. Through loan rescheduling, our businessmen-turned-politicians can temporarily get rid of the blame of being loan defaulters. At the same time, the bank itself is also extensively benefited as its profitability goes up for the time being. With banks' rising profit, bankers also receive increased amount of incentive bonus. Once the loan is classified as NPL, interest accrued cannot be taken as income. Instead it needs to be kept in a suspense account. It has been learnt that most of the banks have sizeable amounts of NPLs in their books and as such the amount of interest in suspense account is also very high. When a NPL is rescheduled, it is moved from bad to good loan status and interest accrued thereon and retained from the suspense account is immediately taken into bank's income. This increases the bank's profit for that particular year though this is a windfall profit. For example, if a bank's loan of BDT 01 billion with interest of BDT 200 million in suspense account is rescheduled on the occasion of this election, the entire interest amount of BDT 200 million will be immediately taken into income without any business impetus. So bank's profitability will increase by this amount.
Fortunately, this year election is going to be held during the bank's year-end. As such, interest retained in the suspense account of rescheduled income will directly go to the bank's current year's profit. From this windfall profit, bank will take out money in the form of dividend declaration and bankers will also take out some money in the form of incentive bonus. But the NPL will remain where it was.
Bangladesh Bank should revisit this loan rescheduling method and take initiative to restrict its widespread use. This method should be allowed only for repayment purposes because where the borrower is interested to repay the loan, this method may be applied to determine instalment stream that is consistent with the borrower's cash flow so that loan can be paid off over a period of time. There must be clear instruction that since this loan is in the process of repayment, it should not be declared as a good loan immediately after rescheduling. Similarly, all payments either in the form of down-payment or instalment must be applied first for principal adjustment and not interest. In this way, principal will be fully paid off first and then the residual amount if any will be utilised towards interest payment. If borrowers can strictly maintain rescheduling instalment at least two years without a single instance of default, then the loan can be restructured for the sake of making it a good loan. This is inevitably required for not merely preventing politically-biased loan rescheduling but for the sake of greater interest to treat the country's NPL problem.
Nironjan Roy is a banker based in Toronto, Canada.