Security reserves against loans changed

Staff Reporter :

The country’s banks are changing the provision of security reserves against loans.
From 2027, potential loan losses will have to be taken into account in the provision of security reserves. Bangladesh Bank has already taken this decision to implement the terms of the International Monetary Fund (IMF) loan.
Central bank officials say that this decision has been taken to upgrade the provisioning or security reserves against loans to international standards.
The notification in this regard states that Bangladesh Bank plans to implement the provisioning system of probable credit loss (ECL) or probable loan loss system for banks according to the International Financial Reporting Standards (IFRS-9) by 2027.
As part of this, it has decided to adopt ECL-based loan classification and provisions for banks under IFRS-9 to enhance the risk management capacity of banks and increase the transparency of financial reporting.
A concerned official of the central bank said on condition of anonymity that currently, the loan classification and provisioning system in the banking sector is rule-based.
The percentage of provision to be kept according to the loan quality has been determined. Bangladesh Bank is moving towards more modern rules in this regard in the future
In this system, a loan disbursed by the bank or loans that the bank can predict in advance will have to be provided in advance.
In this case, many factors including late loan repayment, loan rescheduling will have to be taken into consideration.
The official also said that as a result of following this system, some part of the risky loans of the banks will have to be provided in advance.
Currently, in many cases, cent percent provision has to be made against that loan after a loan default occurs. This has a major negative impact on the capital of the banks.
If the new provisions are introduced, that pressure on the banks will be reduced to some extent.
The notification also said that the banks will prepare themselves at the institutional level by reviewing the internal systems and accounting standards.
For this, the technical aspects and capabilities of the officials will also have to be increased. In addition, an ‘IFRS-9 Implementation Team’ will be formed under the leadership of the bank’s Managing Director (MD) and Chief Executive Officer (CEO).
This team will be responsible for overseeing the management and analysis of loan loss models. The team will also be responsible for regular communication with Bangladesh Bank and necessary reporting.