Dhaka: Bangladesh Bank (BB) has released a master circular detailing new guidelines for loan classification and provisioning, aimed at enhancing risk management and transparency in financial reporting within the banking sector. The directive is part of the central bank's broader strategy to implement an Expected Credit Loss (ECL) methodology-based provisioning system aligned with International Financial Reporting Standard (IFRS 9) by the year 2027. According to Bangladesh Sangbad Sangstha, the newly issued circular categorizes all loans and advances into four distinct groups for classification purposes: Continuous Loan, Demand Loan, Fixed Term Loan, and Short-term Agricultural Credit. The guidelines specify that loans will be deemed overdue from the day following their expiry date or from the creation of a forced loan, depending on the loan's category. For Fixed Term Loans, any installment not paid by its due date will be classified as overdue starting the day after the expiry date. The circular further cla ssifies loans into six categories: Standard-0 (STD-0), Standard-1 (STD-1), Standard-2 (STD-2), Special Mention Account (SMA), Sub-Standard (SS), and Doubtful (DF). Loans overdue for more than three months but less than six months will be classified as 'sub-standard,' while those overdue between six and 12 months will be deemed 'doubtful.' Loans exceeding 12 months overdue will be classified as bad. Under the circular, loans can also be classified based on qualitative judgment, reflecting the borrower's creditworthiness and potential repayment impact. Such classifications may change based on the bank's or Bangladesh Bank's evaluation of repayment improvements or borrower financial condition. However, any reclassification during Bangladesh Bank's inspection based on qualitative judgment requires consent from the bank's Department of Banking Inspection. The circular also addresses interest handling, stating that interest accrued on SS and DF classified loans should be credited to an Interest Suspense Account. A similar approach applies to loans classified as B/L, where interest charging will cease, and any charged interest must be preserved in the Interest Suspense Account. For general provisions, the circular mandates banks to maintain 1% of loan outstanding for STD-0, STD-1, and STD-2 categories, and 5% for SMA. Specific provisions require maintaining 20% of the base for SS, 50% for DF, and 100% for B/L. These are minimum requirements, and banks are encouraged to continuously assess provision adequacy to account for potential losses. Additionally, the circular emphasizes that Islamic banks must comply with this loan classification and provisioning policy for their investments.
