The A – Z of Classified Investment

Faq-Classified investment related questions are given below:

✅ Question : 01 :: What is the  Categories of Loans and Advances ?

Ans: All loans and advances will be grouped into four (4) categories for the purpose of classification, namely- (a) Continuous Loan (b) Demand Loan (c) Fixed Term Loan and (d) Short-term Agricultural & Micro- Credit.

✅ Question : 02 :: What is Continuous Loan?

Ans: 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 Loan. Examples are: Cash Credit, Overdraft, etc.

✅ Question : 03 :: What is Demand Loan?

Ans: Demand Loan: The loans that become repayable on demand by the bank will be treated as Demand Loan. If any contingent or any other liabilities are turned to forced loan (i.e. without any prior approval as regular loan) those too will be treated as Demand Loan. Such as: Forced Loan against Imported Merchandise, Payment against Document, Foreign Bill Purchased, and Inland Bill Purchased, etc.

✅ Question : 04 :: What is Fixed Term Loan?

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

✅ Question : 05 :: What is ACFID?

Ans: ACFID is the acronym of Agricultural Credit and Financial Inclusion Department.

✅ Question : 06 :: What is Short-term Agricultural & Micro-Credit?

Ans: Short-term Agricultural & Micro-Credit: Short-term Agricultural Credit will include the short-term credits as listed under the Annual Credit Programme issued by the Agricultural Credit and Financial Inclusion Department (ACFID) of Bangladesh Bank. Credits in the agricultural sector repayable within 12 (twelve) months will also be included herein. Short-term Micro-Credit will include any micro-credits not exceeding an amount determined by the ACFID of Bangladesh Bank from time to time and repayable within 12 (twelve) 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 : 07 :: What is Basis for Loan Classification?

Ans: Basis/Criteria for Loan Classifications; Classification of Investment & other assets; according to Bangladesh Bank Circular:

Objective Criteria:

Note: O = Overdue, SS=Substandard, DF=Doubtful, SMA=Special Mention Account, SAC=Short Term Agricultural Credit, MC=Micro Credit, N/A=Not Applicable.

✅ Question : 08 :: What is Basis of overdue of various loan?

Ans: Past Due/Over Due:

(i) Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment or after the demand by the bank will be treated as past due/overdue from the following day of the expiry date.

(ii) Any Demand Loan if not repaid within the fixed expiry date for repayment or after the demand by the bank will be treated as past due/overdue from the following day of the expiry date.

(iii) In case of any instalment(s) or part of instalment(s) of a Fixed Term Loan is not repaid within the fixed expiry date, the amount of unpaid instalment(s) will be treated as past due/overdue from the following day of the expiry date.

(iv) The Short-term Agricultural and Micro-Credit if not repaid within the fixed expiry date for repayment will be considered past due/overdue after six months of the expiry date.

✅ Question : 09 :: What is Standard loan?

Ans: All unclassified loans other than Special Mention Account (SMA) will be treated as Standard.

✅ Question : 10:: When a Continuous loan, Demand loan or a Term Loan will be overdue?

Ans: A Continuous loan, Demand loan or a Term Loan which will remain overdue for a period of 02 (two) months or more, will be put into the “Special Mention Account(SMA)”. This will help banks to look at accounts with potential problems in a focused manner and it will capture early warning signals for accounts showing first sign of weakness. Loans in the “Special Mention Account (SMA)” will have to be reported to the Credit Information Bureau (CIB) of Bangladesh Bank.

✅ Question : 11 :: What is Special Mention Account(SMA)?

Ans: A Continuous loan, Demand loan or a Term Loan which will remain overdue for a period of 02 (two) months or more, will be put into the “Special Mention Account(SMA)”. This will help banks to look at accounts with potential problems in a focused manner and it will capture early warning signals for accounts showing first sign of weakness. Loans in the “Special Mention Account (SMA)” will have to be reported to the Credit Information Bureau (CIB) of Bangladesh Bank.

Loans except Short-term Agricultural & Micro-Credit in the “Special Mention Account” and “Sub-Standard” will not be treated as defaulted loan for the purpose of section 27 KaKa(3) [read with section 5(GaGa)] of the  Banking Companies Act, 1991.

✅ Question : 12 :: When a continuous loan will be classified?

Ans:  Any continuous loan will be classified as:

 ‘Sub-standard’ if it is past due/overdue for 03 (three) months or beyond but less than 06 (six) months.

‘Doubtful’ if it is past due/overdue for 06 (six) months or beyond but less than 09 (nine) months

‘Bad/Loss’ if it is past due/overdue for 09 (nine) months or beyond.

✅ Question : 13 :: When a Demand Loan will be classified?

Ans:  Any Demand Loan will be classified as:

i. ‘Sub-standard’ if it remains past due/overdue for 03 (three) months or beyond but not over 06 (six) months from the date of expiry or claim by the bank or from the date of creation of forced loan.

ii. ‘Doubtful’ if it remains past due/overdue for 06 (six) months or beyond but not over 09 (nine) months from the date of expiry or claim by the bank or from the date of creation of forced loan.

iii. ‘Bad/Loss’ if it remains past due/overdue for 09 (nine) months or beyond from the date of expiry or claim by the bank or from the date of creation of forced loan.

✅ Question : 14 :: When a instalment(s) Loan will be classified?

Ans:  In case of any instalment(s) or part of instalment(s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid instalment(s) will be termed as ‘past due or overdue instalment’. In case of Fixed Term Loans:

1. If the amount of past due instalment is equal to or more than the amount of instalment(s) due within 03 (three) months, the entire loan will be classified as ”Sub-standard”.
2. If the amount of past due instalment is equal to or more than the amount of instalment(s) due within 06 (six) months, the entire loan will be classified as ”Doubtful”.
3. If the amount of ‘past due instalment is equal to or more than the amount of instalment(s) due within 09 (nine) months, the entire loan will be classified as ”Bad/Loss”.

Explanation: If any Fixed Term Loan is repayable on monthly instalment basis, the amount of instalment(s) due within 06 (six) months will be equal to the sum of 06 monthly instalments. Similarly, if the loan is repayable on quarterly instalment basis, the amount of instalment(s) due within 06 (six) months will be equal to the sum of 2 quarterly instalments.

✅ Question : 15 :: When a Short-term Agricultural and Micro-Credit Loan will be classified?

Ans:  The Short-term Agricultural and Micro-Credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be classified as ‘Substandard ‘ after a period of 12 months, as ‘Doubtful’ after a period of 36 months and as ‘Bad/Loss’ after a period of 60 months from the stipulated due date as per the loan agreement.

✅ Question : 16 :: What is Qualitative Judgement ?

Ans:   Qualitative Judgement:

If any uncertainty or doubt arises in respect of recovery of any Continuous Loan, Demand Loan or Fixed Term Loan, the same will have to be classified on the basis of qualitative judgement 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 the collateral decreases or if the recovery of the loan becomes uncertain due to any other unfavourable situation, the loan will have to be classified on the basis of qualitative judgement .

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, on the basis of qualitative judgement, 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 ‘ on the basis of qualitative judgement.

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

1. Assets must be classified no higher than Special Mention if any of the following deficiencies of bank management is present: the loan was not made in compliance with the bank’s internal policies; failure to maintain adequate and enforceable documentation; or poor control over collateral.

1. Assets must be classified no higher than Special Mention if any of the following deficiencies of the obligor is present: occasional overdrawn within the past year, below-average or declining profitability; barely acceptable liquidity; problems in strategic planning.

(2) Sub-standard

1. Assets must be classified no higher than Sub-standard if any of the following deficiencies of the obligor is present: 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; doubts about integrity of management; conflict in corporate governance; unjustifiable lack of external audit; pending litigation of a significant nature.

1. Assets must be classified no higher than Sub-standard if the primary sources of repayment are insufficient to service the debt and the bank must look to secondary sources of repayment, including collateral.

iii. Assets must be classified no higher than Sub-standard 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.

(3) Doubtful

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

(4) Bad/Loss

Assets must be classified no higher than Bad/Loss if any of the following deficiencies of the obligor are present: 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; very high losses; asset sales at a loss to meet operational expenses; cash flow less than production costs; no repayment source except liquidation; presence of money laundering, fraud, embezzlement, or other criminal activity; no further support by owners.

✅ Question : 17 :: How to make Improvement in Classification?

Ans:  From time to time, in the judgment of the bank, the condition of a loan may improve and it may be justified to move it to a more favourable classification category. The decision to move a loan to a more favourable classification category must be accompanied by analysis showing that there has been improvement in the payment performance of the loan and/or in the financial condition of the borrower. The decision to move a loan from Bad/Loss to Doubtful or Substandard, or from Doubtful to Substandard, may, with appropriate justification, be taken by the Chief Credit Officer, with the concurrence of the Chief Financial Officer. The decision to move a loan from Substandard, Doubtful, or Bad/Loss to Special Mention Account or to declassify it completely must be taken by the Board of Directors, with appropriate justification presented by the branch manager who originated the loan in question and the Managing Director.

A bank may request the concerned Department of Banking Inspection of Bangladesh Bank to review the classification of any loan for which there is a disagreement on classification that is not resolved during the on-site  inspection. Bangladesh Bank will respond to the bank within 15 days of receiving such request. However, in any case where there is a lingering disagreement between the classification determined by bank management and the classification determined by Bangladesh Bank, the judgment of Bangladesh Bank will prevail. Any loan classified during Bangladesh Bank’s on-site inspection on the basis of qualitative judgement cannot be declassified without the consent of Bangladesh Bank.

✅ Question : 18 :: What is the Accounting of the Interest of Classified Loans?

Ans:  Accounting of the Interest of Classified Loans:

If any loan or advance is classified as ‘Sub-standard’ and ‘Doubtful’, interest accrued on such loan will be credited to Interest Suspense Account, instead of crediting the same to Income Account. In case of rescheduled loans the unrealized interest, if any, will be credited to Interest Suspense Account, instead of crediting the same to Income Account.

As soon as any loan or advance is classified as ‘Bad/Loss’, charging of interest in the same account will cease. In case of filing a law-suit for recovery of such loan, interest for the period till filing of the suit can be charged in the loan account in order to file the same for the amount of principal plus interest. But interest thus charged in the loan account has to be preserved in the ‘Interest Suspense’ account. If any interest is charged on any ‘Bad/Loss’ account for any other special reason, the same will be preserved in the ‘Interest Suspense’ account. If classified loan or part of it is recovered i.e., real deposit is effected in the loan account, first the interest charged and accrued but not charged is to be recovered from the said deposit and the principal to be adjusted afterwards.

✅ Question : 19 :: How to maintenance of Provision?

Ans:  Maintenance of Provision:

 a) General Provision: 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) @ 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.

(3) @ 2% on the unclassified amount for Loans to Brokerage House, Merchant Banks, Stock dealers, etc.

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

(5) @1% 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.)

b) Specific Provision: 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%

Provision for Short-term Agricultural and Micro-Credits:

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

(2) ‘Bad/Loss’ : 100%

 Provisions to Cover All Expected Losses:

The expressed minimum percentages of provisions in Paragraph 4 for exposures in each classification category are absolute minimums, and banks are encouraged to set aside higher provisions if expected losses on the loan pools (for general provisions) or individual loans (for specific provisions) warrant.

✅ Question : 20 :: What is Base for Provision?

Ans:  Base for Provision:

For eligible collaterals of the following types, provision will be maintained at the stated rates in Para 4 on the outstanding balance of the classified loans less the amount of Interest Suspense and the value of eligible collateral:

1. Deposit with the same bank under lien against the loan,
2. Government bond/savings certificate under lien,
3. Guarantee given by Government or Bangladesh Bank.

For all other eligible collaterals, the provision will be maintained at the stated rates in Para 4 on the balance calculated as the greater of the following two amounts:

1. outstanding balance of the classified loan less the amount of Interest Suspense and the value of eligible collateral; and

1. 15% of the outstanding balance of the loan.

However, the base for provision shall be further reviewed towards closer convergence with international best practice standards.

✅ Question : 21 :: What is Eligible Collateral ?

Ans:  Eligible Collateral :

In the definition of ‘Eligible Collateral’ as mentioned in the above paragraph the following collateral will be included as eligible collateral in determining base for provision:

-100% of deposit under lien against the loan

-100% of the value of government bond/savings certificate under lien

-100% of the value of guarantee given by Government or Bangladesh Bank

-100% of the market value of gold or gold ornaments pledged with the bank.

– 50% of the market value of easily marketable commodities kept under control of the bank

– Maximum 50% of the market value of land and building mortgaged with the bank

– 50% of the average market value for last 06 months or 50% of the face value, whichever is less, of the shares traded in stock exchange.

✅ Question : 22 :: How to determine Market Value of Eligible Collateral ?

Ans:  Determination of Market Value of Eligible Collateral :

In determining market value of easily marketable commodities, land and building, banks are advised to follow the instructions mentioned below:

(a) Easily marketable goods will mean pledged, easily encashable/saleable goods that remain under full control of the bank. However, while the concerned bank branch official will conduct periodic inspection to verify as to whether requirements have been met such as the suitability of goods for use, expiry period, appropriateness of documentary evidences, and up to date insurance cover, the same will have to be assessed by the professional assessor from time to time.

(b) For land and building, banks will have to ensure whether title documents are in order and concerned land and building will have to be valued by the professional valuation firm along with completion of proper documentation in favour of the bank. In the absence of a professional valuation firm, a certificate in favour of such valuation will have to be collected from a specialized engineer. Nevertheless, temporary houses including tin-shed structure shall not be shown as building.

In order to facilitate the on-site inspection by Bangladesh Bank’s Department of Banking Inspection, banks are also advised to maintain a complete statement of eligible collateral on a separate sheet in the concerned loan file. Information such as a description of eligible collateral, their assessment by a recognized firm, marketability of the commodity, control of the bank, and reasons for considering eligible collateral etc. will have to be included in that sheet.

✅ Question : 23 :: How to report classification- activities on quarterly basis ?

Ans:  In terms of the Bangladesh Bank  policies, the banks will conduct their classification- activities on quarterly basis. These activities must include periodic revaluations of collateral, no less frequently than one year for movables and no less frequently than three years for immovables.

The classification of each individual loan must be justified in writing and the documentation must contain the signatures of both the persons assigning the classification and the person reviewing it. These written justifications must be maintained in the loan files and be available for viewing by the Bangladesh Bank inspection teams. In this connection revised forms for loan classification, provisioning and interest suspense i.e CL-1 to CL-5 have been enclosed herewith which will replace the existing ones.

(i) CL-1 is the compilation/summary of 4 other forms. This form is for showing summary of classification status for different loan categories mentioned earlier along with staff loan.

(ii) CL-2 is for reporting loan classification of Continuous Loan

(iii) CL-3 is for reporting loan classification of Demand Loan

(iv) CL-4 is for reporting loan classification of Term Loan

(v) CL-5 is for reporting loan classification of Short-term Agricultural and Micro-Credit.

Bank branches shall send the completed forms (CL-1 to CL-5) to their Head Office. The Head Offices of banks should make arrangements for scrutiny of all the forms prepared by the branches. Where necessary, they should carry out corrections and ensure maintenance of the corrected forms in the records of the branch. After scrutiny of all forms (CL-1, CL-2, CL-3, CL-4 and CL-5 ) prepared by branches and being satisfied with the results, they should prepare a consolidated position of classification, provisions and interest suspense using form CL-1 and send the same to the Banking Regulation and Policy Department of Bangladesh Bank and upload in Enterprise Data Warehouse (EDW) of Bangladesh Bank. Banks are also advised to preserve the CL statements in both their Head Offices and branches for inspection by the Bangladesh Bank inspection team.

Banks having Offshore Banking Unit (OBU) will report to Bangladesh Bank in similar way in a separate CL-1 named OBU SUMMARY OF LOAN CLASSIFICATION AND PROVISION (enclosed herewith). In this regard, concerned banks will prepare and send data on OBU transactions for A, B and C type in separate worksheets along with the consolidated statement through the said separate CL-1 named OBU SUMMARY OF LOAN CLASSIFICATION AND PROVISION to the Banking Regulation and Policy Department and Credit Information Bureau (CIB) of Bangladesh Bank.

✅ Question : 24 :: What is BRPD?

Ans: BRPD is the acronym of Banking Regulation and Policy Department.

✅ Question : 25 :: What is CIB?

Ans: CIB is the acronym Credit Information Bureau.

✅ Question : 26 :: What is EDW ?

Ans: EDW is the acronym Enterprise Data Warehouse of Bangladesh Bank.

✅ Question : 27 :: What is OBU ?

Ans: OBU is the acronym Offshore Banking Unit.

FAQ- Classified investment