Cenbank cuts penal interest rate on overdue loans to 0.5%
Bankers warn that the move may weaken repayment discipline and further increase default loans in the banking sector
The Bangladesh Bank has reduced the penal interest rate on overdue loans to 0.5% from the previous 1.5%, offering borrowers additional relief in case of delayed repayments.
The central bank issued a circular in this regard today (13 May), instructing all scheduled banks to implement the decision with immediate effect.
Earlier, in a circular issued in May 2024, the central bank had fixed the penal interest rate at 1.5%.
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According to the new circular, if a loan or instalment is classified as partially or fully overdue, banks will now be allowed to charge a maximum penal interest rate of 0.5% on the outstanding balance for continuous and demand loans, and on overdue instalments for term loans.
Bankers, however, criticised the move, saying higher penal interest rates are generally maintained to encourage borrowers to repay instalments on time.
They argued that reducing the penalty by 100 basis points could weaken repayment discipline and create additional pressure on banks.
Several bankers warned that the decision could further worsen the already rising volume of default loans in the banking sector.
A deputy managing director of a private commercial bank told The Business Standard that banks may respond by increasing regular lending rates.
"Currently, lending rates are around 14.5%. Due to the reduction in penal interest, some banks may raise rates to 15.5%, and ultimately the burden will fall on borrowers," he said.
A managing director of another private bank said the policy would put additional pressure on banks' profitability and could encourage habitual defaulters. "This kind of policy may encourage borrowers who already fail to repay loans regularly."
A senior official of a private bank said overdue loans already create operational and financial complications for banks, and the latest decision effectively lowers the cost of delayed repayment for borrowers.
He also noted that since 2024, Bangladesh has followed a three-month overdue classification timeline in line with international practices, although some business groups have demanded extending the period to six months.
"That would be completely inappropriate and could increase default loans further," he said.
The official added that banks will eventually have to fully comply with IFRS 9, which would make risk management stricter. "Good businesses do not seek these kinds of facilities. Responsible borrowers are already repaying banks on time."
