Bangladesh Bank on Thursday tightened its interest waiver guidelines, requiring banks to seek prior central bank approval for such a waiver if the borrower is a director or a family member of the director or any entity in which the director has an interest.
The BB gave the instruction because many customers were reluctant to pay bank loans to take advantage of the interest relief option.
A BB circular issued the day in this regard stated that there were provisions for the partial or full waiver of interest on customer loans for a number of reasons, including death of customers, natural disaster, river erosion, misery and branch closures.
The central bank, however, has observed lately that banks so often use the ability to waive customer interest, the circular said.
As a result, many customers refrain from paying bank loans to take advantage of the possibility of interest relief and such a trend runs counter to the lending discipline in the banking sector.
In the current environment, the central bank has issued a set of new instructions to banks regarding the waiver of interest to sophisticated customers on the repayment of loans, in order to maintain discipline in the sector and protect the interests of customers.
The new instructions would apply to all kinds of taxed and untaxed loan interest, the BB circular said.
The central bank has also asked the banks to formulate respective interest waiver guidelines based on the latest instructions.
In accordance with the new instructions, the BB has prohibited any principal waivers.
Interest on falsified loans and interest on loans taken out by willful defaulters should not be waived.
Interest should not be removed by deducting from any bank income account, he said.
Interest cannot be canceled without the approval of the bank’s board of directors.
However, the management may be empowered to decide on loans up to Tk 10 lakh.
In the event of exemption from interest, the banks will have to ensure the recovery of its cost of financing.
The BB, however, has relaxed the provision for a number of cases – if a project remains closed for more than three years, if the cost of the fund cannot be realized by selling the pledges, co-pledges and personal assets of project contractors, if collection efforts, including filing, are unsuccessful and if the borrower dies or the borrower becomes default or unable to repay the loans due to a natural disaster.
To ensure the necessity of interest relief clauses, banks will have to carry out an internal audit while taking the opinion of the head of internal control and compliance.
Assessing borrowers’ three-year financial statements was imposed as another condition for Interest Relief and Interest Relief would not be issued if the entity’s equity was found to be positive.
In waiving interest, banks will need to assess its impact on it and in doing so, banks will need to apply due diligence such as capacity adequacy and profitability.