CLASSIFICATION AND INTEREST SUSPENSE OF RESCHEDULED LOANS: BRPD Circular no. 15, dated September 23, 2012

Rescheduled loans may be put into any category of classification by the bank considering the existing financial soundness and repayment capacity of the borrower, subject to the accumulated amount in interest suspense account not being taken into income account, unless actually realized. Upon classification, applicable provisions have to be maintained, according to the Master Circular: Loan Classification and Provisioning (BRPD Circular No. 14/2012). These classifications will be reviewed by Bangladesh Bank inspectors. However, regardless of the classification category into which the loan is placed by the bank, a rescheduled loan will not be considered a "defaulted loan," and the borrower will not be considered a "defaulted borrower" as these terms are understood in the context of section 27KaKa(3) [read with section 5(GaGa)] of the Banking Companies Act, 1991, unless such loan has not been repaid after reaching the maximum number of allowable reschedulings. Interest accrued on rescheduled loans will be subject to the accounting treatment that is appropriate for the classification category of the loan, in line with the Master Circular: Loan Classification and Provisioning (BRPD Circular No. 14/2012) just as if the loan had not been rescheduled.

GUIDELINES FOR CONSIDERING APPLICATION FOR LOAN RESCHEDULING: Ref.BRPD Circular No. 15 dt. September 23, 2012

Banks shall comply with the following instructions while considering application for loan rescheduling of non-performing loan (loans classified as Sub-standard, Doubtful and Bad/Loss):
a) The bank must have a policy approved by its Board of Directors in place that defines the circumstances and conditions under which a loan may be rescheduled, consistent with this BB circular. These conditions may be stricter than those contained in this circular and cannot be lenient in any case. The policy must include controls to avoid the routine rescheduling and repeat rescheduling of loans in those cases where borrowers are experiencing financial difficulty or there is doubt that the full amount of the loan will be recovered. In particular, the policy should place strict limits, or even prohibit, rescheduling of loans to business enterprises in unproductive sectors, or unprofitable business enterprises in productive sectors. If exceptions are made for certain sectors/business enterprises that do not meet the above guidelines, those sectors/business enterprises should be identified in the policy and a justification for rescheduling should be given.
b) When a borrower asks for rescheduling of loan, the bank shall meticulously examine the causes as to why the loan has become non-performing. If it is detected from such review that the borrower has diverted funds elsewhere or the borrower is a habitual loan defaulter, the bank shall not consider the application for loan rescheduling and shall take/continue all legal steps for recovery of the loans.
c) If a borrower while applying for rescheduling, pays the required down payment in cash at a time, the bank must address the application within 03 (three) months upon receipt. If the borrower gives any cheque, pay order or any other instrument against down payment, the bank must ensure encashment of such instrument before processing of the rescheduling case. Any previous payment from time to time shall not be treated as a down payment.
d) Banks while considering loan rescheduling, must consider overall repayment capability of the borrower taking into account the borrower's liability position with other banks and financial institutions.
e) Banks shall review the borrower's cash flow statement, audited balance sheet, income statement and other financial statements in order to ensure whether the borrower would be able to repay the rescheduled installments/existing liability or not.
f) If required, bank officers shall conduct spot inspections of the borrower's company/business place to ensure that the concerned company/business enterprise would be able to generate a surplus to repay the liability of rescheduling. Banks shall preserve such reports in their branches for Bangladesh Bank’s inspection.
g) If a bank is satisfied after due diligence as mentioned above that the borrower will be able to repay, the loan may be rescheduled. Otherwise, bank shall take all legal steps to realize the loan and make necessary provision.
h) Rescheduling of any loan must be justified in written statement by the bank's Credit Committee. The statement must give reasons why the rescheduling is beneficial to the long-run profitability and capital adequacy of the bank, including the factors that cause the Credit Committee to believe that the loan will ultimately be repaid in full. The statement must also explain the impact of this rescheduling on the bank’s liquidity position and the needs of other customers

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.