Classifying loans the better way

In Bangladesh all loans are classified into four categories. They are: (a) continuous loan, (b) demand loan, (c) fixed term loan, and (d) short-term agriculture loan and microcredit. Here the 'continuous loan' means a loan account that sees transactions within a certain limit and that has an expiry date. A demand loan means the loan that becomes repayable on demand. A fixed term loan means the loan which is repayable within a specific period of time as per a specific repayment schedule. Short-term agricultural and microcredit means short-term credit listed under the Annual Credit Programme issued by the Agricultural Credit and Financial Inclusion Department (ACFID) of the Bangladesh Bank, the central bank.
However, banks have to classify their loans in consideration of loan-loss provisioning, valuation of bank assets and supervision.
Loans are classified on the basis of (i) standard, (ii) past due/overdue, (iii) Special Mention Account (SMA), (iv) Sub-Standard (SS), (v) Doubtful (DF), and (vi) Bad and Loss (BL) loan. Banks maintain different percentages of provision depending on the categories of loans and their classification.
For calculation of the provision, a bank has also to calculate the base for provision. The base for provision is calculated as such: total loan (receivable), less value of eligible security etc. The banks provide dividends after deducting provision from their gross profit. As such, the gross profit can be higher, but the net profit comes down to the minimum level.
Efforts have been made here to make the perception clear about bank loans, classification, provision and their dividend distribution capacity. Banks provide 42.50 per cent tax before distribution of dividend. So, it is not easy to set aside more dividends for directors and shareholders.
Now let the focus be on Bad and Loss (BL) loans. A continuous loan or demand loan is classified as BL, if it is a past due or it is overdue for nine months or more. A fixed term loan is classified as BL, if the amount of past due installment is equal to or more than the amount of installment due within nine months. A short-term agricultural loan or microcredit is classified as BL, if the amount of a past due installment is equal to or more than the amount of installment due within sixty months. Banks maintain the cent percent provision against the base for provision of a BL loan.
As per the latest circular of the Bangladesh Bank, if the continuous and demand loans are rescheduled ones, then the loans will further be classified as BL after falling overdue or a past due equivalent to three monthly equal installments. On the other hand, if any loan or part of it or the interest on it accrued to any person or organisation remains overdue for more than six months, the borrower of such a loan facility will be treated as a defaulter as per the Banking Companies Act. It means the banks have to maintain the cent percent provision on the amount of base for provision, but the borrower is allowed a new loan facility from any bank. Definitely this rule overburdens the banks and gives a borrower freedom. This is unacceptable.

The writer is Executive Officer at the Corporate Office of Bank Asia Ltd.
 mashiur.du@gmail.com