Md. Sahidul Islam

The recent issuance of BRPD Circular No. 15 of 2024 by Bangladesh Bank marks a transformative step in the country’s banking sector, setting a new benchmark for loan classification and provisioning practices. By aligning the regulatory framework with global standards such as IFRS 9, the circular introduces forward-looking credit risk assessment, enhanced accountability, and a refined loan classification framework. These measures aim to strengthen the resilience of the banking sector, ensuring financial stability and transparency.

One of the most notable aspects of the circular is its alignment with IFRS 9 Expected Credit Loss (ECL) methodology. This approach shifts the focus from reactive to proactive risk management. Banks are now required to consider past, present, and anticipated future conditions when assessing credit risk, enabling more accurate and robust provisioning. This transition underscores Bangladesh Bank’s commitment to adopting international best practices to safeguard the financial system.

To achieve this, the circular introduces a new loan classification framework that categorizes loans into seven distinct stages: STD-0, STD-1, STD-2, SMA, SS, DF, and B/L. This granular classification allows banks to monitor credit quality more effectively, ensuring that potential risks are identified and addressed early. Regular reviews of Non-Performing Loans (NPLs) are mandated, coupled with stricter provisioning requirements. For instance, general provisions for standard loans (STD-0, STD-1, STD-2) are set at 1%, while special mention accounts (SMA) require 5%. On the other hand, specific provisions are significantly higher: 20% for Substandard (SS) loans, 50% for Doubtful (DF) loans, and 100% for Bad/Loss (B/L) loans.

The circular also revises the general provisioning requirements for CMSMEs from 0.25% to 1%, which could impact banks’ profitability and potentially dilute their enthusiasm for financing this critical sector. While this move ensures better risk coverage, it also presents a challenge for lenders to balance profitability and risk mitigation.

Accountability and transparency are central to this regulatory overhaul. Banks are now required to justify their loan classification decisions in writing, a move that aims to eliminate ambiguities and reduce the risk of misclassification or manipulation. Additionally, the circular emphasizes stringent reporting and compliance requirements. Banks must submit detailed and timely reports to both their internal management and Bangladesh Bank, with penalties in place for non-compliance.

The circular further addresses the use of collateral in credit management. While discouraging the reliance on share-based collateral, it adopts a more pragmatic approach to its acceptance under stringent conditions. This is expected to foster better risk management practices and ensure that banks are adequately protected.

Islamic banks, too, fall under the ambit of this circular. By mandating uniform standards for both conventional and Islamic banks, Bangladesh Bank ensures consistency and fairness across the banking sector. This inclusivity reinforces the broader objective of establishing a robust and standardized financial system.

With an effective date of April 1, 2025, the circular provides banks with a transition period to upgrade their systems and processes. This window allows them to adapt to the new regulations and ensure seamless implementation.

The broader implications of the circular are significant. For banks, it enhances their ability to manage credit risk, comply with international standards, and ensure financial stability. For regulators, it provides better oversight and control over loan portfolios, reducing systemic risks. And for the economy, a stronger banking sector translates into sustainable growth and improved resilience against external shocks.

In summary, BRPD Circular No. 15 of 2024 represents a pivotal step toward modernizing Bangladesh’s banking regulations. By fostering a forward-looking, accountable, and standardized banking environment, the circular ensures greater transparency and resilience in the financial sector, paving the way for sustainable economic development.

  Md. Sahidul Islam, Senior Executive Vice President & Head of Business, Shimanto Bank PLC