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.
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