Reining in indiscriminate loan interest waivers

Saturday, 23 April 2022

The pandemic, meanwhile, has created more problems that need deft handling. Hopefully, the government, the BB and the bankers would rise to the occasion and try to resolve those

The decision of the Bangladesh Bank (BB) to rein in indiscriminate waiving of interest on loans by a section of banks has been long overdue. Unrestrained interest waivers and loan write-offs are viewed as two major problems facing the banking industry. Together, these factors have been cutting banks' profitability, on the one hand, and depriving the government of a substantial volume of tax revenue, on the other.

The banks have been exercising full freedom to waive loan interest, ignoring the methods explained elaborately in a circular issued by the central bank almost three decades back. Now, the BB has come up with a new circular that advises banks on what they should do with interest waivers.

The uncontrolled interest waivers have been taking an economic toll on the banks. In 2018, the interest waived by banks amounted to Tk 11.94 billion and the amount almost doubled in 2019 to Tk 22.93 billion. The volume, however, declined in the pandemic-hit 2020 to Tk15.87 billion. But the uptrend returned in 2021 when the total volume of waived interest rose to Tk.18.55 billion.

The old BB circular had kept a full or partial waiver of interest on loans if natural calamities, epidemics, river erosion, or closure of projects affected the borrowers concerned. But the banks, most of the time, have been granting waivers beyond the causes specified in the BB circular. They have been more interested in getting back their principal amount. Such a move, however, has given rise to the unethical practice of holding back loan repayments by a section of borrowers to force the banks to waive interest. Here, many suspect the complicity of some unscrupulous bank officials.

The central bank's latest move on the interest waiver, surely, would trigger a few questions. One might seek to know from it (BB) the reasons for being indifferent to the issue for such a long time. The BB's inaction has given rise to a free-for-all situation, as far as loan waiver by banks is concerned. This is clear from the sizes of interest waivers vis-à-vis written-off loans. In 2020, the amount of interest waived (Tk.15.87 billion) was almost twice the volume of bank loans written off (Tk 9.7 billion). Banks have to keep 100 per cent provision against the written-off loans from their operating profits. But such provisioning is not mandatory with interest waivers.

The central bank in its latest circular has tried to discipline the interest waivers on loans. It has clarified that under no circumstances would the banks offer a waiver facility to wilful loan defaulters. The burden of classified loans is huge, and it needs to be downsized for the greater interest of banks and the country's economy.

Unfortunately, relevant quarters, despite being fully aware of the problems confronting the banking industry, are yet to make a meaningful move in that direction. The pandemic, in the meantime, has created more problems that need deft handling. Hopefully, the government, the BB and the bankers would rise to the occasion and try to resolve those.