All loans or advances will be counted as classified if overdue for over three months under a master plan meant to enhance risk-management capabilities of banks and transparency of financial reporting.
The Bangladesh Bank (BB) master circular on loan classification and provisioning as per updated rules was rolled out Wednesday as a must-do for all categories of banks and lending.
To this end, the circular states that 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.
With the move that will be effective from April next year, the country's central bank will fully go by the standards of BASEL-III regarding loan-classification and-provisioning mechanism.
According to the circular from the banking regulations and policy department (BRPD) of the BB, 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 day after expiry date or from the creation of the forced loan or from the due date if not repaid or renewed, depending on the 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 post-due or overdue from the day after 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 'substandard' 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 for more than 12 months.
"Such classification should reflect the degree of deterioration in the borrower's creditworthiness and the anticipated impact on repayment," says the regulator in the fresh firman.
If a loan is classified, either by bank or BB, on the basis of objective criteria, it can be moved into a more favourable 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 into a more favourable 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 justifications, 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 Department concerned 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 Department concerned of Banking Inspection, the judgment of the latter will prevail.
In case of general provision, BB asks banks to maintain 1.0 per cent 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," the latest BB direction reads.
The central bank also instructed that Islamic banks must adhere to this loan-classification and-provisioning policy for their investments.
Talking to the FE, BB director (BRPD) Mohammad Shahriar Siddiqui said now all the loans, including those in agriculture and terms, will be counted as classified when they are overdue for more than three months.
"With the circular, the central bank completely complies with the standards of BASEL-III," he added.
Md. Touhidul Alam Khan, Managing Director & CEO of National Bank Limited (NBL), thinks the Bangladesh Bank has commendably and timely introduced the Expected Credit Loss (ECL) framework and categorized standard loans into three segments: STD-0, STD-1, and STD-2, for more effective monitoring.
"The Expected Credit Loss (ECL) concept emphasizes the calculation of potential credit-loss scenarios prior to actual defaults, ensuring better alignment with Basel III guidelines and IFRS-9. This advancement is set to elevate the banking system in Bangladesh to international standards."
Touhidul Alam Khan, also the fellow member of ICMAB, firmly believes these measures will enhance the robustness of financial institutions and contribute to the long-term sustainability and resilience of the banking sector.
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