DHAKA, Jan 15: Bangladesh Bank, the country’s central bank, has directed the commercial banks to write off bad loans over five years old immediately.

The directive was issued on Monday in line with recommendations of the Bank Reform Committee, headed by Dr Wahiduddin Mahmood, a professor of the Dhaka University’s economics department. The Bangladesh Bank has also issued a new guideline for loan rescheduling.

“The Bangladesh Bank directive to write off bad loans is fully in accord with international practice,” BB governor Dr Fakhruddin Ahmed told a press briefing. “But it does not mean that default loans over five years old will be acquitted. The banks will continue the process of recovery of those loans and file cases against the defaulters.”

Under the new directive, the commercial banks will write off around Tk140,000 million of the over Tk250,000 million in default loans. Default loans now account for about 32 per cent of the total disbursed loans. After writing off the bad loans over five years old, this percentage would come down to around 12.

According to the Bangladesh Bank’s new instruction, bad loans over five years old and secured under 100 per cent provisioning would primarily be written off the banks’ balance sheets. If the existing provisioning is not enough, the banks may deduct required funds from their current year’s income to write them off. After the write-off, the borrowers would still be identified as defaulters, and the banks would continue their efforts to recover the loans.

The Bangladesh Bank also directed the commercial banks to continue legal procedures against the defaulters. And, if cases did not exist against any bad loan, the bank would file cases against the parties concerned before writing it off.

As the write-off did not involve acquitting bad debts, the banks would have to maintain separate ledgers for the written-off loans for the annual reports. The new directive further said that as soon as the write-off policy comes into effect, bad and doubtful portfolio loans should be processed for write-off against 100 per cent secured provisions.

The Bangladesh Bank also restricted loan rescheduling of a habitual defaulter. The BB has also asked banks to take into consideration the overall loan repayment and rescheduling position of any borrower.