Loan Classification and Loan Loss Provision

Loan Classification and Loan Loss Provision

Access Banking Notes – Banking Notes

As we all know advancing loan is the primary function of a bank. All credits are not collected on time. Nepal Rastra Bank issues unified directives for banks and financial institutions to follow the certain rules in order to minimize the risks.

According to the overdue of the credit period banks have to classify their loan in two different types. They are

  1. Performing Loan 
  2. Non-Performing Loan

What is a Performing Loan?

1) Pass Loan 

  • Overdue up 1 month
  • Loan against the Fixed Deposit receipt
  • Loan against debenture, Govt. bonds
  • Gold and silver loan up to 10 lakhs/person by taking enough collateral

2) Watchlist

  • Overdue up to 1 – 3 months
  • Loan provided to those who are listed in non-performing loans in other BFIs. (अन्य बैंक तथा वित्तीय संस्थामा निष्क्रिय कर्जामा सुचिकृत भएको ग्राहकलाई दिईएको कर्जालाई पनि Watchlist (सुक्ष्म निगरानी) अन्तर्गत राख्नु पर्दछ। )
  • Extending the credit period time without renewing it.
  • Borrower is paying interest regularly but his project is continuously bearing loss for the last 3 years
  • If Nepal Rastra Bank lists the borrower on the watchlist because his/her project does not fulfill the NRB standard
  • Loan provided exceeding the Debt to Equity Ratio 80:20.

What is Non – Performing Loan?

3) Substandard – Overdue up to 3 – 6 months

4) Doubtful – Overdue up to 6 – 12 months

5) Loss 

  • Overdue up to 1 year
  • The market price of the collateral is not enough to secure the loans
  • The debtor is bankrupt
  • The debtor disappears for 90 days or is not identified
  • The loan is misused meaning used for a different purpose rather than the main purpose
  • When debtor is black-listed by the Credit Information Bureau (CIB). And additional loan is provided to thos persons.
  • The project or business is not in a condition to be operated
  • If collateral value does not cover the total loan.
  • When a debtor submits a double financial statement of the specific period of time.
  • The credit card loan is not written off within 90 days from the date of expiry of the deadline

Double Financial Statement –  It is multiple financial statements of a single business. For e.g. the different financial statements are presented to the bank and to the Tax office.

6) Restructuring and Rescheduling 

If the customer submits a written action plan along with required documents, the restructuring and rescheduling can be done. But customers should pay at least 25% of the total interest by the time of application submission. The bank should assure about he or she can repay the loan on time. There should be enough collateral. Remember, all restructuring is rescheduling but all rescheduling is not restructuring.

Check the latestNRB Unified Directives

Loan Loss Provision

Bank has to maintain the loan loss provision as per the types of loan to minimize the possible loss. The provisioning amount is taken from the profit of the bank. If the debtor will not repay the money, the bank has to maintain the loss from the provisioning reserve. Minimum Loan loss provisions imposed by NRB of different loans are as follows.

Loan Classification Meaning Min. Provision
Pass Loan Not overdue/Overdue up to 1 month 1% of loan
Watchlist Overdue up to 3 month
i.e 1-3 months
5% of loan
Sub-standard Overdue up to 6 months
i.e 3-6 months
25% of loan
Doubtful Overdue up to 1 year
i.e 6-12 months
50% of loan
Loss Overdue for more than 1 year 100% of loan
Restructuring and Rescheduling Changes made in loan timing (credit period) and terms and condition (other structure) in between 12.5 % for Pass Loan
25% for substandard
50% for doubtful
100% for loss

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