S.M. ZAHIDUL ISLAM

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 Bangladesh Bank all on a sudden on June 14, 2012 has issued a circular on loan provisioning and loan rescheduling with several stringent conditions which have put commercial banks as well as entrepreneurs in a troublesome position. The circulars appeared as a bolt from the blue. Usually Bangladesh Bank issues important circulars after discussions with the stakeholders especially Association of Bankers Bangladesh (ABB) and Banks Associations Bangladesh ( BAB), the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), Bangladesh Garment Manufacturers and Exporters Association (BGMEA). But in this case BB did not do that probably for apprehension of protests from them. It was wise if they issued those circulars with proper analysis. All the stakeholders believe that the circular was issued as part of complying with the conditions imposed by the International Monetary Fund (IMF) for availing USD 100.00 billion loan for the government.

In the preface of the circular it was inscribed that Bangladesh Bank recognises that a legitimate banking practice may allow for the renewal of a continuous loan or line of credit occasionally. However, BB is concerned that rescheduling (also known as “prolongation” or “evergreening”) may sometimes result in an overstatement of capital, when loans that have a low probability of repayment are carried at full value on banks’ balance sheets. Bangladesh Bank is hereby issuing this circular in order to communicate its policy stance that rescheduling should be done only in limited circumstances and under restrictions.

Yes, there were some anomalies in rescheduling some loans in the banking sector especially in Public Commercial Banks (PCBs). Is there any statistics against their logic? Probably its’ percentage is very negligible, not more than 2percent to 3percent out of their total portfolios. A total of 98percent borrower should not be punished for the misdeed of so called bankers. These are definitely malpractice in the financial sector, but that could be checked by proper monitoring through offsite and onsite supervision carried by BB. As part of remedy BB could go for online supervision, where their vigilance team could have access in the data centre of each bank, and then BB would validate that information to take decision later on. Bangladesh Bank inspectors hold the capacity to classify any account at any time. They could ask statement of evergreeing loan account, after verify the statement, quantify the volume, assessing the impact then they could take decision of classification to classify those accounts depending on the quality. The logic of keeping evergreening problematic loan in the portfolio is simply lame. Our banking and financing sector has undergone surgery by some inefficient executives of the central bank, who did not link the consequences of their decisions in the economy. Who also do not possesses the capacity to make understand the government about the consequences.

The objective of the issuance of circular is not only to check evergeeing the loan account and swelling the capital through increase of profit by showing the sick loan account as regular and reducing the banks operating profit and net profit but also to fell our banking sector and our economy in the deep trouble as per prescription of IMF. It is also not match up with South Asian nations banking practice. Though our central bank follows step of RBI (Reserve Bank India) to overcome any adverse global economic situation, in this case it is exception. This initiative will give competitive advantage to the Indian counterpart in the bi-lateral trade between the two countries. Comparison on provisioning on assets between Bangladeshi & Indian system:

RBI sets provision of Assets Classification as follows:

Standard Asset: 0.40 per cent. For agricultural and SME sectors it is 0.25 per cent. For personal loans, loans and advances qualifying as capital market exposures and commercial real estate loans, loans and advances to systemically important NBFCs-ND provisioning requirement is 2.0 %. Salary Earners' banks in Tier II ( banks have more than one branches) may provide for standard assets in respect of personal loans at the rate of 0.4 percent Sub standard- 10%

Doubtful (up to one year) :100% of unsecured portion plus 20% of secured portion Doubtful (one to three years) :100% of unsecured portion plus 30% of secured portion Doubtful for more than 3 years :100% of unsecured portion plus 50% of secured portion Loss : 100%.

W.e.f April 1, 2007- the provisioning norms for the secured portion of the doubtful assets more than three years are as under -60 per cent with effect from March 31, 2008 -75 per cent with effect from March 31, 2009 -100 per cent with effect from March 31, 2010 (ii) advances classified as ‘doubtful for more than three years’ on or after April 1, 2007- 100 %

Bangladesh Bank sets Provision as per BRPD circular -7 issued by Bangladesh Bank:

A.General Provision: Banks will be required to maintain General Provision in the following way :

• @ 1% against all unclassified loans (other than loans under Consumer Financing, Loans to Brokerage House, Merchant Banks, Stock dealers etc. and Special Mention Account.)

• @ 5% on the unclassified amount for Consumer Financing whereas it has to be maintained @ 2% on the unclassified amount for (i) Housing Finance and (ii) Loans for Professionals to set up business under Consumer Financing Scheme.

• @ 2% on the unclassified amount for Loans to Brokerage House, Merchant Banks, Stock dealers, etc.

• @ 5% on the outstanding amount of loans kept in the 'Special Mention Account' after netting off the amount of Interest Suspense.

• @1% on the off-balance sheet exposures. (Provision will be on the total exposure and amount of cash margin or value of eligible collateral will not be deducted while computing Offbalance sheet exposure.)

The writer is Senior Assistant Vice President of Jamuna Bank Limited.  HYPERLINK "mailto:zahid_2411@yahoo.com"
zahid_2411@yahoo.com

News: Daily Sun/Bangladesh/15-Sep-12