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Dhaka, Bangladesh (BBN)- The central bank of Bangladesh has issued guidelines on the Internal Credit Risk Rating System (ICRRS), aiming to reduce the volume of classified loans through maintaining credit risk exposure within acceptable levels.
The guidelines along with a model will be a valuable addition to the credit risk management tools, which will help the banks to develop and maintain a better-quality credit portfolio, officials said.
Talking to the BBN, a senior official of the Bangladesh Bank (BB) said the ICRRS will also play an important role in reducing non-performing loans (NPLs) in the country's banking sector.
The BB’s latest moves came against the backdrop of rising trend of non-performing loans (NPLs) in the banking sector in the recent months despite close monitoring by the central bank.
The amount of classified loans jumped by over 20 per cent or BDT 150.37 billion to BDT 893.40 billion as of June 30, 2018 from BDT 743.03 billion as of December 31 last. The amount of NPLs was BDT 741.48 billion a year ago.
The official, however, said some 20 sub-sectors under four key sectors have been included in the model considering financial risks and efficiency of the borrow management.
The existing Risk Grading System (RGS) along with ICRRS and the model will be functional simultaneously until June 30, 2019, he added. "But the banks must implement the ICRRS along with the mode from July 01, 2019.”
The ICRRS refers to the system to analyze a borrower's repayment ability based on information about a customer's financial condition, including their liquidity, cash flow, profitability, debt profile, market indicators, industry and operational background, management capabilities and other indicators.
It also describes the creditworthiness of the borrower of a particular sector based on the assessment criteria set for that sector, according to the guidelines, issued on Tuesday.
The ICRRS also said banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual borrower transaction.
"The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization," it added.
BBN/SSR/AD