Dhaka, Bangladesh (BBN)- The central bank of Bangladesh has tightened its loan classification, provisioning and rescheduling policies aiming to ensure stability in the country’s banking sector, officials said.
Under the new provisions, a continuous loan will be classified for non-repayment within three months instead of six months fixed earlier.
The base for provisioning has been fixed at minimum 20 percent of the outstanding balance of the loan while rescheduling will be limited to three times.
“We’ve taken the measures to ensure stability in the banking sector,” a senior official of the Bangladesh Bank (BB) said while explaining the main objective of the latest moves.
He also said such steps will help ensure efficient and effective credit management in the banking sector.
The central bank issued two separate circulars in this connection on Thursday and asked the chief executives of scheduled banks to maintain the new measures for classification, provisioning and rescheduling of loans.
“Any loan will turn into a ‘Special Mention Account (SMA)’ which is overdue for two months instead of three months fixed earlier,” the central banker said, adding that the loans in the SMA will not be treated as default loan.
The BB asked the banks to place the loans that remain overdue for a period of two months instead of three months or more into the SMA to ensure discipline in credit management by the banking sector.
“The interest accrued on such loan will be credited to ‘interest suspense account’ instead of crediting it to ‘income account’ for reflecting the real picture of profit in the balance sheet,” another BB official said.
He also said this will help banks to look at accounts with potential problems in a focused manner and it will capture early warning signals for accounts showing the first sign of weakness.
Loans in the “Special Mention Account (SMA)” will have to be reported to the Credit Information Bureau (CIB) of the Bangladesh Bank, according to the circular.
“We’ve taken the latest measures relating to classification, provisioning and rescheduling of loan in line with international standards,” the central banker said, adding international best practices require that a loan will be classified as non-performing if its principal and interest are of three months or more in arrears.
“Early recognition of non-performing loans (NPL) stimulates collection efforts and helps reduce the possibility of loss of such assets,” he noted.
Under the new provisions, any continuous loan will be classified as ‘Substandard’ if it is past due/overdue for three months or beyond but less than six months.
It will be ‘Doubtful’ if it is past due/overdue for six months or beyond but less than nine months while it will be ‘Bad/Loss’ if it is past due/overdue for nine months or beyond.
“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 ‘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,” the central bank said in its circular.
The BB official said the provisioning base will be at least 20 per cent of the outstanding balance of loan which was zero per cent in some causes earlier.
“The banks will have to calculate the base for provisioning considering the outstanding balance of the loan deducting the amount of interest suspense and the value of eligible collateral,” he noted. The banks will be allowed to reschedule their loans maximum three times by paying the required payments, according to the circular.
“There is no scope for evergreen loan after rescheduling for three times,” the central banker said, adding that all the required principal and interest must be paid during the rescheduling period. “If the amount of defaulted installments is equal to the amount of three months’ installments, the loan will be classified as Bad/Loss,” the central bank said.
Meanwhile, bankers sought some time for implementation of the BB’s new measures relating to loan classification, provisioning and rescheduling, saying that it would hit profitability of the commercial banks by the end of this year.
“The amount of classified loans will increase if the move comes into effect immediately,” a chief executive of a leading private commercial bank said.
BBN/SSR/AD-15June12-11:55 am (BST)