Loan Classification and Provisioning Rules (from 1989-2005):

In order to strengthen credit discipline and to improve the recovery position of credit of banks, Bangladesh Bank time to time changes loan classification rules through its circular. These loan classification rules are presented in the following tables:

Loan Classification Rules 1989:

In 1989, BB via its circular (BCD Circular No.34 Nov. 16, 1989) set the following rules for classifying loans, for suspending overdue interest and for making provisions against potential load losses. These rules are presented in the table below:

Table# Shows the Loan Classification Rules of BB in 1989 Basis of loan classification 1. Qualitative Criteria: Adverse financial condition, Poor financial performance, insufficient security 2. Overdue Criteria: Overdue six month for private sector and fifteen months for public sector enterprises. 3.Others Criteria Substandard
If and advance or any portion of an advance or interest thereon remains overdue for one year or more but less than three years. Limit stands overdrawn by more than 50% for a period of 45 continuous days preceding the reference date for the classification. 1) Renew or reschedule at least three times. 2) Payments were not made within the required period. 3)Qualitative criteria

Doubtful
Any portion of advance or interest thereon remains overdue for three years or more but less than five years.

Bad and Loss

1) Overdue for five years or more. 2) Doubtful and has remained doubtful for two years or more.

Substandard for two years or more.

1) Doubtful and has remained doubtful for two years or more. 2) Legal action initiated. 3) Qualitative Criteria.

a) Legal action has been initiated b)qualitative criteria

Not Applicable.

Source: BCD Circular No.34 Nov. 16, 1989, BB.

Provision against Classified Loans:

Bangladesh Bank has directed all banks to make provision on their classified loans in the following rates: (1) On substandard loans 10% (2) On doubtful loan 50 % and (3) On bad and loss 100 % (Source: BCD Circular No.34 Nov. 16, 1989, BB.)

Loan Classification Rules 1998:

On December 06, 1998 BB via its circular (BCD Circular No. 34/1989 and 20/1994, and BPRD Circular No.16. December 06, 1998) informed all schedule banks that in order to strengthen credit discipline, to make simple the loan classification procedure and to develop the loan classification and provisioning principle to international level, BB has been decided to revise its earlier loan classification standard. The new loan classification standards are exhibit in the following table: Table# Show the Loan Classification Rules in 1998 Types on loan Continuous loans Demand loans Fixed term loans (Up-to five years) Fixed term loans (More than five years) Short-term Agriculture and Micro-Credit Substandard
Nonpayment/Renewal within 3 months or 6 months after expiry date. Nonpayment within 3 months or 6 months after expiry date.

Doubtful
Classified as substandard for 6 to12 months. Classified as substandard for 6 to12 months.

Bad and Loss

Classified as doubtful for 12 months or more. Classified as doubtful for 12 months or more.

Installment default for more than 6 months.

Classified as substandard more than 12 months. Installment default Classified as more than 12 months. substandard more than 18 months. Overdue more than 12 Overdue more than 36 months. months.

Classified as doubtful more than 18 months. Classified as doubtful more than 24 months. Overdue more than 60 months.

Source: BCD Circular No. 34/1989 and 20/1994, and BPRD Circular No.16. December 06, 1998, BB.

Provision against Classified Loans:

Bangladesh Bank has directed all banks to maintain provision in the following rates on their all loans: (1) 1% on non-classified loans, (2) 20% on substandard loans, (3) 50 % on doubtful loans and (3) 100% on bad and loss loans.

Classification Rules in 2001:

Bangladesh Bank again revises its loan classification rules and provision rates on 2001 via its BRPD Circular No. 09 on May 14, 2001. Revise loan classification rules are present in the table below:

Credit Information Bureau (CIB) It is necessary to know the credit status of a loan applicant for credit analysis. But in Bangladesh, before 1993, there was no established bureau to provide information about credit status of borrowers. To meet this deficiency, Bangladesh Bank (BB) established Credit Information Bureau (CIB) and made mandatory for all schedule banks to collect information about borrowers credit status before sanctioning, renewals and rescheduling of loans from 1st January 1993. On 17-06-1995, BB via its circular (BCD circular No. 07), again directed all schedule banks to collect information about borrowers before sanctioning new loan, renewal and rescheduling of loan up to Tk. 10.00 lakhs or more. On 29-06-1995, BB extended this ceiling to Tk. 50.00 lakhs (BCD circular No. 09). On 26-10-2000, BB made it mandatory for all schedule banks to collect information from CIB for sanctioning new loans, renewals and rescheduling, issuing bank guarantee and opening letter of credit (LC) via its circular BRPD Circular No. 13.

Guidelines on Managing Core Risks on in Banking Deregulation along with globalization of business warrants better risk management practices around the world. Failure to adequate manage of risks exposes banks not only to business losses but also to threat of not to survive in the business. To look into the practices of management in home and abroad and to produce a best model to deal with risk management, Bangladesh Bank formed a Focus Group consisting of members from NCBs, PCBS, and FCBs. Members from

Bangladesh Bank acted as team coordinator. This focus group identified five core risks in banking business and these are: 1. Credit risks; 2. Asset and Liability/Balance Sheet risks; 3. Foreign exchange risks; 4. Internal control and compliance risks; and 5. Money laundering risks. Bangladesh Bank by its circular ( BRPD Circular no.17 October 07, 2003) advised all schedule banks in Bangladesh to put in place an effective risk management system by December 2003. Focus group also supplied a CD-ROM to all banks which contain possible guidelines to handle each risk separately. Risk Credit Grading Manual The LRA was faced various problem and it made no attempts to introduce a Risk Grading System (RGS) for unclassified loans. After realizing it, in January 2004, BIBM was introduced by Governor of Bangladesh Bank to produce a Credit Grading Manual (CRGM) based on the Core Risks Management Guidelines (CRMG). BIBM constituted a Focus Group for this purpose. The Focus Group completed its task and submitted it to Bangladesh Bank in September 2004. This was received by an Industry Review Group (IRG) consists of the representatives from NCBs, PCBS, and FCBs specifically involved in the credit approval and corporate business functions. The IRG met a number of times in August and September 2005 and gave their recommendations. These were discussed and suitable amendments were made in the guidelines. The CRGM is a mandatory replacement of the LRA and it will be applicable for all exposures (irrespective of amount) other than those covered under Consumer and Small Enterprise Financing under Prudential Guidelines and also under Short Term Agriculture and Micro Credit (Source: Credit Risk Grading Manual, November 2005). Legal Environment and Non-Performing Loans Legal action against borrower is the last weapon bank uses to recover dues .But in most cases; legal environment in Bangladesh becomes a barrier instead of being helpful to recover bank dues. The commercial law dealing with loan recovery overwhelmingly favors the delinquent customers. The legal system makes its difficult for the NCBs to repossess and sell many securities [LRA Manual, 1-2] The borrower are confident that they would not be touched for at least 10-12 year due to cumbersome , inefficient and time consuming procedural low ,over burdened judges and most of all , ingenuity of their lawyers in adopting dilatory tactics . Bangladesh legal system provides an elaborate system of appeals, reference, reviews and revisions, which causes abnormal delays in the legal process. Present scenarios of environment will the following subsections 1. Present Status of Low Relating to Recovery of Loans

Bank lends money to borrowers in hope that it will be repaid at the end of its tenure. If borrowers fail to repay the loans as agreement, bank takes recovery drive. When bank recovery drives fail, bank file case against borrowers as the last weapon. At present, bank can take legal actions under the following laws1. Filing certificate cases under the public demand recovery act, 1913 2. Filing bankruptcy cases under the Bankruptcy Act, 1997; 3. Filing money suit/title suit under the Artha Rin Adalat 2003; and 4. Other legal actions.

Present Status of Law Relating to Recovery of Loan Bank lend money to borrowers in the hope that it will be repaid at the end of its tenure. If borrowers fail to repay the loans as agreement, bank takes recovery drive. When bank recovery drives fail, bank file case against borrowers as the last weapon. At present, bank can take legal actions under the following laws:1.filling certificate cases under the Public Demand Recovery Act,1913; 2. filling bankruptcy cases under Bankruptcy Act,1997; 3. Filling money suit/title suit under the Artha Rin Adalat 2003; and 4. Other legal action. Performance of Artha Rin Adalat : After failing to recover the loan from borrowers, banks have the legal option to file case in the Artha Rin Adalat. Table given below shows the performance of Artha Rin Adalat as on June 2004. Shows the performance of Artha Rin Adalat as on June 2004 Tape of banks Suits filed No. of suits 5274 8 2124 5 1445 Amount claimed 1057268. 3 236516.3 584183.2 Suits Settled (Cumulative) No. of suits Amount claimed 97207.3 62971.1 129541.9 Amount No. recovered of suits 82995.6 3204 3 13038.3 1080 9 54509.0 7965 Suits under trail Amount claimed 965191.5 173725.3 454419.8 Amount recovered 47055.0 2711.o 67180.4

NCBs DFIs PCBs

21721 10436 6493

8 FCBs 296 23865.7 206 8668.6 Total 8974 1901834. 38856 298028.8 7 1 Source: Bangladesh Economic Review 2004

5845.7 15688.6

90 5090 7

15197.1 1608533. 6

1210.2 118156.7

The above table presents the performance of Artha Rin Adalat 2003 as on June, 2004. It is revealed from the table that as on June, 2004, out of the total 89747 cases, 38856 cases were settled and tk. 156288.60 crores was recovered. It is also clears from the table that average claim of the case is tk. 21.19 crores (amount claimed /no. of suits i.e 1901834.1/89747). Average claim of the settled case is Tk. 7.67 crores (298208.8/38856) and average amount recovered from each suit is Tk. 4.02 crores(156388.6/38856). It is 52 percent (4.02/7.67=52%) of the claim .Table also shows that average amount claimed per case under trial is Tk. 31.60 crores (1608533.6/50907).From this table it is concluded that small defaulters case takes short and big defaulters case takes longer time to settle.