BB issues guideline on interest waiver

Bangladesh Bank (BB) issued a circular on interest waiver on Thursday, tightening the existing policy to bring disciplines in the banking sector.

The central bank has observed that many banks are involved in giving interest exemption to their clients bypassing the existing policy.

Usually, banks waive the interest at a time when a natural disaster or other force majeure - unforeseeable circumstances that prevent someone from fulfilling a contract - happened. They also face difficulties to recover their loans if borrowers die and river erosion takes place.

The latest policy has stated in detail who will get the waiver facility and how the whole process will work.

As per the new policy, banks will not waive the principal amount of the loans under any circumstances. The financial institutions will also not allow any waiver to the loans created by wilful defaulters.

The funds that have already been transferred to the income segment of banks cannot be waived.

Managing directors and CEOs of the banks can waive interest accrued principal amount of Tk 1.0 million, while the above needs to be approved by the respective boards.

Banks must consider costs associated with the fund while exempting the interest. The cost of funds may be relaxed for the projects, which have been closed for three years in a row.

If banks do not get back the default loan despite completion of all legal procedures, the formula of cost of funds can be sidestepped.

The central bank also advised that banks would consider financial statements of the borrowers for three consecutive years. If the owner's equity of the financial statements becomes positive after paying taxes, they will not get an interest waiver facility.

The state-owned banks, however, will follow the government directives on interest exemption.