BB’s bailout plan for affected businesses meets bankers’ resistance

A bailout policy-support committee constituted by the Bangladesh Bank (BB) has sought commercial banks’ support to prop up the non-wilful loan defaulters that were in a jam due to unforeseen circumstances.

The committee aims to assist businesses that have been adversely affected by various factors, including the COVID-19 pandemic, the Russia-Ukraine war, energy price hikes, US dollar shortages, and the mass uprising in July-August 2024.

To implement its mission effectively, the committee plans to engage directly with the chief executives of commercial banks, motivating them to reschedule loans for non-wilful defaulters – those who failed to repay due to external factors, rather than willful neglect.

However, at the committee’s last meeting held recently, it became evident that some commercial banks were hesitant to offer any more loan-restructuring, citing their own financial struggles, said sources.

Many of these banks are already grappling with a significant volume of non-performing loans (NPLs) and are facing a financial crisis of their own.

A number of bank officials participating in the meeting raised concerns that rescheduling loans for non-wilful defaulters might worsen their already fragile financial condition.

At the same time, some bankers suggested that the existing rules and regulations are sufficient to address the current challenges, while others expressed reluctance to recommend policy changes.

They stressed that any intervention from the central bank should align with national and international best practices and should not disrupt the stability of the banking sector.

In this situation, the bailout committee is working to strike a balance between helping the businesses and not deteriorating the banking sector’s health by adopting a bank-led remedial measure.

Efforts to identify affected businesses

To address these concerns, the committee has outlined a clear process for identifying businesses that deserve support.

Mamun Rashid, a former banker and committee member, said they requested the commercial banks to identify businesses that have been impacted by the factors mentioned earlier. The committee has set a threshold, focusing on businesses with loans of Tk500 million or more. These businesses will be scrutinised carefully to ensure that the support reaches those truly in need.

“We have already held two meetings, including one with the chief risk officers (CROs) of 15 private commercial banks. Our goal is to identify businesses that were impacted by the pandemic, the Russia-Ukraine war, and other unforeseen events,” said Mamun Rashid.

After identifying the deserving non-wilful defaulters, the committee will make a final selection and recommend the rescheduling of loans where appropriate.

Bankers’ reluctance and committee’s strategy

Despite the committee’s efforts, some banks remain hesitant to extend further rescheduling opportunities, citing previous bad experiences. Many lenders said they were struggling with bad loans, and providing additional leeway could worsen their financial position. Some banks have even questioned the necessity of changing existing regulations to accommodate non-wilful defaulters, arguing that current rules should suffice.

To address this, the committee has decided to involve the Bangladesh Bank governor and the CEOs of the commercial banks in the next round of discussions. This collaboration aims to find a balance between assisting affected businesses and protecting the financial health of the banking sector. By drawing on international models from countries such as Indonesia, Thailand, Sri Lanka, India, and the Philippines, the committee hopes to build a sustainable solution that supports businesses without exacerbating the NPL crisis.

“We will adopt a bank-led model and ensure that any restructuring efforts align with international best practices. Our focus is on providing support to businesses that have been genuinely impacted, without overburdening the banking sector,” Rashid explained.

Support for employment-generating businesses

The committee’s primary focus is on businesses that contribute to the country’s industrial sector, particularly those generating employment. Many of these businesses are facing dire circumstances and risk closing down due to their inability to repay loans.

The committee hopes to provide them with the opportunity to continue operations, thus preserving jobs and contributing to the economy.

Shams Mahmud, president of the Bangladesh Thai Chamber of Commerce and Industry, welcomed the formation of the bailout committee, acknowledging that the pandemic and other crises have caused widespread damage to business operations. Many businesses, once compliant borrowers, have become defaulters due to circumstances beyond their control.

With the central bank’s intervention, these businesses may get a lifeline, enabling them to regain their footing and contribute to the country’s economic recovery, he added.

He said that, “The initiative from Bangladesh Bank comes at a critical time when many businesses are struggling to recover from the multiple shocks they have faced in recent years.

“Genuine businessmen may become loan defaulters for various reasons, as every business faces fluctuations. For example, a strike or issues in a factory can affect neighboring factories as well. Considering these factors, an exit policy is necessary.”

Mohammad Hatem, president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said in the past, loan rescheduling was provided only to certain influential individuals. However, with the Bangladesh Bank’s current initiative, genuine victims will benefit.

“While the path forward remains fraught with challenges, the committee’s efforts represent a proactive step toward helping businesses recover and thrive once again,” he added.

Regulatory support and bankers’ concerns

Despite the committee’s efforts to offer support, there is considerable reluctance among some banks.

Mohammad Nurul Amin, former president of the Association of Bankers Bangladesh (ABB) and chairman of Global Islami Bank, said positive results can only be achieved if the central bank works free from outside influences and strictly follows the law. Otherwise, no measures will be fruitful.

The cooperation of the commercial banks will be crucial in ensuring that the initiative benefits those most in need, without destabilising the broader financial system, he added.

Another senior banker, who requested not to be named, expressed concerns about the current financial situation, stating that banks are not in a position to offer additional support to defaulters at this time due to ongoing financial challenges.