Stressed loans in banks to stay high: Moody’s
The stressed loans in the banking sector of Bangladesh will remain elevated even after the central bank tightened the rules for classification of non-performing loans (NPLs), said Moody's Investors Service.
Last month, the Bangladesh Bank tightened its definition of overdue installments for fixed-term loans, reversing a relaxation of classification and provisioning rules since April 2019.
Fixed-term loans are currently classified as overdue six months after their expiry date and are subsequently classified as non-performing when overdue for a further three months, implying 270 days past due. Cottage, micro and small credits are classified as NPLs when past due/overdue for six months.
From September 30, a loan will be treated as overdue if an instalment on a term loan is not paid within three months of its due date, while from March 2025 an instalment payment late by even one day will be considered overdue.
The period for classifying past due/overdue loans as NPLs remains unchanged.
"We expect the revised guidelines to increase levels of NPLs and provisions, which will strain banks' profitability in the near term," Moody's said in a report yesterday.
The removal of forbearance measures will push banks to recognise loans to weak borrowers as non-performing in the long term and set aside adequate provisions, a long-term credit positive because it will improve their resilience in times of stress, it said.
The global credit ratings agency, however, expects NPLs to increase by 50 basis points until September 2024.
"We expect stressed loans, including performing loans with modified payment terms, as well as NPLs, to remain elevated."
This is because banks are likely to step up collection efforts on overdue loans to contain higher levels of slippage to non-performing, and may also take advantage of relatively lenient guidelines to restructure overdue loans to contain the impact on profitability.
The revised guidelines are an outcome of the central bank's initiatives related to Bangladesh's programme with the International Monetary Fund to strengthen loan classification and provisioning rules, eliminate forbearance measures and align with global best practices.
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