Bangladesh Bank has recently issued a policy framework aimed at providing policy support to the country’s business community. Earlier, Bangladesh Bank had offered special loan rescheduling facilities to some prominent businessmen, particularly large business enterprises. Compared to the special loan rescheduling facility, this policy support has been adopted in a somewhat broader scope, which includes: (1) eligibility for policy support, (2) types and nature of policy support, (3) special loan rescheduling facility, (4) policy support in the context of losses caused by foreign exchange rate fluctuations, (5) special loan restructuring facility, (6) special loan transfer or exit facility, and (7) procedures for application and disqualification for policy support.
Although both the special loan rescheduling facility and the new policy support have been introduced to assist the business community, there are some clear differences between the two.
First, the special loan rescheduling facility was a very limited measure, focusing mainly on repayment of loans and maintaining their status as performing loans. In contrast, the policy support incorporates some extended facilities. Second, the special loan rescheduling facility did not include any provision for granting new loans, whereas the new policy support does. Most importantly, following the issuance of this policy support circular, the loan rescheduling facility has now become a part of this broader policy framework.
However, several limitations and inconsistencies have been observed in the circular on policy support.
First, the policy states that those who have been affected by disruptions in international trade supply and by abnormal currency depreciation will be eligible for this support. But the issue of international trade supply disruption is so subjective that it is difficult to prove with documents. As a result, this will create misunderstandings between clients and bankers, and many will be deprived of this facility.
Second, under this policy, priority in loan rescheduling is given to those who have never previously availed rescheduling facilities. This means a businessman who never rescheduled his loan before but whose business has now collapsed will get priority. On the other hand, a businessman who once availed rescheduling and kept his business alive—and who could do even better with a little more support—will either receive this support much later or not at all, simply because he is lower on the priority list. In effect, those who diverted bank loans elsewhere will be in a more favorable position to receive policy support, while those who struggled hard to keep their businesses afloat through rescheduling will find themselves in the worst position.
The terms for loan rescheduling have also been made stricter regarding maximum tenure and down payment. Under the new policy, a 2% down payment is required, whereas under the previous special rescheduling facility it was only 1%. Moreover, those who previously rescheduled three or more times must pay an additional 1% down payment. This raises the question: if businessmen are already in trouble, how will they manage to arrange such large down payments? Those who are not in financial difficulty do not need policy support anyway. Yet those who are in crisis are being asked to pay significant amounts upfront in order to access support. How this is supposed to work is difficult to understand.
Similarly, the maximum repayment tenure under this policy support has been set at 10 years, compared to 15 years under the earlier special rescheduling facility. This will result in higher monthly or quarterly installments. The most critical point is that if the installment amount exceeds the cash flow generated from a businessman’s business, he will be unable to make payments even if he wants to.
In determining maximum tenure for rescheduling, the guiding principle should be to ensure that monthly or quarterly installments remain below the borrower’s cash flow. For instance, in the US and Canada, the maximum mortgage tenure was 25 years. But when interest rates shot up in recent years, debt servicing became unmanageable, and many borrowers faced the risk of default. To avoid this, banks in those countries, despite going beyond established norms, extended the tenure from 25 to 35 years. This reduced installment amounts and allowed borrowers to continue repayment, thereby preventing mass defaults. Interestingly, this move attracted little criticism, and many people are not even aware of it. The key point is: shorter loan tenure may seem good at first glance, but in reality, it pushes borrowers toward default. Conversely, longer tenure may look unfavorable but actually motivates borrowers to repay. For some reason, Bangladesh Bank does not seem to consider this critical issue while setting loan tenures—whether in this policy support or in any other loan-related policies.
The circular on policy support also mentions the provision of new loans, but it has not clarified the matter. This needs to be stated more clearly. Without access to new loans, it will not be possible to keep businesses running, which will disrupt cash flows and make repayment of installments impossible. Similarly, the matter of interest rates has not been addressed at all. Regardless of other measures, if high interest rates persist, no business can survive. If direct access to bank loans at lower interest rates is not possible, then alternative mechanisms must be explored—though that is a separate issue beyond the scope of this discussion.
Another important point is the time frame for policy support, which has been set at 9 months to 1 year. Yet the situation of businesses is so fragile that waiting this long will only make things worse.
Bangladesh Bank’s initiative of policy support is commendable. But unless its limitations and inconsistencies are removed, and unless its terms are made simple, straightforward, and practical, businesses will not benefit. Otherwise, this initiative will remain nothing more than a paper-based exercise. Our expectation is that Bangladesh Bank will take these matters into consideration.
The writer is Certified Anti-Money Laundering Specialist & Banker, Toronto, Canada
