Before determine the provision
for classified loan it is first needed to classify the total loan
1. 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: transactions may be made within certain limit
and have an expiry date for full adjustment. Examples are: Cash Credit, Overdraft,
etc.
b)
Demand Loan: The loans that become repayable on demand
by the bank and 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 LIM,
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.
d)
Short-term Agricultural & Micro-Credit: 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) month
and as listed under the Annual Credit Program issued by ACFID of Bangladesh Bank
Basis for Loan Classification: A) OBJECTIVE
CRITERIA:
(1) Past Due/Over Due:
(i) Continuous loan-Any Continuous Loan if not
repaid/renewed within the fixed expiry date for repayment or after the demand by
the bank.
(ii) Demand Loan -Any Demand Loan if not repaid
within the fixed expiry date for repayment or after the demand by the bank.
(iii) Fixed Term Loan- In case of any installment(s)
or part of installment(s) of a Fixed Term Loan is not repaid within the fixed expiry
date, the amount of unpaid installment(s) will be treated as past due/overdue
from the following day of the expiry date.
(iv) Short-term Agricultural and Micro-Credit -The
Short-term Agricultural and Micro-Credit if not repaid within the fixed expiry date
for repayment will be considered past due/overdue after six months of the expiry
date.
(2)
All unclassified loans other
than Special Mention Account (SMA) will be treated as Standard.
(3) A Continuous loan, Demand
loan or a Term Loan which will remain overdue for a period of 02 (two) months or
more, will be put into the "Special Mention Account(SMA)".
(4) Loans except Short-term
Agricultural & Micro-Credit in the "Special Mention Account" and ―Sub-Standard‖
will not be treated as defaulted loan for the purpose of section 27KaKa(3) of the
Banking Companies Act, 1991.
(5) Any continuous loan after the expiry date will
be classified as:
i. ‗Sub-standard‘ if it
is past due/overdue for 03 (three) months or beyond but
less than 06 (six) months.
ii. ‗Doubtful‘ if it is
past due/overdue for 06 (six) months or beyond but less than
09 (nine) months
iii. ‗Bad/Loss‘ if it is
past due/overdue for 09 (nine) months or beyond.
(6) Any Demand
Loan after expiry/claimed by bank will be classified as:
i. ‗Sub-standard‘ if it
remains past due/overdue for 03 (three) months or beyond
but not over 06 (six) months
ii. ‗Doubtful‘ if it remains
past due/overdue for 06 (six) months or beyond but not over 09 (nine) months
. iii. ‗Bad/Loss‘ if it remains past due/overdue
for 09 (nine) months or beyond
(7) Fixed Term Loan -In case of
any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid
within the due date, the amount of unpaid installment(s) will be termed as ‗past
due or overdue installment‘.
For the below reasons total
amount of loan will be classifies if as-
i. The amount of past due
installment is equal to or more than the amount of installment(s) due within 03
(three) months, the entire loan will be classified as
''Sub-standard''.
ii. If the amount of past
due installment is equal to or more than the amount of installment(s) due within
06 (six) months, the entire loan will be classified as
''Doubtful".
iii. If the amount of 'past
due installment is equal to or more than the amount of installment(s) due within
09 (nine) months, the entire loan will be classified as
''Bad/Loss''.
(8) The Short-term Agricultural and
Micro-Credit -The Short-term
Agricultural and Micro-Credit
will be classified as 'Substandard ' after a period of
12 months, as 'Doubtful'
after a period of 36 months and as 'Bad/Loss' after a period of 60 months from the
stipulated due date as per the loan agreement.
Symbol- <=greater
than >=less than M=month
|
Types of loan
classification
|
Continuous
loan
|
Demand
loan
|
Fixed
term loan
|
Short-term agri
& micro credit
|
|
unclassified
|
STD
|
0< >2 M
|
0< >2 M
|
0< >2 M
|
0< >12 M
|
|
SMA
|
2< >3 M
|
2< >3 M
|
2< >3 M
|
|
|
classified
|
SS
|
3< >6 M
|
3< >6 M
|
3< >6 M
|
12< >36 M
|
|
DF
|
6< >9 M
|
6< >9 M
|
6< >9 M
|
36< >60 M
|
|
BL
|
9 & more M
|
9 & more
M
|
9 & more
M
|
60 & more M
|
B) QUALITATIVE JUDGEMENT:
If any uncertainty or doubt
arises in respect of recovery of any Continuous Loan, Demand Loan or Fixed Term
Loan, the same will have to be classified on the
basis of qualitative judgement
be it classifiable or not on the basis of objective criteria.
If any situational changes
occur in the stipulations in terms of which the loan was extended or if the capital
of the borrower is impaired due to adverse conditions or if the value of the collateral
decreases or if the recovery of the loan becomes uncertain due to any other unfavorable
situation, the loan will have to be classified on the basis of qualitative judgment.
No
need for exam----- For
incorporating qualitative judgment, banks must focus on the likelihood that the
borrower will repay all amounts due in a timely manner, using their own judgment
and the following assessment factors:
(1)Special
Mention
i. Assets must be classified
no higher than Special Mention if any of the following deficiencies of bank management
is present: the loan was not made in compliance with the bank‘s internal policies;
failure to maintain adequate and enforceable documentation; or poor control over
collateral.
ii. Assets must be classified
no higher than Special Mention if any of the following deficiencies of the obligor
is present: occasional overdrawn within the past year, below-average or declining
profitability; barely acceptable liquidity; problems in strategic planning.
(2) Sub-standard
i. Assets must be classified
no higher than Sub-standard if any of the following deficiencies of the obligor
is present: recurrent overdrawn, low account turnover, competitive difficulties,
location in a volatile industry with an acute drop in demand; very low profitability
that is also declining; inadequate liquidity; cash flow less than repayment of principal
and interest; weak management; doubts about integrity of management; conflict in
corporate governance; unjustifiable lack of external audit; pending litigation of
a significant nature.
ii. Assets must be classified
no higher than Sub-standard if the primary sources of repayment are insufficient
to service the debt and the bank must look to secondary sources of repayment, including
collateral.
iii. Assets must be classified
no higher than Sub-standard if the banking organization has acquired the asset without
the types of adequate documentation of the obligor‘s net worth, profitability, liquidity,
and cash flow that are required in the banking organization‘s lending policy, or
there are doubts about the validity of that documentation.
(3).Doubtful
Assets must be classified
no higher than Doubtful if any of the following deficiencies of the obligor is present:
permanent overdrawn; location in an industry with poor aggregate earnings or loss
of markets; serious competitive problems; failure of key products; operational losses;
illiquidity, including the necessity to sell assets to meet operating expenses;
cash flow less than
required interest payments;
very poor management; non-cooperative or hostile management; serious doubts of the
integrity of management; doubts about
true ownership; complete
absence of faith in financial statements.
(4)
Bad/Loss
Assets must be classified
no higher than Bad/Loss if any of the following deficiencies of the obligor are present: the obligor seeks new
loans to finance operational losses; location in an industry that is disappearing;
location in the bottom quartile of its industry in terms of profitability; technological
obsolescence; very high losses; asset sales at a loss to meet operational expenses;
cash flow less than production costs; no repayment source except liquidation; presence
of money laundering, fraud, embezzlement, or other criminal activity; no further support by owners.