Banks bracing for big hit on profits

Banks bracing for big hit on profits: Banks will have a hard time logging in profits in the coming days because of the latest government decision to fix interest rate for lending at 9 percent and for deposit at 6 percent.

Loan Classification in Bangladesh based on Objective Criteria as per latest BRPD Circular no. 03/2019

As per the Bank Company Act, 1991 amended from time to time lastly in 2013, Bangladesh Bank, the central bank of Bangladesh is responsible to set criteria for Loan Classification in Bangladesh and setting provision requirement against the respective classification. As per the latest Bangladesh Bank BRPD Circular 03/2019, Loan Classification in Bangladesh based on Objective criteria is presented below.

Type of Loan	Classification of Loan Objective Criteria under BRPD cir 03/2019
Continuous Loan	Overdue: From the following day of expiry date SMA : Overdue  for 2 months or beyond but less than 3 months SS : overdue for 3 months or beyond but less than 9 months DF: overdue for 9 months or beyond but less than 12 months BL: overdue for 12 months or beyond
Demand Loan	Overdue: From the following day of expiry date SMA: overdue for 2 months or beyond but less than 3 months SS: overdue for 3 months or beyond but less than 9 months DF: overdue for 9 months or beyond but less than 12 months BL: overdue for 12 months or beyond
Term Loan	SMA: overdue installments are equal to or more than the amount of installments due within 2 months. SS: overdue installments are equal to or more than the amount of installments due within 3 months. DF: overdue installments are equal to or more than the amount of installments due within 9 months. BL: overdue installments are equal to or more than the amount of installments due within 12 months. Note: In case of any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the fixed expiry date, the amount of unpaid installment(s) will be termed as ‘past due or overdue installment’ after six months of the expiry date. Remarks: Since, overdue installments will be counted after 6 months of expiry; SMA will be after 8 months, SS after 9 months, DF after 15 months, and BL after 18 months of expiry/due dates. Term Loan below 10 lacs will also be fallen under these criteria.

Explanation on reporting of ‘defaulted’ loan in the format under BRPD Circular 08/2015 [section 2.5 of BRPD circular 3/2019]: According to Bank Company Act 1991; any person, business entity or company will be treated as ‘default borrower’ if their own or associated loan(s) or part of loan(s) or accrued interest/profit remains overdue (as defined by Bangladesh Bank) for 6 months or beyond.  Hence, all DF and BL loans were reported as ‘Defaulted Loan’ in the CL 1 reporting format.

Under the new circular, a portion of ‘SS’ loan, which are overdue for 6 months or beyond but less than 9 months to be recognized as ‘defaulted loan’ to comply with Section: 5(Ga Ga) of Bank Company Act 1991. Accordingly, part of SS (overdue for 6 months or beyond but less than 9 months) along with entire DF and BL loans will be reported as ‘defaulted loan’ in CL 1 format with effect from 30/06/2019.      

Credit Risk Management Basics/Techniques-Part-1 - knowing borrower/ borrower evaluation

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One of the core function of the Bank is lending and the function is called providing credit facilities to the client/borrower. This has involved risk of fulfillment of obligations by the counter party/borrower as per contact. Managing this sort of risk to the acceptable level, Credit Risk Management is essential. Presently, in Bangladesh every Bank has Credit Risk Management Division to mitigate credit risk. Processing the proposals of the borrower for the credit facilities for approval/decline is main function Credit Risk Management Division.

In the approval process one of the most important things to consider is borrower evaluation. Knowing the borrower itself is 1st steps of borrower evaluation. Credit Analyst should know followings of the borrower (proprietor/partners/directors):

Personal life - What types of people(S) the borrower. Whether he is pious or not? Generally pious people have self motivation of repayment of the loan from religious point. Association, Social engagement of borrower is also important. Family back ground of the borrower also important. These are important to judge borrower willingness to pay and honesty. 

Educational Qualification- Knowledge is power. Whether the borrower/sponsors have proper educational strength to sustain the continuously changing business world. Educational back ground to known.

Business Experience and knowledge- Bank should also think about the client/borrower/sponsors related business experience and knowledge. Sponsors in new types of business should be examine with extra care and to be discouraged.

Credit Analyst should not recommend credit facilities without perfectly knowing the proprietor/partners/directors of the respective borrower.