BB to fix loan classification system from 2028

The Bangladesh Bank (BB) has introduced a forward-looking framework requiring banks to anticipate credit losses, rather than wait for borrowers to default, as part of a broader overhaul of the country’s loan classification and provisioning system.

The central bank Saturday issued an implementation guideline to that effect, based on the International Financial Reporting Standard 9 (IFRS 9) a global accounting standard governing how financial instruments are recognised, measured and reported.

Under the new rules, banks will be required to adopt the Expected Credit Loss (ECL) model for funded and non-funded credit facilities from January 1, 2028. The framework will be extended to other financial instruments from January 1, 2029.

The shift marks a significant departure from the current system, which relies on an “incurred loss” approach, where provisions are typically made only after loans show clear signs of deterioration.

Under the new framework, banks will instead be required to estimate potential losses in advance, incorporating macroeconomic indicators such as GDP growth, inflation and interest rate trends into their credit risk assessments.

Under the new framework, loans will be classified into three stages based on changes in credit risk: performing loans (stage 1), loans with a significant increase in risk (stage 2), and credit-impaired loans (stage 3). Provisions will be calculated based on either 12-month or lifetime expected credit losses, depending on the stage.

The new rules will also extend provisioning requirements to off-balance-sheet exposures such as loan commitments, bank guarantees and unused credit lines, enabling banks to assess risks more comprehensively.

According to the central bank, the reform is expected to help detect credit deterioration earlier, enhance transparency in financial reporting and strengthen the resilience of the banking sector.

Banks will need to upgrade their data infrastructure and risk-modelling systems to implement the framework, while the central bank will provide regulatory guidance and supervisory support to ensure a smooth transition.