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Loan Classification Matrix:

Types of loan Past Due/Over Due Treatment Unclassified Sub- Doubtful Bad/ Loss
Standard
Standard SIMA

From next day of expiry <2 Months 2 to < 3 3 to < 6 6 to < 9 >9
Continuous Loan Months
Months Months Months

From next day of expiry <2 Months 2 to < 3 3 to < 6 6 to < 9 >09
Demand Loan Months
Months Months Months

Term Loan Amount of unpaid installment <3 Installment ? to < 6 6 to < 9 9 to < 12 > 12
( Inst amount up to taka 10 lac ) : From next day of expiry N Installment Installment Installment Installment

Term Loan <2 Installment 2 to < 3 3 to < 6 6 to < 9 >09


( Inst amount more than taka 10 lac ) Installment Installment Installment Installment

Short Term Agricultural Credit After six months of expiry 12 to <36 36 to <60 >60
0< 12 Months Months Months Months
&
Short Term Micro Credit 12 to <36 36 to <60 >60
Months Months Months

Provisioning:
General Provisioning Specific Provisioning Provision for Short Term Agricultural &
Micro Credit
SME 0.25% Sub Standard 20% Unclassified ( Irregular & Regular ) 1%
Consumer Finance ( except House Fin & Prof Loan ) 5% Doubtful 50% Sub Standard & Doubtful 5%
Housing Finance under Consumer Finance 1% Bad & Loss 100% Bad & Loss 100%
Loans for Professionals to set up business under Consumer Financing Scheme 2%
Credit Card Finance 2%
Loans to brokerage House, Merchant Bank, Stock Dealers etc. 2%
All unclassified Loan 1%
Off Balance Sheet Item 1%
SMA 5%
26/02/ 2018

BANK LOAN CLASSIFICATION What is Loan Classification?


AND
PROVISIONING • Loan classification It is differentiating,
grouping or arranging or catagorizing of
loans and advances based on the perceived
risk and other relevant characteristics.
• Loans are catagorized according to their
Compiled By:
status like unclassified, substandard, doubtful
Janata Bank Staff College, Dhaka and bad- loss based on given criteria.

Importance of Loan Classification


What is provisioning ?
Key component of a regular internal loan review
process.
• Provisioning means setting aside certain fund
Strengthen credit discipline;
from current year profit against possible loan
Improve loan recovery positions &
losses. Make future planning of loan.
Calculate and take into account the expected losses.
classifications are used for regulatory reporting to
facilitate regulators’
Assessments of the level of credit risk in banks’ loan
portfolios.
Find out net- worth of a bank.
Assess financial soundness of bank.

Categories of Loans and Advances


Effects of Loan classification for the purpose ofclassification
( I . Continuous^N
• Interests applied on loan are not taken into income V Loan J
account because such interests are to be taken into
account only on its realization. 2. Demand
• Banks have to make provisions on classified loans as Loan
Loan
per guidelines provided by the Bangladesh Bank from
income earned by them on performing loan. 3 . Fixed Term
• (BRPD circular no- 14 , 19) Loan

4. Short-term
Agricultural
& Micro- Credits

1
*
nd
Date: Saturday 22 July 2017
Time: 10:30 am
th
Venue: Mercantile Bank, IT Division, Head Office, Sun Moon Tower, 8 Floor, Dilkusha C/ A, Dhaka.

Bidder : Flora Telecom Limited/Temenos t 24


Selected Groups: GB; Loans; Report; Finance; Trade; Treasury; MCT; ITS, BUET
Venue: Mercantile Bank, Head Office, 68 Dilkusha C/ A, Dhaka -1000
Saturday: 22 July, 2017
Total Person : 22 ( MTBians-17, BUET- 3,Optinovo - 2 )
Team Groups Persons Time

General 1. Md. Baker Hossain, SAVP (S )


Branch & HO
Banking ( 2 ) 2. Syed Towhid Hossain, SAVP ( S )
1. Md. Monwar Hossain, SVP ( S )
Report ( 2) 2. Md. Moazzam Hossain, VP ( S ) Head Office
LO

_<u
Q
1. Muhammad Nurul Afsar, AVP ( S)
E Finance ( 2 ) Head Office

E 2 . Md. Anwar Hossain, AVP ( S) 10:30 - 13:30
o
> 1. Suvash Chandra Biswas, SVP ( S)
at
3 2. Muhammad Shams-ul- Arifin, VP ( S)
4
-* Interface &
rH ITS ( 3 ) & 3. A . K . M. Ahasan Kabir, SAVP ( S )
Other Technical
BUET ( 3 ) 4. Prof. Dr. Md. Saidur Rahman Details
<
LU
5. Prof. Dr. Mahmuda Naznin
6. Dr. Muhammad Abdullah Adnan
Lunch Break ( 1330- 1430 )
Loans & 1. Md. Shirajul Islam, SAVP ( S )
Branch & HO
{/ )
Advances( 2 ) 2. Mirza Kamrul Hassan Shanto, AVP ( S)
Ol
-Q 1. Mohammad Shiful Islam Miah, AVP ( S )
E Treasury ( 2 ) Head Office 14:30 - 17:30
OJ

fM
E 2. Mohammed Forhad, FAVP ( S )
X
l/> 1. Mohammad Ataur Rahman, FAVP
< Trade ( 2 ) Head Office
LU
2 . Shakh Raju Ahamed, FAVP

MTB CBS 1. Azad Shamsi, SEVP


CO
MTB
1 - OJ
O
Team ( 2 ) 2. Md. Shah Alam Patwary, EVP
< Presence
LU E
l - OJ
1
CBS 1. Asim Talukdar
CBS Consultant Optional
O Consultant
x 3
( External)
o Optinovo ( 2 ) 2. Vijay Kumar

Appreciate if you please arrange to keep stream wise ( General Banking, Reports, Finance, Loans & Advances,
Treasury, Trade Finance, Core Technical etc. ) appropriate resources for functional and technical presentation
based on your current system during site visit .
\
26/02/ 2018

Continuous Loan : Demand Loan :


Fixed Term Loan :
I) Continuous Loan - The loan Accounts in which 3 ) Fixed Term Loan:
transactions may be made within certain limit and have an
expiry date for full adjustment will be treated as • The loans, which are repayable within a specific time
.
Continuous Loans. Examples are: CC OD etc . period under a specific repayment schedule will be
treated as Fixed Term Loans.
2) Demand Loan: The loans that become repayable on
demand by the bank will be treated as Demand Loans. If any Doctors Loan, Service Loan, Consumers Loan, Loan
contingent or any other liabilities are turned to forced loans (i.e. General, GHBL, Project Loan
without any prior approval as regular loan) those too will be
treated as Demand Loans. Such as: Forced LIM, PAD, FBR and IBP
etc .

Short- term Credit i. Standard

4) Short- term Agricultural Credit will include the short


term credits as listed under the Annual Credit Program issued by
- Unclassified
the Agricultural Credit Department of Bangladesh Bank. Credits
in the it, SMA
agricultural sector repayable within less than 12 months will
also be included herein. Loans &
Advances
i.Sub- standard
• & Short- term Micro-Credits will include any micro-credits
for less than Tk.50,000/ = and repayable within less than 12
months, be those termed in any names such as Non- Classified ii. Doubtful
.
agricultural credit Self-reliant Credit,

iii. Bad/ Loss


9 To

Basis for Loan Classification (A ) Objective Criteria: ( BRPD circular 14 &19 )


Types of loan Unclassified Sub- Doubtful Bad / Loss
( A) Objective Criteria Standard SMA
standard

( B) Qualitative Judgment Continuous Loan <2 2 3 6 >9


( A) Objective Criteria : Demand Loan 3 6

<2 2 > 09
.
I Past Due/ Over Due — Any i. continuous & ii. Demand
Term Loan ( up to 3 3 6 9 > 12
|<
loan not repaid/renewed within the fixed expiry date for
taka 10 lac ) r
repayment or after demand by bank will be treated as past
due/ overdue from the following day. Term Loan ( more <2 2 3 6 >09
iii. Any installment(S) of a Fixed Term Loan is not repaid than taka 10 lac)
within the fixed expiry date the amount of unpaid Short Term
installment(S) will be treated as past due/ overdue from
12 36 > 60
Agricultural Credit
the following day. & 0< 12
iv. Short-term Agricultural & Micro Credit is not repaid within
12 36 > 60
Short Term Micro
the fixed expiry date will be treated as past due/ overdue Credit
after 6 months of the expiry date.
u 12

2
04 / 02 / 2015

-
t

Introduction:
CLASSIFICATION PROCESS
TEMENOS (T24) software was implemented in Mercantile
IN TEMENOS ( T 24 ) Bank Ltd. on 14/11/ 2013. Since inception classification
has been a burning issue of this software. From the
beginning TEMENOS has Informed us that they will
Tcmenos T24 CL Program develop a program which will take care of the
classification problem. Since then there has been
Bangladesh Bank Guideline numerous number of meetings & discussion between
TEMENOS & our team regarding the issue. During this
& period they have provided several programs in different
instances. But none of the program complied Bangladesh
ITPT Developed CL Program Bank ( BB ) guideline. In the meantime, our IT Project
Team has developed a program (ITPT program)
complying BB guideline which has already been
presented to our Management in December 2014.
04/ 02/ 2015 IT Project Team, Mercantile Bank Limited, MO, Dhaka 2

CLASSIFICATION PROCESS IN CLASSIFICATION PROCESS IN


TEMENOS ( T 24 ) TEMENOS ( T 24 )
Recently TEMENOS has come up with a new Whenever a loan has been marked as classified
classification program (T24 program) with ( SS, DF# BL) the system will start to transfer the
Interest of that loan to Interest suspense account
some rectifications as per our requirement . from the day it has been marked. All the previous
Now both the programs have some common interest would be transferred to Income account.
attributes. These are: If a loan has been De-classified, then total
Either of the programs can be run suspense amount (held by system) will be
everyday / monthly/quarterly and the loan will transferred to Income Account automatically.
classify or de-classify the entitled loans base on If partial payment is made in any classified
frequency. account which does not declassify the loan, then
only the partial suspense amount ( proportionate to
repay amount) will be transferred to Income
account.
04/02/2015 . .
IT Project Team Mercantile Bank Limited, HO Dhaka 3 04/02/2015 IT Project Team, Mercantile Bank Limited, HO, Dhaka

1
r*
26/02/ 2018

Calculation of Defaulted Loan ( B) . Qualitative Judgment:


• If any situational changes occur in the stipulations in terms of
1a) (4). Loans except Short-term Agrkjltural t Micro-Credit in the " Special Mention Account" and which the loan was extended .
“ Sub-Standard" will not be treated defaulted
as loan for the purpose of section 27KaKa(3) [read with • If the capital of the borrower is impaired due to adverse
section 5(GaGaj] of the Banking Comparies Act, 1991 . However, Fixed Term Loans amounting up to conditions
Tk. 10.00 Lacs in the “ Sub-Standard" category will also be treated as defaulted loan for the same • If the value of the securities decreases .
purpose. • If the recovery of the loan becomes uncertain due to any other
unfavorable situation, the loan will have to be classified on the
Defaulted Loan will be calculated as Stated bellow : ( As per basis of qualitative judgment.
BRPD circular # 8, dated 02.08.2014)
• Besides, if any loan is illogically or repeatedly re- scheduled or the
>) piru vt (Continuous Loan) <1TO
) (Demand Loan) it CTO I
l Defaulted loan = DF + BL
Defaulted loan = DF + BL
-
norms of re scheduling are violated
*
o) fo s 5rtf :*W (Fiud Terra Loan - ) « TO I Defaulted loan = DF + BL -
• Instances of frequently exceeding the loan limit are noticed
*
8
-
(F i x e d Terra Loan
--
«! ) «
<

) r on# jft n « vT’ fli u&B (STAC & MC) « TO


* *
*•TO l Defaulted loan = SS + DF + BL
Defaulted loan = SS + DF + BL • Legal action is lodged for recovery of the loan
• The loan is extended without the approval of the proper authority,
it will have to be classified on the basis of qualitative judgment.
13 14

Maintenance of provision Maintenance of provision


• (b) (i) Banks will maintain provision at the following
rates in respect of classified Continuous, Demand and 2. Classified
Fixed Term Loans: (2) Sub- standard : 20%
***(BRPD Circular # 05 dt.- 29/05 / 201 3)& (BRPD (3) Doubtful : 50%
-
Circular 16 dated-J 8.1 1.14)



^
( I ) Unclassified . 25 % against SME
-^
5.00 % (consumer financing) * CA/ 3 2 Vj
2.00 % on
- ^
_
(4) Bad/ Loss : 100%

Short Term Agricultural and Micro Credits:


(if Housing Finance and l % X (1) All unclassified Credits :
(ii) Loans for Professionals to set up (irregular and regular ) 2.5%
business under Consumer Financing Scheme , loans to
brokerage House, Merchant Bank, Stock Dealers etc. (1) Sub-standard, Doubtful 5%
• 1.00 % All others including off balance
sheet items (such as Bills for collection, L/C, L/G etc.) (3) Bad/ Loss 100%
(BRPD Circular -16 dated 18.11 14) .
IS

6 . Value of eligible securities


Base for Provision :
In the definition of 'Eligible Securities' as mentioned in the above
paragraph are the following :
• - 100% of deposit under lien against the loan
.
I Outstading - (Interest Suspense +
• -under
100% of the value of government bond/ savings
lien.
certificate

Value of eligible securities ) • gl 00% j>f hg vajlue of guarantee given by Government or



^
- 100% tjf the market value of gold or gold ornaments pledged with
I 1 . 15 % of Outstanding whichever is • 50% of the market value of easily marketable commodities kept
higher. under control of the bank
• Maximum 50% of the market value of land and building mortgaged .
• 50% of the average market value for last 06 months or 50% of the
{ Provision should be minimum 15 % or higher as per guideline face value, whichever is less, of the shares traded in stock exchange.

3
04 / 02 / 2015

CLASSIFICATION PROCESS IN CLASSIFICATION PROCESS IN


TEMENOS ( T 24 ) TEMENOS ( T 24 )
Defining no of overdue installments of Term Loan:
As per BB guideline there are some deviations
T24 Program Bangladesh Bank Guideline
in Temenos provided CL Program which
Consider the principal amount along Consider only the overdue
considered during the development of ITPT CL with the capitalized interest of overdue principal amount and the
program and was rectified. Such deviations are amount . total deposit as total
described below : repayment of overdue
installments.
Example :
Overdue Installment = Tk. 600,000.00
Interest Capitalized( OD Amt)= Tk. 50,000.00
Accrued Int. on OD = Tk. 20,000.00 As per BB guideline ( BRPD
Circular No.14, dated
Repayment = Tk. 180,000.00 23.09. 2012 )

As per T 24 net OD will be = Tk. 490,000.00 OD will be = Tk . 420,000.00

ITPT CL Program complied the above BB Guideline .


04/02/ 2015 IT Project Team, Mercantile Bank Limited, HO, Dhaka s 04/ 02/ 2015 IT Project Team, Mercantile Bank Limited, MO, Dhaka 6

CLASSIFICATION PROCESS IN CLASSIFICATION PROCESS IN


TEMENOS ( T 24 ) TEMENOS ( T 24 )
Expired Term Loan's OD month calculation: Expired Demand & Continuous Loan's OD month calculation:
T24 Program Bangladesh Bank Guideline T24 Program Bangladesh Bank Guideline
In this program the outstanding As per BB Guideline for Classification will depend on the But in BB guideline ( BRPD
amount of Term loan has been expired Term loan the no. number of days from expiry date. Circular No.14, dated
considered to calculate the of overdue days have 23.09.2012 ) No. of overdue
months ( not days) have been
overdue installment. So for been considered instead
considered to determine the s
expired Term loans the no of . of overdue installment to classification.
overdue installment will remain determine the Example:
same for a long period, which classification status If a loan is expired on 01/ 10/ 2014. The Said Loan should have
will differ with the accurate It will be Classified on 29/ 12/ 2014 been classified on
scenario. (Considering 31+30+29 =90 Days) 02/01/ 2015.

ITPT CL Program complied the above BB Guideline. ITPT CL Program complied the above BB Guideline .
04 / 02/ 2015 IT Project Team, Mercantile Bank Umlted, HO, Dhaka 7 04 / 02/ 2015 IT Project Team, Mercantile Bank Umlted, HO, Dhaka 8

2
Bank Guarantee ( BG ) :
to pay a
A bank guarantee is an unconditional undertaking of the bank on account of its customer in favour of the beneficiary
.
specified amount of money if the customer (on account of which guarantee is issued ) fails to fulfill the contractual obligations

Features / Norms :
1. The guarantee is unconditional and irrevocable.
11 Bank is obliged to pay the beneficiary upon lodgment of claim by the beneficiary.
111. Guarantee are of different types:
a . Bid Bond ( BB): This guarantee is issued on behalf of a bidder/contractor (customer) to participate in a tender
favouring tender inviting authority. If the customer becomes the successful bidder, the work /supply awarding
authority asks for submission of Performance Guarantee and return the original Bid Bond. If the customer
becomes the unsuccessful bidder, the work /supply awarding authority returns the bid bond immediately after
tender.
b. Performance Guarantee ( FG ) : This guarantee is issued on account of the contractor (after being successful
bidder) favouring the work /supply order awarding authority for getting formal work / supply order. Usually its
validity covers the work order validity plus warranty period.
c. Advance Payment Guarantee ( APG ) : This guarantee is issued on behalf of contractor (Customer ) favouring the
work / supply order awarding authority against advance made by them . Bank's liability under APG is liquidated
gradually as per adjustment of the advance with the Work Awarding Authority.
d . Retention Money Guarantee / Retention Bond / Warrantee Guarantee: This guarantee is issued on behalf of
contractor (Customer) favouring the work /supply order awarding authority after completion of work /supply
order for withdrawing the money retained by them from the bills. Usually its validity ends with the
warranty / defect liability period .
e. Payment Guarantee / Suppliers Credit Guarantee: This guarantee is provided in favor of the
suppliers/service providers and on behalf of the Customers to avail certain amount of supplies/services on
credit

f. Guarantee against Counter Guarantee of other Bank: This Guarantee is given by Banks normally on behalf of
their customers to another bank. It happens when, by law, a foreign bank even of good or best standing, is not
authorized to issue guarantee in favor of resident in a specific country but only allowed to instruct a local bank
to issue a bank guarantee on its behalf .
g- Customs Guarantee: This guarantee is issued on account of the customer favouring the Customs Authority of
Bangladesh to clear imported goods postponing payment of customs duty. Usually exporters avail this kind of
the guarantee.
h. Other Bank Guarantees: Besides these, time to time Bank provides different other guarantees in the name of
' Bank Guarantee' to meet customer requirements.

IV. Pricing mode: Commission usually on quarterly basis.


V . Primary security: Counter Guarantee of the customer.

General Covenants:
specific to
While sanctioning credit facility, Bank will set some covenants. Some of the covenants will be general and others will be
a particular credit facility and / or customer. General covenants may be as follows:
0 The customer shall not sell or transfer the ownership of the business / factory / shop/ vehicle etc until bank dues are
fully paid or without NOC of the bank
ii ) Nature of business cannot be changed without prior approval of the bank.
iii) Capital in the business of the borrower cannot be reduced without prior approval of the bank.
iv) The borrower shall not make any amendment or alteration in Memorandum & Article of Association without prior
approval of Bank
v) The customer shall not borrow from any other source without prior approval of the Bank.
vi ) The customer shall submit financial statements within 30 days after yearend .
,
vii ) Bank will have the authority to debit client's account to keep insurance policy with other charges, commission
interest including stamps cost etc. in force.
viii ) Other covenants as set by the sanctioning authority.
The End

Page 20 of 29
Abbreviation :
-
ABP Accepted Bills for Payment
CAR - Capital Adequacy Ratio .
MCR - Minimum Capital Requirement (10 % of total RWA from July 2011)
-
RWA Risk Weighted Assets.
-
LIBOR London Inter Bank Offered Rate
-
MICR Magnetic Ink Character Recognition
SND- Special Notice Deposit
-
EFTN Electronic Fund Transfer Network
-
PEPS Politically Exposed Persons
CTR - Cash Transaction Report (Tk 5.00 lac + )
-
STR Suspicious Transaction Report (Any amount if suspicious)
-
CAMLCO Chief Anti Money Laundering Compliance Officer
-
BAMLCO Branch Anti Money Laundering Compliance Officer .x
-
CRR - Cash Reserve Requirement ( 6.50 %} * ^ =
SLR Statutory Liquidity Requtfementjjj.5 % 13.00% + 6.50%)^ - CylO j^
-
BMRE Balancing, Modernization, Replacement, Expansion
-
BNBC Bangladesh National Building Code
-
DAP Detailed Area Plan
-
CSR Corporate Social Responsibility
ICAAP - Internal Capital Adequacy Assessment Process
-
HSBC Hong Kong and Shanghai Banking Corporation (opened in 1865)
-
BASIC Bangladesh Small Industries and Commerce Bank
-
RBCA Risk Based Capital Adequacy
RWA - Risk Weighted Assets
-
ECAI External Credit Assessment Institute ( Bangladesh bank recognized 8 companies: 1. Credit Rating Information and services
Ltd . (CRISL, 2. Credit Rating Agency of Bangladesh (CRAB), 3. National Credit Rating Ltd. ( NCRL), 4. Emerging Credit Rating Ltd.
( ECRL), 5. ARGUS Credit Rating Services Ltd . (ACRSL), 6. Alpha Credit Rating Ltd . (ACRL), 7. WASO Credit Rating Company ( BD ) Ltd .
and 8. Bangladesh Rating Agency Ltd. ( BDRAL)

Page 21 of 29
Credit Risk Grading ( CRG ):
Five types of Risks-
Key Parameter Weight
Name of Risk
Leverage Ratio 15%
(Debt Equity Ratio=Total Liabilities to Tangible Net worth)
Liquidity Ratio 15%
(Current Ratio= Current Assets to Current Liabilities)
Financial Risk 50% Profitability Ratio 15%
Operating Profit Margin= ( Operating Profit/Sales) x 100%
Coverage Ratio (Interest Coverage ratio) 5%
Earning before Interest & Tax/Interest on Debt
Size of Business (Annual Sales) 5%
Age of Business 3%
Business/Industry Risk Business Outlook 3%
18% Industry Growth 3%
Market Competition 2%
Entry/Exit Barriers 2%
Experience 5%
Management Risk Second Line/ Succession 4%
12% 3%
Team Work
Security Risk Security Coverage ( Primary) 4%
10% Collateral Coverage 3%
Support (Guarantee) 3%
Account Conduct 5%
Relationship Risk Utilization of Limit 2%
10% Compliance of Covenant/Condition 2%
Personal Deposit 1%

SL # Grading Score
1 Superior Fully cash secured, secured by government
2 Good 85 +
3 Acceptable 75 -84
4 Marginal / Watch list 65 - 74
5 Special Mention 55-64
6 Substandard 45 - 54
7 Doubtful 35 - 44
8 Bad/Loss < 35

Page 22 of 29
1. The term "Credit'' implies:
a ) Only 'Funded' credit
b ) Both ' Funded ' and ' Non -funded ' credit
c) Credit against financial instruments only
2. " Borrowing Power" is described in -
a ) Articles of Association
b) Memorandum of Association
c) Business policy of the company
3. Cost of Goods sold ( CGS) is:
a ) Cost incurred in selling goods.
b ) Cost of Material, labor and overhead for producing goods.
c) Cost of Marketing the goods.
4. Current Ratio is:
a ) The comparison between current & fixed asset.
b ) The comparison between current asset and current liability
c) The comparison between cash and inventory.
5 . Acid - Test Ratio expresses :
a ) More accurate position of current liability.
b ) More accurate position of liquidity.
c) Real solvency of the company.
6 . The concept "present value" has evolved due to :
a ) Time value of money
b ) Effect of inflation
c) Both of the above
7 . Working Capital means:
a ) Capital required for meeting day to day operating expenditure.
b) Capital subscribed by the sponsor of the company.
c) Required capital for installation of machinery.
8 . Net working capital means:
a} Total of Current Asset
b ) Total Current Asset minus total current liability
c) The cash and Bank balance only
9 . Which statement is most appropriate?
a ) Project appraisal is the critical analysis of an investment decision whether it is acceptable or not.
b) Project appraisal is financial feasibility study of a project.
c) Project appraisal is the projection of the future of project.
10 . Internal Rate of Return ( IRR ) is :
a ) The rate that equates total of time adjusted cash inflows with the initial investment
b ) The rate where Net present value ( NPV) is 'zero'.
c) Both of the above .
11. By Break - Even Point ( BEP) analysis we can:
a ) Find out the level of production where both the Revenue & Cost is equal
b ) Decide the price level to earn a particular amount of profit.
c) Both of the above .
12 . An example of non - cash expenditure :
a ) Advertisement cost
b ) Depreciation
c) Interest on loan
13 . Which one is Off- Balance Sheet item?
a ) Lease Finance
b ) Bank Guarantee
c) Depreciation

Page 26 of 29
Loan Documentation

An Overview on the laws relating to Bank loan


Company Act 1994
Partnership Act 1932
Contract Act 1872
Negotiable Instrument Act 1881
Transfer Of Property Act 1882
Ortho Rin Adalot Ain 2003
Limitation Act 1908
Stamp Act 1899
Money Laundering Prevention Act 2002
Bankruptcy Act 1997
Other Rules & Guides for credit operation

Documentation
Concept
Areas in the whole process of Documentation
Acceptance to the sanction
Charge Documentation
Witnessing
Stamping

Documentation ( continued1
Mortgage Formalities
Deeds & Documents to be obtained essentially
Vetting of Deeds & obtaining Lawyers Opinion
Major Deeds to be executed
Obtaining Lawyers Satisfaction Report
Creation of charges with RJSC
Lien . Right of Set off and Assignment

Laws related to Bank Loan :


i) Company Act 1994: Enacted on 12.09.94 in the light of Company Act 1913.
ii ) Partnership Act 1932
Hi) Contract Act 1872
iv) Negotiable Instrument Act 1881
v) Transfer of Property Act 1882
vi ) Ortho Rin Adalat Ain 2003
vii ) Money Laundering Prevention Act 2002
vii ) Limitation Act 1908
viii) Stamp Act 1899
ix) Bankruptcy Act 1997

RULES & GUIDES FOR CREDIT OPERATION :


1. Bangladesh Bank guide lines & Circulars ( BRPD, DB 0 D etc)
2. Overall Credit Policy of the Bank.
3. Internal Circulars & policies Relating to credit operation .
4. Uniform Customs and Practices for Documentary Credit ( U C P D C )

DOCUMENTATION
Documentation' in relation to credit facility is a comprehensive matter. It is an art of providing shield against risk of non -
repayment of loan . Usually, in real life, as the process of " Documentation " we see the following :
• Obtaining Acceptance to the Sanction .
• Obtaining charge documents.
• Witnessing.
• Stamping.
• Completion of mortgage formalities.
• Creation of Charge with proper authority.
However, "Documentation" should be viewed as a process of ensuring shield against risk of non - repayment of loan
comprehensively in 03 ( three ) dimensions:
i ) The Type of Borrower
ii ) The Type of Loan or credit facilities &
iii) The Type of Security Arrangement
Page 27 of 29
& Security are:
In General, the Papers & Documents to be obtained / maintained irrespective of Type of Borrower, Loan
1. Demand Promissory Note
2. Letter of Authority
3. Letter of Arrangement
4. Letter of Disbursement
5. Letter of Revival
6. Personal Networth statement
7. Copy of National ID
8. Credit Approach in Business Pad of the Borrower
9. Credit Application in prescribed format duly filled in
10. Photograph of the Borrower
11. Up to date CIB Report
12 . Credit report of the Borrower /Supplier
13. Liability Declaration of the borrower along with an Udertaking that they have no liability with any bank
or Financial
institution excepting as declared .
without prior
14 . Undertaking stating that, they will not avail any credit facility from any other bank or financial institution
consent of the bank.
15. Undertaking stating that customer does not have any relationship as Director or Sponsor with the bank.
16. Undertaking stating that customer shall not sell or transfer the ownership of the business / factory /shop until
bank dues are
fully paid or without NOC of the bank.
17. Credit Risk Grading Score Sheet ( CRGS)
18. Un - dated cheque covering the credit facility
19. Acceptance of the Borrower to the Sanction Letter
20. Proper Stamping

Specific Charge Documents & Papers to be obtained


A. As per type of Borrower:
SI. Type of Document
Borrower

1. Individual Letter of Guarantee of a Third Person


Borrower Personal Networth Statement ( PNS) of Guarantor
Personal Networth Statement ( PNS) of the Borrower
Letter of Guarantee of the Spouse of the Borrower

2. Proprietorship Trade License ( upto date )


Firm Personal Networth Statement ( PNS) of Proprietor

3. Partnership Firm Trade License ( upto date)


Registration of Firm with RJSC& F
Partnership Deed ( Registered with Registrar )
Letter of Guarantee of the partners
Personal Networth Statement ( PNS) of Partners
Letter of Partnership.
Partnership Account Agreement.

4. Limited Company Trade License ( upto date )


Memorandum & Articles of Association ( Certified by RJSC )
List / Personal profile of the Directors
Certificate of Incorporation
Form XII Certified by RJSC ( Particulars of Directors)
Board Resolution in respect of availing loans & execution of document with Bank
Letter of Guarantee of the Directors
Personal Networth Statement ( PNS) of Directors
Deed of Mortgage & Hypothecation for creation of Charge on fixed & floating
assets (existing & future ) with RJSC along with Form 18.
Modification of charge with RJSC through form 19.
Certified copy of charge creation certificate from RJSC
Undertaking stating that the borrower shall not make any amendment or
alteration in Memorandum & Article of Association without prior approval of Bank.
Approval of the Bank for any inclusion or exclusion of Directors in & from the
company
Certificate of Commencement ( In case of Public Limited Company)
Joint venture Agreement ( In case of Jt. venture company)
BOI Permission ( In case of Jt. venture company)
Financial Statements of the company.
Page 28 of 29
B. As per type of Borrower:
Si Type of Loan Document

1. CC ( Hypo) Letter of Hypothecation of stock in Trade


Supplementary Letter of Hypothecation
IGPA to sale Hypothecated goods
Letter of Continuity
Periodical Stock Report
Letter of Disclaimer form the owner of rented Warehouse
Insurance Policy cover note

2. CC ( Pledge ) Letter of Pledge


IGPA to sale Pledged goods
Letter of Continuity
Periodical Stock Report
Letter of Disclaimer form the owner of rented Warehouse
Insurance Policy cover note

3. Overdraft Letter of Continuity


( General ) Insurance Policy cover note

4. SOD (Work Bid Document / Tender Notice


Order) Letter of Awarding
Assignment of Bills against work order

5. SOD ( FO) The Financial Instrument duly discharged on the Back


Lien on the Financial Instrument
Letter of Continuity

Page 29 of 29
Investment Classification, Provisioning, Re-scheduling
& Write-off procedures as per Bangladesh Bank Circulars
Mohammad Maksudul Huq Chowdhury
Assistant Vice President
IA & MIS Division, Exim Bank
Head Office, Dhaka .
Mobile: 01713-361838
Classification of Investment:
[ Related Circulars of Bangladesh Bank ( BB): BRPD Circular no.14 dated 23.09.2012; BRPD Circular no. 19
dated 27.12. 2012; BRPD Circular no.05 dated 29.05.2013; BRPD Circular no. 16 dated 18.11. 2014; BRPD
Circular no. 08 dated 02.08. 2015; BRPD Circular No. 4 dated 29 January 2015; ACFID Circular No. 1 dated 05
March 2013]

What is Classification:
Classification of investment means classify / segregate the same according to its merit ( performing and non-
performing ) in accordance with Bangladesh Bank circular. Adversely classified investments are those
investments where bank is unclear whether it will be able to recoup the investment proceeds from the
customer or not. As per Bangladesh Bank circulars there are following types of classification of Investment:

1. Standard

3. Sub-Standard (SS)
4. Doubtful ( DF)
^
2. Special Mention Account (SMA ) Uncjfssified

Adversely Classified
5. Bad / Loss ( BL)

Why Classification of Investment is important:


Classification of Investment is necessary for the following reasons:
1. To assess the quality of Investment of the bank .
2. To establish discipline in banking sector.
3. To calculate specific provision .
4. To determine the upper cap of Large Investment ( BRPD Circular no. 02 dated 16.01.2014).
5. To retain defaulter customers from availing further investment without regularizing the classified
one.
6. To ascertain the capital requirement.
7. To assess the level of Risk.

Categories of investment:
There are 4 types of investment as per BRPD Circular-14 dated 23/ 09/ 2012. They are:
( a) Continuous investment
( b) Demand Investment
( c) Fixed Term Investment
( d) Short Term Agriculture & Micro Investment (STAG & MI ) .

a . Continuous investment:
The Investment Accounts in which transactions may be allowed frequently within certain limit and have an
expiry date for full adjustment will be treated as Continuous Investment Examples are: CC, OD etc
Two key indicators:

1. Transactions may be allowed frequently within certain limit.


2. Have an expiry date for full adjustment.

1
b . Demand Investment:
The investment which has no specific repayment schedule is known as demand investment . So the
! investment that becomes repayable on demand by the bank will be treated as Demand Investment . If any
contingent or any other liabilities are turned to forced investments ( i .e. without any prior approval as regular
investment ) those too will be treated as Demand Investments . Such as: Forced MPI, MIB, FBP, and IBP etc

c . Fixed Term Investment:


The Investment, which is repayable within a specific time period under a specific repayment schedule, will
-
be treated as Fixed Term Investment. Such as: IBB. Classification rule for Fixed Term Investment is different
depending on its limit.

d . Short Term Agriculture & Micro Investment:


Short- term Agricultural Investment will include the short-term investments as listed under the Annual
Credit Programme issued by the Agricultural Credit Department ( ACD) of Bangladesh Bank . Investment in
the agricultural sector repayable within 12 ( twelve) months will also be included herein . Short- term Micro-
Investment will include any micro- investment not exceeding an amount determined by Bangladesh Bank
from time to time and repayable within 12 ( twelve) months.

Basis of classification:
There are two basis:
a ) Objective Criteria
b) Qualitative Judgment

Past due investment:


Any investment account or part of investment (installment ) after expiry of the repayment date will fall under
past due. As such i . Demand & Continuous Investment: not paid and / or not renewed within the fixed expiry
date, ii. Fixed Term Investment: installments or part of installment not paid within schedule time & iii.
Agricultural & Micro Investment: after six months of expiry date will be treated as pastdue/ overdue
investment.

Rules of Classification:

Type of investment Grade of classification


SMA SS DF BL
Continuous & Demand 2 months or 3 months or more 6 months or more 9 months or
Fixed Term more but less but less than 6 but less than 9 more
( Above Tk.10 lac) than 3 months months months
Fixed Term 2 months or equal to or more equal to or more equal to or
( up to Tk.10 lac) more but less than 6 months or than 9 months or more than
than 6 months more but less than more but less than 12 months
9 months 12 months
STAG & MI 12 months 36 months 60 months

Defaulted Investment :
According to Section 5 (GaGa ) of The Banking Company Act, 1991 " defaulter borrower"
means investment which remains overdue for 06 (six ) months . As such investment classified
as DF / BL for all categories and as SS for Fixed Term Investment up to Tk .10.00 lac &
Agricultural category will be treated as defaulted investment.
Reporting of Investment:
Summary of all CL : CL - 1
Continuous Investment : CL - 2
Demand Investment : CL - 3
Fixed Term Investment : CL - 4
STAG & Micro Investment : CL - 5

2
Provision:
What it is:
Provision for investment is part of profit set aside to bear the expected losses from non- payment of
investment. Provision is kept against both classified and unclassified investment. The reason for
keeping provision against classified investment is obvious- there are explicit symptoms of non-
payment by customer . What is the reason for keeping provision against unclassified investment?
Historically it is seen that a part of unclassified investment becomes classified at some point of time. So,
to cover that part of expected loss, provision is maintained against unclassified investment.

Types of Provision:
General Provision (provision against STD & SMA): Provision for unclassified investment is kept at
certain percentage on total amount of unclassified investment and it is called general provision .
-
General provision is a component of Tier II capital.
)/. Specific provision ( provision against SS, DF & BL): Provision against classified investment is kept
after analyzing the classified accounts one-by-one and it is called specific provision
Base for provision ( BP):
It implies the amount on which provision is calculated .
a . For UC & SMA Investment- base for provision is: Outstanding amount.
b. For SS, DF & BL Investment- base for provision is calculated by applying the following rules as per
nature of Eligible collateral security :
A. For eligible collaterals of the following types:
1. Deposit with the same bank under lien against the investment
2. Government bond / savings certificate under lien
3. Guarantee given by Government or Bangladesh Bank,
/
^ BP = Outstanding Balance —
B . For all other Eligible collaterals:
Profit Suspense
— Value of eligible Securities

Base for Provision will be greater of the following two:


— —
1. Outstanding Balance Profit Suspense Value of eligible Securities.
2. 15 % of the outstanding balance

Eligible Collateral :
Eligible Collaterals ' included in determining base for provision is:
-
100 % of deposit under lien against the investment.
-
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 .
\/ y30 % of the market value of easily marketable commodities kept under control of the bank
N/- Maximum 50 % of the market value of ]and and building mortgaged with the bank
-50 ?4 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.
Rate of general provision:
General Provision : ( Applicable for UC and SMA investments!
SME 0.25 %
HF/ Investments to Professional under CF / Brokerage House/ Merchant Banks / Stock Dealers 2%
Consumer Financing 5%
Agriculture 1%
Off balance sheet items 1%
UC all other Investment (other than CF, Brokerage House, Merchant Banks, Stock dealers, SME ) 1%

3
Specific Provision :
SS 20 % on Base for provision
DF 50 % on Base for provision
BL 100 % on Base for provision
For ST Agri and Micro Investment:
SS, DF 5% on Base for provision
BL 100 % on Base for provision
***If any investment rescheduled according to BRPD Circular no. 04/ 2015 dated January 29, 2015 ( Large
Investment Restructuring) provision of that investment will be: Provision applicable for SMA inv + 1% .

Rescheduling of Investment:
[ Related Circulars of Bangladesh Bank ( BB): BRPD Circular no.15 dated 23.09.2012; BRPD Circular no.06
dated 29.05.2013; BRPD Circular No. 5 dated 23 February 2015; ACFID Circular No. 1 dated 23
February 2015 ]

What is Rescheduling:
Rescheduling means fixing up a new' repayment schedule for a defaulted Investment where new Investment
replaces the outstanding balance on an older investment, and is paid over a longer period , usually with a
lower installment amount. Rescheduled Investment also called Restructured Investment / Replacement
Investment. It is also termed as " prolongation" and "evergreening".
Requirement of Rescheduling:
1. Investment commonly rescheduled to accommodate a customer in financial difficulties .
2. To provide a customer with relief when needed due to an economic downturn or other unforeseen
personal event or natural disasters.
3. A default w'ould hurt both the customer and the FIs.

Guidelines of considering application for Rescheduling:


1. The bank must have a policy approved by its Board of Directors.
2. The bank shall meticulously examine the causes as to why the Investment has become non -
performing
3. For rescheduling, pays the required down payment in cash at a time, the bank must address the
application within 03 ( three) months upon receipt. If the customer gives any cheque, pay order or
any other instrument against down payment, the bank must ensure encashment of such instrument
before processing of the rescheduling case. Any previous payment from time to time shall not be
treated as a down payment
4. Banks while considering Investment rescheduling, must consider overall repayment capability of
the customer taking into account the customer 's liability position with other banks and financial
institutions
5. Banks shall review' the customer 's cash flow statement, audited balance sheet, income statement and
other financial statements
6. If required, bank officers shall conduct spot inspections of the customer 's company / business
7. If a bank is satisfied after due diligence as mentioned above that the customer will be able to repay,
the Investment may be rescheduled
8. Rescheduling of any investment must be justified in written statement by the bank 's Investment
Committee

4
Time limit for rescheduling:
a . Continuous Investment:
Frequency SS DF B/L
First 18 months 12 months 12 months
Second 12 months 09 months 09 months
Third 06 months 06 months 06 months

b . Demand Investment:

Frequency SS DF B/L
First 12 months 09 months 09 months
Second 09 month 06 months 06 months
Third 06 months 06 months 06 months

c . Fixed Term Investment:

Frequency SS DF B/L
First 36 months 24 months 24 months
Second 24 months 18 months 18 months
Third 12 months 12 months 12 months

* ** If the investment is rescheduled


Before expiry, the above time will be added with last installment date.
After expiry , the above time will be applicable from the date of rescheduling date.

Repayment Conditions:

a. For Continuous & Demand Investment:


I. Rescheduled amount should be repaid only monthly installments.
l i. If the amount of defaulted installments is equal to the amount of 3 ( monthly)
installments, the investment will be classified as Bad / Loss.
b. For Fixed Term Investment:
l. Rescheduled amount should be repaid in monthly / quarterly installments.
u. If the amount of defaulted installments is equal to the amount of 6 monthly or 2
quarterly installments, the investment will be classified as Bad / Loss .
d . Short-term Agricultural and Micro- Investment
In case of rescheduling of STAG & MI, 6 months may be added with the following time-limit from
the day after the expiry / repayment date. If the investment rescheduled after expiry date, the
following time-limit will be applicable:
First Rescheduling Repayment time limit for rescheduling should not exceed 2 ( two) years.
Second Rescheduling Maximum l (one) year.
Third Rescheduling Maximum 6(six ) months.

e . If the investment becomes default after third rescheduling, the customer will be treated as a
habitual defaulter and the bank shall not consider for further rescheduling.
f . Any investment classified during Bangladesh Bank's on-site inspection on the basis of
Qualitative Judgment can not be declassified without the consent of Bangladesh Bank.
g. Before rescheduling any Large Investment or Investment Related to the directors of other Bank,
prior approval from Bangladesh Bank to be obtained.

5
Down Payment:
Fixed Term Investment:
1st time ; 15 % of overdue installment or 10 % of total outstanding (which is lower)
2 nd time: 30 % of overdue installment or 20 % of total outstanding (which is lower )
3 rd time ; 50 % of overdue installment or 30 % of total outstanding (which is lower)
b Continuous and Demand Investment:
Amount of Overdue Investment Rate of Down payment
Up to Tk . 1.00 (one) crore 15 %
Above Tk .l .OO(one) crore and up to Tk .5.00 (five) crore 10 % ( but not less than Tk . 15.00 lac)
Above Tk . 5.00(five) crore 5 % ( but not less than Tk .50.00 lac)
**** If any Continuous or Demand Investment is rescheduled for further (first time after being
converted partly or wholly into Term Investment) and the repayment installments are fixed, the
application for rescheduling of such investment shall be like as Fixed Term Investment .

Exceptions:
I. In case of RMG sector, force investments, which are backed up with stock lot, may avail
rescheduling facility without down payment. However, sales / export proceeds from the stock
lot must be used to repay the investment.
l i. In case of fertilizer importer, if investment becomes adversely classified due to delay in
receipt / realization of government subsidies, the investment may be rescheduled without down
payment . However, the receivable government subsidy must be used to repay the investment.

Restriction of extending maturity of a term Investment:


The term to maturity of a term Investment may be extended subject to the following conditions and
restrictions:
a) The Investment must be performing ( Unclassified : Standard or SMA )
b) The decision should be made at the level where the Investment was originally sanctioned .
c) The maturity date may be extended by a period of time not exceeding 25 % of the current remaining time
to maturity.

Profit Suspense of Rescheduled Investment:


Accumulated profit suspense balance up to rescheduling not to be transferred to income account unless
actually realized . However, if there exists any partial realization, up to that realized amount may be
transferred to income account . Unrealized amount to be credited to Profit Suspense Account instead of
Income account.

New Investment facility after Rescheduling:


a . The customer whose investment facility has been rescheduled may avail new facility or enhance
existing facility subject to the following conditions:

The customer must pay at least 15% of the outstanding balance (outstanding amount
excluding down payment) . If the customer is exporter, new facility may be availed after
paying at least 7.5 % of the outstanding balance (outstanding amount excluding down
payment )
n. Newr Facility from other bank also subject to the condition ( i ) and obtaining NOC from
the rescheduling Bank or FI.

b. Prior approval of Bangladesh Bank shall have to be obtained if the investment is related to the
director of any bank.
c. Number of rescheduling should be mentioned in sanction letter . While reporting to CIB, the
rescheduling investment should be shown as RS-1/ RS-2 / RS-3 and if there exists any kind of profit
waiver, reporting should be RSIW-1/ RSIW-2/ RSIW-3.
6
Write-off :
[ Related Circulars of BB: BRPD Circular no. 02 dated 13.01.2003; BRPD Circular no. 13 dated 07.11.2013]

-
The term " write-off " is an accounting term where write off of investment means removing the long time
outstanding bad investment from the books of accounts by observing some regulation.

Rules of Write-off :
1. BL investment can be w' ritten -off at any time. If classified account remains BL for more than 05 (five)
years and 100 % provision is kept there-against, the account has to be written-off immediately .
2. If provision kept there against is not sufficient, current year income account may be debited for
balance amount. *

3. Approval from Board of Directors to be obtained before write-off .


4. Suit must have to be filed before write-off in case of exposurelndre than BDT 50,000.00 (Taka Fifty
Thousand ) .
5. Separate debt collection unit to be responsible to recover the written-off investment.
6. 'Third party may be engagedTo expatiate legal issues or to recover the written-off investment .
7. Separate ledger to be maintained for write-off investment and cumulative balance of write-off
amount to be mentioned in Balance Sheet under the head " notes to the accounts'
^
8. Despite of write-off , respective client will treat as "defaulter borrower" till full adjustment and
reporting to be made to Credit Information Bureau (CIB) accordingly.
9. Prior approval from Bangladesh Bank must have to take in case of write-off of investment related to
Directors of Financial Institutions.
10. A statement of write-off investment to be sent to Bangladesh Bank on monthly basis as per specified
format.