Loan rescheduling and impact on Banking Essay

THE  central bank  extended a set of new facilities to loan defaulters to give them a fresh lifeline, stoking fears of further deterioration in the banking sector’s financial health.

As per the new policy, 

#the defaulters will be allowed to reschedule their classified loans by making a down payment of only 2 percent instead of the existing 10-50 percent.

#A maximum 9 percent interest will be charged on the rescheduled loans while the existing interest rate is 12-16 percent.

#Besides, the tenure for repayment is 10 years with a grace period of one year.

#Based on the bank’s relationship with the client, the accrued interest on the defaulted loan can be waived, leaving the defaulter to pay only the principal amount with the new interest rate of 9 percent. 

#Businesspeople from wheat, food stuff and edible oil manufacturing sectors, and shipbuilding, ship-breaking, steel and aluminium industries will get the facilities straightaway. Defaulters from the other sectors will have to face special audit.

#If a defaulter wants to clear his or her debts to the bank in one year, the interest rate would be just the lender’s cost of fund.

#At present, the banks cost of fund ranges from 7 to 9 percent.

Impact on Banking :

#The expert thinks The new waivers for defaulters would cast a shadow over the whole banking sector.

#Good borrowers will be discouraged to repay their loans. The latest directives of the central bank will jeopardize the banking sector, while loan defaulters will gain undue advantage

This will be devastating for the banking sector

The policy will encourage wilful defaulters to continue with their shady activities without repaying the depositors’ money. It will weaken the foundation of banks

Earlier, the central bank had extended such facilities back in January 2015 but the move did not yield any success.

The latest move will bring down defaulted loans for the time being, but the amount will go up again once the grace period ends.

The BB instructed banks to withdraw the facilities if the clients do not pay their instalments regularly after the grace period is over.

In case of monthly instalments, if the client fails to pay up for six months straight, the facilities will be taken back. In case of quarterly instalments, two back-to-back non-payments will result in cancellation of the facilities.

Collected from Facebook