Chapter: 1

Introduction
1.1 Background of the study
The liberalization of the financial sector demands a new technology to cope with the rising
pressures on the profitability of banks and financial sector institutions in the country. Banking
industry is the potential industry where the growth of a country depends on a lot. This industry is
very important in Bangladesh and holds a lot of skilled employees. The banking industry of
Bangladesh is mainly divided into two sectors, such as Specialized Banks (SBs) and Commercial
Banks (CBs). The Specialized Banks are those banks that deal with specific sectors or industry of
an economy. Bangladesh is a developing country and the present economic condition of Bangladesh
is of open market in natures, in this situation, the specialized bank like Bangladesh Development
Bank Limited(BDBL) can play necessary role toward the economic improvement by providing term
loan & SME loan to different industries and entrepreneurs in Bangladesh. Bangladesh development
Bank Limited is one of the major Governments owned Bank having country wide network of 32
branches, 4 Zonal offices and plans to open few more branches to cover the important Industrial
areas in Bangladesh. The bank has been operating in Bangladesh since 2009 and has achieved
public confidence as a sound, stable and trustworthy Bank. Bangladesh Development bank
Limited(BDBL) is the prime development financing institution continued its effort to make an
effective contribution towards expansion of industrialization process of Bangladesh. Along with any
other financial institution, Bangladesh Development Bank Ltd. is also a powerful banking
institution who invested large amount of investment in Long term and SME sectors. Investment
decision forms an integral part of development process. Amongst various methods of making
investment decisions, project appraisal occupies the most leading position. It helps rationalize the
guidelines for investment criteria at the project level and the national level. Before sanctioning loan
Bank prepare a project appraisal on the basis of borrower.

Bangladesh, being a developing country and with an underdeveloped capital market, mainly
depends on the intermediary role of commercial banks for mobilizing internal saving and providing
capital to the investor. Thus, it matters greatly how well our financial sector is functioning. Looking
at the performance of our financial sector for the last decade or so, we observe that our banking
sector is heavily burdened with a high percentage of classified loans.

It is obvious that classified loans reduce banks profitability, as banks cannot appropriate interest
income from those loans. It is reduce loan able funds by stopping recycling. Banks need to set aside
a portion of their income as loan loss reserve to make up bad debt. A bank with a high percentage of
classified loans suffers from erosion of the capital if there is no preparation. All those adverse
impact of classified loans on banks financial health such as low profitability and low capital base
are clearly reflected in Bangladesh banking sector.

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1.2 Literature Review:

Loan classification means giving each and every loan case a status like unclassified, sub- standard,
doubtful and bad or loss through verification of borrowers repayment performance on a particular
date while provisioning means setting aside fund from the profit (profit before provision and taxes)
against possible loan loss. This is obviously essential for determining the financial health and
efficiency of the banking sector. Besides, a proper loan classification and provisioning system
ensures credibility of the financial system that in turn restores trust and confidence in the minds of
the depositors. Loan classification is the act of grouping or arranging of loans and advances
according to their status like unclassified, sub-standard, doubtful and bad or loss based on given
criteria.

Provisioning means setting aside certain fund from the current year profit against possible loan
losses. In Bangladesh, Bangladesh bank prescribes the loan classification and provisioning criteria
through BRPD Circular No. - 1 dated June 05, 2006; BRPD Circular No. -7 June 14, 2012;
BRPD Circular No.-14 dated September 23, 2012 and BRPD Circular No. 19 dated December
27, 2012. As part of this program, a new system of loan classification and provisioning against
potential loan losses for advances was introduced in November 1989. Before 1989 no specific
guidelines were followed by the commercial banks for this purpose. This process is continued to
date. The title of the circular was Master Circular: Loan Classification and Provisioning. The
introduction of this program was aimed at to bring loan loss provisioning and classification in line
with international standards by the end of 2012.

There are various ways of classifying loans. This process of loan classification helps banks to
evaluate the loan facilities so as to be able to grant loans to grades based on the observed risk and
other relevant features of the loans. To Laurin et al (2002), banks should use more complex
internal control classification systems to do away with the more standardized systems that the
regulators of bank need in order to evaluate and report on the purposes which are intended to
facilitate excessive monitoring.

Loan advances portfolios of financial institutions are classified into various categories or types to
determine the level of provisions to be made in conformity with the banking regulations stated in
the Banking Act of 1963, Act 179. Kone (2006), classified the various loans as current, NPL,
substandard, doubtful and loss.

Non-performing loans refer to those financial assets from which banks no longer receive interest
or installment payments as scheduled. It is a very critical but frequent issue in bank fund
management and the present situation of NPLs in Bangladesh is a topic of great concern. It can
bring down investors confidence and if created by the borrowers willingly and left unresolved
might act as a contagious financial malaise by driving good borrowers out of the financial market.
The volume of default loans of state owned commercial banks in Bangladesh (BD) has been
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increasing at an alarming rate. It is not a new issue but the tendency of fraud, embezzlement and
loan default is in a serious situation in recent years due to excessive political interference and
illegal interruption of the concerns.

Lending decision of a bank is very important because it determine the future profitability and
performance of the bank. Recently banks are becoming more and more conscious in customer
selection to avoid the negative impact of bad loan or non-performing loan. The issue of
nonperforming loans (NPLs) has gained increasing attentions in the last few decades. Amounts of
bad loans are alarmingly increasing in not only the developing and under developed countries but
also in developed countries. Banks lending policy could have crucial influence on non-performing
loans. A default is not entirely an irrational decision. Rather a defaulter takes into account
probabilistic assessment of various costs and benefits of his decision. Lazy banking critically
reflects on banks investment portfolio and lending policy sector(Reddy & Mohan (2003); Sinkey
(1991) & Dash (2010).

According to the definition of the Financial Reconstruction Law (FRL), the total amount of
NPLs of all banks in Japan as of the end of March 2003 was 35.3 trillion yen, although there are
claims that the actual amount of NPLs might exceed 100 trillion yen. On the other hand, the causes
of the financial and exchange rate crisis that erupted in East Asia (Thailand, Taiwan, Malaysia and
Indonesia) in 1997 are viewed as high short-term external debts, excessive loans for real estate,
large current account deposits, high international interest rates and weaknesses in the balance sheet
of financial institutions. In addition, Kwack (2000: 195-206) finds that the 3-month LIBOR
interest rate and nonperforming loan rates of banks were the major determinants of the Asian
financial crisis.
Choudhury and Adhikary (2002) stated that the nonperforming loan is not a uniclass but rather
a multiclass concept, which means that NPLs can be classified into different varieties usually
based on the length of overdue of the said loans. NPLs are viewed as a typical byproduct of
financial crisis: they are not a main product of the lending function but rather an accidental
occurrence of the lending process, one that has enormous potential to deepen the severity and
duration of financial crisis and to complicate macroeconomic management

In addition, NPLs, if created by the borrowers willingly and left unresolved, might act as a
contagious financial malaise by driving good borrowers out of the financial market. Reddy
(2004)argues that a bank with high level of NPLs is forced to incur carrying costs on non-income
yielding assets that not only strike at portability but also at the capital adequacy of a bank, and in
consequence, the bank faces difficulties in augmenting capital resources. Mohanty (2006) also state
that the probability of banking crises increases if financial risk is not eliminated quickly. Such crises
not only lower living standards but can also eliminate many of the achievements of economic
reform overnight.

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Desai and Farmer (2001) argued that the expansion of credit policy during the early stage of
liberation, which was directed to disbursement of credit on relatively easier terms, did actually
expand credit in the economy on nominal terms. However, it also generated a large number of
willful defaulters in the background who, later on, diminished the financial health of banks through
the sick industry syndrome. In the 1990s, however, a broad based financial measure was
undertaken in the name of FSRP, enlisting the help of World Bank to restore financial discipline to
the country. Since then, the banking sector has adopted prudential norms for loan classification
and provisioning (Bangladesh Bank, 2014). Other laws, regulations and instruments such as loan
ledger account, lending risk analysis manual, performance planning system, interest rate
deregulation, the Money Loan Court Act 1990 has also been enacted to promote sound, robust and
resilient banking practice. Surprisingly, even after so many measures, the banking system of
Bangladesh is yet to free itself from the grip of the NPL debacle. The question thus arises, what are
the reasons behind such a large proportion of nonperforming loans in the economy of Bangladesh?
Is it because of flexibility in defining NPLs or lack of effective recovery strategies on the part
of the banks? Alternatively, is it due to poor enforcement status of laws related to nonperforming
loans? The present study has concentrated on the above issues mainly with a view to assisting
policymakers to formulate concrete measures regarding sound management of NPLs in Bangladesh
(Boi.gov.bd, 2015).

Loan classification makes two pronged attacks on the activities of banks. First, interests applied on
loans are not taken into account because such interests are to be taken into account only on its
realization. Second, banks have to make provisions on classified loans as per guidelines by
Bangladesh Bank from out of the income earned by them on performing loans.

1.3 Objective of the Study

The main Objective is:

To understand and evaluate how BDBL manage their classified loan and its impact on the
banks profitability.

Other Objectives are as follows

To evaluate different criteria about the existing classified loan procedure.

To explore the significance of relationships between the variables related to classified loan
& Profitability.
To identify the causes and remedies of classified loans.

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1.4 Significance of the Study

Industrialization is the main indicator to develop a country, so government has established

Bangladesh development Bank Limited (BDBL) to disperse the loan and other technical facilities
among the entrepreneurs to develop industry. Since Bangladesh is a developing country, and the
present economic situation of Bangladesh is of open market in nature so in this situation the
specialized Bank like BDBL can play vital role toward the economic improvement. The types of
organizations in which BDBL finance are large scale Jute, Textile spinning and Weaving,
Composite Textile, Food & Allied Products, Water Transport, Chemicals & Pharmaceuticals etc.
Many of sponsoring borrowers of BDBL financed projects have now become the most successful
entrepreneurs of the country. In working with the BDBL I found that some of its financed industry
is unable to operate in the market. These Industries are recognized as sick industry.
So I decided to identify and measures to reduce the effect of classified loans to maximize profit,
thereby increasing recovery rate as well. To that effect, credit managers and other officers in the
credit channel can plan recognition initiatives, map out plans for career development, initiate a well
balance work-life programs and bring out attractive packages to curve down the non - performing or
bad loans in the rural banking industry. Again the study aimed at assisting customers and clients in
identifying the factors that will motivate them towards repayment of their loans. It will also serves
as a guide to those in the academic, financial institutions, corporate managers and individuals that
want to know more about the effect of classified loans on the lending potential and profitability of
the banking industry.

1.5 Limitation of The Study

On the way of the study, I have faced the problems that are given below that may be terms as the
limitation or shortcoming of the study-

It was very difficult to collect the information from various personnel for the job constrain.

Bank policy was not disclosing some data and information for various reasons.

The department people always remain busy due to lack of supporting employees so they could
not dedicate their full efforts.

Because of the limitation of information some assumption was made. So there may be some
personal mistake in this report.

The annual report is the main secondary source of the information but this information was not
enough to complete the report and it was not identified clear idea about this bank.

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 Chapter: 2
Methodology
Sources of Information

On my way to prepare this report I had to adhere to some canons and methodologies to collect
proper and authentic data. Rules and regulations were followed to data collection procedure.
Accuracy of the study depends on the information and data analysis.
Data are collected from both primary and secondary sources. This study has been conducted using
screening technique which is a descriptive research model. For collecting required data from
selected sample some interviews and visit has been occurred.

Sources of Information

Practical Desk Work Annual Report of BDBL.

Oral Interview of the respective Various documents of BDBL.
officials and stuff of BDBL.
Annual budget of BDBL
Direct observation of the function of
various departments Extensive literature search on the bases
Relevant document studies as of these documents of publication.
provided by the concerned officers.
Website of BDBL

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 Chapter: 3
Organizational Profile
3.1 Introduction

3.1.1 Start Point of BDBL:

The Bangladesh Development Bank Ltd (BDBL) began its operations on January 03, 2010. This
bank is resulted from a merger of two state-owned entities, the Bangladesh Shilpa Bank (BSB) and
Bangladesh Shilpa Rin Sangstha (BSRS), which were in crisis over unrealized loans. Shilpa Bank
and Shilpa Rin Sangstha, which were established in 1972 to provide loans and facilities to industrial
units, help set up new industries and expand investment in Bangladesh.

3.1.2 Evolution of BDBL:

However, they failed to meet expectations. In 1972, the government moved to privatize BSRS, but
did not success. In 2008 government subsequently launched an initiative for a merger between the
two non- performing lenders. The two boards sat on December 8, 2009 to fix a vendor agreement
schedule with the government, which was inked on December 31.

As per the merger plans, the accounts of the two organizations were also consolidated in December
2009. The BDBL plans to operate across the country setting up branches at the district level.

The defunct BSB had 15 branches while BSRS has two. BSB and BSRS have financed 174
and 69 projects.

The paid up capital of the merged company will amount to 400 crore. Before merged the
paid up capital of BSB was TK 200 crore was TK 70 crore for BSRS.

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 3.2 Institutional Overview of BDBL:
Table 2: Institutional Overview of BDBL

Name Bangladesh Development Bank Limited, a state-

owned commercial Bank ( formed through merger
:
of Bangladesh Shilpa Bank and Bangladesh Shilpa
Rin Sangstha)

Legal Status : Public Limited Company

Date of incorporation : November 16, 2009

Banking License obtained : November 19, 2009 issued by Bangladesh Bank

Vendors Agreement Signed December 31, 2009 between the government and
: boards of directors of BDBL Nominated By the
Government
Formal Inauguration : January 03, 2010

Registered Office : BDBL Bhaban, 8, Rajuk Avenue, Dhaka-1000

Authorized capital : Tk. 10000 million

Paid up capital : Tk. 4000 million

Reserve ( As on 31.12.2014) : 13205.5 million

Total Assets( As on
: 50259.9 million
31.12.2014)

Total Human Resources : 878

Number of Zonal Office : 04

Number of Branch office : 35

Membership : Dhaka and Chittagong Stock Exchange Ltd.

Website : www.bdbl.com.bd

3.3 Sources of Fund

Paid up Capital.
Loan from Government of Bangladesh.
Loan from Bangladesh Bank.
Commercial Bank.
Local/ Overseas Financial Institutions.
Suppliers credit.

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3.4 Ownership of BDBL
At least 51 percent of the Authorized capital of BDBL be subscribed by Bangladesh government
and remaining 49 percent be subscribed by Bangladesh nationals or by financial institutions local or
foreign. Presently, 100 percent ownership of the Bank belongs to the government.

3.5 Vision:
To emerge as the countrys prime Financial Institution for supporting private sector industrial and
other projects of great significance to the countrys economic development. Also be active
participant in commercial baking by introducing new lines of product and providing excellent
services to the customers.

3.6 Mission:
To be competitive with other banks and financial intuitions in rendering services.
To contribute to the countrys socio economic development by identifying new and
profitable areas for investment.
To mobilize deposit for productive investment.
To expand branch network in commercially and geographically important places.
To delegate maximum authority ensuring proper accountability.
To maintain continuous improvement and up gradation in business policies and procedures.

3.7 Values:

Customer Focus: Provide smart, efficient, transparent and courteous services.

Social Responsibility: Practice corporate Social responsibility.
Transparency & Accountability: BDBL is committed to remain transparent and accountable to
their stockholders in discharging their responsibilities.

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3.8 Five years performance of BDBL: at a Glance

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!

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3.9 Corporate Profile

Established : January 03, 2010

Head Office : Dhaka

Department : 26

Division : 11

Branch Office : 35

Man Power : 975

3.10 Business Programs of BDBL

There are six criteria of business programs existing in Bangladesh Development Bank Ltd. These
are given below:

A. Industrial Credit Programs:

Long Term Finance ( up to 10 years & up to 10 crore)

Medium Term Finance (up to 3 years)
Short Term Finance (up to 1 year) (working capital)

B. Commercial Banking Services:

Maintaining all kinds of general banking accounts with one stop service for payment of
cheques.

All kinds of Letter of Credit opening with nominal commission (0.5% for 1st quarter and
0.25% for subsequent quarter, not less than taka 250.00)

Issue of pays Order/Bank draft, DD/TT, Guarantee issue, selling and enactment of
Bangladesh Savings Certificate and Prize Bonds etc.

C. EEF Program:

EEF (Equity Entrepreneurship Fund) is an equity support program sponsored by Bangladesh Bank
with a view to inspiring the risky but potential sectors like:

Software Industry (for the projects costing not less than Taka 10.00 million)

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 Food processing and Agro-based Industries (for the projects costing not less than Taka
15.00 million).

D. Share Trading Service:

BDBL provides trading facility and client service as well of DSE at its share trading cell
of head office with nominal commission 237 members are presently enjoying this facility
here.

CDS (Central Depository System) Service initiated in the cell for providing online
Delivery of Shares in both ways.

E. Incentive Program for Loan Recovery:

Deferred payment of IDCP (Interest During Construction Period) after some moratorium
periods in instalments.
Regular loan repaying projects are honoured with special certificates and BDBL Crests.

F. Deposit Mobilization Program:

Bank tries to meet its fund requirement from various sources like private, government and non-
government organizations for lending and investment.

Limit of Equity Support

Not more than 49% of equity or 33.33% of project cost for bank financed units.
But up to 49% of project cost for borrowers own financed units.

Achievement of the Bank in FY: 2013-2014

a) Recovery of loan Taka 3,702.1 million (58% of target).

b) Sanction of loan Taka 16,501 million in Long-term & SME.

c) Classified loan reduced and stand at 38% to 40% in 2013.

d) Income from purchase and sale of shares Taka 4,133.6 million.

e) Provision for loans and advances 50 million.

f) Capital surplus Taka 7,743.4 million.

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 g) Liquidation of loan accounts of 8380 projects.

h) Net asset value per share Taka 438.44.

i) Earnings per share (EPS) Taka 28.23.

(Source: Annual report 2014)

3.11 Merger of BSB & BSRS

The merger of BSB and BSRS and transferring them to a government owned proposed public
limited company naming Bangladesh Development Bank Limited (BDBL) has been approved in the
meeting of Advisors Committee and passed in the first session of the 9th National Assembly held
on 24th February, 2009 as Bangladesh shilpa bank (amendment) bill, 2009 and published in the
Bangladesh gazette as the 14th Law. The bank, among others, has been informed this by the
Ministry of Finance vide its Memorandum and Articles of Association vetted by the Ministry of
Law for creating BDBL as well as a draft copy of Vendors Agreement for the whole undertaking of
BSB & BSRS to BDBL to be signed between the Government and the BDBL.

Besides, it has been directed, among others, to complete the following activities-

(1) To adopt required steps for registering Bangladesh Development Bank Ltd as the public
Limited Company with the office of the Register of Joint Stock Companies & Firms.

(2) To take measures for getting Banking License to be issued by Bangladesh Bank in favour of
this proposed company and,

(3) To complete Vendors Agreement between the Government and the Board of Directors of
the company relating to the transferring of assets and liabilities BSB & BSRS after
finalizing the process establishing the proposed company.

With a view to seeing of up of BDBL, the following work has been completed by the bank as per
direction of the ministry of finance:-

(1) Taken approval from Bangladesh bank regarding memorandum and Articles of Association
vetted by ministry low;

(2) Collected Certificate of incorporation & certificate for commencement of Business from the
joint stock companies and firms and,

(3) Got permission from the Securities and Exchange Commission for utilizing Taka 400 crore
as per paid up capital.

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3.12 Prospectus of BDBL (SWOT Analysis):

Having a SWOT analysis is one of the most prolific techniques to bear out the prospectus of an
organization. The comparison of the Strengths, Weakness, Opportunities, Threats are normally
refers as a SWOT analysis. SWOT analysis explains in two broad ways on viewed of organizations
environment.
These are:
External Environment Analysis:
a) Threats
b) Opportunities
Internal Environment Analysis:
a) Weakness
b) Strengths

STRENGTHS OPPORTUNITIES

As a prime DFI, it has a large number of Gear-up recovery through setting up of

qualified & experienced professionals. pragmatic recovery targets

Structural set up & business location is Expansion of new area of investment

strategic.
Clearing loan ledger with exit facilities
BDBLs assets position is quite satisfactory
and All about efforts for deposit mobilization

BDBL has requisite strength and opportunity Undertake need based training program
to sustain the challenge of the market including computer training to all officers &
economy. develop a computerized data base system and

Full computerization of banks activities

WEAKNESS THREATS
Employee relation is bad in some cases
Recovery System are very weak
Normally in BDBL mid and low level
personnel are less qualified and experienced. In some cases recovery policies are not
practices properly.
Bureaucracy official process hampered the
daily internal workflow. Introduction of certain harder banking rules
and regulations.
The prime weakness I found lack of
motivation of workers, creating from Third party consideration( Bangladesh Bank,
interpersonal clash, work environment, low Ministry of finance etc. regulates the overall
salary structure. internal activities of the bank and bank must
be bound to follow the rules of Bangladesh
Absence of team work because of Bank)
interpersonal clash.

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 Chapter 04

Loans Duration of overdue Required Provision (% of

outstanding loans)
Unclassified Less than 6 months 1
Substandard 6 months < 9 months 20
Doubtful 9 months < 1 year 50
Bad 1 year or more 100

4.1 Classified Loan:

A classified loan is any kind of loan that a bank examiner has remembered to be in danger of
defaulting. It is not necessary all the time that a borrower need to miss payments order for a bank to
docket the account in this way. Bank can identifies a loan as a classified loan for different reasons.
Loan classification is simply a precaution that financial institutions take several steps to prepare for
a possible loss and to reduce any further risk.
The Bangladesh Bank as a guardian of money market defines the classified loan an 8-tier loan
classifying system like Superior, Good, Acceptable, Marginal, Special Mention, Sub-standard (SS),
Doubtful (DF) and Bad/ Loss (BL). Actually this are treated as the key risk grading system for
measuring the assets quality. Financial institutions are use this grading system periodically to check
asset-quality. If any facilities need to be downgraded it should be informed to the authorities in
Early Alert Reporting (EAR) for their decision-making.

4.2 Loan classification system

Bangladesh is a member country of the World Bank, so it needs to compare its loan classification
and provisioning system with the international standard. As a result, the standard international

Loans Duration of overdue Required Provision (% of

outstanding loans)
Unclassified Less than 3 months 1

Substandard 3 months < 6 months 20

Doubtful 6 months < 1 year 50
Bad 1 year or more 100

system of loan classification and provisioning is shown below

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 Period overdue Status of Rate of provision Frequency of
classification classification
Less than 3 months Unclassified 1% - 5% At least quarterly,
Loans overdue for 3 months but Substandard 10% - 25%
less than 6 months usually monthly.

Loans overdue for 6 months but Doubtful 50%-75%

less than 9 months
Loans overdue for 9 months or Bad/loss 100%
more
Source: Studies in Bangladesh Banking: Series 1, Page 67.

4.3 Basis for Loan Classification

When any uncertainty arises for the recovery of any loans such as Continuous Loan, Demand Loan
or Fixed Term Loan, then the loans will have to be considered whether they classifiable or not on
the basis of qualitative judgement of their objective criteria. The loan will have to be classified on
the basis of qualitative judgement, these are:
If any situational changes occur in the contractions in terms of which the loan was sanctioned;
If the borrower is damaged his capital due to adverse conditions;
If the collateral decreases its value or recovery of the loan becomes uncertain due to any other
unfavourable situation,

Loans will be classified as Sub-standard if it is affected due to the reasons stated above or for any
other reasons or if there is any chance for change of the situations by resorting to exact steps on the
basis of qualitative judgement. But even after resorting to necessary steps when there are no
certainty of total recovery of the loan, it will be classified as ' Doubtful ' and even after asserting the
full efforts when there exists no chance of recovery, it will be classified as ' Bad/Loss ' on the basis
of qualitative judgement. For organizing qualitative judgment, banks must focus on the possibility
that the borrower will repay the loans due in a timely manner, using their own judgment and the
following assessment factors:

(1) Special Mention:

I. Assets must be classified no higher than Special Mention if any of the following deficiencies of
bank management is present: the loan was not made in compliance with the banks internal
policies; failure to maintain adequate and enforceable documentation; or poor control over
collateral.
II. Assets must be classified no higher than Special Mention if any of the following deficiencies of
the obligor is present: occasional overdrawn within the past year, below- average or declining
profitability; barely acceptable liquidity; problems in strategic planning.
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(2) Sub-standard:
I. Assets must be classified no higher than Sub-standard if any of the following deficiencies of the
obligor is present: recurrent overdrawn, low account turnover, competitive difficulties, location
in a volatile industry with an acute drop in demand; very low profitability that is also declining;
inadequate liquidity; cash flow less than repayment of principal and interest; weak
management; doubts about integrity of management; conflict in corporate governance;
unjustifiable lack of external audit; pending litigation of a significant nature.
II. Assets must be classified no higher than Sub-standard if the primary sources of repayment are
insufficient to service the debt and the bank must look to secondary sources of repayment,
including collateral.
III. Assets must be classified no higher than Sub-standard if the banking organization has acquired
the asset without the types of adequate documentation of the obligors net worth, profitability,
liquidity, and cash flow that are required in the banking organizations lending policy, or there
are doubts about the validity of that documentation.

(3) Doubtful:
Assets must be classified no higher than Doubtful if any of the following deficiencies of the obligor
is present: permanent overdrawn; location in an industry with poor aggregate earnings or loss of
markets; serious competitive problems; failure of key products; operational losses; illiquidity,
including the necessity to sell assets to meet operating expenses; cash flow less than required
interest payments; very poor management; non-cooperative or hostile management; serious doubts
of the integrity of management; doubts about true ownership; complete absence of faith in financial
statements.

(4) Bad/Loss:
Assets must be classified no higher than Bad/Loss if any of the following deficiencies of the obligor
are present: the obligor seeks new loans to finance operational losses; location in an industry that is
disappearing; location in the bottom quartile of its industry in terms of profitability; technological
obsolescence; very high losses; asset sales at a loss to meet operational expenses; cash flow less
than production costs; no repayment source except liquidation; presence of money laundering,
fraud, embezzlement, or other criminal activity; no further support by owners.

4.4 Maintenance of Provision

1. General Provision: Banks will be required to maintain General Provision in the following way:
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I. @ 0.25% against all unclassified loans of Small and Medium Enterprise (SME) as defined by
the SME & Special Programmes Department of Bangladesh Bank from time to time and @ 1%
against all unclassified loans (other than loans under Consumer Financing, Loans to Brokerage
House, Merchant Banks, Stock dealers etc., Special Mention Account as well as SME
Financing.)
II. @ 5% on the unclassified amount for Consumer financing whereas it has to be maintained @
2% on the unclassified amount for (i) Housing Finance and (ii) Loans for Professionals to set up
business under Consumer Financing Scheme.
III. @ 2% on the unclassified amount for Loans to Brokerage House, Merchant Banks, Stock
dealers, etc.
IV. @ 5% on the outstanding amount of loans kept in the 'Special Mention Account.
V. @1% on the off-balance sheet exposures. (Provision will be on the total exposure and amount
of cash margin or value of eligible collateral will not be deducted while computing Off-balance
sheet exposure.)

2. Specific Provision: Banks will maintain provision at the following rates in respect of classified
Continuous, Demand and Fixed Term Loans:
VI. Sub-standard: 20%
VII.Doubtful: 50%
VIII.Bad/Loss: 100%

3. Provision for Short-term Agricultural and Micro-Credits:

I. All credits except 'Bad/Loss' (i.e. 'Doubtful', 'Sub-standard', irregular and regular credit
accounts): 5%
II. 'Bad/Loss : 100%

4.5 Summarisation of provision of loan

Classified loans was provisioning on the basis of the balance outstanding in the loan ledger for the
loan, less any interest taken in an interest suspense account. However, the base for provision shall
be further reviewed towards closer convergence with international best practice standards.
Loans Duration of overdue Required Provision (% of
outstanding loans)
Unclassified Less than 1 year 1
Substandard 1 year < 3 years 10
Doubtful 3 years < 5 years 50
Bad 5 years or more 100
Source: BRPD circular no. 07 / 2012
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In latest BRPD circular no. 19 dated December 27, 2012, Bangladesh Bank introduced an amended
and revised loan classification and provisioning procedure to compare with the international
standards. This was implemented in five phases, the last of which ended in December 2012. In the
revised policy, the duration for loans to be classified under various categories was drastically
reduced. For classification and provisioning under the revised procedure banks were instructed to
classify the loans in following procedure:
Source: BRPD circular no.19/December 2012
According to BRPD circular no. 19 dated December 27, 2012 either of these continuous, demand
and fixed term loans will be classifying and provisioning by following procedure:
Source: BRPD circular no. 19/December 2012

4.6 Base for Provisioning and Accounting Treatment of Classified Loans

4.6.1 Base for Provision:

For eligible collaterals of the following types, provision will be maintained at the stated rates on the
outstanding balance of the classified loans less the amount of Interest Suspense and the value of
eligible collateral:
III. Deposit with the same bank under lien against the loan,
IV. Government bond/savings certificate under lien,
V. Guarantee given by Government or Bangladesh Bank.

For all other eligible collaterals, the provision will be maintained at the stated rates on the balance
calculated as the greater of the following two amounts:
VI. Outstanding balance of the classified loan less the amount of Interest Suspense and the value of
eligible collateral; and
VII.15% of the outstanding balance of the loan.

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4.6.2 Accounting of the Interest of Classified Loans
In the treatment of 'Sub-standard' and Doubtful' loans, 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 will be credited to Interest Suspense Account, instead of
crediting the same to Income Account.

When a loan or advance is classified as 'Bad/Loss', interest will not charge in the same account. 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, these also preserved
in the 'Interest Suspense' account. If classified loan or part of it is recovered, first the interest
charged and accrued but not charged is to be recovered from the said deposit and the principal to be
adjusted afterwards.

Making provision stemmed from the credit transactions such as credit sales. Sales on any basis
other than for cash make possible the subsequent failure to collect the account. An uncollectable
account receivable is a loss of revenue that requires, through proper entry in the accounts, a
decrease in the asset accounts receivable and related decrease in income and stockholders equity.
Recording the bad debt expense recognizes the loss in revenue and the decrease in income. Of the
two methods of recording uncollectible accounts receivable, the allowances method is appropriate
in situation where it is probable that an asset has been impaired and that the amount of the loss can
be reasonably estimated since the collectability of receivables is considered a loss contingency. A
receivable is a prospective cash inflow, and the probability of its collection must be considered in
valuing this inflow (Kieso et al, 2001).
On the other hand, an uncollectable loan/advance indicate both the loss of revenue and the loss of
capital for the banking business. Its interest receivable indicates the loss of revenue and the
principal is the loss of capital. The relation between the uncollectable account receivable and the
uncollectable interest can be drawn as:

Sales price= Cost+ Mark up fir risk premium and profit expectation (spread)

According the provision against the interest receivable can be showed as a normal business
expense. As we know that the banking businesses are different from other businesses by its nature
and policy because banks are not utilizing the capital directly to generate revenue-generating goods
whereas other business do. For this reason it may raise some conflict between them. As for security
purpose banks take the collateral against the loans and advances so that they can create pressure on
the borrowers for mainly repayment of loans and advances. Considering that issue it is clear that the
damage of a capital is the fault of either of the legal system or of the political system of
management but neither of the shareholders nor the depositors. Bangladesh follows protectionist

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banking systems where the deprivation rate of depositors is less in case of a bank failure. So, the
loss is of the shareholders.

4.7 Bangladesh Banks Guidelines as per Latest Banking Regulation and Policy
Department(BRPD) Circular for Loan Classification

To skip the risk from default loans and to maintain the bank capital from this engulfing crisis the
government also formed a committee named of National Commission on Money in 1986. This
committee usually provides suggestions for managing non-performing loans and how Banking and
Credit institute can improve the efficiency of the banking system. At present World Bank also get
them involves for making an comprehensive study on the financial sector of Bangladesh.

Bangladesh Bank advised the commercial banks to use their own subjective criteria regarding the
default loans so that they can identify the problems of the loans and to maintain provisions against it
Banks are simply disregarded the identification of problem assets as well as maintenance of proper
provision on it. Banks are used to believe that they would be able to recover loans in full after
selling the collateral. And as such, they used to count accrued interest on the non-performing loans
as their income following the accrual principles of accounting. Hence, both the profit and loss
account and the balance sheet did not reflect the actual position and both dividend and taxes were
paid from the overstated income. This practice seriously decayed the capital bases of the banks till
the end of 1989, as before that there were no specific policy guidelines by the central bank
regarding classification of loans. Moreover, there was also a lake of appropriate laws relating to
recovery of default loans.
In order to defences continuing financial distress and to obstacle increasing growth of default loans,
Bangladesh Bank formally introduced BCD Circular No-34 on November 16, 1989 on loan
classification and making provisions thereof. The circular mentions that the banks will classified
their loans based on their own policy at least once in a year on the basis of the position existing on
December 31 (annual closing date) in accordance with the guidelines given in the BRPD Circular
No. 07 on June 14, 2012: Loan Classification and Provisioning. The law also described that all
loans are to be classified as either classified' or unclassified except agricultural loans. Classified
loans are to be considered as those loans that have a reduced chance of repayment and are to be
further classified as substandard, doubtful and bad/ losses. It also mentions that the bank will
differentiate their loans between classified or unclassified through using both overdue and
qualitative judgment criteria.
Banks need to make effective provision and to determine the net realizable asset position so that
they can properly assess the probable losses or revenue of the bank: There is always a requirement
for banks to systematically and realistically identify their problem assets and provide adequate
reserves for possible losses. To accomplish this, Bangladesh Bank issued guidelines in 1989 (vide

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BCD Circular No. 34, dated 16.11.89) regarding classification and provisioning procedure.
Subsequently, a revised policy as introduced in 1994 (vide circular No.20, dated 27.12.94) to be
implemented by banks in five phases commencing 31st December 1994. The introduction of this
program as aimed at bringing loan loss provisioning and classification in line with international
standards by the end of 1998. Prior to 1989, there were no clear cut policy guidelines to enforce
adequate provision by the banks. In the majority of cases, banks simply did not identify problem
assets, establish realistic provisions for potential losses or suspend interest on non-performing
assets. As a result, the balance sheet did not reflect the banks actual condition and the income
statement overstated profits upon which dividends and taxes were paid. However, during the mid-
eighties a norm was fixed by Central Bank to raise the level of provisions by 0.5% of the total loans
each year till it reached 4%. Obviously, it had no relation to loans classified. Interestingly, the banks
on the whole did not comply with this requirement. The situation ultimately led to unreasonable
developments regarding keeping of provisions by the banks (Choudhury et al, 1997, pp.43-44).

It implies that raising provision by central bank does not reduce the fluctuation in classified loan.
Moreover the commercial bank on the whole did not comply with this requirement may be due to
luck of Central Bank supervision, lack of sufficient profit before provision and taxes. For
sometimes it is an unavoidable issue that loan repayment is quite difficult for the borrowers because
of the higher bank rate and the banks defend this term by saying that banks have to pay a higher rate
against deposits and borrowings, and they take higher proportion for risk, which actually results
from their anticipation of loan loss. Whatever, It is not necessary at all that reduction of interest
spread, the difference between the interest received and the interest paid, will improve the present
bad loan situation because intentional defaulters are indifferent to such steps.

4.8 Current Loan Classification and Provisioning System as per Latest Banking
Regulation and Policy Department(BRPD) Circular in Bangladesh:

Bangladesh follows two types of criteria such as overdue criteria and qualitative criteria to
deem a loan classified or unclassified Since 1989. According to overdue criteria, as suggested by
Bangladesh Bank, authorities usually divide all loans into five categories (continuous loan, demand
loan, term loan payable within five years, term loan payable in more than five years and short-term
agricultural credit / micro credit), and observe the repayments periods. All loans which have some
problems are then reclassified as special mention account (SMA), substandard, doubtful and bad/
losses to comply with international norms of loan classification. Bank managers monitors the loan
quality quarterly so that they can provide up to date information to the management regarding the
status of the. With some exceptions, the banking sector at present follows a norm of six months
overdue for deeming a loan nonperforming. The rate of provision on classified loans follows norms

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of 5%, 20%, 50% and 100% against special mention accounts, substandard, doubtful, and bad/loss
loans respectively. The current loan classification and provisioning system (in a summary form) in
use in Bangladesh is shown below

Type of Loan Period overdue Status of Rate of provision

classification
Continuous Loan Less than 6 months Unclassified 1% (except
(OD/CC, PC, LIM, LTR 3 months or more but less SE&CF)
etc.). Overdue period will than 6 months SMA 2% (for SE&CF)
be counted from the day 6 months or more but less Sub-standard 5%
following the date of than 9 months Doubtful 20%
expiry of such loan. 9 months or more but less Bad/Loss 50%
than 12 months 100%
More than 12 months

Demand Loan Less than 6 months Unclassified 1% (except

(Forced LIM, BLC/ PAD, 3 months or more but less SE&CF)
IBP, FBP etc.). Overdue than 6 months SMA 2% (for SE&CF)
period will be counted 6 months or more but less Sub-standard 5%
from the day following than 9 months Doubtful 20%
the date of expiry of such 9 months or more but less Bad/Loss 50%
loan. than 12 months 100%
More than 12 months
Term Loan Payable Less than 6 months Unclassified 1% (except
Within 5 Years If the default amount of SE&CF)
Overdue period will be installment is equal to or SMA 2% (for SE&CF)
counted from the day more than the installment Sub-standard 5%
following the expiry of payable in 3 months Doubtful 20%
the due date of payment If the default amount of Bad/Loss 50%
of installment of such installment is equal to the 100%
loan. installment payable in 6
months
If the default amount of
installment is equal to the
installment payable in 12
months
If the default amount of
installment is equal to the
installment payable in 18
months

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 Type of Loan Period overdue Status of Rate of provision
classification
Term Loan Payable in If the overdue amount of SMA 5%
More Than 5 Years installment is equal to or Sub-standard 20%
Overdue period will be more than the installment Doubtful 50%
counted from six (6) payable in 3 months but Bad/Loss 100%
months following the less than 12 months.
expiry of the due date of If the default amount of
payment of the installment is equal to the
installment of such loan installment payable in 12
months
If the default amount of
installment is equal to the
installment payable in 18
months
If the default amount of
installment is equal to the
installment payable in 24
months
STAC / Micro Credit Less than 12 months Unclassified 5%
Overdue period will be Sub-standard 5%
counted from six (6) 12 months or more but less Doubtful 5%
months following the than 36 months Bad/Loss 100%
expiry of the due date of 36 months or more but less
payment of the than 60 months
installment of such loan More than 60 months
Source: Banking Regulation & Policy Department circular no. 8,15,7, 34, 16, 9 and 14. Financial
Sector Review, (various year), Bangladesh Bank.

Managers classify their loans based on these qualitative judgment criteria to forecast the uncertainty
of recovery of the loan. There are some reason behind the uncertainty of loan repayment system
mentioned below:

Sometimes authorities approve borrowers credit extension proposal under pressure without any
logical reason.
In some cases loans are passed without complete documentation.
It is difficult for the banks to recover the loan which are provided against insufficient collateral.
Rescheduling terms are not maintained.
If borrowers are traceless or because of their death bank face trouble to recover the loans.

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4.9 Measures Adopted for Reduction of NPLs in Bangladesh
Bangladesh has adopted some vindictive provision to defences and recover problem loans. Hence, it
is important to discuss all these measures adopted for better policy framework and effective
management of NPLs. The measures are summarized in below.
National Commission on Money Exchange and Credit suggest to manage NPL banks should
increase their administrative and judicial steps. To do so banks may set recovery targets,
prohibiting defaulters from access to further credit.

According to Financial Sector Reform Project (FSRP), banks should improve their debt recovery
environment. Legislate new provisions for enabling speedy the settlement processes.

Banking Reform Committee suggests to formulate a embodied recovery policy for the banks to
identify their large default loans. Committee advised banks to create recovery cells to boost the
process of recovery of default loans.

The credit risk grading system was made mandatory from the beginning of 2006 to analyze the
borrowers credit risk as well as to prevent fresh NPLs. In this codified system, if a borrowers
risk falls within the range of 45-54 out of 100; he is not allowed to receive credit. Any borrower
who has a score above the range of 45-54 is eligible to receive credits.

According to Recent Reform Initiatives in 2012, Banks are intending to finance the purchase of
used vehicles. For these reason bank shall prepare uniform guidelines for determining value of the
used vehicles. However, the bank shall only finance the vehicles imported as described in the
existing Import Policy Order. Loan-margin ratio for fresh loans shall be maintained at 70:30 in
case of house finance under consumer financing and 30:70 for all other consumer loans including
motor car loans.

There are some others measures which are given below:

1. Banks with net classified loans of up to 5% are allowed to sanction a maximum of 56% of total
loans and advances as large loans.
2. Banks with net classified loans between 5% to 10% are allowed to lend 52% of their portfolio
as large loans.
3. Banks with net classified loans between 10% and 15% are allowed to lend up to 48% of their
total loans as large loans.
4. Banks with net classified loans of 20% and more are allowed to lend a maximum of 44% of
their total loans as large loans.
5. The Bangladesh Bank has also advised the banks pursue syndicated loans in case of large
loan amounts.

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4.10 Classified loans of BDBL
The huge amount of classified and written-off loans received from former BSB and BSRS was a
huge burden on BDBL. Throughout 2015, the Board of Directors along with banks senior
management maintained both pressure and vigilance for bringing down the level of classified loans
and accelerating the recovery from written-off projects. In 2015, TK. 34.38 crore and TK. 10.01
crore were recovered from classified loans and written-off loans respectively.
However, the bank management was endeavouring hard to minimise the existing classified loans by
the way of new injection of quality loans, cash recovery and regularisation through rescheduling.

4.12 BDBLs provision for loan classification

In accordance with Bangladesh Banks policy, classification of a loan is made on the basis of its
quality, performance and risk involved in its recovery. A provision has to be made against this loan
on a particular dater protecting the interest of shareholders and depositors. In 2015, requirement of
provision against loans and advances as per Bangladesh Banks inspection report was TK. 307.52
crore . But the bank maintain a provision of TK. 308.82 crore, which left a surplus of TK. 1.30 crore
during the period under reference.

4.13 Recovery of Classified Loans

BDBL management is very much concern about recovery and reduction of classified loans since its
inception.So, keeping eye on the recovery of the board spectrum of default loans, bank designed
various action plans and also took all out efforts to implement the same for reducing classified loans
and increase cash recovery as well.
For 2015, BDBL set a loan recovery target of TK. 581.60 crore including TK. 105.51 crore from
classified loans. Against this TK. 314.63 crore was recovered, representing 54% of the target
achieved. BDBL could not achieve desire recovery target due to unfriendly business environment.

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 Chapter 05
Causes of Loan Classification

5.1 Entrepreneurs Related

Under Age People:

The under aged or minor peoples are usually fail to repayment of regular loan. The main reason
behind this, they are suffer from lack of business experience and enough banking experience.

Insufficient Business Experience:

In many cases people who have no prior business experience want to start business. Basically the
retire government or private service holders are want to establish these kind of business which is not
very relevant to their past experience. They usually searching for bank loans besides their own
capital. Normally banks do not finance in the projects where the key personnel do not have enough
background in that particular business. Because this type of investment is very risky for the bank.
The ratio of failure rate in such projects are very high.

Insufficient Training in Business Background:

Business experience is very much related to business background. Actually business background
indicates ones family business background. As we know family business has a strong role in
entrepreneurial orientation. Though there is no direct relationship between business background and
business performance or loan repayment but who are come from business background family are
good at their performance. But it is not necessary one has to come from business family to be a
good entrepreneur.

Unwillingness to Pay:
This is the most common reason in Bangladesh for loan default. People are interested to practice
this in some situations like when collateral against loan is weak, borrowers feel that defaulting the
loan will not harm them much. For such reason people try to default. If the business is not
performing well people are not interested to repay the loans.

5.2 Business Related

Non Attractive Industry:

Sometimes cause of loan default is highly depends on non attractive industry. The non attractive
industries usually score poor performance. As a result of poor financial performance companys
cash flow gets affected. It will reduce the liquidity flow and increase the risk of defaulting bank
loan. Not necessarily that all the companies of non attractive industry perform poor.
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Poor Management Capability:
Bank must operates an efficient investigation on the management of the company who is applying
for loan before sanctioning the loan. If the report is positive and bank feels that the management is
capable enough to successfully run the business and utilize bank finance, then bank agree to finance
otherwise not. The capability of management plays a very important role in repaying loan. If needed
bank can sets conditions like some of the key personnel must not quit the organization before
repayment of the loan.

Poor Financial Performance:

Definitely Poor financial performance is the major reason of loan default. It is directly related to the
loan repayment issue. An insolvent company cant repay the loan properly. Poor financial
performance is the key reason behind maximum loan default.

Poor Cash flow:

Actually poor cash flow is the outcome of poor financial performance. Because of poor cash flow
companies mainly default loan. Irregular cash flow direct the business into a unstable and illiquid
situation. For these reason businesses do not have enough cash and fail to manage repayment
schedule and interest. Sometimes the profitable companies are also face this situation because of
irregular cash flow. Basically this situation arise when company sell most of their finished goods in
credit so they dont have enough cash to support the loans.

5.3 Lending Related

Delayed Assessment of Loan Proposal:

Sometimes banks are wasting time in assessing loan proposals of the businesses. For these reason
firms are not getting the loan amount timely. This pervade shortage of cash in their business
operations. It is very tough for the bank to manage their day to day business expenses on these
situation and make a barrier for repayment of the loans.

Lack of Proper Monitoring:

Lack of Monitoring on credit may increase the risk of loan default. Through purpose of monitoring
is to know that whether their fund is being used for the desired path or not. In many cases disbursed
money is used for different purposes than the specific areas. In that case risk of loan default gets
higher.

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Lack of Taking Proper Action:
Action means a subset of activities which is taken on the basis of monitoring. Monitoring reveal the
exact situation and identify the deviations or exceptions. If there is any exception then banks needs
to take corrective action. because the reduction of the default loans very much depends on the
timely taking corrective actions.

5.4 Indicators and Remedies of Loan Default Problem

There are some indicators of default loan which would indicate financial trouble and serve as a red
flag to the financial officer. There are several indicators but there is no exact pattern of frequency
of occurrences of events where a loan could be declared as a problem loan.

A. Indicators of Default Loan:

If the financial statements are submitted on delay.

Declining deposit balances and the occurrences of overdrafts and returned cheques.
If the inventories are unusually raised and tread payables are increased.
When the receivable is increased, this may indicate a lowering in the qualities of the firms
products or services.
Default Loan can be identified through expansion such as merger or acquisition or sale of assets.
Irregular payment of the loan; Loan can be default if the management of a company is being
changed or resigned.

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B. Remedies of Default Loans:

Considering the above indicators bank tries to find out some remedies. According to Prof. Muzaffer
Ahmad(1997) the way out of the current crisis of bank loan default lies in evolution and
entrenchment of responsive and participate governance from grass roots upwards which can be
instrumental in decartelizing the decision making process. Bhattacharya (1998) mentions to build
up a strong financial infrastructure an adequate legal framework for enforcing lenders' recourse on
borrowers, feasible supervisory and regulatory role of the central bank through implementing the
guidelines, commercial freedom of bank management.
There are some others remedies which can be followed by banks to rescue themselves from this
crisis situation:
Bangladesh Bank should be increase their monitoring system and the governor should be elected
by constitutional way;
Role of banking division of the Ministry of Finance should be reduced;
Bangladesh Bank should increase their regulatory system over the scheduled banks;
Board of directors of banks should not be consist of the members of political parties and
defaulters

State owned enterprises should be pursued for defaulter loans, loan amnesty and loan forgiveness
undermines financial discipline;
Banks maybe improve the deposit insurance schemes.

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 Chapter 06
Findings, Recommendation and Conclusion

Summary of Findings
The leading discussion regarding classified loans in Bangladesh discloses that the banking sector of
Bangladesh is yet to get out of its classified loans mess, although tangible improvement has been
noticed recently. Bangladesh follows the international standard for classifying and provisioning
their internal loans but still they are lagging behind to manage their nonperforming loans. At
present, the banking system of Bangladesh demonstrators a very high proportion of default loans
compared to other countries.Probably management of bad loans is the most unsatisfactory
performance of banks compare to the other loans. This situation clearly elucidate that the banking
system is not efficient to equipage bad loans problems.

The study reveals the dissatisfactory performance of the banking sectors for the management of
classified loans, settlement the rate of NPL disputes and the recovery of loans over the years.
Behind the low recovery the main problem is the very sluggish execution of the provisions. The
Financial Sector Reform Project (FSRP) argues that the cause of extensive loan delinquency in
Bangladesh banking system is the weakness of the legal infrastructure. The incapacity of the legal
system encourages borrowers to deceive from paying licit dues to the banks.

However, To reduce the time duration of settlement process banks may create a separate posts like
Bank Magistrates to settle problem loans issues. Without having the proper collaboration and
sincerity of the concerned individuals, the law itself can not change the situation. It is the very
tough challenge to ensure cooperation, sincerity and accountability of the involved parties like
denunciators, defendants, lawyers and judges, to make the settlement process vibrant and speedy.

The study mainly focused on the Bangladesh Development Bank Limited (BDBL), like other banks
this bank has some problem with nonperforming loans. It is already known to the above discussion
that nonperforming loans have direct impact on the banks profitability. so every bank always tries to
minimise the rate of their bad loans establishing effective provision and strong monitoring systems.
For competing with other banks and making a strong position in the money market. Bangladesh
Development Bank Limited also take some steps for classifying their loans and maintain those loans
properly so that they can secure a good profit. There are some activities which are taken by the
BDBL for managing their loan problem,

BDBL constitute a concrete NPL management strategy furnished by both preventive and
resolution measures. But the legal measure is not performing well because it is found to be very
time consuming, ineffective, and scoring a poor recovery performance.

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 Sometime BDBL takes non-legal measures such as out of court settlements, compromise
settlement schemes for the effective recovery of bad loans.
BDBL develop some specific tools and techniques so that their managers can easily understand
the borrowers whether they are willful defaulters or the genuine ones. Banks arrange seminars to
improve their employees skill regarding these sector.

Banks provide regular basis training for improving their employees capacities so that they
understand the situation properly and analysis the risk associated with the project before
sanctioning any loans and it will reduce the loan recovery risk for the bank.

BDBL sets two measurements like prevention and resolution to address the flow problem of bad
loans effectively.

BDBL strictly constitute their managing body, they always avoid political personnel and any
defaulter as a member of their managing body. It will reduce the pressure for sanctioning
unethical loans.

BDBL follow the Credit Risk Rating (CRR) fully in term of sanctioning loans.

BDBL strengthen their internal supervisory and monitoring functions to improve their employes
discipline and put them away from engaging in malpractice.

To reduce the loan risk banks takes assets which is 1.5 times more than the sanctioned amount as
a collateral.

BDBL quarterly monitors their loans account for identifying the default accounts and take
necessary actions against them.

In case of sanctioning large loan BDBL use syndicated financing technique to minimise risk and
unhealthy competition.

Finally, Employees should maintain some ethical standard in the banking profession from all
concerns can be viewed as an important means for making the credit environment credible and
vibrant. The contribution of ethics is great to establish fair practices of lending. Hence, the
importance of ethics in financial institutions should not be overlooked.

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Recommendation
1. Banks should not compromise with due diligence in the loan sanctioning process. Always
remember that "prevention is better than cure."Banks should increase the amount of collateral.
In case of loan defaulting lender can sell the collateral to meet up the loss. The submitted
security or collateral must be valued by proper authorities;

2. Make some alternative action plan for the potential default loans. Banks should have create
some clear step to collect the default loan otherwise they should go to Artha Rin Adalat;

3. Before sanctioning loan banks need to identify the highly risk sensitive borrowers by using
credit portfolio. Banks should collect their clients information and analyse before giving loans.
Banks could collect their clients information from Bangladesh Bank through CIB and verify the
financial statement carefully from reliable sources to identify the risky borrowers;

4. Obviously banks should identify the geographical area-wise risk sensitivity. Before sanctioning
loan banks should identify the clients properties to minimise geographical because in
Bangladesh, there is some places where growth rate is low and it may hamper on repayment of
loan;

5. Banks should monitor their accounts and target high value end NPL accounts;

6. Prompt action on credit reports;

7. Banks should arrange some training sessions so that their officers and executives can build up
their capacity on recovery department. The Training can help them to understand how to handle
loans properly. If there is a short of experience employees bank should recruit experience
employee for recovery department.

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Conclusion
In Bangladesh there are around 56 listed public and private banks. The two major characters like
low profitability and inadequate capital are found when we analysis the banking sectors. Generally
banks make their revenue from spread (Lending rate borrowing rate). But there is extensive
competition in return of minimum profit in these market because a large number of banks are in
Bangladesh. The reason behind the problem lies in the procurement of high percentage of non-
performing loans over a long period of time. According to the latest information the rate of
nonperforming loans are going down as we know is starts from a very high rate of 41.1% in 1999
but now the rate is near about 11.90%. Still, the percent rate is not in satisfactory level comparing to
the international standard. Our Banks are gradually losing their competitive position in the global
market because of the high rate of nonperforming loans. We have had a two-decade long experience
in dealing with the NPLs problem and much is known about the causes and remedies of the
problem. Unfortunately, banks are still burdened with an alarming amount of nonperforming loans
and scoring low points comparing the neighbour countries. Although Bangladesh has adopted some
laws and provisions for loans classifications according to the international standard. But banks are
failed to arrest fresh NPLs significantly because the ineffective management of nonperforming
loans. The management of nonperforming loans must be multiprogrammed. Bank should use
different strategies in different stages for passing the credit. Bank should both types of measurement
like prevention and resolution to reduce the rate of default loans. prevention measure like loan
surveillance and loan review functionaries are taken by the both bank and central bank of the
country. Resolution measures must be accompanied by legal measures, i.e. improving the
efficiency of the legal and the judicial system and developing other out of the court settlement
measures like compromise settlement schemes, incentive packaging, formation of asset
management companies, factoring, and asset securitization and so on. Unfortunately, Bangladesh is
no performing well and found to be very weak in the list. From the above discussion we can see that
the banks of Bangladesh have mainly concentrated on a few legal measures but these are still
ineffective.

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