Loan Rescheduling: A Vital Tool for Managing Non-Performing Loans in Bangladesh

Non-performing loans (NPL) are a significant challenge for the banking industry in Bangladesh. These loans, where borrowers fail to make timely payments, result in decreased profitability for banks and a higher risk of financial instability. As a result, it is critical for banks to employ effective techniques to manage non-performing loans. One such technique is loan rescheduling.

Loan rescheduling is a process where the terms and conditions of an existing loan are changed to accommodate the borrower's current financial situation. It is a common technique used by banks to help borrowers who are struggling to make payments due to financial difficulties. The process of loan rescheduling varies by bank, but typically involves extending the loan's maturity date, reducing the interest rate, or providing a grace period for payments.

Loan rescheduling has become increasingly important in Bangladesh due to the high level of non-performing loans in the country's banking sector. According to a recent report by the Bangladesh Bank, the country's central bank, the non-performing loan ratio of the banking sector was 8.89% at the end of June 2020, which is significantly higher than the global average.

The use of loan rescheduling by banks in Bangladesh has been met with some criticism. Some argue that it is an ineffective technique that merely delays the problem rather than solving it. Critics also argue that loan rescheduling can lead to moral hazard, where borrowers become less likely to repay loans on time, knowing that they can reschedule if they fall behind on payments.

Despite these criticisms, loan rescheduling can be an effective technique for managing non-performing loans if used properly. Banks must conduct a thorough analysis of the borrower's financial situation before rescheduling a loan to determine whether the borrower is capable of making future payments. Banks must also ensure that borrowers understand the consequences of loan rescheduling, including the possibility of higher overall interest costs due to an extended loan term.

Furthermore, loan rescheduling can be combined with other techniques to manage non-performing loans effectively. For example, banks can implement stricter loan recovery processes or offer debt restructuring options in addition to loan rescheduling.

In conclusion, loan rescheduling is a valuable tool that banks in Bangladesh can use to manage non-performing loans. However, it must be used judiciously, and banks must be diligent in assessing borrowers' financial situations and ensuring they understand the potential consequences of rescheduling. With the proper use of loan rescheduling and other techniques, banks can reduce their non-performing loan ratios, improve their financial stability, and continue to provide vital financial services to the people of Bangladesh.