Bangladesh Bank (BB) has amended its policy on single borrower exposure limit in order to comply with the recently incorporated Section-26 (Kha) of the Banking Companies Act (BCA), 1991 and further improve bank’s credit risk management.
A circular was issued Thursday in this regard, consolidating all instructions issued so far on single borrower exposure limit, and bringing some changes, reports the Financial Express (FE).
In the policy the central bank incorporated the definition ‘group’ of borrowers. It said: “Two or more persons shall be deemed to be a group, if one person has the ability, directly or indirectly, to control the other person(s) or to exercise significant influence over the financial and operating decisions of the other person(s), or if both persons are subject to common control or common significant influence.”
However, the amended policy did not change exposure limit for single person or a group.
According to the existing limit, the outstanding amount of exposure, both funded and non-funded, to a single person/counterparty or a group shall not exceed 35 per cent of the capital at any point of time.
It also said the aggregate outstanding principal amount of funded exposures shall not exceed 15 per cent of the capital at any point of time.
The policy said in case of export financing, the outstanding amount of exposure, both funded and non-funded, at any point of time to a single person/counterparty or a group shall not exceed 50 per cent of the capital. It said the aggregate outstanding principal amount of funded exposures shall not exceed 15 per cent of the capital at any point of time.
In case of large loan, it said large loan refers to any exposure to a single person/counterparty or a group which is equal to or greater than 10 per cent of the capital.
In the policy the central bank said the banks shall collect the loan information on their borrowers from BB’s Credit Information Bureau (CIB) before sanctioning, renewing or rescheduling loans in order to ensure that credit facilities are not being provided to defaulters.
It said the banks must assess credit risk by adopting Credit Risk Grading (CRG) before sanctioning or renewing large loans. If the rating of a CRG turns out to be “Marginal”, banks shall not sanction the large loan, but it can consider renewal of an existing large loan taking into account other favourable conditions and factors.
However, if the rating of a CRG is “Special Mention Account (SMA)”, neither sanction nor renewal of large loans can be considered, it added.
The policy also said while sanctioning or renewing large loans, banks should assess borrowers’ overall debt repayment capacity by taking into consideration their liabilities with other banks and financial institutions.
Banks shall examine their borrowers’ cash flow statement, audited balance sheet, income statement and other financial statements to make sure that they have the ability to repay the loan, it said.
Sanctioning, renewing or rescheduling large loans shall be approved by the board of directors in case of local banks. Such decisions will be taken by the chief executive in case of foreign banks. However, while approving proposals of large loans, among other things, compliance with this circular must be ensured.
It also said when two or more banks collectively provide credit to a borrower under a common loan facility, for example a syndicated loan, the loan limits, as mentioned for the single and group borrowers, apply only to the funds provided by each bank and represent that bank’s pro rata share of the total loan.