Bangladesh Bank (BB) has issued master circular on loan classification and provisioning to enhance risk management capabilities of banks and strengthen the transparency of the financial reporting.
To this end, the central bank plans to implement Expected Credit Loss (ECL) methodology-based provisioning system for banks in accordance with International Financial Reporting Standard (IFRS 9) by 2027.
According to the circular, all loans and advances will be grouped into four categories for the purpose of classification, namely- (a) Continuous Loan (b) Demand Loan (c) Fixed Term Loan and (d) Short-term Agricultural Credit.
All the loans will be treated as past due or overdue from the following day of the expiry date or from the creation of the forced loan or from the due date if not repaid or renewed depending on different categories of loans and advances.
However, in case of any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the fixed expiry or due date, the amount of unpaid installment(s) will be treated as past due or overdue from the following day of the expiry or due date.
All the loans will be classified into six categories --Standard-0 (STD-0), Standard-1 (STD-1), Standard-2 (STD-2), Special Mention Account (SMA), Sub-Standard (SS) and Doubtful (DF).
Banks can now classify loans as ‘sub-standard’ when they are overdue for more than three months and less than six months. Loans overdue for between six and 12 months can be classified as ‘doubtful’. Loans will be classified as bad only once they are overdue more than 12 months.
Under qualitative judgment, any loan can be classified based on the perceived risk and/or if full repayment is unlikely even if it has no past due or overdue on the basis of objective criteria.
Such classification should reflect the degree of deterioration in the borrower’s creditworthiness and the anticipated impact on repayment.
If a loan is classified, either by bank or Bangladesh bank, on the basis of objective criteria, it can be moved to a more favorable classification category depending on payment of its past due or overdue amount as per agreement.
If a loan is classified on the basis of Qualitative Judgment by the bank, from time to time, in the judgment of the bank, it may be moved to a more favorable classification category. The decision must be accompanied by analysis showing that there has been improvement in the payment performance of the loan and/or in the financial condition of the borrower. The decision to move a loan gradually from B/L to DF, or from DF to SS, may, with appropriate justification, be taken by Managing Director/CEO.
If a loan is classified during Bangladesh Bank’s inspection on the basis of qualitative judgment, it cannot be declassified without the consent of the concerned Department of Banking Inspection of Bangladesh Bank.
A bank may request the concerned Department of Banking Inspection of Bangladesh Bank to review the classification of any loan for which there is a disagreement on classification that is not resolved during the on-site inspection. However, in any case where there is a lingering disagreement between the classification determined by bank management and the classification determined by the concerned Department of Banking Inspection, the judgment of the later one will prevail.
If any loan or advance is classified as SS and DF, interest accrued on such loan will be credited to Interest Suspense Account instead of crediting the same to Income Account.
As soon as any loan or advance is classified as B/L, charging of interest in the same account will cease. If any interest is charged on any B/L account for any other special reason, the same will be preserved in the Interest Suspense account.
In case of rescheduled loans, the unrealized interest, if any, will be credited to Interest Suspense Account, instead of crediting the same to Income Account.
In case of filing a law-suit for recovery of such loan, interest for the period till filing of the suit can be charged in the loan account in order to file the same for the amount of principal plus interest. But interest thus charged in the loan account has to be preserved in the Interest Suspense account.
If classified loan or part of it is recovered i.e., real deposit is effected in the loan account, first the interest (charged and not charged) is to be recovered from the said deposit and the principal to be adjusted afterwards.
In case of general provision, BB asked banks to maintain 1 percent of loan outstanding for STD-0, STD-1 and STD-2 while 5 percent for SMA. In case of specific provision, BB asked banks to maintain 20 percent of base for provision on SS, 50 percent of base for provision on DF and 100 percent of base for provision on B/L.
The rates of provisions stated above are absolute minimums, and banks are encouraged to assess the adequacy of provisions on a continuous basis to ensure that the provisions set aside are reflective of their potential losses.
BB also instructed that Islamic banks must adhere to this loan classification and provisioning policy for their investments.
