Central bank steps in to tighten interest relief on loans
The central bank, in an effort to limit generous interest waivers, has reminded banks that they can only waive interest on loans under special circumstances such as the death of the borrower, a natural calamity and the misfortune, and cannot waive the principal amount.
Although a circular issued three decades ago clearly spelled out the special circumstances of partial or full waiver of interest, banks frequently offer interest waivers to customers ignoring these instructions, Bangladesh Bank noted.
Such practices run counter to general lending discipline in the banking industry and may “deter customers from repaying their loans on time to take advantage of the interest waiver”, the central bank said in a circular yesterday.
The new circular clarifies that the loan interest relief facility must be approved by a bank’s board of directors. The managing director of a bank can decide to waive interest on loans up to Tk 10 lakh.
The central bank’s circular says there is a possibility of full or partial loan interest relief due to natural disasters, epidemics, river erosion, catastrophic causes or closed projects.
However, it has recently been observed that interest relief facilities are often provided to certain clients despite the absence of special circumstances as described.
This can lead to customers’ reluctance to repay bank dues on time, which is contrary to discipline in banking. Therefore, the last instruction was given to raise awareness of debt repayment.
Although business activities have been completely normal over the past year, customers have shown no willingness to repay their loans. On the contrary, they took advantage of the interest waiver facilities.
In 2020, Tk 1,578 crore interest on customer loans was waived due to the Covid-19 outbreak, while around Tk 1,855 crore interest was waived in 2021. This means that the amount of interest waived increased by Tk 277 crore in one year.
The circular was issued to clarify the type of interest on loans that can be forgiven as the amount of interest exempt in the banking sector has gradually increased, a senior central bank official said.
According to the circular, interest on loans disbursed in connection with fraudulent activities and on loans granted to intentionally defaulting borrowers cannot be cancelled. It will be necessary for the bank to ensure the recovery of the expenses of the fund before waiving the interest.
In addition, the conditions for recovering the expenditure of the funds are relaxed in certain cases, namely: a project closed for three years, failure to recover the loans despite taking the necessary measures, the death of the borrower and the loss due to a natural calamity, an epidemic, river erosion.
Banks will need to review the borrower’s financial statements for the past three years to waive interest on loans for which these statements are required. Interest cannot be waived if the owners’ equity is positive according to the latest audited financial statements.
The circular also indicates that banks must take into account the impact of waiving interest on their own financial situation. The capital, profitability and other important financial indicators of the bank must also be reviewed.