BD extended loan payment terms credit positive for banks: Moody’s analysis
Dhaka 5 February 2021:
According to a Moody’s Credit Outlook article titled “Bangladesh lifts loan moratorium but allows extended payment terms, a credit positive for banks”, on 31 January, the Bangladesh central bank announced that it will not extend the loan repayment moratorium that was introduced after the start of the coronavirus outbreak.
Instead, the central bank will allow banks to extend the repayment period for term loan installments. This scheme will only be available to unclassified term loans.
The extension of loan tenure – a type of loan rescheduling – is credit positive because it will reduce the risk of a sudden surge in nonperforming loan (NPL) ratios. With the expiry of the moratorium, borrowers face higher monthly installments because the maturities remain the same, resulting in amortization of loan balances over a shorter period. The loan tenure extension will alleviate pressure on borrowers because they will have up to an additional two years to make repayments.
The moratorium’s end is also credit positive because it restores transparency and payment discipline in the banking system, ensuring the comparability of asset quality between banks within Bangladesh. It will allow banks to identify those borrowers that are truly affected by the economic slowdown and those that are willful defaulters. In addition, revealing the extent of asset-quality problems will provide regulators with more visibility on the financial health of the banking system and enable implementation of effective support measures.
The banking sector’s NPL ratio decreased to 8.9% as of 30 September 2020 from 12% a year earlier despite disruptions caused by the coronavirus pandemic. The decline was driven by the loan moratorium and the prohibition on banks downgrading loans until December 2020, which delayed the recognition of NPLs.
With the loan moratorium expiring at year-end 2020 and borrowers’ debt repayment capacity weakened as a result of the coronavirus shock, we expect the systemwide NPL ratio to increase in coming quarters (see exhibit). The extent of NPL formation will, however, depend on banks’ willingness to extend loan repayment periods and the effectiveness of stimulus measures announced last year.
The true asset quality of loans will emerge across all sectors and we expect significant pressure in loans to vulnerable sectors such as the ready-made garment (RMG) and textile sectors. These two sectors accounted for 19.4% of banking system loans at the end of 2019. During the nine months to 30 September 2020, RMG-related exports fell by 19.8% from the year-earlier period. We also expect loans in sectors such as cement manufacturing and tanneries to contribute to asset-quality stress because they have yet to recover from the economic slowdown.