Tuesday, 6 December 2011

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. 

2 comments:

  1. The classification exercise should be focused on the integrity of asset value, with specific reference to the criteria and requirements of the risk-based loan classification. Relationship banking, I think also help a lot in improving this criteria.

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