A Brief Analysis on the Bangladesh Bank’s Exit Policy for Loan Defaulters
In a bid to manage the growing challenge of non-performing loans, the Bangladesh Bank has introduced an exit policy that offers a structured and flexible approach for defaulted borrowers to settle their debts. This policy, detailed in a recent circular from the central bank, allows defaulters up to three years to repay their loans, provided they make an initial down payment of at least 10% of the outstanding amount. This move is intended to maintain liquidity in the banking sector and reduce the volume of non-performing loans, which currently holds at a significant chunk of the total disbursed loans.
Read the Exit Policy (BRPD Circular No. 13, dated 08.07.2024)
Key Features of the Exit Policy
- Down Payment and Repayment Period: Borrowers must pay a minimum of 10% of their defaulted loan amount upfront. They are then allowed to repay the remaining balance over a three-year period. This facility is designed to facilitate gradual debt clearance without the burden of immediate full repayment.
- Non-restructuring Nature: The exit facility is distinct from traditional debt rescheduling or restructuring. Borrowers utilizing this option will remain classified as defaulters until the entire loan is cleared, and they will be ineligible for new credit during this period.
- Bank Implementation and Oversight: Banks are responsible for determining the repayment schedule within the three-year timeframe and must annotate the status of these loans in the Credit Information Bureau. Applications for the exit facility are to be settled within 60 days, and bank management can approve loans up to Tk10 lakh, while higher amounts require board approval.
- Interest and Security Provisions: Interest may be waived according to central bank policies, but if the loan is not repaid within the stipulated period, waived interest will be reinstated, and the exit facility revoked. Security against the loan cannot be released until full repayment, though it can be adjusted through the sale of mortgaged property.
Benefits and Limitations
The new policy offers significant benefits to borrowers, particularly those facing financial difficulties that hinder immediate repayment. It provides a structured pathway to become debt-free without immediate full repayment pressure, potentially improving the liquidity and financial stability of both borrowers and banks.
However, the policy also has limitations. Borrowers remain classified as defaulters during the repayment period, limiting their access to new credit. Additionally, the success of the policy heavily depends on the diligent implementation by banks and the borrowers’ ability to adhere to the repayment schedule.
Context and Future Implications
Historically, the Bangladesh Bank has implemented various policies to manage defaulted loans, including a one-time exit policy for large borrowers in 2019. The current policy expands these efforts, offering a more inclusive and structured solution for all borrowers.
Looking ahead, the exit policy is expected to play a crucial role in stabilizing the banking sector. By reducing the volume of non-performing loans and maintaining liquidity, it could foster a more resilient financial environment conducive to economic growth. However, continuous monitoring and adjustments may be necessary to address any emerging challenges and ensure the policy’s effectiveness in the long term.