Loan Classification Practice in Commercial bank of Bangladesh
INTRODUCTION
In general sense we mean “Bank” as a financial institution that deals with money.
But when we use the term bank it generally means ‘commercial bank’ that collects the Deposit from surplus unit of the society and then lends the deposits to the deficit units of the society. From very first emergence and inception of modern civilization, Bank plays a pivotal role in case of overall financial and socioeconomic development of any modern country.
Loan Classification For a long period after liberation, the banking system of Bangladesh operated in an environment of directed lending, particularly to priority sectors determined by the government, at administered rates of interest. The system of classifying non-performing loans was extremely lax in absence of a standardized loan classification procedure and specific time limits for loans to be classified. Generally, a long time was required for a loan to be identified as classified, and as such the provisioning requirement was less important. This resulted in huge non-performing loans and banks had to operate with inadequate capital bases. Gradually, the country's banking system reached a chronic state of insolvency and became virtually non-viable.
The loans were usually classified by the lending bank whenever the bank had reasons to believe that the borrower would not be able to repay the loan. This judgment was made regardless of whether the loan was overdue or not. Banks by themselves formulated specific conditions for classification on a qualitative basis. Loans extended by a bank were classified into the following three categories: substandard-if an advance or any portion of an advance or interest thereon remained overdue for one year or more but less than three years; doubtful-if the advance or any portion of the advance or interest thereon remained overdue for three years or more but less than five years, or if legal action for recovery of the loan had been
In general sense we mean “Bank” as a financial institution that deals with money.
But when we use the term bank it generally means ‘commercial bank’ that collects the Deposit from surplus unit of the society and then lends the deposits to the deficit units of the society. From very first emergence and inception of modern civilization, Bank plays a pivotal role in case of overall financial and socioeconomic development of any modern country.
Loan Classification For a long period after liberation, the banking system of Bangladesh operated in an environment of directed lending, particularly to priority sectors determined by the government, at administered rates of interest. The system of classifying non-performing loans was extremely lax in absence of a standardized loan classification procedure and specific time limits for loans to be classified. Generally, a long time was required for a loan to be identified as classified, and as such the provisioning requirement was less important. This resulted in huge non-performing loans and banks had to operate with inadequate capital bases. Gradually, the country's banking system reached a chronic state of insolvency and became virtually non-viable.
The loans were usually classified by the lending bank whenever the bank had reasons to believe that the borrower would not be able to repay the loan. This judgment was made regardless of whether the loan was overdue or not. Banks by themselves formulated specific conditions for classification on a qualitative basis. Loans extended by a bank were classified into the following three categories: substandard-if an advance or any portion of an advance or interest thereon remained overdue for one year or more but less than three years; doubtful-if the advance or any portion of the advance or interest thereon remained overdue for three years or more but less than five years, or if legal action for recovery of the loan had been