Posts in category: Banlgadesh Bank

Banks will have to pay 4% “penal interest” if they fail to repay loans taken from the Export Development Fund (EDF) formed from the country’s foreign exchange reserves on time, according to a circular issued by the Bangladesh Bank on Sunday. 

The central bank has made the decision as several banks have been delaying the repayment of EDF loans for a long time, officials concerned have told The Business Standard.

Data obtained from the central bank on 19 March show that the outstanding amount of EDF loans currently stands at $5.5 billion.

To reduce the strain on its reserves, the central bank has been more aggressive in recovering outstanding EDF loans than disbursing new loans from the fund. In the last two and a half months, the amount of outstanding EDF loans has been reduced by over $1.5 billion.

According to central bank sources, the size of the EDF at the beginning of January this year was more than $7 billion, which was reduced to $6 billion by the third week of the month.

A senior official of the central bank said that the size of the EDF is regularly being reduced in accordance with the advice of the IMF.

According to the central bank’s guidelines, foreign exchange assistance is provided to exporters for importing raw materials under the EDF. An EDF loan has a tenor of 180 days and this period can be extended by another 90 days subject to the approval of the Bangladesh Bank. But, many banks failed to repay EDF loans even long after the completion of the extended period, prompting the central bank to impose penal interest.

The latest circular of the central bank says that the penal interest or compensation in the case of Shariah-based Islamic banking will be charged at a rate of 4% per annum above the prevailing interest rate on the overdue amount of EDF loans for the delayed period.

According to industry insiders, the interest rate of EDF loans was previously determined in accordance with the London Interbank Offer Rate (Libor). Until the beginning of the Covid-induced economic downturn, the interest rate of EDF loans was fixed by adding 1.5% to the 6-month average Libor.

However, to reduce the cost of funds amid the coronavirus pandemic, the interest rate was fixed at 2% in the first phase. Later on 20 July last, the rate was increased to 3%. Finally, the Bangladesh Bank increased the interest rate to 4.5% in January this year.

According to several sources of the central bank, the size of EDF will be downsized by another $2-3 billion within the next six months.

The central bank is planning to phase out foreign currency lending from EDF, which is made up of foreign currency.

The IMF delegation that visited Dhaka in December last year to discuss the terms and conditions for the $4.5 billion loan also suggested that the central bank exclude the existing EDF loans from its reserve calculation, sources at the central banks told The Business Standard.

Anwar-ul Alam Chowdhury, chairman of Evince Textiles Ltd, told TBS, “EDF was instrumental to increasing our country’s exports. Through this, traders could take funds at low interest. The latest central bank instruction will discourage them from doing so.”

“If the interest rate of this fund is high, the product cost will also be high, which will trigger sales problems. It is true that the government is under some pressure because of the IMF’s loan conditions, but phasing out EDF should have been done slowly. At least a year would have given everyone a chance to sort it out,” he said.

“Backward linkages will face some major problems as they have to bring the cotton in advance. Besides, textile mills import yarn with EDF funds. At present, they have fewer orders, and if the import cost becomes high, they will face a big problem,” Anwar-ul Alam Chowdhury said.

The central bank has reduced the size of the EDF but created a new fund of Tk10,000 crore as part of its decision to build an EDF in local currency to support exporters by providing loans at 4% interest.

In this regard, several exporters said the problem remains even if the fund is provided in local currency. Because Bangladeshi traders have to pay more than Tk110 for a dollar to import goods but get a lower rate when they export.

At present, the gross foreign currency reserves of the country stand at $31.28 billion, but if the IMF calculation is taken into account, the figure will be nearly $24 billion, according to central bank sources.

Infograph: TBS

Default loan rescheduling and loan interest waivers have increased at an unusual rate in the banking sector, according to the latest Bangladesh Bank data.

Lenders waived off some Tk5,064 crore while rescheduling loans throughout 2022. It is Tk3,209 crore higher than that of the previous year.

For such a situation, sector insiders blamed the liberal policy of the central bank which empowered bank owners to waive loan interests on nominal down payments.

Besides, the desperate attitude of banks to recover outstanding loans which got stuck thanks to pandemic-induced relaxed policies also contributed to the surge in waived-off interests.

“All the benefits of loan rescheduling and waiver are received by some large borrowers, who are mostly wilful defaulters,” Salehuddin Ahmed, former central bank governor, told The Business Standard.

“Currently the banking sector is very unfortunate. The central bank is not taking proper actions, banks are tactfully making their balance sheet look good. No one is giving due importance to protecting the interests of the depositors.”

“The central bank should play a stronger role to curb such irregularities in the banking sector. For example, strict measures should be taken if any customer defaults. At the same time, new loans should be scrutinised properly,” he added.

According to the Bangladesh Bank, banks waived off Tk1,194 crore in loan interest in 2018 as the figure jumped to Tk2,293 crore next year. It dropped slightly to Tk1,578 crore in 2020 and spiralled again to Tk1,855 crore in 2021.

Besides, banks rescheduled loans of Tk27,279 crore in 2022, almost two times more than Tk12,380 crore in 2021. It was Tk13,468 crores in 2020.

Thanks to the latest interest waivers, the amount of defaulted loans of banks fell to Tk1.20 lakh crore at the end of December 2022 from Tk1.32 lakh crore in January of that year, Bangladesh Bank data said.

“It would have been good if banks had waived interest on bad loans [to small borrowers]. The benefit of the interest waiver is gone to large groups, unfortunately,” a central bank official, wishing to remain unnamed, told The Business Standard.

Last year, a Chattogram-based group got large amounts of interest waiver from National Bank and a state-owned bank, he added.

Regarding defaulted loans, former governor Salehuddin Ahmed said, “This is not the actual amount of defaulted loans in the banking sector. The figure has been hidden in various ways.”

“International rating agencies are marking our banking sector negatively, which is bad for the overall economy. Our imports will suffer and interest rates on foreign loans will increase, as a consequence. Mass people will be the ultimate sufferer,” he added.

“Now, many banks are in a liquidity crisis.  At the same time, their defaulted loans are increasing. Such banks are set to see more difficulties soon,” a private bank managing director, asked not to be named, told TBS.

“Banks have been stuck with defaulted loans of customers for a long time. Hence, they are trying to recover their money even though they need to waive some amounts, which is why interest waivers have been on the rise,” he added.

The Bangladesh Bank, in a circular in July last year, empowered boards of banks for rescheduling new loans on 2.5-4.5% deposits. Prior to that, the central bank’s approval was required to regularise the loans and 10-30% deposits were mandatory. Besides, the time limit for repayments was extended up to eight years, from the previous two years.