Bangladesh Bank Circular: Loan Classification and Provisioning

This Master Circular No. 05 issued in June, 2006 aims to:

• Strengthen banks' credit discipline and improve the recovery position of loans and advances by the banks by introducing several circulars that cover:
  • Loan classification,
  • Suspension of interest due,
  • Making of provisions against potential loan loss;
• Bring classification and provisioning regulation in line with international standards by undertaking a phase-wise program for loan classification and provisioning;
• Enable banks to have all existing information on the subject in one place by incorporating all instructions issued from time to time.

The circular:

• Classifies loans into four types: continuous, demand, fixed term and short-term agricultural and microcredit;
• Describes the accounting of the interest of classified loans and their classification into "doubtful," "sub-standard," "interest suspense accounts," etc;
• Sets out the rules governing maintenance of provision.

It also describes the following basis for loan classification:

• Objective criteria such as: past due/overdue, unclassified loans, "Special Mention Accounts," default instalments, etc.
• Qualitative judgements that take over when quantitative judgements cannot be used. This occurs if:
  • Doubt arises with respect to recovery of a loan;
  • There are situational changes in the stipulations of the terms of a loan;
  • Norms of re-scheduling are violated.

The circular also sets out rules for:

• Basis for provision;
• Eligible securities and the determination of their market value.