The circular, issued from the Department of Financial Institutions and Markets of Bangladesh Bank said this will be treated or classified as 'Bad and Loss'
Bangladesh Bank has directed all embezzlement by financial institutions like fraud-forgery, robbery, etc known as protested bills to be classified as bad loans.
The circular, issued from the Department of Financial Institutions and Markets of Bangladesh Bank also said this will be treated or classified as 'Bad and Loss' and a 100% provision must be maintained by them.
It will be effective from the quarter ended September 2021.
In 2016, the IMF suggested the same thing but it wasn’t adopted till now.
It is learned that in the last few years, there have been major frauds in seven financial institutions. About Tk6,000 crore have been embezzled from these financial institutions.
From now on, those funds will have to be classified under the new rules confirmed by an official of BB.
“This (Protested Bill) money would not have been directly classified as defaulted in the past. If the customer did not repay the loan or lease at the end of the term, it would be defaulted after three or six months in case of current loan and after six or nine months in case of term loan,” a BB official said.
“On the other hand, previously only 20% provision had to be kept. In many cases, fraudulent loans were regularly shown by extending or renewing the term.”
“As a result, even if the money went out through fraud, it would not have any immediate negative impact on the financial system of the organization,” he added.
According to the official, if the fraudulent money is defaulted from now on, it will naturally have a negative impact on the financial base of the organization.
Meanwhile, AB Mirza Azizul Islam, economist and financial adviser to the caretaker government welcomed the decision of BB even though it was late.
“The decision should have been implemented earlier. Then perhaps it would have been possible to further reduce the thousands of crores of Taka that have been embezzled from the bank and non-banking sector in the last few years. However, this decision of Bangladesh Bank, though late, is certainly commendable,” he said.
Asked about the impact of the new decision on banks, he said if the new guidelines are implemented, the amount of defaulted loans of financial institutions will increase, simultaneously increasing the amount of provision savings.
In that case, in response to the question of what can be done by Bangladesh Bank, these economists said: “In that case, Bangladesh Bank can provide various kinds of assistance to these banks to meet the financial deficit. For example, they can buy bonds from them; opportunities to raise money from the open market could also be given.”
“However, it will not be right to come to the conclusion from this decision. If we are able to implement this directive, the financial base of the concerned institutions will be strong,” he added.
The central bank circular issued on Sunday, also says that all unadjusted prepaid entries, unadjusted prepaid legal expenses, protested bills and other expenses and losses are shown as 'Other Assets', although these are not real assets.
According to the circular, the instructions for classification and provisioning of “Other Assets” are as follows:
1. Unadjusted Prepaid Entries: Any prepaid expenses for salary and allowances, travelling, entertainment, advertisement and business development that remain unadjusted for 12 (twelve) months or beyond will be classified as 'Bad and Loss' and 100% provision must be maintained.
2. Unadjusted Prepaid Legal Expenses: As there is uncertainty in any unsettled legal actions, unadjusted expenses related to these legal actions will be classified as 'Doubtful' and 50% provision must be maintained.
For settled legal actions if there remain any unadjusted expenses, these will be classified as 'Bad and Loss' and 100% provision must be maintained.
3. Protested Bills: Protested Bill originated from fraud-forgery, robbery, fund embezzlement and other causes.
If there is any possibility of recovery of that Protested Bill, it will be classified as 'Doubtful' in qualitative judgment and 50% provision must be maintained. If there is no possibility of recovery, it will be treated as 'Bad and Loss' and 100% provision must be maintained.
4. Other Expenses/Losses: Other expenses/losses shown in 'Other Assets' will be classified as 'Bad and Loss' and 100% provision must be maintained.
In terms of the above policies, the Financial Institutions will conduct their classification and provisioning of “Other Assets” on a quarterly basis therefore March 31, June 30, September 30 and December 31.
Financial Institutions will submit Classification and Provisioning Statement of Other Assets within 30 days after the end of each quarter in the Department of Financial Institutions and Markets of BB and upload the same in Enterprise Data Warehouse (EDW) of BB.
Financial Institutions will ensure reflection of the position of other assets classification and provisioning in the Annual Financial Statements with the instructions laid out in this circular.
These instructions will be effective from the quarter ended September 2021.