The new loan classification and provisioning rules of the Bangladesh Bank may give rise to default loans in the short-term, but will ultimately reduce the number of wilful defaulters and benefit both banks and borrowers, according to a BB study.

The central bank in the study said, if the rules are followed strictly, the amount of default loans as well as the banks' insolvency will fall in the long run.

The study found that the amount of default loans may increase by only 2.38 percent over the existing amount under the new rules.

On March 31, the total default loans in the banking sector stood at 6.57 percent of their outstanding loans. The percentage could be 8.95 percent on the same day if the amount was calculated under the new rules, the BB found in the study.

The central bank presented the study report to the heads of credit departments of all banks yesterday.

The BB also organised a workshop at its head office where its Deputy General Manager Anwarul Islam showed the study results through a presentation.

BB Deputy Governor SK Sur Chowdhury at the workshop said some influential borrowers have repeatedly got their huge amount of default loans rescheduled.

The workshop was organised to remove misunderstandings created among the bankers regarding the new decision.

the new policy does not provide scope for rescheduling loans for more than three times, new entrepreneurs will get more access to loans and the banks will also overcome their liquidity crisis, Chowdhury said.

Islam said the new rules were issued to ensure accurate asset valuation in financial reporting and maintain the appropriate asset quality of banks in the changing global economic environment.

According to the changes in rules the central bank brought in June, if a loan remains in default for three months, it would be classified as substandard.

It means the borrower will not face any difficulty in getting new loans but the bank will have to keep 20 percent provisioning of the sub-standard loan.

Also, in line with the new rules, no loan can be rescheduled for more than three times.

After a new circular was issued in this regard, both business community and banks have requested the central bank to reconsider the decision.

However, BB officials said the impact of the new decision would be minimal.

According to Islam, the new decision will ensure better recognition of losses at banks, proper calculation of their income, and avoidance of overstatement of capital.

He also said the new rules will increase the banks' resilience, ensure better management efficiency, and bring transparency in financial reporting and discipline in the industry.

Islam said good borrowers will not face any adverse impact; instead, credit flow will increase to new entrepreneurs and productive sectors.

The number of habitual defaulters will fall and depositors' interest will be better protected, he said.

The Daily Star/Bangladesh/ 17th July 2012