Loan interest

Limit blind interest waivers on loans

| Updated:
April 25, 2022 10:02:39 p.m.

The pandemic, meanwhile, has created more problems that require skillful management. Hopefully the government, the BB and the bankers will take the opportunity and try to solve these

The decision of the Bangladesh Bank (BB) to curb the indiscriminate waiver of interest on loans by part of the banks is long overdue. Unlimited interest relief and loan forgiveness are seen as two major issues facing the banking industry. Together, these factors have reduced the profitability of banks, on the one hand, and deprived the government of a substantial amount of tax revenue, on the other.

Banks have exercised full freedom to waive interest on loans, ignoring methods detailed in a circular issued by the central bank nearly three decades ago. Now the BB has come up with a new circular that advises banks on what to do with interest waivers.

Uncontrolled interest relief has had an economic impact on banks. In 2018, interest waived by banks amounted to 11.94 billion taka and the amount almost doubled in 2019 to 22.93 billion taka. The volume, however, decreased during the 2020 pandemic to 15.87 billion Tk. But the upward trend returned in 2021 when the total volume of waived interest rose to 18.55 billion taka.

The old circular BB had retained a total or partial exemption from interest on loans in the event of natural disasters, epidemics, river erosion or closure of projects affecting the borrowers concerned. But the banks have, most of the time, granted exemptions beyond the causes specified in the circular BB. They were more interested in getting their principal amount back. Such a move, however, gave rise to the unethical practice of withholding loan repayments by a portion of borrowers to force banks to waive interest. Here, many suspect the complicity of some unscrupulous bank officials.

The central bank’s latest decision on interest relief would surely raise some questions. One could seek to know (BB) the reasons for which one has been so long indifferent to the question. The BB’s inaction has resulted in a beggar-thy-neighbour situation of banks giving up credit. This is evident from the amount of interest relief on canceled loans. In 2020, the amount of canceled interest (15.87 billion taka) was almost double the volume of canceled bank loans (9.7 billion taka). Banks must retain a 100 percent provision against loans written off from their operating profits. But such provisioning is not mandatory with interest waivers.

The central bank in its latest circular tried to discipline interest relief on loans. He clarified that under no circumstances would the banks offer a waiver facility for willful defaults. The burden of classified loans is enormous, and it must be reduced for the best interests of the banks and the country’s economy.

Unfortunately, the circles concerned, although fully aware of the problems facing the banking sector, have yet to take a significant step in this direction. The pandemic, meanwhile, has created more problems that require skillful management. Hopefully the government, the BB and the bankers would take the opportunity and try to solve these problems.