Loan Classification, Provisioning,
Rescheduling, Write Off
Loan Classification
Objectives of loan classification
Loan classification can be divide into two: 1. Objectives/Quantitative
Criteria and 2. Qualitative Criteria
Frequency and parties related with loan classification
Categories of loans
Types of Loan Required Form
Summary of all forms CL-1
Continuous CL-2
Demand CL-3
Fixed Term CL- 4
STA/MC CL-5
Basis for loan classification
Loan Classification(Objective Criteria)
Types of UC SS DF Bad
loan Stan SMA
dard
Continuous O< 2 2≤0<3 3≤ O<6 6≤O< 9 O≥9
Demand O< 2 2≤0<3 3≤ O<6 6≤O< 9 O≥9
TL (up to 10 lac) O< 2 2≤0<6 6≤ O<9 9≤O< 12 O≥12
TL (more than 10 O< 2 2≤0<3 3≤ O<6 6≤O< 9 O≥9
lac)
SAC/MC O< 12 12≤ O<36 36≤O< O≥60
60
Qualitative Judgement
If any uncertainty or doubt arises in respect of
recovery of any continuous loan, demand loan,
fixed term loan, and short term agricultural and
micro credit loan, the same will have to be
classified on the basis of QJ be it classifiable or
not on the basis of objective criteria. If any
situational changes occur in the stipulations in
terms of which the loan was extended or if the
capital of the borrower is impaired due to adverse
conditions or if the value of collateral decreases or
if the recovery of the loan becomes uncertain due
to any other unfavorable situation, the loan will
have to be classifies on the basis of QJ
Qualitative Judgement: SMA
Loan was not made in compliance with the
bank’s internal policies
Failure to maintain adequate and
enforceable documentation; or poor control
over collateral
Occasional overdrawn within the past year
Below-average or declining profitability
Barely acceptable liquidity
Problems in strategic planning.
Qualitative Judgement: SS
Recurrent overdrawn
Low account turnover
Competitive difficulties
Location in a volatile industry with an acute drop in
demand
Very low profitability that is also declining
Inadequate liquidity; cash flow less than
repayment of principal and interest
Weak management and doubts about integrity of
management
Conflict in corporate governance
Unjustifiable lack of external audit and pending
litigation of a significant nature.
Qualitative Judgement: SS
Primary sources of repayment are
insufficient to service the debt
The banking organization has acquired the
asset without the types of adequate
documentation of the obligor’s net worth,
profitability, liquidity, and cash flow that are
required in the banking organization’s
lending policy, or there are doubts about the
validity of that documentation
Qualitative Judgement: DF
Permanent overdrawn
Location in an industry with poor aggregate
earnings or loss of markets
Serious competitive problems
Failure of key products
Operational losses and illiquidity
Cash flow less than required interest payments
Very poor management
Non-cooperative or hostile management and
serious doubts of the integrity of management
Doubts about true ownership
Complete absence of faith in financial statements.
Qualitative Judgement: B/L
The obligor seeks new loans to finance operational
losses
Location in an industry that is disappearing
Location in the bottom quartile of its industry in
terms of profitability
Technological obsolescence and ; very high losses
Cash flow less than production costs
No repayment source except liquidation
Presence of money laundering, fraud,
embezzlement, or other criminal activity
Qualitative Judgement: B/L
The obligor seeks new loans to finance operational
losses
Location in an industry that is disappearing
Location in the bottom quartile of its industry in
terms of profitability
Technological obsolescence and ; very high losses
Cash flow less than production costs
No repayment source except liquidation
Presence of money laundering, fraud,
embezzlement, or other criminal activity
How a CL can be Declassified?
The decision to move a loan to a more favorable
classification category must be accompanied by
analysis showing that there has been improvement in the
payment performance of the loan and/or the financial
condition of the borrower
It may, with appropriate justification, be taken by BM/
BRM/CI, with the concurrence of the CFO
The final decision must taken by the BoD with
appropriate justification presented by the BM/BRM/CI
who originated the loan in question and the CEO/MD
Any loan classified during the BB’s on-site inspection on
the basis of QJ cannot be declassified without the
consent of BB
Loan Classification
Accounting of the interest of classified loans
Maintenance of provision
Base for Provision:
(i) Outstanding Balance of the Classified Loan – The amount
of Profit Suspense – The value of Eligible Collateral or
(ii) 15% of the Outstanding Balance of the Classified Loan
[whichever is higher]
Eligible Collateral
Determination of Market Value of Eligible
Collateral
Maintenance of Provision
General Provision:
1. @ 0.25% against all UC loans of SME as defined by the SME &
Special Prog. Dept. of BB and @ 1.00% against all UC loan (other
than loans under Consumer Financing, Loans to Brokerage House,
Merchant Banks, Stock Dealers etc., SMA as well as SME Financing
2. @ 5.00% on the UC amount for Consumer Financing whereas it has
to be maintained @ 2.00% on the UC amount for (i) Housing
Finance and (ii) Loans for Professional to set up business under
Consumer Financing Scheme
3. @ 2.00% on the UC amount for loans to Brokerage House,
Merchant Banks, Stock Dealers etc.
4. @ 5.00% on the outstanding amount of loans kept in the SMA
5. @ 1.00% on the off-balance sheet exposures (provision will be on
the total exposure and amount of cash margin or value of eligible
collateral will not be deducted while computing Off-balance sheet
exposure)
6. @ 5.00% on UC amount for Agricultural loan
Maintenance of Provision
Specific Provision: Banks will maintain provision
at the following rates in respect of Classified
Continuous, Demand, and Fixed Term Loans:
1. Sub-Standard : 20.00%
2. DF : 50.00%
3. B/L : 100.00%
Provision for STA and MC:
1. All credit except B/L:5.00%
2. B/L : 100.00%
Eligible Securities
Gold/ Gold Ornaments 100% of Market value
100 % of deposit under lien against the loan
100 % of the value of government bond/Savings
certificate under lien
Guarantees( Govt, BB) 100%
Readily salable Goods under control of Bank 50%
Market Value of mortgaged property maximum
50%
50% of the average market value for last 6
months or 50% of the face value , whichever is
less, of the shares traded in stock exchange.
Loan Rescheduling
Rescheduling of Loans:
Guidelines
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 circular.
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 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.
Rescheduling of Loans:
Guidelines
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.
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.
If required, bank officers shall conduct spot
inspections of the borrower's company/business
place
Rescheduling of Loans:
Guidelines
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.
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.
Time Limit for Rescheduling: CL
Frequenc SS DF B/L
y
First Max 18 months Max 12 Max 12
from the date of months from months
rescheduling the date of from the
rescheduling date of
reschedulin
g
Second Max 12 months Max 9 Max 9 from
from the date of months from the date of
rescheduling the date of reschedulin
rescheduling g
Third Max 6 months from Max 6 Max 6
the date of months from months
rescheduling the date of from the
Time Limit for Rescheduling: DL
Frequenc SS DF B/L
y
First Max 12 months Max 9 Max 9
from the date of months from months
rescheduling the date of from the
rescheduling date of
reschedulin
g
Second Max 9 months from Max 6 Max 6
the date of months from months
rescheduling the date of from the
rescheduling date of
reschedulin
g
Third Max 6 months from Max 6 Max 6
Time Limit for Rescheduling: FTL
Frequency SS DF B/L
First Maximum 36 Max 24 Max 24
months from the months from months
expiry date the expiry from the
date expiry date
Second Max 24 months Max 18 Max 18
from the expiry months from months
date the expiry from the
date expiry date
Third Max 12 months Max 12 Max 12
from the expiry months from months from
the expiry
date the expiry
date
date
Time Limit for Rescheduling: STA and
MC
First Repayment time limit for
Rescheduling rescheduling should not exceed
2 (two) years from the date of
rescheduling
Second Maximum 1(one) year from the
Rescheduling date of rescheduling
Third Maximum 6 months from the
Rescheduling date of rescheduling
Down Payment of Term Loan and STA&MC
Down payment of 15 % of the overdue or 10% of
the total outstanding whichever is lower for first
time rescheduling
Down payment of 30 % of the overdue or 20% of
the total outstanding whichever is lower for
second time rescheduling
Down payment of 50 % of the overdue or 30% of
the total outstanding whichever is lower for more
than second time rescheduling
Rescheduling of CL/DL( Converted into TL): First Time
Overdue Amount Rate of DP
Up to Tk. 1crore 15%
Tk.. 1crore to 5 crore 10% (minimum 15 lakh)
Tk. 5 crore and above 5% (minimum 50 lakh)
Rescheduling of CL/DL( Converted into TL): Second and Third
Time
Second time rescheduling shall be
considered upon receiving cash payment
of minimum 30% of the overdue
installments or 20% of the total
outstanding amount of loan, whichever is
less.
Third rescheduling minimum 50% of the
overdue installments or 30% of the total
outstanding amount of loan, whichever is
less
New Loan facility after Rescheduling of Loans
The borrower whose credit facility has
been rescheduled may avail a new loan
facility with conditions:
Payment of at least 15% of the
outstanding balance
In case of borrowing from other banks, the
same rule will be applicable with NOC from
the rescheduling bank
Export borrowers may be granted further
credit facility (Not being a willful defaulter) ,
if required, subject to settle at least 7.5 %
of the compromise amount.
New Loan facility after Rescheduling of Loans
Prior approval of BB shall have to be obtained if
the loan is related to the director of any Bank
Company
Information on the loan accounts rescheduled
shall be reported to the Credit Information
Bureau (CIB) of BB.
While reporting to the CIB, the rescheduled
loans/advances should be shown as RS-1 for first
time rescheduling, RS-2 for second time
rescheduling and RS-3 for third time rescheduling.
If rescheduling facility is availed through interest
waiver, reporting should be RSIW-1 for first time
rescheduling, RSIW-2 for second time
New Loan facility after Rescheduling of Loans
Number of rescheduling should be
mentioned in the sanction letter as well as
in the date column of sanction/last
renewal/rescheduling in the basic CL form
as RS-1/RS-2/RS-3 or RSIW-1/RSIW-2/
RSIW-3.
Restriction on Extending the Term to maturity of
TL
The loan must be performing (
Unclassified: Standard or SMA )
The decision should be made at the level
where the loan was originally sanctioned
The maturity date may be extended by a
period of time not exceeding 25% of the
current remaining time to maturity
Write-Off
International practice to give a fair face to
the balance sheet
Loans classified as ‘bad or loss’ for five
years or more
Process of write off will be chronological
Cases are to be filled before write-off
‘Debt Collection Unit’
Outside agency
Write-Off
Written off loans to be kept in a separate
ledger
To be reported to the CIB of Bangladesh
Bank
Prior approval of the BB is required for
writing off loans of the directors or former
directors of the banks
THANK YOU
