BB tightens loan default criteria

Infographic: TBS

All types of loans will be classified as non-performing after three months of being overdue – instead of the current six months – effective from April 2025, as the central bank aligns the rule with international best practices under Basel III.

The Bangladesh Bank yesterday issued a master circular, amending the classification and provisioning of all loans, which experts believe will result in a large amount of credit turning into non-performing loans (NPLs).

Central bank officials said the overdue policy earlier was according to international practices since 2012.

Since 2019 during the Awami League regime, borrowers of term loans were allowed a six-month grace period after the initial three-month overdue period, facilitating habitual loan defaulters. This means that if a borrower failed to pay their loan instalment within nine months, it would be classified as an NPL.

But since September, the overdue period has been reduced from nine months to six months, in line with conditions set by the International Monetary Fund (IMF) as part of a $4.7 billion loan package for Bangladesh.

Effective immediately, NPLs in the banking sector sharply surged by a staggering Tk73,586 crore in the September quarter, marking a record quarterly increase.

By the end of September, total NPLs rose to Tk2,84,977 crore, accounting for nearly 17% of the country's outstanding loans, which total nearly Tk16.83 lakh crore.

Selim RF Hussain, managing director of BRAC Bank, told The Business Standard, "If the Bangladesh Bank's new master circular is aligned with international standards, we have to accept it.

"It will create some difficulties for banks in the short term."

The seasoned banker called for recognising the stressed assets in the country's banking sector and expressed his hope that the sector will bounce back.

Given the changes in the economic cycle, global dynamics, borrowers' risk profiles over time, and international best practices, it is crucial for supervisors to regularly review and update regulations on NPLs and provisioning policies to ensure more effective risk management. 

Basel III standards also require supervisors to closely monitor whether banks have robust policies and processes in place for managing credit risk.

"The Bangladesh Bank plans to implement an Expected Credit Loss methodology-based provisioning system for banks in accordance with International Financial Reporting Standards by 2027," reads the report.

All loans and advances will be grouped into four categories for classification purposes: continuous loan, demand loan, fixed-term loan, and short-term agricultural credit.

The Classification and Provisioning Rules state that all types of loans will be reported as Special Mention Accounts (SMA) from the overdue period until the next three months. 

Loans will be classified as substandard from the overdue period until six months. Loans overdue for six to nine months will be classified as doubtful, and loans overdue for more than one year will be reported as bad/loss.

If all types of loans are standard, the bank will maintain a 1% provision on the loan outstanding. If the loan is classified as SMA, a 5% provision will be made against the loan outstanding. 

Additionally, if the loan is sub-standard, a 20% provision will be required. If it is classified as doubtful, a 50% provision will be made, and if it is classified as bad/loss, a 100% provision will be made.

Mohammad Shahriar Siddiqui, director of the relevant department of Bangladesh Bank, said various steps have been taken by the government and the central bank for reforms in the banking sector. 

"The new master circular on loan classification and provisioning will make it possible to determine the actual quality of assets. This new master circular has been introduced after 2012," he added.