Bank owners seek refinance liquidity support by easing 20% NPL cap, lower provisioning

The Bangladesh Association of Banks (BAB) has urged the central bank to relax eligibility criteria for refinance schemes by removing current restrictions on banks with high non-performing loans (NPLs) and reducing general provisioning for rescheduled loans.

In a letter to the governor yesterday, the association proposed banks with NPL ratio below 20% should remain eligible for refinance and prefinance schemes for at least the next five years. It also requested to reduce the general provisioning requirement for rescheduled loans from 5% to 1%.

Currently, banks with high NPL ratios are often excluded from these facilities, which BAB argues unintentionally limits credit support to productive sectors such as SMEs, agriculture, and exports.

The BAB also sought policy support for income recognition during grace periods and several other reforms to help the sector navigate its current “challenging phase”. 

The letter highlighted that the banking sector is grappling with elevated NPLs, provisioning shortfalls, and liquidity pressures, necessitating coordinated and pragmatic policy interventions to restore investor confidence and maintain credit flow to the real economy.

Reforming rescheduled loan classification, provisioning

BAB has also expressed concerns over the financial impact of current regulatory treatment of policy-supported rescheduled loans. Under existing rules, these loans are generally treated as Special Mention Accounts (SMA), requiring a 5% general provision and carrying a 150% risk weight.

The association argued that these requirements place undue pressure on Capital Adequacy Ratios (CAR) and limit fresh lending capacity. Consequently, BAB requested the central bank to treat compliant policy-supported rescheduled loans as Unclassified (UC), reduce the general provision requirement from 5% to 1%, and assign a more moderate risk weight instead of the current 150%.

Furthermore, BAB pointed to a mismatch where banks incur funding costs on deposits during a borrower’s one-to-two-year grace period but cannot recognise interest income.

The association proposed allowing accrual-based income recognition during the grace period or immediate recognition upon the expiry of the grace period to protect bank profitability.

Addressing capital pressures and tax hurdles

The letter also detailed how certain tax policies and market classifications are hurting the sector’s stability. BAB requested an exemption from the 10% additional tax on stock dividends for banks maintaining capital adequacy under Basel III.

The association said penalising the retention of earnings through stock dividends discourages banks from strengthening their Tier-1 capital.

Additionally, BAB proposed several fiscal measures for the upcoming national budget, including reducing the corporate tax rate for listed banks to 30%, allowing loan-loss provisions as tax-deductible expenses for at least five years, and preventing the automatic migration of banks to the “Z Category” on the stock exchange if they are under approved restructuring or transformation programmes.

Strengthening recovery through AMC and legal reforms

To address “legacy NPL challenges”, BAB proposed establishing a professionally managed national Asset Management Company (AMC). The AMC would acquire large classified portfolios, conduct forensic investigations, and facilitate faster settlements.

On the legal front, the association called for amendments to the Artha Rin Adalat Ain to include ultimate beneficiaries and the introduction of fast-track financial courts. It said judicial bottlenecks, such as the misuse of stay orders, continue to delay the recovery of classified loans.

Bank owners fear return of former directors

Also yesterday, leaders of the BAB met Governor Mostakur Rahman. 

Speaking to reporters after the meeting, BAB Chairman and Dhaka Bank Chairman Abdul Hai Sarker said the association was concerned about a provision in the amended Bank Resolution Act that could allow former bank owners to return to banks.

He said the amended law had created scope for individuals who had siphoned money from banks to return. “People know who took money from banks. If they are allowed to return, public confidence in the banking sector will weaken further, creating the risk of another crisis.” 

He added that the government should consider the issue more carefully. He further said important policy decisions such as amendments to banking laws should be discussed with stakeholders beforehand.

The BAB chairman said the governor had assured them that former owners would not be able to return without fully complying with the conditions outlined in Section 18(A) of the amended law.

The meeting was also attended by former FBCCI president and Shahjalal Islami Bank Director AK Azad, United Commercial Bank Chairman Sharif Zahir, Pubali Bank Chairman Monzurur Rahman and Bank Asia Chairman Romo Rouf Chowdhury.