Loans and Advances Final Version 2 Powerpoint

Hoda Vasi Chowdhury & Co
Chartered Accountants
Audit of Loans and Advances of a Bank
Presented by
Shaikh Hasibur Rahman FCA
Partner

 Risk related to loans & advances from audit perspective
 Categories of loans & advances
 Definitions and Examples
 Classifications of loan & advances
 Interest suspense
 Categories of CL
 Customer selection based on risk
 Loan disbursement process
 Checking of loan files
Major contents  ICRRS
 Maintenance of provision
 Reschedule and Restructure
 Special Reschedule and one time exit facility
 Loan to directors
 Single borrower exposure and large loan
 Write off policy
 Impact of COVID 19
 IFRS VS BRPD
 Journal
Risk Related to loan or Advances from Audit Perspective
 Risk of material misstatement

 Documentation risk
 Risk related to Collateral security
 Compliance risk
 Information wrongly presented in CL to avoid classification
 Trend to income overstatement
 Inadequate provision
 Violation of BRPD Circular, letter and prudential guideline
 Interest recognized instead of transferred to interest suspense
 Rescheduled without comply with BRPD : repayment time, down
payment, recovery for new credit facility, specific condition discussed
in later sections etc.
Categories of loans and advances
Continuous loan
Demand Loan
All Loans and Advances
will be grouped into four Fixed Term Loan
categories.
Short-term Agricultural &
Micro-Credit

Definition and Example
Continuous Loan. The loan accounts in which transactions may be

made within certain limit and have an expiry date
for full adjustment will be treated as Continuous
Loan. Examples are: Cash Credit, Overdraft, etc.
Demand Loan.
The loans that become repayable on demand by the
bank will be treated as Demand Loan. Such as:
Forced Loan against Imported Merchandise,
Payment against Document, Foreign Bill Purchased,
and Inland Bill Purchased, etc.

Fixed Term Loan.

The loans, which are repayable within a specific
time period under a specific repayment schedule,
will be treated as Fixed Term Loan
Short Term
agriculture and
Micro-Credit.
Short-term Agricultural Credit will include the short-
term credits as listed under the Annual Credit
Program issued by the Agricultural Credit and
Financial Inclusion Department (ACFID) of
Shaikh Hasibur Rahman FCA Bangladesh Bank.
Past due or Overdue As per BRPD circular no. 03 dated 21 April, 2019
 If a continuous loan or demand loan is not
repaid/renewed within the fixed expiry date for
repayment or after the demand by the bank will be
treated as past due/overdue from the following day
of the expiry date.
Practical Example:
Name of Nature of Sanction Sanction Outstanding Expiry date 1st overdue Overdue as on
borrower the loan date amount amount date 31.12.2020
Months
MM OD/CC 01.01.2018 10000 10020 31.12.2018 01.01.2019 24


As per BRPD circular no. 14 dated 23 Sept 2012 & 03 dated 21 April, 2019
Past due or Overdue
 In case of any installment(s) or part of installment(s)
of a Fixed Term Loan and the short term
Agricultural & Micro credit loan is not repaid
within the fixed expiry date, the amount of unpaid
installment(s) will be treated as past due/overdue
after six months of the expiry date.
Practical Example: In million
Name of Nature of Sanction Sanction Outstanding instalment overdue from Overdue as on
borrower the loan date amount amount due date 31.12.2020
Months
MM Term 01.01.2018 10,000 10,020 01.01.2019 01.07.2019 18

loan/Micro
credit

Classification
Loan
Classification
Objective Criteria Qualitative Judgment

Classification
Objective Criteria: Loan Classification based on past due or overdue for a period of as followings:
Circular reference: BRPD Circular no: 14 Dated 23 September, 2012 and 03 Dated 21 April, 2019
UC (Unclassified) Classified
Categories of Loans
STD (Standard) SMA( Special SS (Sub – DF (Doubtful) BL (Bad/Loss)

Mention Account) Standard)
Continuous 0 months or 2-2.99 03 months or 09 months or 12 months or beyond

beyond but less Months beyond but less beyond but less
than 2 months than 09 months than 12 months
Demand 0 months or 2-2.99 03 months or 09 months or 12 months or beyond

Fixed term 0 months or 2-2.99 03 months or 09 months or 12 months or beyond

beyond but less Months beyond but less beyond but less Months
Short-term Agricultural & 0 months to 12 After 12 months After 36 months After 60 Months
Micro-Credit Months -
Classification
Practical Example 01 In million
Name of Nature of Sanction Sanction Outstandi Expiry overdue Overdue as Classification
borrower the loan date amount ng date from on status as on
amount 31.12.2020 31.12.2020
MM OD/CC 01.01.2018 10000 10020 31.12.2018 01.01.2019 24 BL
Practical Example 02 In million

Name of Nature Sanction Sanctio Outstan instalment Instalme overdue Overdue as Classificati
borrower of the date n ding Due date nt from on on status as
loan amoun amount paid(in 31.12.2020 on
t equivale 31.12.2020
nt
month)
MM Term 30.06.20 10,000 9,000 31.01.2019 7 01.02.2020 11 DF

loan 18
(6 months
grace)

Loan classification for CMSME

• Objective Criteria: CMSME loan classification based on past due or overdue for a period of as
followings:
Circular reference: BRPD Circular no: 16 Dated 21 July, 2020
UC (Unclassified) Classified
Categories of Loans
STD (Standard) SMA( Special SS (Sub – DF (Doubtful) BL (Bad/Loss)

Mention Account) Standard)
Continuous 0 months or 2-2.99 06 months or 18 months or 30 months or beyond

Demand 0 months or 2-2.99 06 months or 18 months or 30 months or beyond

Fixed term 0 months or 2-2.99 06 months or 18 months or 30 months or beyond

beyond but less Months beyond but less beyond but less Months

Loan classification for CMSME

• Practical Example 01
Name of Nature of Sanction Sanction Outstandi Expiry overdue Overdue as Classification
borrower the loan date amount ng date from on status as on
amount 31.12.2020 31.12.2020
ABM OD/CC 01.01.2016 10,000 10,020 31.12.2017 01.01.2018 36 BL
• Practical Example 02
Name of Nature Sanction Sanction Outst instalment Instalme overdue Overdue as Classificati
borrower of the date amount andi Due date nt from on on status as
loan ng paid(in 31.12.2020 on
amou equivale 31.12.2020
nt nt
month)
ABM Term 30.06.20 10,000 9,000 01.01.2018 7 01.02.2019 23 DF

loan 17
(6 months
grace)

Interest Suspense
Accounting for interest of Classified Loan
Circular Reference: BRPD Circular No. 14 dated 23 September 2012
 If any loan or advance is classified as 'Sub-standard' and 'Doubtful',
interest accrued on such loan will be credited to Interest Suspense
Account, instead of crediting the same to Income Account.
 In case of rescheduled loans the unrealized interest, if any, will be
credited to Interest Suspense Account, instead of crediting the same to
Income Account.
 As soon as any loan or advance is classified as 'Bad/Loss', charging of
interest in the same account will cease.

Continue……Interest Suspense
 In case of filing a law-suit for recovery of such loan, interest for the period till
filing of the suit can be charged in the loan account in order to file the same
for the amount of principal plus interest. But interest thus charged in the loan
account has to be preserved in the 'Interest Suspense' account.
 If any interest is charged on any 'Bad/Loss' account for any other special
reason, the same will be preserved in the 'Interest Suspense' account.
 If classified loan or part of it is recovered i.e., real deposit is effected in the

loan account, first the interest charged and accrued but not charged is to be
recovered from the said deposit and the principal to be adjusted afterwards.

Categories of CL
1. CL-1 is the complication/summary of 4 other forms

2. CL-2 is for reporting loan classification of Continuous Loan
3. CL-3 is for reporting loan classification of Demand Loan
4. CL-4 is for reporting loan classification of Term Loan
5. CL-5 is for reporting loan classification of Short-term Agricultural
and Micro-Credit.

Customer Selection based on risk
1. Top 50 Clients 11. Previous year’s tripartite meeting

2. BB Inspection Report minutes memorandum (Continuing
3. Previous year’s management Report audit)
of external auditor 12. Clients whose other accounts are
4. Loan to directors and connected already classified
person (own Bank and other Banks 13. Board Meeting Minutes
and NBFIs) 14. EC Meeting Minutes
5. Rescheduled Loan 15. Print and electronics
6. Solenama Client media(Vulnerable clients)
7. Restructured Loan 16. Vulnerable industry
8. Writ clients/suited clients 17. Defaulter List published by BB and
9. Excess over limit clients High Court
10. Period of arrear discrepancies in CL 18. Newly Disbursed loan
19. Internal Audit Report

Loan disbursement process Chartered Accountants
Customer
Relationship
Manager
Branch
BOD/EC CRM CAD

Checking of loan file
Pre Approval phase
Approval phase
Post Disbursement phase

Continue…..Pre Disbursement Phase
Obtaining corresponding file

1. Loan application from client 12. Schedule X,XII and XV (where applicable)
2. Purpose of loan 13. Customer visit report by Bank
3. CIB 14. Know Your Customer
4. Bank Statement of client 15. National ID Card
5. Audited financial statements 16. Utility Bill copy
6. Internal Credit Risk Rating System 17. Net worth statement
(ICRRS ; Previously known as CRG) 18. Income tax return
7. Board/EC Memo 19. Association membership certificate (for
8. Updated TIN and BIN Certificate export related client)
9. Trade License 20. Factory license
10.Memorandum of Association 21. Consent letter/NOC from other bank if any
11.Article of Association loan taken

Continue…..Pre Disbursement Phase
Obtaining Security file

Mortgaged documents:
1. Land deed, updated khajna receipt, khatian copy
2. Property plant and equipment charge documents
3. Property valuation report by Bank’s listed valuer
4. Stock report
5. Copy of FDR lien
6. Personal guarantee charge documents
7. Letter of guarantee
8. Insurance deed against mortgaged property

Internal Credit Risk Rating Scores
The ICRR consists of 4-notched rating system covering the Quantitative and Qualitative parameters.
The ratings and scores are mentioned below:
Rating Scores Aggregate
Excellent ≥80%
Good ≥70% to <80%
Marginal ≥60% to <70%
Unacceptable <60%

Continue….Internal Credit Risk Rating Scores
Components of Credit Risk Rating

• In the previous version of Credit Risk Grading Manual, 50 percent weights were assigned for
quantitative indicators (financial risk) while 50 percent weights were for subjective judgment. In
the ICRR, these weights have been revised; 60 percent weights are assigned for quantitative
indicators while 40 percent are assigned for qualitative indicators.
Quantitative indicators and associated weights
• Quantitative indicators in ICRR fall into six broad categories: leverage, liquidity, profitability,
coverage, operational efficiency, and earning quality. Details indicators under these categories
and associated weights are furnished below:

Quantitative Indicators Weight Definition
a) Debt to Tangible Net Worth Total Interest Bearing Liabilities or
(DTN) 7
1. Leverage (10%) Financial Debt/Total Tangible Net Worth
b) Debt to Total Assets (DTA) 3 Total Interest-Bearing Liabilities or Financial Debt/Total
Assets
a) Current Ratio (CR) 7 Current Assets/Current Liabilities
2. Liquidity (10%)
b) Cash Ratio (Cash) 3 Cash and Easily Marketable Securities/Current
Liabilities
a) Net Profit Margin (NPM) 5 Net Profit after Tax/Net Sales
b) Return on Assets (ROA) 3 Net Profit after Tax/Total Assets
3. Profitability (10%) c) Operating Profit to Operating Assets 2 Operating Profit/Average Operating Assets
(OPOA)
a) Interest Coverage (IC) 3 Earnings Before Interest and Tax/Interest Expense

b) Debt Service Coverage Ratio Earnings Before Interest Tax
(DSCR) 5
4. Coverage (15%) Depreciation Amortization/Debts to be Serviced
c) Operating Cash Flow to Financial
Debt Ratio (OCDR) 4 Operating Cash Flow/Financial Debt
d) Cash Flow Coverage Ratio 3 Cash Flow from Operation/Debts to be Serviced
(CCR)
5. Operational Efficiency a) Stock Turnover Days (STD) 4 (Total Inventory/Cost of Goods Sold)*360
(10%)
b) Trade Debtor Collection 3 (Total Accounts Receivable/Sales)*360
Days (TDCD)
c) Asset Turnover (AT) 3 Sales/Total Assets

a) Operating Cash Flow to Sales 3 Operating Cash Flow/Sales
6. Earning Quality (5%) (OCFS)
b) Cash Flow based Accrual NI-(CFO+CFI)/Average Net Operating Assets
Ratio (CFAR) 2

Qualitative indicators and associated weights
Qualitative indicators cover six broad aspects of the firms/institutions to be

rated, namely business/industry risk, credit quality enhancement,
performance behavior, management risk, relationship risk, and compliance
risk. Noteworthy that aggregate weights against the qualitative indicators
stands at 40 percent. Detail indicators and associated weights are appended
below in details:

Indicators Weights
1. Performance Behavior 10
Performance Behavior with Banks Borrowings Regarding Classification
Regarding Rescheduling/Restructuring 5
4
Performance Behavior with Suppliers/Creditors 1

7
2. Business and Industry Risk
Sales Growth 2
Age of Business 2
Industry Prospects 1
Long-Term External Credit Rating of the Borrower 2
3. Management Risk 7
Experience of the Management 2
Existence of Succession Plan 2
Auditing Firms 2
Change of Auditors in Last 4 Years 1
4. Security Risk 11
Primary Security 2
Collateral 2
Eligible Collateral Coverage 5
Type of Guarantee 2
5. Relationship Risk 3
Account Conduct 3
6. Compliance Risk 2
Compliance with Environmental Rules, Regulations and Covenants 1
Corporate Governance 1
Total 40
Continue…..Approval Phase
Delegation of Authority
Board of Directors
Executive Committee
Head of CRM/Branch
Manager
Delegation of Authority may vary based on Banks’ policy

Continue…Post Disbursement Phase and

Monitoring
1. Utilization of fund
2. Visitation report in regular interval
3. Collecting Updated all other documents taken in corresponding
file and security file.
4. Updated Purchase and sales report
5. Loan performance of other banks

Maintenance of Provision
Circular reference: BRPD Circular Letter no.52 Dated 20 October,2020 and 14 Dated 23 September, 2012 & BRPD
Circular 16 Dated 21 July 2020, BRPD Circular 5 Dated 29 May 2013, BRPD Circular 12 Dated 20 August 2017

Continue….Maintenance of Provision
Eligible Collateral
Circular reference: BRPD 14 Dated 23 September, 2012
100% of deposit under lien against the loan

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.
50% of the market value of easily marketable commodities kept under control of
the bank
Maximum 50% of the market value of land and building mortgaged with the
bank
50% of the average market value for last 06 months or 50% of the face value,
whichever is less, of the shares traded
Base for Provision
Circular reference: BRPD 14 Dated 23 September, 2012

Practical Example:01 In million

Name Nature Sanctio Sanct Outsta Expiry Collateral Intere 1st Overdue Classifica
of of the n date ion nding date security st overdue as on tion
borrow loan amou amount Suspe dated 31.12.2019 status as
er nt nse on
31.12.2019
MM OD/CC 01.01.201 10000 10,575 31.12.2018 4,000 200 01.01.2019 12 BL

8
Base for provision Required provision Remarks
10,575-4,000-200= 6,375
6,375*100%=6,375 Collateral : Deposit with the same bank lien under the loan

In million
Practical Example:02
Name Nature Sanctio Sanct Outsta Expiry Collateral Intere 1st Overdue Classifica
of of the n date ion nding date security st overdue as on tion
borrow loan amou amount Suspe dated 31.12.2019 status as
er nt nse on
31.12.2019
MM OD/CC 01.01.201 10,000 10,575 31.12.2018 20,000 200 01.01.2019 12 BL

8
Outstanding 15% of Base for Required Remarks

-I.suspense- outstanding provision provision
Collateral
Securities
10,575-10,000-200= 10,575*15%=1,587 1,587

1,587*100%=1,5 Mortgaged : Land which market value is 20,000 million
87
375

Reschedule, Restructure and one time exit

Loan Rescheduling and Loan Restructuring
Circular reference: BRPD Circular no:15 Dated September 23, 2012, 06 Dated May 29, 2013 and 05 Dated February 23, 2015
Banks shall comply with the following instructions while considering application for loan
rescheduling of non-performing loan (loans classified as Sub-standard, Doubtful and
Bad/Loss):
The bank must have a policy approved by its Board of Directors in place that defines the
circumstances and conditions under which a loan may be rescheduled, consistent with this
circular
When a borrower asks for rescheduling of loan, the bank shall meticulously examine the
causes as to why the loan has become non-performing. If it is detected from such review that
the borrower has diverted funds elsewhere or the borrower is a habitual loan defaulter, the
bank shall not consider the application for loan rescheduling and shall take/continue all legal
steps for recovery of the loans.

Continue….Loan Rescheduling and Loan Restructuring
 If a borrower while applying 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 borrower 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.
 Banks shall review the borrower's cash flow statement, audited balance sheet, income
statement and other financial statements in order to ensure whether the borrower
would be able to repay the rescheduled installments/existing liability or not.

 If a borrower while applying 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 borrower 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.
 Banks shall review the borrower's cash flow statement, audited balance sheet, income
statement and other financial statements in order to ensure whether the borrower would
be able to repay the rescheduled installments/existing liability or not.

Time Limit For Rescheduling

• These time limits are absolute maximums only, and banks are encouraged
to establish shorter time limits in their internal policies. Each loan that is
being considered for rescheduling should be evaluated on its own merits
and not automatically rescheduled for the maximum time period or
rescheduled for the maximum number of three (03) times.

Time limit for rescheduling Continuous Loan:

Frequency Classified as Sub-standard Classified as Classified as
Doubtful Bad/Loss
First Maximum 18 (eighteen) Maximum 12 (twelve) Maximum 12 (twelve)
Rescheduling months from the date of months from the date of months from the date of
rescheduling rescheduling rescheduling
Second Maximum 12 (twelve) Maximum 09 (nine) Maximum 09 (nine)
Rescheduling months from the date of months from the date of months from the date of
Third Maximum 06 (six) months Maximum 06 (six) Maximum 06 (six)
Rescheduling from the date of months from the date of months from the date of
Conditions: During the rescheduled period all required principal and interest payments must be made.
Rescheduled amount should be repaid in monthly installments. If the amount of defaulted installments
is equal to the amount of 3(monthly) installments, the loan will be classified as Bad/Loss.
Time limit for rescheduling Demand Loan:

Frequency Classified as Classified as Classified as
Sub-standard Doubtful Bad/Loss
First Maximum 12 (twelve) Maximum 09 (nine)months Maximum 09 (nine) months
Rescheduling months from the date of from the date of from the date of
Second Maximum 09 (nine) months Maximum 06 (six) months Maximum 06 (six)

Rescheduling from the date of from the date of months from the date of
rescheduling Rescheduling rescheduling
Third Maximum 06 (six) months Maximum 06 (six) months Maximum 06 (six)

Rescheduling from the date of from the date of months from the date of
Conditions: During the rescheduled period all required principal and interest payments must be made.
Rescheduled amount should be repaid in monthly installments. If the amount of defaulted installments
is equal to the amount of 3(monthly) installments, the loan will be classified as Bad/Loss.

Time limit for rescheduling Fixed Term Loan:

• The loan which is repayable within a specified time period under a prescribed repayment
schedule is treated as Term Loan. In case of rescheduling of any classified Fixed Term Loan,
following time-limit may be added with the expiry date/repayment date of last installment to
determine the repayment schedule which will be started from the date of rescheduling. If the loan
is rescheduled after the expiry date, the following time-limit will be applicable from the date of
rescheduling:

Time limit for rescheduling Fixed Term Loan:

Frequency Classified as Classified as Classified as
Sub-standard Doubtful Bad/Loss
First Maximum 36 (thirty Maximum 24 (twenty Maximum 24 (twenty

Rescheduling six)months four) months four) months
Second Maximum 24 (twenty Maximum 18 Maximum 18 (eighteen)

Rescheduling four)months (eighteen) months months
Third Maximum 12 Maximum 12 (twelve) Maximum 12 (twelve)

Rescheduling (twelve)months months months
Conditions: During the rescheduled period all required principal and interest payments
must be made. Rescheduled amount should be repaid in monthly/quarterly installments. If
the amount of defaulted installments is equal to the amount of 6 monthly or 2 quarterly
installments, the loan will be classified as Bad/Loss.”
Time limit for rescheduling for Short-term Agricultural and Micro- Credit :
In case of rescheduling of any classified Short-term Agricultural and Micro-Credit, 6
months may be added with following time-limit from the day after the expiry
date/repayment date of last installment to determine the repayment schedule which will
be started from the date of rescheduling. If the loan is rescheduled after the 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 1(one) year.
Third Rescheduling Maximum 6(six) months.

Loan rescheduling restriction

a. If the loan becomes default after third rescheduling, the
borrower will be treated as a habitual loan defaulter and the bank
shall not consider for further loan rescheduling.
b. Approval of loan rescheduling cannot be made below the level

at which it was originally sanctioned. A detailed appraisal report
including implications of such loan rescheduling on the income
and other areas of the bank must be placed to the approving
authority at the time of placing the rescheduling proposal.
DOWN PAYMENT OF TERM LOANS:

a) Application for first time rescheduling will be taken into consideration upon receiving cash
payment of at least 15% of the overdue installments or 10% of the total outstanding amount of
loan, whichever is less.
b) Application for second time rescheduling will be considered upon receiving cash payment of
minimum 30% of the overdue installments or 20% of the total outstanding amount of loan,
whichever is less.
c) Application for rescheduling third time will be considered upon receiving cash payment of
minimum 50% of the overdue installments or 30% of the total outstanding amount of loan,
whichever is less.
d) The rate of down payments for Short-term Agricultural and Micro-Credit will be same as above.

DOWN PAYMENT OF DEMAND AND CONTINUOUS LOAN

First time rescheduling Rate of Down payment
Amount of Overdue Rate of Down Second time 3rd time

Loan payment
Up to Tk.1.00 (one) crore 15% Cash payment of Minimum 50% of the

minimum 30% of the overdue installments or
overdue installments 30% of the total
Above Tk.1.00(one) crore 10% or 20% of the total outstanding amount of
and up to (but not less than outstanding amount loan, whichever is less,
Tk.5.00(five) crore Tk.15.00 lac) of loan, whichever is shall have to be repaid in
less. cash.
Above Tk. 5.00(five) crore 5%
(but not less than
Tk.50.00 lac)

Special Reschedule and One Time Exit
As per BRPD Circular No. 05 Dated 16 May, 2019
• Eligibility: If any loan was classified as BL on 31 December 2018 will be eligible for special
rescheduling and one time exit fulfilling the following criteria:
1. Trading Industries (Wheat, Food, Edible oil & Refinery), Ship breaking & ship building, Iron & Steel
industries
2. Non-agriculture sector’s import & export related industrial loans of Specialized Bank.
3. Any sectors if identified by the special audit that the loan was classified as BL unintentionally.
• Conditions:
1. Down payment: minimum 2% of total loan outstanding.
2. Total allowable repayment period: Maximum 10 years including 1 year moratorium period for special
reschedule and maximum 360 days for one time exit.
3. Client must apply within 14 February, 2020 to avail these facilities as per BRPD Circular letter no. 24
Dated 17 November, 2019.

Interest on special reschedule and one time exit clients

• On the basis of bankers customers relationship, bank may waive the uncharged interest on the loan
classified as BL and the interest maintained to interest suspense accounts for the specific loan
account. However, these interest must be transferred to blocked account(interest free). After the
final settlement of the loan these interest will be considered as final waiver.
• After the rescheduling and one time exit facilities, interest charged amount on these accounts can
not be transferred to interest income account unless actual recovery.

Classification and Provisioning of Special reschedule

and One time exit
• These loans have to be reported as SMA and 1% provision need to kept.
• For special reschedule If any loan’s arrear stands for 6 months or beyond, the entire loan will
classified as BL.
• For one time exit if any loan is not repaid within the allowable time limit, the entire loan will be
classified a BL.
• After classified as BL, provision need to be kept as per BRPD circular no.14 Dated 23
September, 2012.

New facility after reschedule
As per BRPD Circular no 06 dated 29 May 2013.
• After repayment of minimum 15% of outstanding balance client will be

eligible for new loan facility.
• In case of borrowing from others Banks, the Same rule will be applicable.

RESTRICTION ON EXTENDING THE TERM TO MATURITY

OF A TERM LOAN:
• The term to maturity of a term loan may be extended subject to the following conditions and restrictions:
• a) The loan must be performing( Unclassified: Standard or SMA )
• b) The decision should be made at the level where the loan 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

Loan to Director
• The quarterly statement of liabilities of the Directors and Ex-Directors of the bank as defined
in the latest amendment of the Banking Companies Act, 1991, will have to be submitted to
Bangladesh Bank in the format as enclosed with the BRPD Circular Letter No. 8 dated 19
June, 1997.
• Any loan facility or guarantee or security provided to a Director of a bank or to his relatives
must be sanctioned by the Board of Directors of the bank and has to be specifically
mentioned in the Balance sheet of the bank. However the total amount of the loan facilities
extendable to a Director or to his relatives should not exceed 50% of the paid-up value of the
shares of that bank held in Director's own name.
• Subject to compliance of the conditions mentioned in paragraph No.1 above, loan facilities in
excess of Tk.10 lacs for funded loan and Tk.50 lacs (funded and non-funded) in favor of any
Director or his relatives or proprietorship or partnership firms and private or public limited
companies wherein those persons have interests, can be extended subject to obtaining No
Objection Certificate from Bangladesh Bank.
Single borrower exposure and Large loan
• In order to comply with the section–26(Kha) of the Banking Companies Act, 1991 and to improve bank’s
credit risk management further, Bangladesh Bank has issued BRPD Circular No. 02/2014 consolidating
all instructions issued so far on the subject and has made some amendments.
• “Exposure” – means credit exposure (funded and non-funded) and refers to all claims, commitments
and contingent liabilities arising from on and off-balance sheet transactions, which include, but not
limited to, outstanding loans/financing facilities, advances and receivables. These amounts comprise
outstanding balance (i.e. principal amount and accrued interest/profit) which has not yet been repaid as
at reporting date;
• i) “Funded Exposure” – means the exposure for which the bank has provided or shall provide funds to
the borrower or to a third party on behalf of the borrower;
• ii) “Non-funded Exposure” – means the off-balance sheet exposure which has not yet been funded by
the bank and may or may not be converted into funded facilities in future. Examples, letter of credit,
guarantee, acceptance, commitment etc;
• iii) “Large Loan” – defined in Paragraph-2(b)(i) of this circular as per Clause (2) of Section-26Kha of the
Banking Companies Act, 1991
Continue….Single borrower exposure and Large loan
a. Single Person/Counterparty or Group:

i) The outstanding amount of exposure, both funded and non-funded, to a single person/counterparty or a
group shall not exceed 35% of the capital at any point of time.
ii) The aggregate outstanding principal amount of funded exposures shall not exceed 15% of the capital at any
point of time.
iii) In case of export financing, the outstanding amount of exposure, both funded and non-funded, at any
point of time to a single person/counterparty or a group shall not exceed 50% of the capital. However, the
aggregate outstanding principal amount of funded exposures shall not exceed 15% of the capital at any point
of time.
b. Large Loan:
i) Large loan refers to any exposure to a single person/counterparty or a group which is equal to or greater
than 10% of the capital.
ii) The banks may sanction large loans as per the following limits set against their respective classified loans:
Continue….Single borrower exposure and Large loan
Rate of net classified loans Large loan portfolio ceiling against

Bank’s total loans and advances
Upto 5% 56%
More that 5% but upto 10% 52%
More than 10% but upto 15% 48%
More than 15% but upto 20% 44%
More than 20% 40%

Continue….Single borrower exposure and large loan
• In order to determine the above Large Loan Portfolio Ceiling of any bank, 50% credit equivalent
of all non-funded credit facilities shall be included in the Total Loans and Advances (i.e., 100%
funded exposures plus 50% non-funded exposures). However the entire amount of non-funded credit
facilities shall be included in the Large Loan Portfolio.

Write-off policy
 Loan classified as BL can be written-off provided that 3 (three) years have been passed and 100%
provision has been kept.
 If 100% provision kept against the account is not sufficient for write-off, then current year’s
income may be debited for loan write-off purpose.
 Loan write-off does not mean that the borrower is relieved from his debt obligations and the banker will not do
anything after loan write-off. Rather banker will initiate / continue all out efforts for recovery of written-off loan
liability, and if legal action is not already initiated against the borrower, then legal action will be initiated against
the client with immediate effect.
 The bank will open and maintain a separate debt collection unit which will look after recovery of classified as well
as written-off loan accounts. Outside agencies may be deployed in this purpose as per BRPD Circular no 02/2015.
 No Loan/ Investment can be partially written-off.

Write-off policy Chartered Accountants
 Balance of written-off loan account(s) will be mentioned in the “notes to accounts” of

the Annual Report of the bank.
 No Loan/ Investment can be written-off without the authorization of the board of the
directors.
 The borrower whose loan is written-off will still be treated as loan defaulter and his loan
classification status will be reported in the CIB database of Bangladesh Bank as BLW.

Changes due to COVID 19
• As per BRPD Circular-17 Dated 28.09.2020, Continuous & Demand loan exist at
01.01.2020 and new demand loan approved from 01.01.2020 - 30.09.2020, expiry
period can be extended from the current expiry date to 12 months or up to
31.12.2020, whichever is earlier.
• As per BRPD Circular- 17 Dated 28.09.2020, in case of term loan, number of
installments arrear from 1 January 2020 to 31 December 2020 will be considered as
deferred installments. However, the total number of installments will be re fixed
in 1 January 2021 by adding the deferred installments.
• As per BRPD circular no.03 Dated 21.20.2021 deferral maximum allowable time
for term loan to repayment of the deferred installment will be 50% of the
remaining expiry period of the loan or up to 2 years whichever is lower
• As per BRPD circular no. 59 Dated 30 December 2020, for One time exit facilities
under BRPD Circular number: 05 Dated 16.05.2019, maximum allowable time to
repay the deferred installments will be 180 days.
Changes in Classification due to COVID 19
As per BRPD Circular-56 Dated 10.12.2020, In case of downgrading, Loans

classification status can not be downgraded from 1 January 2020 to 31
December 2020 and should be reported based on the classification status of
01 January 2020. However if any loan’s classification status gets improved, it
can be reported as per BRPD circular number. 03 Dated 21 April, 2019.

Impact on interest income Due to COVID-19
As per BRPD circular no:11 Dated 03.05.2020, 23 Dated 04.05.2020 and 12 Dated 10.06.2020.
• Interest charged / chargeable for the months from 01.04.2020 to 31.05.2020 must be transferred to
“Interest free blocked accounts”.
This is not applicable for the loan sanctioned or disbursed from 01.04.2020
• Interest maintained in the blocked account for the months from 01.04.2020 to 31.05.2020 must be
waived in the following manner.
Loan outstanding as on 31.03.2020 Percentage of waiver(Interest for the months of

April and May)
1 lac or below Entire interest
Above 1 lac - 10 lac 2% annually
Above 10 lac 1% annually or 12 lac whichever is lower

Impact on interest income due to

COVID-19
• Waived interest will be reimbursed by the Bangladesh Bank only if 9% interest rate (As
per BRPD circular no. 03/2020) is effective by the bank from 01.04.2020 except the interest
rate of credit card.
• As per BRPD 12 dated 10.06.2020, for all the unclassified loans, interest (Net off waived)
for the month of April and May 2020 maintained in the “Interest blocked account” can be
transferred to income account as per the existing guidelines and Interest receivable
account.
Recovery
Recovery period: July 2020 to June 2021
Payment method: Monthly installment or any other way
• For continuous loan net off waived interest will be considered as excess over limit. Based
on banker-customer relationship this interest can be adjusted at the time of renewal.
If any waived interest has been already recovered before July 2020, the recovered amount
must be returned/adjusted with the loan outstanding amount.
• Bank must apply within 15.07.2020 for the reimbursement in BB prescribed form.
Changes in Classification due to COVID 19
• As per BRPD circular no:56, Dated:10 December, 2020 & Ref: BRPD(P-
1)661/13/2021-117 dated 5 January 2021
• If any loan has become unclassified due to deferral facility, additional 1% general
provisions have to maintain on these unclassified loans as “Special general
provision- Covid 19” which will be represented in other liabilities separately and it
can not be reverse until BB further instruction thereon

Stimulus Fund
Risk & Checking
1. Any classified client is not allowed for stimulus fund

2. For new loan client’s ICRRS score must be marginal at least
3. Government will provide 4.5% interest for the first year.
4. If any client become classified Bangladesh Bank will not provide
interest for the client
5. Before disbursement Bangladesh Bank No Objection Certificate
required
6. This loan validity will be maximum 3 years

IFRS VS BRPD in loans and advances
IFRS: Loans and advances/investment should be presented net of provision
Bangladesh Bank: As per BRPD 14, provision on loans and

advances/investments are presented separately as liability and can not be
netted of against loans and advances.

Provision on loans and advances/investments IFRS:

IFRS 9: an entity shall recognize an impairment allowance on loans and advances based on expected credit losses. At
each reporting date, an entity shall measure the impairment allowance for loans and advances at an amount equal to the
lifetime expected credit losses if the credit risk on these loans and advances has increased significantly since initial
recognition whether assessed on an individual or collective basis considering all reasonable information, including that
which is forward-looking. For those loans and advances for which the credit risk has not increased significantly since
initial recognition, at each reporting date, an entity shall measure the impairment allowance at an amount equal to 12
month expected credit losses that may result from default events on such loans and advances that are possible within 12
months after reporting date.
Bangladesh Bank: As per BRPD circular No. 24 (17 November 2019), BRPD circular No.6 (19 May 2019), BRPD circular
No. 4 (16 May 2019), BRPD circular No. 3 (21 April 2019), BRPD circular No.15 (27 September 2017), BRPD circular No.16
(18 November 2014), BRPD circular No.14 (23 September 2012), BRPD circular No. 19 (27 December 2012), BRPD circular
No. 05 (29 May 2013) and BRPD circular No.1 (20 February 2018) a general provision at 0.25% to 5% under different
categories of unclassified loans (good/standard loans) has to be maintained regardless of objective evidence of
impairment. Also specific provision for sub-standard loans, doubtful loans and bad losses has to be provided at 5%, 20%,
50% and 100% respectively for loans and advances depending on time past due. Again as per BRPD circular no. 10
dated 18 September 2007 and BRPD circular no. 14 dated 23 September 2012, a general provision at 1% is required to be
provided for all o -balance sheet exposures. Such provision policies are not specifically in line with those prescribed by
IFRS 9.

Provision on loans and advances/investments IFRS:

IFRS: Loans and advances to customers are generally classified at amortized cost as per IFRS 9
and interest income is recognized by using the effective interest rate method to the gross carrying
amount over the term of the loan. Once a loan subsequently become credit-impaired, the entity
shall apply the effective interest rate to the amortized cost of these loans and advances.
Bangladesh Bank: As per BRPD circular no. 14 dated 23 September 2012, once a loan is classified
as impaired, interest on such loans are not allowed to be recognized as income, rather the
corresponding amount needs to be credited to an interest in suspense account, which is presented
as a liability in the balance sheet.

Loan and Advances Journal

• At the time of initial disbursement:

Loan and Advance receivable- Customer A/C……………… Dr.
Deposit – Customer A/C………………………………………………… Cr.
• At the time of interest charged on STD loans:

Loan and Advance receivable- Customer A/C………………. Dr.
Interest Income A/C …………………………………………………….. Cr.
• At the time of interest charged on Classified Loans:

Loan and Advance receivable- Customer A/C………………. Dr.
Interest Suspense A/C …………………………………………………. Cr.

• At the time of collection/ recovery of STD loans:
Deposit- Customer A/C or Cash or Bank A/C ………………… Dr.
Loan and Advance receivable- Customer A/C……………….……Cr.
• At the time of collection/ recovery of Classified loans:
Deposit- Customer A/C or Cash or Bank A/C ………………… Dr.
Interest Suspense A/C ……………………………………………… Dr.
Loan and Advance receivable- Customer A/C……………………. Cr.
Interest Income A/C ……………………………………………………… Cr.
• At the of making provision:
Income Statement ………………………………………………………… Dr.
Provision for loans and advances ………………………………………..…. Cr.

Islami Banking VS Conventional Banking

Islami Shariah Banking Conventional Banking
Revenue Profit Interest Income
Relationship Seller-Buyer, seller-agent & Lender-borrower
Buyer, lessee-lessor
Profit Sales, sales commission Interest charge over the
period
Income Investment Loan provided

comes from


Accounts For every disbursement against a For every disbursement against a
sanction, Separate accounts/deals are sanction, only one account is
maintained. maintained.
Classification Every separate deals are consider as a Though only one loan account is
separate loan account and classify created for every disbursement against
separately based on overdue status of a sanction, entire facility will be
each deal. classified based on overdue status.
Renewal For CL 2 & 3 Investment: Only credit For CL 2 & 3 loan: Any loan account
facility can be renewed. No deal will can be renewed if the loan is not excess
be renewed. Hence, there is no scope over limit.
to enhance the expiry date of the
existing deal by providing renewal
facility.


Profit charged Profit charged at the time of opening a Interest charged over the period.
deal (Though Bank sell the product or
facility) and subsequently only rent
can be charged in case of HPSM
facility.
Penalty Bank charges compensation as Bank can charge penal interest and
penalty. Instead of recognizing it as recognizes as interest income.
income, Bank recognizes
compensation as liability(CSR
activities/Transferred to fund)
Disbursement Usually, Bank makes disbursement to Bank can disburse the credit amount to
supplied although bank may disburse suppliers account.
to clients account if clients make seller-
Agent agreement with the bank.

• At the time of loan rescheduling:
Cash or Bank A/C…………………………………………………………… Dr.
Interest Suspense A/C ………………………………………………..……. Dr.
Provision for loans and advances ……………………………….………. Dr.
Interest Income A/C …………………………………………………………….. Cr.
Loan and Advance receivable- Customer A/C………………...…………..Cr.
• At the time of loans write off:

Income statement (Short fall) ………………………………………. Dr.
Provision for loans and advances …………………………………. Dr.
Interest Suspense A/C …………………………………………………Dr.
Loan and Advance receivable- Customer A/C……………….……. Cr.

• At the time of loan rescheduling:
Cash or Bank A/C…………………………………………………………… Dr.
Interest Suspense A/C ………………………………………………..……. Dr.
Provision for loans and advances ……………………………….………. Dr.
Interest Income A/C …………………………………………………………….. Cr.
Loan and Advance receivable- Customer A/C………………...…………..Cr.
• At the time of loans write off:

Income statement (Short fall) ………………………………………. Dr.
Provision for loans and advances …………………………………. Dr.
Interest Suspense A/C …………………………………………………Dr.
Loan and Advance receivable- Customer A/C……………….……. Cr.

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Hoda Vasi Chowdhury & Co

Audit of Loans and Advances of a Bank

Shaikh Hasibur Rahman FCA

Risk Related to loan or Advances from Audit Perspective

 Risk of material misstatement

Categories of loans and advances

Shaikh Hasibur Rahman FCA

Definition and Example

Continuous Loan. The loan accounts in which transactions may be

Shaikh Hasibur Rahman FCA

Definition and Example

Fixed Term Loan.

Definition and Example

MM OD/CC 01.01.2018 10000 10020 31.12.2018 01.01.2019 24

Shaikh Hasibur Rahman FCA

Definition and Example

MM Term 01.01.2018 10,000 10,020 01.01.2019 01.07.2019 18

Shaikh Hasibur Rahman FCA

Objective Criteria Qualitative Judgment

Shaikh Hasibur Rahman FCA

STD (Standard) SMA( Special SS (Sub – DF (Doubtful) BL (Bad/Loss)

Continuous 0 months or 2-2.99 03 months or 09 months or 12 months or beyond

Demand 0 months or 2-2.99 03 months or 09 months or 12 months or beyond

Fixed term 0 months or 2-2.99 03 months or 09 months or 12 months or beyond

MM OD/CC 01.01.2018 10000 10020 31.12.2018 01.01.2019 24 BL

Practical Example 02 In million

MM Term 30.06.20 10,000 9,000 31.01.2019 7 01.02.2020 11 DF

Shaikh Hasibur Rahman FCA

Loan classification for CMSME

STD (Standard) SMA( Special SS (Sub – DF (Doubtful) BL (Bad/Loss)

Continuous 0 months or 2-2.99 06 months or 18 months or 30 months or beyond

Demand 0 months or 2-2.99 06 months or 18 months or 30 months or beyond

Fixed term 0 months or 2-2.99 06 months or 18 months or 30 months or beyond

Shaikh Hasibur Rahman FCA

Loan classification for CMSME

ABM OD/CC 01.01.2016 10,000 10,020 31.12.2017 01.01.2018 36 BL

ABM Term 30.06.20 10,000 9,000 01.01.2018 7 01.02.2019 23 DF

Shaikh Hasibur Rahman FCA

Shaikh Hasibur Rahman FCA

 If classified loan or part of it is recovered i.e., real deposit is effected in the

Shaikh Hasibur Rahman FCA

1. CL-1 is the complication/summary of 4 other forms

Shaikh Hasibur Rahman FCA

Customer Selection based on risk

1. Top 50 Clients 11. Previous year’s tripartite meeting

Shaikh Hasibur Rahman FCA

BOD/EC CRM CAD

Shaikh Hasibur Rahman FCA

Checking of loan file

Pre Approval phase

Post Disbursement phase

Shaikh Hasibur Rahman FCA

Continue…..Pre Disbursement Phase

Obtaining corresponding file

Shaikh Hasibur Rahman FCA

Continue…..Pre Disbursement Phase

Obtaining Security file