Basis/Criteria for Loan Classifications; Classification of Investment & other assets; according to Bangladesh Bank Circular:

Objective Criteria:

Types of loan	UC		SS	DF	Bad & Loss
	Standard	SMA
Continuous	No overdue & overdue up to 2 months	Overdue more than 2 months.	Overdue more than 3 months	Overdue more than 6 months	Overdue more than 9 months
Demand	No overdue & overdue up to 2 months	Overdue more than 2 months	Overdue more than 3 months	Overdue more than 6 months	Overdue more than 9 months
Term Loan	No overdue & overdue up to 2 months	Overdue more than 2 monthly installments	Overdue more than 3 monthly installment	Overdue more than 6 monthly installment	Overdue more than 9 monthly installments
Short Term Agricultural & Micro Credit	No overdue & overdue up to 12 months		Irregular more than 12 months	Irregular more than 36 months	Irregular more than 60 months

Note: O = Overdue, SS=Substandard, DF=Doubtful, SMA=Special Mention Account, SAC=Short Term Agricultural Credit, MC=Micro Credit, N/A=Not Applicable.

Investment and Other Assets Classification and Provisioning System:

As per Bangladesh Bank, BRPD Circular No. 14 dated June 25, 2001 guidelines for classification and provisioning of investment and other assets are as follows:

01.   For Investment:

·         The investment balance other than Govt. securities, which is shown in the books of account under the head of Investment that is security investments in private companies say share, debenture etc. will not come into the direct classification rules.

·         But, these investments are to be valued on months basis as per qualitative criteria from the reference date and if the market value of the investments becomes lower than book value, the difference would be treated as investment loss.

·         100% provision is to be required for the amount of investment loss.

02.   For the other assets:

Sometimes unadjusted expenditures are shown in the books of account under the head of Other Assets. The classification rules will be applied directly on these unadjusted expenditure.

2.1 Unadjusted Expenditure:

Unadjusted expenditure items like business development expenses, travelling, entertainment, salaries, advertisement, and sundry expenses, etc. include in other assets but these are not actual assets for the banks. If no adjustment is made in regard of these assets within 1(one) year from the date of creation of such expenditures, it will be classified as ‘Bad/Loss’ and it is required to keep 100% provision against these expenditures.

2.2 Suit Filling / Legal Expenses:

If suit filing or legal expenses is included in the other assets, the expenses in regard of legal proceeding under process will have some uncertainty and for this reason it has to be classified as ‘Doubtful’ and 50% provision is required to maintain this item. If there is any unadjusted legal expenses against settle case, this has to be classified as ‘Bad/Loss’ and 100% provision is required.

2.3 Fund Defalcation / Protested Bills:

Due to fraud – forgeries, robbery, fund defalcation, etc. such type of item is created. By applying qualitative judgment, if it is expected that it is possible to recover from the person(s) who are involved with it then it will be treated as ‘Doubtful’ and 50% provision is required. If it is unlikely to recover whole or part amount then it will be treated as Bad/Loss and 100% provision is required.

2.4 Other Expenses / Losses: Other expenses and losses which are included under ‘Other Assets’ have to be treated as ‘Bad/Loss’ and 100% provision is required for that. 

Major forms of loans and advances as per latest BRPD Circular:

a.       Continuous Loan: The loan which is sanctioned without specific repayment schedule but there is a specific expiry date. Example: OD, CC, PC, LIM, LTR etc.

b.      Demand Loan: When loan is sanctioned on the basis of repayment depends upon the demand of the bank than it can be treated as demand loan. Contingent or other liabilities which are converted into forced loan (for which there is no previous formal approval as regular credit) are also to be treated as demand loan. Example: LIM, PAD, FBP, IBP etc.

c.       Term Loan: The loans which have specific expiry dates for repayment and for which repayment is scheduled through specific repayment schedule are treated as fixed term loan. Example: Project Finance, Industrial Finance etc.

d.      Short Term Agricultural Credit and Micro-Credit: Short Term Agricultural Credit and Micro-Credit means the credit which are enlisted as short term credit under the Annual Credit Program announced by Agricultural Credit Department of Bangladesh Bank. Credit in agricultural sector repayable within 12 months is also included in this category. Short Term Micro-Credit means the credit which have loan limit less than Tk. 25000.00 and repayable within 12 months. Micro credit may be even non-farm credit, self employment credit, loom-loan or any forms of credit under the own credit program of the banks.

LOAN CLASIFICATION, PROVISIONING

Loan classification is the act of grouping or arranging of loans and advances according to their status like unclassified, substandard, doubtful and bad-loss based on given criteria.

Provisioning means setting aside certain fund from current year profit against possible loan losses.

Effects of Loan classification:

·         Interests applied on loan are not taken into account because such interests are to be taken into account only on its realization.

·         Banks have to make provisions on classified loans as per guidelines provided by the Bangladesh Bank from income earned by them on performing loan.

Objective of loan classification:      

·         Find out net-worth of a bank.

·         Assess financial soundness of bank.

·         Determine required provision and the amount of interest suspense.

Importance of Loan Classification:

·         Strengthen credit discipline;

·         Improve loan recovery positions &

·         Make future planning of loan.