What do you mean by Loan classification & Provisioning?

Ans. The loan classification & provisioning may be defined as a process by which the risks, associated with the loan accounts is identified and quantified to measure the level of reserves to be maintained by the Bank for providing those risky loans.

Classification means giving each and every loan case a status like UC, SMA, SS, DF, BL through verification of their transaction and repayment performance on a particular date i.e. reference date.

Provisioning means, setting aside fund from the profit against possible loan loss.

What are the objectives of loan classification & provisioning?

Ans.

* To regularize follow up & monitoring activities.

• To strengthen credit discipline.
• To improve recovery position.
• To raise a fund (reserve for provision) gradually which may help the Bank to lessen the burden of loan loss in a single year.
• To comply with central bank’s instruction.
• To consolidate & provide necessary data/information which help the concerned authority of the Bank as well as the government and Bangladesh bank in formulating and activating necessary policy.

What are the different circulars issued by Bangladesh Bank for loan classification & provisioning?

Ans. BCD Circular # 34/1989, 20/1994

BRPD Circular # 16/1998, 02/2005, 08/2005 & 09/2005,

BRPD Circular # 05/2006 Dt. 05.06.2006 (Latest one)

BRPD Circular # 08/2007 Dt. 07.08.2007 (for provision of off balance sheet items).

For the purpose of classification loans and advances divided into different types, please discuss?

a). Continuous Loan: The loan accounts in which transaction may be made within certain limit and have an expiry date for full adjustment will be treated as continuous loan. Such as Overdraft, Cash Credit, Packing Credit, LIM, LTR etc. (CL form -2 is used for reporting this type of loans).

b). Demand Loan: The Loan 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 loans (i.e. without any prior approval as regular loan) those too will be treated as Demand Loan.  Such Forced LIM, PAD, FBP & IBP etc.  (CL form – 3 used for reporting this types of loans).

c). Fixed Term Loan: Loans and advances which have a set repayment schedule of some installments within a fixed term period are called Fixed Term Loan. Fixed Term Loan can be divided into two categories:

i). Term Loan payable within 5 years: The term loan which are payable within a period of 5 years as per the contractually fixed repayment schedule. Any term loan other than STAC/MC allowed for a period of 5 years should be of this types. (CL form – 4 used for reporting this types of loans).

ii). Term Loan payable in more than 5 years term: The Term loan which are repayable in a period more than 5 years as per the contractually fixed repayment schedule. Term of this type of loan will be more than 5 years. (CL form – 5 used for reporting this types of loans).

d). Short Term Agricultural Credit: Will include the short term credits as listed under the annual credit programme issued by the Agricultural credit & special programs Department (ACSPD) of Bangladesh Bank. Credit in the agricultural sector repayable within 12 months will also be included herein.

Short term Micro Credit will include any micro credits not exceeding Tk. 25,000/= and repayable within 12(Twelve) months , be those termed in any names such as non-agricultural credit, self reliant credit, Weavers credit or Bank’s individual project credit.  (CL form – 6 used for reporting this types of loans).

What are the basis for classification of loan?

Ans. a). Objective Criteria b). Qualitative judgment.

What do you mean by Special Mentioned Account? What are objectives to identify a loan as Special Mentioned Account? What are the treatment of interest for this loans?

Ans. A continuous loan, Demand loan or a Term Loan which will remain overdue for a period of 90(Ninety) days or more, will be put in to the “Special Mentioned Account (SMA)”

By treating such loan as “Special Mentioned Account (SMA)” will help banks to look at accounts with potential problems in a focused manner and it will capture early warning signals for accounts showing first sign of weakness.

 Interest accrued on “Special Mentioned Account (SMA)” will be credited to Interest suspense account , instead of crediting the same to income account.

What is the implication/suggestion of “Special Mentioned Account (SMA)” ?

Ans. Loans in the “Special Mentioned Account (SMA)” will have to be reported to the credit information bureau (CIB) of Bangladesh Bank. However it is reiterated/repeat that loans in the “Special Mentioned Account (SMA)” will not be treated as defaulted loan for the purpose of section 27KaKa(3) of the Bank Company Act, 1991.

1. Write down the objective criteria of Pastdue/Overdue loan under different categories?

Ans. i). Any continuous loan if not repaid/renewed within the dixed expiry date for repayment will be treated as past due/overdue from the following day of the expiry date.

ii). Any Demand loan if not repaid/rescheduled within the fixed expiry date for repayment will be treated as past due/overdue from the following day of the expiry date.

iii). In case of any installments(s) or part of installment(s) of a fixed term loan (Not over 5 years) is not repaid within the fixed expiry date, the amount of unpaid installments will be treated as past due/overdue from the following day of the expiry date.

iv). In case of any installments or part of installments of a Fixed Term Loan (Over 5 years) is not repaid within the fixed expiry date, the amount of unpaid installments will be treated as past due/overdue after six

months of the expiry date.

agricultural credit 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.

1. What are the classification segments for different categories of loan?

Ans. a). Any continuous loan will be classified as:

• ‘Sub-standard’ if it is past due/overdue for 6(Six) months or more but less than 09(Nine) months.

• ‘Doubtful’ if it is past due/ overdue for 09(Nine) months or more but less than 12(Twelve) months.

• ‘Bad/Loss’ if it is past due/overdue for 12(Twelve) months or more.

b). Any Demand Loan will be classified as:

• ‘Sub-standard’ if it is past due/overdue for 6(Six) months or more but less than 09(Nine) months from the date of claim by the bank or from the date of creation of forced loan.

• ‘Doubtful’ if it is past due/ overdue for 09(Nine) months or more but less than 12(Twelve) months

from the date of claim by the bank or from the date of creation of forced loan.

• ‘Bad/Loss’ if it is past due/overdue for 12(Twelve) months or more from the date of claim by the bank or from the date of creation of forced loan.

c). In case of any installments or part of installments of a Fixed Term Loan is not repaid within due date, the amount of unpaid installments will be termed as “defaulted installment”.

c). i). In case of Fixed Term Loans which are repayable within maximum five years of time:

• If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due within 06(six) months, the entire loan will be classified as “Sub-standard”.

• If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due within 12(Twelve) months, the entire loan will be classified as “Doubtful”.

• If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due within 18(eighteen) months, the entire loan will be classified as “Bad/Loss”.

c). ii). In case of Fixed Term Loans, which are repayable in more than five years of time:

• If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due within 12(Twelve) months, the entire loan will be classified as “Sub-standard”.

• If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due within 18(Eighteen) months, the entire loan will be classified as “Doubtful”.

• If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due within 24(Twenty four) months, the entire loan will be classified as “Bad/Loss”.

d). The Short Term Agricultural and Micro Credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be classified as “Sub-standard” after a period of 12(Twelve) months, as “Doubtful” after a period of 36(thirty six) months and as “Bad/Loss” after a period of 60(Sixty) months from the stipulated due date as per loan agreement.

What are the basis for classification of loan under “Qualitative Judgment”?

Ans. If any uncertainty or doubt arises in respect of recovery of any continuous loan, demand loan or fixed term loan, the same will have be classified on the basis of qualitative judgment be it is 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 securities 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

Besides if any loan is illogically or repeatedly re-scheduled or the norms of rescheduling are violated or instances or frequently exceeding the loan limit are noticed or legal action is lodged for recovery of the loan or the loans is extended without the approval of the competent authority, it will have to be classified on the basis of qualitative judgment. 

1. What are the criteria to classify loan under “Qualitative Judgment” ?

Ans. i). If there exists any hope for change of the existing condition by restoring to proper steps, the loan, on the basis of qualitative judgment, will be classified as “Sub-Standard”.

ii). Even if after restoring to proper steps, there exists no certainty of total recovery of the loan, it will be classified as “Doubtful”

iii). Even after exerting the all out effort, there exists no chance of recovery, it will be classified as “Bad/Loss” on the basis of qualitative judgment.

Note: The concerned bank will classify on the basis of qualitative judgment and can declassify the loans if qualitative improvement does occur. 

What is the procedure to declassify a loan at Branch level?

Ans. A loan only can be declassified by the approval of the Board of Directors of concern Bank. The Bank will have to inform such declassification to the Department of Banking Inspection (DBI)/ concerned offices of Bangladesh Bank within 15(Fifteen) days of such decision taken by the Board of Directors.

1. Write down the treatment of interest of different types of classified loan?

Ans. If any loan or advance is classified as “Sub-standard” and “Doubtful”, interest accrued on such loan will be credited to Interest suspense account instead of crediting the same to income account. In case of rescheduled loans the interest, if any, will be credited to interest suspense account, instead of crediting the same to t income account.

As soon as any loan or advance is classified as “Bad/Loss”, charging of interest in the same account will cease. In case of filing a law suit for recovery of such loan, interest for the period till filing of the suit can be charged in the loan account in order to file the same for the amount of principal plus interest. But interest this charged in the loan account has to be preserved in the “Interest suspense” account. If any interest is charged on any Bad/Loss account for any other special reason, the same will be preserved in the “interest Suspense” account. If classified loan or part of it is recovered i.e. real deposit is effected in the loan account, first the interest charged and not charged is to be recovered from the said deposit and the principal to be adjusted afterwards.

1. Write down the steps of realization in case of recovery of a classified loan?

Ans. If a classified loan is adjusted or a partial amount of the same is recovered, the adjustment procedure will maintain following order for application of recovered funds:

i). To interest in suspense.

ii). To interest currently due or overdue, oldest amount first

iii). To overdue principal, oldest amounts first.

iv). To principal currently due.

That is, in any given period for a classified loan, repayments are first applied against existing amount of interest in suspense. If repayments cover all suspended interest remaining amounts are applied to currently due interest and so forth through the order given herein above.

1. What do you mean by provisioning? Define the base for provisioning? Enumerate the percentages of provisioning against different unclassified & classified credit facilities?

Ans. Provisioning: This is the accounting process of setting aside funds from the profit against possible loan loss according to status of classifications. The worse the classification status, the more the provision requirement will be. This provision is made gradually, year after year, which help a bank lessen the burden of charging the loan loss as an expense (Write-off) in a single year.

Base for Provisioning: The base for classification will be computed as under:

Aggregate outstanding amount of classified loan less: The amount in interest suspense. Less: The value of eligible securities.

Provisioning against unclassified Loans:

Banks will be required to maintain General Provision in the following way: 

1). @ 1% against all unclassified loan (Other than the loans under Small Enterprise and consumer financing & Special Mentioned Account).

2). @ 2% on the unclassified amount for Small Enterprise financing.

3). @ 5% on the unclassified amount for Consumer financing where it has to be maintained @ 2% on the unclassified amount for: a). Housing Finance & b). Loans for professionals to set up business under consumer financing scheme.

4). @ 5% on the outstanding amount of loans kept in the “Special Mentioned Account” after netting off the amount of interest suspense.

Provisioning against classified Loans:

Banks will maintain provision at the following rates in respect of classified Continuous, Demand & Fixed Term Loans:

a). Sub-Standard: 20%

b). Doubtful: 50%

c). Bad/Loss: 100%

Provision in respect of short term agricultural and micro credits is to be maintained at the following rates:

• All credits except Bad/Loss (i.e. “Doubtful”, “Sub-standard” irregular and regular credit accounts) : 5%
• Bad/Loss : 100%

Provision against off Balance Sheet exposure of the Bank (BRPD Circular # 08/07 Dt. 07.08.07):

i). @ 0.50% provision effective from December 31, 2007

ii). @ 1.00% provision effective from December 31, 2008

1. Define “Eligible Security” as per Bangladesh Bank guideline?

Ans. As per Bangladesh Bank’s BRPD Circular # 08 Dt. 27.04.2005 value of eligible securities are:

i). 100% value of deposit which are under lien against credit.

ii). 100% value of Gold & ornaments pledged with the Banks.

iii). 100% value of under lien Government Bond & Savings Certificate.

iv). 100% value of Guarantee provided by the GOB or Bangladesh Bank.

v). 50% market value of easily marketable commodities under direct control of Bank.

vi). Highest 50% market value of mortgaged land & building.

vii). In case of shares & securities which are in trade at DSE or CSE –50% of last 06(Six) moths average market value or 50% of face value whichever is lower.  

1. Write down Bangladesh Bank’s guide line regarding “Market value of Eligible Security”?

Ans.

a). Easily marketable goods will mean pledged, easily encashable/saleable goods that remain under full control of the Bank. However, while the concerned bank branch official will conduct periodic inspection to verify as to whether issues such as the suitability of goods for use, expiry period, appropriateness of documentary evidences, up to date insurance cover, same will have to assessed by the professional assessor from time to time.

b). For land and building, banks will have to ensure whether title of documents are in order and concerned land and building will have to valued by the professional valuation firm along with completion of proper documentation in favor of the bank. In absence of professional valuation firm certificate in favor of such valuation will have to be collected from the specialized engineer. Nevertheless, temporary houses including tin shed structure shall not be shown as building.

Note:  Banks are also advised to maintain complete statement of eligible securities on a separate sheet in the concerned loan file. Information such as description of eligible securities, their assessment by recognized firm, marketability of the commodity, control of the Bank and reasons for considering eligible securities etc. will have to included in that sheet. 

1. Write down the reporting method of different CL statement?

Ans. i). CL-1 is the summary of 5 other forms.

ii). CL-2 is for reporting loan classification of continuous loan

iii). CL-3 is for reporting loan classification of Demand loan.

iv). CL-4 is for reporting loan classification or term loans which are repayable within maximum 05(Five)

years.

v). CL-5 is for reporting loan classification of term loan of over 05(Five) years.

vi). CL-6 is for reporting loan classification of Short Term Agricultural & Micro Credit.