Global rating agency Moody’s has said that the revised loan write-off policy of Bangladesh Bank would not be able to reduce non-performing loans significantly due to the weaknesses in corporate governance and lengthy legal processes.
Bangladesh Bank on February 6 relaxed the loan write-off policy allowing banks to write off a loan worth below Tk 2 lakh without filing lawsuit. In the previous policy, the limit was Tk 50,000.
The revised policy also allows banks to write off bad loans after three years of the loans becoming classified without any possibility of recovery in near future.
The previous policy allowed banks to write off bad loans after five years of the loans becoming classified.
‘We do not expect any significant increase in amounts written off following the announced changes. The system-level NPL ratio will remain elevated because the formation of NPLs are likely to persist as a result of the weaknesses in corporate governance and difficult and lengthy legal processes, which are the main drivers behind the weak asset quality of Bangladeshi banks,’ Moody’s said.
It said that the new policy encouraged the banks to write off loans earlier, they might be reluctant to do so as banks with significant legacy of NPLs were already facing profitability and capital pressures, and writing off bad loans would entail higher provision costs, which banks would prefer to avoid.
‘The banks are also likely to keep bad loans on the balance sheet given that the extended period of loan recovery reflects weaknesses of the legal system rather than the inability of borrowers to repay,’ Moody’s said.
It said that the loan recovery process in Bangladesh was long and the legal process was difficult and lengthy because of overburdened courts and repetitive writ petitions.
Moody’s recommended that the banks continue with recovery efforts after writing off loans and take prior approval from the central bank to write off loans related to bank directors.
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