Banks can show interest receivables as income

Banks can show interest receivables for 2022 as income on their books on the term loans that have been extended a relaxed repayment facility up to December, said the central bank yesterday.   

Interest receivable is the amount of interest that has been earned but has not yet been received in cash.

On December 18, the Bangladesh Bank relaxed its loan repayment policy, saying the real income of borrowers has fallen due to the severe impacts of the prolonged Russia-Ukraine war.

Thanks to the relaxation, borrowers can avoid being classified as a defaulter if they clear 50 per cent of their instalments payable in the final quarter of 2022 instead of 75 per cent previously.

At the time, the BB did not specify whether the interest receivables could be transferred to the income segment and provision has to be kept and if yes, by how much. 

In a notice yesterday, the BB said banks can transfer the interest receivables on the term loans to their income sector after analysing the risks facing the recovery of such advances.  

The move has been taken to keep the foundation of banks solid and raise their shock-absorbing capacity, it said. 

The interest receivables on the rescheduled and restructured loans or on the loans that have been given a one-time exit facility can't be shifted to the income segment if the interest is not realised in the form of cash.

Besides, an additional 2 per cent general provision has to be kept against the loans. This means banks will have to keep a total of 3 per cent provision from the existing 1 per cent.

Lenders will have to earmark an additional 1 per cent provision for the cottage, micro, small and medium enterprises. They usually keep a 0.25 per cent provision for such borrowers.

The provisions have to be transferred to the Special General Provision-Covid-19 sector and they can't be shifted to any other sector until further directive from the central bank.

A BB official says that banks will be able to transfer the interest receivables of the loans that have enjoyed the relaxed repayment facility, to their income segment. But it will inflate the profit of banks artificially.

Such inflated profits can be tackled by the way of imposing an additional provision on the loans, he said.

The BB circular says that if the loans are fully repaid, banks can move the additional general provision to the income segment of their books at their own discretion. And when the classified loans are backed by a required specific provision, the additional general provision can be shifted to proper sectors. 

Term loans carry a repayment tenure of more than a year.

The latest extension in the repayment period came less than two weeks after the Federation of Bangladesh Chambers of Commerce and Industry pressed for a relaxed loan classification policy until June next year.

Experts, however, warn that default loans in the banking sector may increase further once the relaxed facility is withdrawn.

Bad loans hit a record Tk 134,396 crore in September, accounting for 9.36 per cent of the total outstanding loans of Tk 1,436,200 crore in the banking industry, BB data showed. A year earlier, the ratio was 8.12 per cent.

The loan repayment rules were relaxed at a time when banks are facing a liquidity crisis due to the shortage of loanable funds.

So, if borrowers pay their instalments partially, the ongoing fund shortage will deepen further, said the managing directors of two banks earlier.