Lesson-8 on Credit

Question: What are different types of loan for the purpose of classification?

Answer:

Continuous Loan: The loan Accounts in which transactions may be made within certain limit and have an expiry date for full adjustment will be treated as Continuous Loans. Examples are: CC, OD etc.

 Demand Loan: The loans that become repayable on demand by the bank will be treated as Demand Loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as regular loan) those too will be treated as Demand Loans. Such as: Forced LIM, PAD, FBP, and IBP etc.

Fixed Term Loan: The loans, which are repayable within a specific time period under a specific repayment schedule will be treated as Fixed Term Loans.

Short-term Agricultural Credit: This will include the short-term credits as listed under the Annual Credit Program issued by the Agricultural Credit Department of Bangladesh Bank. Credits in the agricultural sector repayable within less than 12 months will also be included herein. Short-term Micro-Credits will include any micro-credits for less than Tk.25,000/= and repayable within less than 12 months, be those termed in any names such as Non-agricultural credit, Self-reliant Credit, Weaver's Credit or Bank's individual project credit.

 Question: What are the rules for classification  of Loans/Advances?

Answer:

l       Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment or after Demand by the Bank will be treated as past due/overdue from the following day of the expiry date. This loan will be classified as Sub-standard if it remains past due/overdue for 3 months or beyond but less than 6 months, as `Doubtful' if for 6 months or beyond but less than 9 months and as `Bad-Debt' if for 9 months or beyond.

l       Any Demand Loan if not repaid/rescheduled within the fixed expiry date for repayment or after Demand by the Bank will be treated as past due/overdue from the following day of the expiry date. This Loan will be classified as Sub-standard if it remains past due/overdue for 3 months or beyond but not over 6 months from the date of claim by the bank or from the date of creation of the forced loan; likewise the loan will be classified as "Doubtful' and Bad/loss if remains past due/overdue for 6 months or beyond but not over 9 months and for 9 months and beyond respectively.

In case of Term Loans,

If the amount of `defaulted installment' is equal to or more than the amount of installment (s) due within 3 months, the entire loan will be classified as ``Sub-standard''.

l       If the amount of 'defaulted installment' is equal to or more than the amount of installment (s) due within 6 months, the entire loan will be classified as ''Doubtful.

l       If the amount of 'defaulted installment' is equal to or more than the amount of installment (s) due within 9 months, the entire loan will be classified as ''Bad & Loss.''

Question: What are the rules for maintain General Provision against loan and advances by Bank?

Answer:

(a) (i) Banks will be required to maintain General Provision in the following way :

(1) @ 0.25% against all unclassified loans of Small and Medium Enterprise (SME) as defined by the SME & Special Programmes Department of Bangladesh Bank from time to time and @ 1% against all unclassified loans (other than loans under Consumer Financing, Loans to Brokerage House, Merchant Banks, Stock dealers etc., Special Mention Account as well as SME Financing.)

 (2) @ 2% on the unclassified amount for Small Enterprise Financing.

(3) @ 5% on the unclassified amount for Consumer Financing whereas it has to
be maintained @ 2% on the unclassified amount for (i) Housing Finance and
(ii) Loans for Professionals to set up business under Consumer Financing
Scheme.

(4) @ 5% on the outstanding amount of loans kept in the 'Special Mention  Account' .

(b) (i) Banks will maintain provision at the following rates in respect of classified Continuous,  Demand and Fixed Term Loans:

(1) Sub-standard 20%
(2) Doubtful 50%
(3) Bad/Loss 100%

(ii) Provision in respect of Short-term Agricultural and Micro-Credits is to be maintained at the following rates:

(1) All credits except 'Bad/Loss'(i.e. 'Doubtful', 'Sub-standard', irregular and regular credit accounts) : 5%
(2) 'Bad/Loss' : 100%

c) Banks are required to maintain 1.00 % general provision against Off-balance sheet exposures with effect from December 31, 2008. (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.)

 Question: What are the rules for calculation of Base for Provision for  classified loan?

Answer:

(i) For eligible collaterals of the  following types, provision will be maintained on the outstanding balance of the classified loans less the amount of Interest Suspense and the value of eligible collateral:

a. Deposit with the same bank under lien against the loan,

b. Government bond/savings certificate under lien,

c. Guarantee given by Government or Bangladesh Bank.

(ii) For all other eligible collaterals, the provision will be maintained on the balance calculated as the greater of the following two amounts:

a) Outstanding balance of the classified loan less the amount of Interest  suspense and the value of eligible collateral; and

b) 15% of the outstanding balance of the loan.

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