Reasons of Classification/Classification

Methods & De-Classification Process

1. Categories of Investments/Loans & Advances

BRPD Circular No.14 dated: 23-09-2012
a) Continuous Loan – Cash Credit, Overdraft, Baim, BM etc.
b) Demand Loan – Loans that become repayable on demand. If any contingent/other liabilities
are turned to forced loan (without prior approval as regular loan).
c) Fixed Term Loan – Repayment under specific repayment schedule.
d) Short-term Agricultural &
Micro-Credit : 1) Short term Agril.Credit under ACP issued by
Agril.Credit and Financial inclusion Deptt.
2) Credit in agril sector repayable within 12 months.
3) Short term Micro-Credit.

2. Basis long Loan Classification

a) Objective Criteria
1) Past Due/Overdue:
i) Continuous Loan – From the following day of expiry date.
ii) Demand Loan – From the following day of the expiry date of the demand
or after the fixed expiry date.
iii) Fixed Term Loan:
iv) Short-term Agricultural & Micro-Credit

- After six months of the expiry date.

2) Standard – All unclassified loans other than SMA.

3) SMA – A Continuous/Demand/Fixed Term Loan will remain overdue for a period of

2 months or more.
4) Loans except short-term Agrie & Micro-Credit in SMA and SS will not be treated as Defaulted
Loan for purpose of Section 27 KaKa (3) [Section 5(GaGa)] of BCA, 1991.
5) Continuous Loan
i) SS - Past Due/Overdue for 3 months or beyond
ii) DF- Past Due/Overdue for 6 months or beyond
iii) BL - Past Due/Overdue for 9 months or beyond
6) Demand Loan
 i) SS - Past Due/Overdue for 3 months or beyond
ii) DF- Past Due/Overdue for 6 months or beyond
iii) BL - Past Due/Overdue for 9 months or beyond
7) Fixed Term
i) SS -Installments = 3 months
ii) DF-Installments = 6 months
iii) BL-Installments = 9 months
8) Agricultural-Credit
i) SS – After 12 months or irregular mature.
ii) DF – After 36 months or irregular mature.
iii) BL – After 60 months or irregular mature.

B) Qualitative Judgment: To classify investments depending on the degree of

deterioration of quality or the probability of recovery of the investment.

Applicability of Qualitative Judgment

Classification of Loans under Qualitative Judgment will be applicable if,
Any change of circumstances under which credit was extended;
The recovery of the credit becomes uncertain or doubtful resulting from any other unfavorable
situation
The Borrower sustained loss of capital; or
The Value of the security decreases;
The credit is extended without any logical basis;
A suit is filed for recovery of the credit;
The credit is extended without the approval of the competent authority.
Incorporation of Qualitative Judgment:

Despite the probability of any loan being affected due to the reasons stated above or for
any other reasons, if there is any hope for change of the existing condition by resorting
to proper steps, the loan will be classified as 'Sub-standard '.
But even after resorting to proper steps, there exists no certainty of total recovery of
the loan, it will be classified as ‘Doubtful' and
Even after exerting the all-out efforts, there exists no chance of recovery, it will be
classified as ' Bad/Loss ‘

Incorporation of Q/J: For incorporating qualitative judgment, banks must focus on the
likelihood that the borrower will repay all amounts due in a timely manner, using their own
judgment and the following assessment factors:
1) Special Mention: Assets must be classified no higher than SMA
if any of the following deficiencies of bank management is present:
i. The loan was not made in compliance with the bank’s internal policies;
ii. Failure to maintain adequate and enforceable documentation;
iii. Poor control over collateral.
If any of the following deficiencies of the obligor is present:
i. Occasional overdrawn within the past year,
ii. Below-average or declining profitability;
iii. Barely acceptable liquidity;
iv. problems in strategic planning

Assets must be classified no higher than Sub-standard

A. if any of the following deficiencies of the obligor is present: i. recurrent overdrawn, ii.
low account turnover, iii. competitive difficulties, iv. location in a volatile industry
with an acute drop in demand; v. very low profitability that is also declining;
vi. inadequate liquidity; vii. cash flow less than repayment of principal and interest; viii. weak
management; ix. doubts about integrity of management; x. conflict in corporate governance; xi.
unjustifiable lack of external audit; xii. pending litigation of a significantnature.

Incorporation of Q/J: Sub Standard

B. if the primary sources of repayment are insufficient to service the debt and the bank
must look to secondary sources of repayment, including collateral.

C. if 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
.

Incorporation of Q/J: Doubtful

Assets must be classified no higher than Doubtful if any of the following deficiencies of the obligor
is present:
i. permanent overdrawn; ii. location in an industry with poor aggregate earnings or loss of markets;
iii. serious competitive problems; iv. failure of key products; v. operational losses; vi. illiquidity, vii.
including the necessity to sell assets to meet operating expenses; viii. cash flow less than required
interest payments; ix. very poor management; x. non-cooperative or hostile management; xi.
serious doubts of the integrity of management; xii. doubts about true ownership; xiii. complete
absence of faith in financial statements.

Incorporation of Q/J: Bad/Loss

Assets must be classified no higher than Bad/Loss if any of the following deficiencies of the obligor
are present:
i. The obligor seeks new loans to finance operational losses; ii. location in an industry that is
disappearing; iii. location in the bottom quartile of its industry in terms of profitability;
iv. technological obsolescence; v. very high losses; vi. asset sales at a loss to meet operational
expenses; vi. cash flow less than production costs; vii. no repayment source except liquidation; viii.
presence of money laundering, fraud, embezzlement, or other criminal activity; x. no further
support by owners.
Improvement in Classification:
The decision to move a loan from B/L to DF or SS, or from DF to SS, may, with appropriate
justification, be taken by the Chief Credit Officer, with the concurrence of the Chief Financial officer
(with the analysis of development of payment Performance or financial condition.)

From SS, DF, or B/L to SMA or to declassify it completely must be taken by the BoD, with
appropriate justification presented by the branch manager who originated the loan in question and
the Managing Director.

Any loan classified during Bangladesh Bank’s on-site inspection on the basis of qualitative
judgment cannot be declassified without the consent of Bangladesh Bank.

C) Provision
a) General Provision
1) @ .25% against SME loans

2) @ 1% all unclassified

3) @ 5% on Consumer Finances
(2% for Housing & Professionals)

4) @ 2% against Brokerage House

5) @ 5% against SMA

6) @ 1% on off-balance sheet expenses

b) Specific Provision

1) SS – 20%

2) DF – 50%

3) BL – 100%

c) ST Agril Credit

1) All except BL – 5%

2) BL – 100%

Base for Provision

1. Outstanding of Investment – Interest Suspense – Eligible Securities

11. 15% of the outstanding balance.