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Welcome to the Session on

Welcome to the Session on. Management of NPL –Provisioning, Loan Rescheduling, and Write-off. Consequence of NPL. On Domestic Banking Recycling Stopped Earnings Reduced Capital Erosion Loan Pricing Liquidity Problem On International Banking Confirmation Charges on L/C

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Welcome to the Session on

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  1. Welcome to the Session on Management of NPL –Provisioning, Loan Rescheduling, and Write-off

  2. Consequence of NPL • On Domestic Banking • Recycling Stopped • Earnings Reduced • Capital Erosion • Loan Pricing • Liquidity Problem • OnInternational Banking • Confirmation Charges on L/C • International Expansion is not Possible

  3. Ratio of gross NPL* to total loans by type of banks (%) Source: BB Annual Report , 2009-10

  4. CRM Guidelines • Policy Guidelines • Lending Guidelines • Credit Assessment & Risk Grading • Approval Authority • Segregation of Duties • Internal Audit

  5. Management of NPL

  6. CRM Guidelines • Procedural Guidelines • Approval Process • Credit Administration • Credit Monitoring • Credit Recovery

  7. Credit Recovery (CRM Guidelines) • The Recovery unit of CRM should directly manage accounts with sustained deterioration • Transferring accounts to the RU • A handover/downgrade checklist

  8. Primary Functions of RU • Determine Account Action Plan/ Recovery Strategies • Pursuing all option to maximize recovery • Ensuring adequate and timely loan loss provisions • Regular review of grade 6 or worse accounts

  9. NPL Account Management • Management of NPL must be a dynamic process. • NPL associated strategy and adequacy of provisions must be regularly reviewed. • Learning lessons from the experience of credit loss. • All NPLs should be assigned to an account manger within RU. • Maintaining the autonomy of the RU

  10. NPL Management • Transferring of an NPL account to RU • Preparation of a classified loan review report • Ensuring the following things by the Recovery Unit when an account is classified as Sub Standard or worse • Withdrawal of facilities or demanding repayment as appropriate

  11. NPL Management • Updating the CIB report • Loan loss provisions are taken based on FSV • Rescheduling of Loan as per BB guidelines and should be based on projected future cash flow • Prompt legal action if the borrower is uncooperative

  12. NPL Monitoring • Preparation of Classified loan Review by the RU Account manager on a quarterly basis • Updating the status of the recovery plan, reviewing the adequacy of provisions and modifying the bank’s strategy

  13. Incentive program

  14. NPL Provisioning • Guidelines of BB to be followed at minimum • Banks are encouraged to adopt more stringent treatments • Provisions should be raised against the actual and expected loss • RU account manager should determine the FSV for accounts grade 6 or worse • For non cooperative customer no value to the operating cash flow

  15. Provisioning Requirement

  16. Determination of Amount of Provision 1. Gross outstanding2. Less: (i) Cash margin held or fixed deposits (ii) Interest in suspense account3.  Loan value4.  Less: Estimated salvage value of the security/ collateral held5. Net loan value

  17. Required Provision and Actual Provision: All Banks( billion taka)

  18. Required Provision and Actual Provision: Categories of Banks (billion)

  19. Financial Techniques • Rescheduling • Waiver/Remission of Interest • Additional Finance • Debt-Equity Swap • Write Off

  20. Rescheduling of Loans Guidelines for Rescheduling • Causes of loan default • Ability of the borrower to repay the loan • Spot inspection of the company • Rescheduling for a minimum period • To be approved by the board of directors

  21. Rescheduling of Term Loan • Down payment of 15 % of the overdue or 10% of the total outstanding whichever is lower for first time rescheduling • Down payment of 30 % of the overdue or 20% of the total outstanding whichever is lower for second time rescheduling • Down payment of 50 % of the overdue or 30% of the total outstanding whichever is lower for more than second time rescheduling

  22. Rescheduling of CL/DL

  23. Other Conditions for Rescheduling • The defaulting borrower who has availed interest waiver must settle at least 15% of the compromise amount to avail any further credit facility from the bank • In case of borrowing from other banks, the same rule will be applicable. • Export borrowers may be granted further credit facility (Not being a willful defaulter) , if required, subject to settle at least 7.5 % of the compromise amount.

  24. Other Conditions for Rescheduling • Prior approval of BB shall have to be obtained if the loan is relayed to the director/ex-directors of a Bank Company • Information on the loan accounts rescheduled shall be reported to the Credit Information Bureau (CIB) of BB.

  25. Write-Off • International practice to give a fair face to the balance sheet • Loans classified as ‘bad or loss’ for five years or more • Process of write off will be chronological • Cases are to be filled before write-off • ‘Debt Collection Unit’ • Outside agency

  26. Write-Off • Written off loans to be kept in a separate ledger • To be reported to the CIB of Bangladesh Bank • Prior approval of the CB is required for writing off loans of the directors or former directors of the banks

  27. Bank Category Wise Write-off Loan (billion) Source: BB Annual Report.

  28. THANK YOU

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