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Strict rules for large loan restructuring

Rejaul Karim Byron
***RESTRUCTURING TERMS
Maximum tenure of 12 years
Discounted interest rate Down-payment in cash Repayment in quarterly instalments**
Bangladesh Bank has now followed through on its decision to allow restructuring of large loans until June 30 with a watertight guideline for banks to ensure no further defaults on the loans.
Political turmoil for the best part of last fiscal year has damaged many large borrowers' business and their debt servicingcapacities.
Given that the affected
large borrowers have significant importance from the socio-economic and employment generation perspective, the BB board on Wednesday agreed to extend restructuring
facility to them on their loans ofTk500 crore and above.
The guideline, circulated on Thursday, said the restructuring facility would only become effective after the receipt of down-payment of at least 2 percent of the outstanding amount in cash.
If the outstanding amount is upwards ofTk 1,000 crore, the down payment would then be 1 percent of the sum.
The loans would have to be repaid in quarterly instal-
ments; the failure to pay two consecutive instalments would be considered as default and the restructured facility cancelled.
Incomes from the restructured loans shall be accounted for only when they are actually received.
All restructured loans would be treated as special mention assets (SMAs). SMAs are potentially weak loans or assets presenting an unwarranted credit risk but are less risky than substandard assets.
Assets listed for special mention generally reflect weaknesses in administration, servicing or collection. Consequently, the banks will have to keep provisioning, with the amount calculated at the existing rate forSMA along with a further 1 percent.
As collateral, the banks should obtain: charge documents covering the restructured loan amounts, corporate guarantees from the business concerns of the groups and personal guarantees from all the directors/owners. They should also try to raise more physical collaterals to cover the restructured loans.
The borrowers are strictly forbidden from announcing any cash dividends or making any personal drawings in the first three years of the restructured tenure. After that, they can do so but need prior consent of the banks.
The banks will also have to set up special cells headed by their heads of recovery for continuous monitoring of the restructured loans. The cells would have to hand in quarterly reports, comprising compliance progress of the restructuring terms and conditions among others, to the banks' boards, who would then forward it to the central bank.
Under the policy, the borrowers can also apply for new financing facility or enhancement of existing credit facility so that the repayments are made in time.
The banks are allowed to extend working capital financing of up to 50 percent
of the last sanctioned limit in the first three years. After that, the working capital requirement issue may be decided on the basis of banker-customer relationship and the need of the business.
Term financing may be allowed up to 60 percent of the last sanctioned amount in the first five years. Beyond that, the banks have the prerogative to extend fresh term financing.
In case of default, the restructured facility will be cancelled and the loan classified as per the existing policy.
Banks must take all possible legal steps for recovery of such defaulted loans, failing which may result in filing suit under the Bankruptcy Act, 1997. Zahid Hussain, lead economist of the World Bank's Dhaka office, said the facility should not be extended beyond the announced date.
If the borrowers begin to expect continuation of the facility year after year, as seen in case of black money whitening, they will lose the incentive to take all possible precautions to make sure they do not take excessive risk in using the borrowed money, he said.
“This is a type of bailout attempt - there are many such instances in other countries. On the one hand, it creates a moral hazard and on the other, it is not a permanent solution to a problem, * Nazrul Huda, former deputy governor ofBB, said.
‘The devil is always in the details and how the policy is implemented, ” Hussain said, adding that it will also be important to make sure the habitual defaulters do not hijack this window. The WB economist also said the root cause for restructuring has to be addressed.
Huda reiterated the same, while calling for the formation of a dedicated cell to monitor the loans that will get the opportunity to restructure.