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9/9/2024
Navigating regulations on Loan Classification &
Provisioning,Rescheduling,Restrucring & Write-off

Mohammad Rafiqul Islam

CDCS.CSDG.CITF.CTFP
(Qualified Trade Finance Specialist-QTFS)
Founder, The Learning Line Academy
Vice President & Head of Export Operation
Prime Bank Limited
Former Head of Offshore Banking
Bank Asia Limited
Visiting Faculty, Bangladesh Institute of Bank
Management(BIBM)
 Loan Classification &
Types of loans
Provisioning

❑ Loan Classification
Loan classification is the process of categorizing loans based on their credit risk and repayment performance. Loans are
typically classified into the following categories:
❑ Performing Loans:
❑ Loans that are being repaid on time.
❑ Non-Performing Loans (NPLs):
❑ Loans where the borrower has failed to make scheduled payments.
❑ Substandard Loans:
❑ Loans that are at risk of default but are not yet classified as non-performing.

❑ Provisioning
Provisioning is the practice of setting aside funds to cover potential losses from classified loans. When a loan is classified
as non-performing or at risk of default, the institution creates a provision. This provision:
❑ Reduces the bank's profits.
❑ Increases its reserves to prepare for potential losses.
 Loan Classification & Why learning loan classification and
Provisioning provisioning

❑ Financial Reporting Accuracy:

❑ Ensures correct loan classification and provisioning, affecting the accuracy of financial
statements.
❑ Regulatory Compliance:
❑ Helps maintain adherence to regulations, avoiding penalties.
❑ Risk Management:
❑ Assists in assessing credit risk and ensuring adequate reserves for loan losses.
❑ Strategic Decision-Making:
❑ Informs cost control, financial planning, and resource allocation.
❑ Performance Measurement:
❑ Affects key financial metrics, impacting overall financial health.
❑ Investor Communication:
❑ Enables clear explanations of financial status to stakeholders.
❑ Cost and Profitability Analysis:
❑ Essential for analyzing profitability and determining the cost of risk.
 Loan Classification &
Categories of loan
Provisioning

The loans and advances

are classified into four
categories:

Short-term Agricultural
Continuous Loan Demand Loan Fixed Term Loan
& Micro-Credit
 Loan Classification &
Categories of loan
Provisioning
❑ What is a Continuous Loan?
❑ A Continuous Loan is defined as an account where transactions can be made within certain limits, and it has a set
expiry date for full adjustment. Examples of Continuous Loans include:
❑ Cash Credit
❑ Overdraft

❑ What is a Demand Loan?

❑ A Demand Loan is a loan that is repayable on demand by the bank. Additionally, if any contingent or other liabilities
convert into a forced loan (without prior approval), those will also be classified as Demand Loans. Examples
include:
❑ Forced Loans against Imported Merchandise
❑ Payment against Document
❑ Foreign Bill Purchased
❑ Inland Bill Purchased
 Loan Classification &
Categories of loan
Provisioning

❑ What constitutes a Fixed Term Loan?

❑ A Fixed Term Loan refers to loans that are repayable within a specified time frame and follow a defined
repayment schedule. This means that the borrower agrees to repay the loan in fixed installments over
time.

❑ What is Short-term Agricultural & Micro-Credit?

❑ Short-term Agricultural Credit includes credits specified under the Annual Credit Programme issued by
the Agricultural Credit and Financial Inclusion Department (ACFID) of Bangladesh Bank. These credits
are typically repayable within 12 months.
❑ Short-term Micro-Credit refers to micro-credits that do not exceed a certain amount determined by the
ACFID and are also repayable within 12 months. These can include various types of credit, such as:
❑ Non-agricultural Credit
❑ Self-reliant Credit
❑ Weaver's Credit
❑ Individual project credit by banks
 Loan Classification &
Loan Classification methods
Provisioning

Objective criteria Qualitative judgment

• Objective criteria refer to • Qualitative judgement involves

measurable, quantifiable factors making assessments about a loan's
that can be used to evaluate a recovery prospects based on factors
loan's risk level. These criteria are that may not be strictly
typically based on historical data quantifiable. It considers the overall
and statistical analysis. financial health of the borrower, the
quality and value of the collateral,
and any changes in circumstances
that affect the likelihood of
repayment.
 Loan Classification & Loan Classification with Quantitative
Provisioning Judgment
❑ Past Due/Overdue Loans:
❑ Continuous Loan: Becomes overdue if not repaid or renewed by the expiry date or on demand.
❑ Demand Loan: Becomes overdue if not repaid by the expiry date or on demand.
❑ Fixed Term Loan: If any installment isn't repaid by the due date, that part is overdue.
❑ Short-term Agricultural & Micro-Credit: Considered overdue if not repaid within six months of the expiry date.

❑ Standard Loans:
❑ All loans that are not classified as Special Mention Account (SMA) or lower will be treated as Standard.

❑ Special Mention Account (SMA):

❑ Continuous, Demand, or Term Loans overdue for 2 months or more are placed in SMA, which signals potential
issues.
❑ These loans must be reported to the Credit Information Bureau (CIB) for monitoring.
❑ SMA and Sub-standard loans (except Short-term Agricultural & Micro-Credit) are not treated as defaulted under
certain laws.
 Loan Classification &
Past due/Overdue
Provisioning

1.Current Definition of Past Due/Overdue:

1.if any installment of a Fixed Term Loan is not repaid by the due date, it is considered past
due/overdue after six months of the expiry date.(BRPD Circular No. 03 (21.04.2019): Loan
Classification and Provisioning)
Term Loan 2.Change in Past Due/Overdue Definition: To align with international best practices, the following
changes will be implemented:
1. Step 1: Starting from 30 September 2024, any unpaid installment(s) will be classified as past
due/overdue after three months of the due date.
2. Step 2: From 31 March 2025 onwards, any unpaid installment(s) will be treated as past
due/overdue starting the day after the due date.(BRPD Circular No. 09 (08.04.2024)
 Loan Classification & Loan Classification with Quantitative
Provisioning Judgment

❑Sub-standard (SS):
❑Loans that remain overdue for 3–9 months.
Quantitative ❑Doubtful (DF):
judgment
❑Loans that remain overdue for 9–12 months.
❑Bad/Loss (B/L):
❑Loans that remain overdue for more than 12 months.
 Loan Classification & Classification of Short-term Agricultural
Provisioning and Micro-Credit loans

Classification Time Period

❑ How does the classification apply to Short-term Considered Past Due

After six months from the
Agricultural and Micro-Credit loans? expiry date if not repaid
❑ Short-term Agricultural and Micro-Credit:
❑ Considered past due after six months from the expiry
date if not repaid. Sub-standard After 12 months past due
❑ Sub-standard: After 12 months past due.
❑ Doubtful: After 36 months past due.
❑ Bad/Loss: After 60 months past due. Doubtful After 36 months past due

Bad/Loss After 60 months past due

 Loan Classification &
Loan Classification in CMSME category
Provisioning

❑ Sub-standard (SS):
❑ If a Continuous Loan, Demand Loan, Fixed Term Loan, or any installment(s)/part of
installment(s) of a Fixed Term Loan remains past due/overdue for a period of 6 months or
beyond but less than 18 months.
❑ Doubtful (DF):
❑ If a Continuous Loan, Demand Loan, Fixed Term Loan, or any installment(s)/part of
installment(s) of a Fixed Term Loan remains past due/overdue for a period of 18 months or
beyond but less than 30 months.
❑ Bad/Loss (B/L):
❑ If a Continuous Loan, Demand Loan, Fixed Term Loan, or any installment(s)/part of
installment(s) of a Fixed Term Loan remains past due/overdue for a period of 30 months or
beyond.

21/07/20 BRPD Circular No. 16: Loan Classification and Provisioning for Cottage, Micro and Small Credits
under CMSME.
 Loan Classification & Loan Classification with qualitative
Provisioning judgment

❑ Special Mention:
❑ Management deficiencies, such as non-compliance with internal policies or poor documentation.
❑ Borrower issues, such as occasional overdrawing, below-average profitability, or poor liquidity.
❑ Sub-standard:
❑ Recurring issues like consistent overdraws or low account turnover.
❑ Competitive difficulties or location in a volatile industry.
❑ Weak management and significant pending litigation.
❑ Doubtful:
❑ Permanent overdraws, operational losses, or concentration in industries with poor performance.
❑ Serious competitive challenges and illiquidity.
❑ Non-cooperative or hostile management and doubts about financial integrity.
❑ Bad/Loss:
❑ Continued operations dependent on acquiring new loans to cover losses.
❑ Operating in an industry that is declining or experiencing technological obsolescence.
❑ Significant criminal activity or lack of support from owners
 Loan Classification &
Loan Defaulter and Bank Company Act
Provisioning

section
5(GaGa) of
the Banking
Companies
Act, 1991,

section 27(ka
ka) of the
Banking
Companies
Act, 1991,
 Loan Classification &
Default loan
Provisioning

❑ Loans, except for Short-term Agricultural & Micro-Credit in the "Special Mention Account" and "Sub-Standard"
category, will not be treated as defaulted loans for the purpose of section 27KaKa(3) of the Banking Companies Act,
1991.

Unclassified Loan Special Mention account(SMA) Substandard Doubtfull Bad & Loss

Stndard Loan Not Default loan Default Loan

Loan Classification &
Loan declassification
Provisioning
Loan Classification &
Declassification of loan and authority
Provisioning
 Loan Classification & Accounting of the Interest of
Provisioning Classified Loans
❑ Loan Classification ❑ Treatment of Interest ❑ Notes
❑ - Interest accrued is credited to the Interest
❑ This reflects that interest is not currently
❑ Sub-standard Suspense Account instead of the Income
recognized as income.
Account.

❑ - Unrealized interest is also credited to ❑ Similar treatment as Sub-standard loans to

❑ Doubtful
the Interest Suspense Account. avoid inflating income.

❑ - Charging any interest on the loan ceases

❑ Bad/Loss ❑ This indicates the loan is considered a total loss.
completely.

❑ - Interest for the period until filing the lawsuit

❑ If Lawsuit is Filed can be charged but must be preserved in ❑ This interest remains unrecognized as income.
the Interest Suspense Account.

❑ - If any interest is charged for special reasons, it

❑ Exception for Bad/Loss must be preserved in the Interest Suspense ❑ Maintaining transparency in accounting.
Account.

❑ - Upon recovery, priority goes to recovering

❑ This process ensures that the financial impact
❑ Recovery from Classified Loans accrued interest, whether charged or not.
of the loan is managed accurately.
Remaining funds adjust the principal balance.
 Loan Classification &
Forms of loan classification reporting
Provisioning

•The revised forms for loan classification, provisioning, and interest suspense are CL-1 to CL-5:
• CL-1: Compilation/summary of loan classification status for various categories, including staff loans.
• CL-2: Reporting for Continuous Loans.
• CL-3: Reporting for Demand Loans.
• CL-4: Reporting for Term Loans.
• CL-5: Reporting for Short-term Agricultural and Micro-Credit loans.
 Loan Classification & General Regulation on Reporting of
Provisioning classified loan

❑ Submission Recipients:
❑ Reports must be submitted to the Banking Regulation and Policy Department and
the Credit Information Bureau (CIB) of Bangladesh Bank.
❑ Submission Deadline:
❑ Statements must be submitted within 15 days from the reference date.
❑ Consequences of Non-compliance:
❑ Failure to submit the CL-1 report accurately and on time may result in penalties imposed
on the non-compliant bank.
Loan Classification & Provisioning

Provisioning against
loans and advances
 Loan Classification &
Types of Provision
Provisioning

❑General Loan Loss Provisions: Applied to groups of loans with similar characteristics
without analyzing individual loans. These are calculated based on historical loss
experiences of similar loan pools.
❑Specific Provisions: These are established on a loan-by-loan basis for loans classified as
Sub-standard, Doubtful, or Bad/Loss, reflecting an analysis of repayment probabilities.
 Loan Classification & Loan Loss:
Provisioning Expected loss and Unexpected loss

❑Expected Losses: These are losses anticipated based on historical data and current loan
classifications. Provisioning is aimed at covering these expected losses.
❑Unexpected Losses: These are losses that exceed the expected losses and are not
anticipated based on historical data.
 Loan Classification &
Maintenance of provision
Provisioning
Reference
Types of Borrowers Rate of Provision Classification status BRPD CL No.
Brokerage House 1% Unclassified 03/2023
Merchant Bank 1% Unclassified 03/2023
Stock Dealers 1% Unclassified 03/2023
Consumer Financing 2% Unclassified 52/2020
House building Finance 1% Unclassified 01/2018
0.25% Unclassified 16/2020
5% Sub-standard 16/2020
20% Doubtful 16/2020
CMSME 100% Bad & Loss 16/2020

1% Off-balance sheet Exposure 13/2018

Nil BB rating-1 13/2018
0.50% BB rating-2 13/2018
Guarantees 0.75% BB rating-3 13/2018

Bills for Collection Nil Off-balance sheet Exposure 07/2018

1% Unclassified 15/2017
5% Sub-standard 15/2017
5% Doubtful 15/2017
Short-Term Agriculture & Micro credit 100% Bad & Loss 15/2017
Credit Cards loan 2% Unclassified 12/2017
Specific Provision 5% SMA 14/2012
20% Sub-standard 14/2012
50% Doubtful 14/2012
100% Bad & Loss 14/2012
 Loan Classification &
Base for provision
Provisioning
❑ What is provision?
❑ Purpose: Provisions are funds set aside by
banks to cover expected losses on loans.
❑ Importance: Helps manage financial risk
and ensures banks are prepared for potential
loan defaults.

The "base for provision" refers to the amount on

which a bank calculates the required provision for
expected loan losses. It is essentially the relevant
figures used to determine how much money the
bank needs to set aside to cover potential losses on
classified loans.
 Loan Classification &
Eligible collateral
Provisioning

❑ What is meant by 'Eligible Collateral'?

❑ Eligible collateral refers to the specific types
of assets that can be considered when
calculating provisions for expected loan
losses. These assets serve as security for the
loans and provide a way to offset potential
losses in case the borrower defaults.
 Loan Classification &
Collateral Valuation
Provisioning

❑ BRPD Circular No. 14 dated 23/09/2012 defines eligible collaterals and their valuation:
❑ 100% of the market value of gold or gold ornaments pledged with the bank.
❑ 50% of the market value of easily marketable commodities kept under bank control.
❑ Maximum 50% of the market value of land and building mortgaged with the bank.
❑ For land and buildings, banks must ensure proper documentation and valuation by a professional
valuation firm or a specialized engineer
 Loan Classification &
Collateral revaluation
Provisioning
Collateral revaluation refers to the process of assessing the current market value of collateral that has been pledged
as security for a loan or credit facility. This process is crucial for lenders and banks as it helps ensure that the
collateral remains sufficient to cover potential loan losses in case of borrower default.

•Movable Collateral:
•Must be revalued at least once a year. Examples of movable collateral include
Frequency vehicles, machinery, inventory, and other tangible assets that can be easily
of transferred or sold.
revaluation •Immovable Collateral:
•Must be revalued at least once every three years. This typically includes real estate
properties like land and buildings.
Loan Rescheduling &
General regulation on Loan rescheduling
Restructuring

Loan Rescheduling
 Loan Rescheduling &
General regulation on Loan rescheduling
Restructuring

Similar type of loan-

similar nature of
classification

4th time rescheduling

and legal action

Down payment
 Loan Rescheduling &
General Regulation on loan rescheduling
Restructuring

Eligibility for being

Down payment

Bank’s recommendation

Rescheduling frequency
Loan Rescheduling &
Maximum time for rescheduling
Restructuring
Loan Rescheduling &
Down payment and loan rescheduling
Restructuring
Loan Rescheduling &
New loan facility after rescheduling
Restructuring
Loan Rescheduling &
General regulation on Loan rescheduling
Restructuring

Loan Restructuring
Loan Rescheduling &
Loan restructuring of Term Loan
Restructuring
Loan Rescheduling & Classification of rescheduled loan and
Restructuring Interest suspense
Loan Rescheduling & Reporting of rescheduled/restructured
Restructuring loan
Loan Rescheduling &
General regulation on Loan rescheduling
Restructuring

Loan Write-off
 Loan Write-off Process & Procedures

Eligibility of loan write-off

Effort to sale mortgage

property

Lodging suit under ARA

act 2003
 Loan Write-off Process & Procedures

Provisioning

Board approval
 Loan Write-off Process & Procedures

Provisioning

Board approval

Loan Write-off & Asset

management company

Classification of the
borrowers having written-
off loan
 Loan Write-off Process & Procedures

Provisioning

Writing off directors loan

Loan Write-off Process & Procedures
 Navigating regulations on Loan Classification &
Provisioning,Rescheduling,Restrucring & Write-off