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Definition' of defaulters

BB succumbs to pressure to change rules

By imran Ahmed
As pressure on the central bank mounted to relax the present bar on giving loans to defaulters, Bangladesh Bank has tried to saleguard the banks by suggesting some changes in the rules.
According to sources concerned. the finance ministry was under tremendous pressure from a vested group to change the definition of a defaulter. The group felt that Section 5 of the Bank Company Act should be changed to allow giving loans to companies related to a defaulting company or person.
Currently, if a company or
person becomes a defaulter, other companies related to the company or person are also denied fresh loans.
But the vested business group felt that due to this rule, many good companies are denied funds just because one company related to them has defaulted loans. This condition, they claimed, is also making others sick.
The business group first expressed the concern when the central bank started cracking down on defaulters in 1997 ana many big business groups were denied loans.
With the election year ahead, the same quarter found it an appropriate time for change of the rule and embarked on a massive lobbying.
The finance ministry later contacted Bangladesh Bank asking for its advice. Sources said the central bank told the ministry that discipline in the banking sector was restored to some extent through such stringent rules and changes would not be good for it
But later, under some compulsion. Bangladesh Bank sug-f’ested some changes and those tave also been approved by the cabinet.
As per the changes, if the loans of a company are considered sub-standard or doubtful, these would not bar a related company of the same group from getting fresh loans. But if the loans become bad. the related companies would be barred.
On the other hand, if a person has less than 20 per cent share in a defaulting company, this would also not hamper his getting fresh loans for a related company.
While such changes in the rules are likely to make the banks once again vulnerable to defaulters, the central hank Is also facing pressure from the finance ministry to change the current classification standard. The current standard stating that a loan would be considered classified after repayment failure for three months was applied from January. 1099
But now. the finance min-fstry wants reverting to the old system when a Ioan was considered classified after six months of repayment failure.
In a recent CPD dialogue, Finance Minister S A M S Klbrla had openly requested Bangladesh Bank Governor Dr M Farashuddin to reconsider the new standard as he felt it was applied without considering the ground reality.
Dr Farashuddln however curtly replied that he would be defeated If the standard Is changed.
"There is no reason to change the standard, ' said a Bangladesh Bank source “ We e xpected that classified loans of
the banks would increase by seven per cent when the new standard was applied. But now we find (hat it increased only by one per cent. So. there is no correlation between the new standard the increase in classified loans. The whole purpose of banking sector reform would be defeated if we change the system "