Classification means segregation/separation/the act of forming into classes. In the context of banking investment, classification is the process to identify the invested amount into classes or status of loan as per formula given by BB considering their nature, transaction or turnover, repayment process and qualitative judgment.
The purposes of loan classification are:
I. To segregate the loan accounts into classes to take appropriate steps. II. To strengthen the loan discipline of every bank
III. To increase the recovery of outstanding loan.
IV. To suspend the loan of interest from classified loan accounts into income account. V. To maintain actual/accurate provision against probable loss of classified loan
VI. To determine the proper capital adequacy on the basis of risk weighted assets
VII. To establish transparency of the bank’s account
VIII. To determine the accurate profit for payment of tax and distribution of profit to the stakeholders.
ii. Describe the various types of classification with example
Categories of Loans and Advances:
All loans and advances will be grouped into four (4) categories for the purpose of classification, namely- (a) Continuous Loan (b) Demand Loan (c) Fixed Term Loan and (d) Short-term Agricultural & Micro- Credit.
a) Continuous Loan: The loan accounts in which transactions may be made within certain limit and have an expiry date for full adjustment will be treated as Continuous Loan. Examples are: Cash Credit, Overdraft, etc.
b) Demand Loan: The loans that become repayable on demand by the bank will be treated as Demand Loan. If any contingent or any other liabilities are turned to forced loan (i.e. without any prior approval as regular loan) those too will be treated as Demand Loan. Such as: Forced Loan against Imported Merchandise, Payment against Document, Foreign Bill Purchased, and Inland Bill Purchased, etc.
c) Fixed Term Loan: The loans, which are repayable within a specific time period under a specific
repayment schedule, will be treated as Fixed Term Loan.
d) Short-term Agricultural & Micro-Credit: Short-term Agricultural Credit will include the short-term credits as listed under the Annual Credit Programme issued by the Agricultural Credit and Financial Inclusion Department (ACFID) of Bangladesh Bank. Credits in the agricultural sector repayable within 12 (twelve) months will also be included herein. Short-term Micro- Credit will include any micro-credits not exceeding an amount determined by the ACFID of Bangladesh Bank from time to time and repayable within 12 (twelve) months, be those termed in any names such as Non-agricultural credit, Self-reliant Credit, Weaver's Credit or Bank's individual project credit.