Academic journal article Journal of Management Research

A Comparative Study of Prudential Regulation on Loan Classification and Provisioning of the Southeast Asian Countries

Academic journal article Journal of Management Research

A Comparative Study of Prudential Regulation on Loan Classification and Provisioning of the Southeast Asian Countries

Article excerpt


The process of economic development of Bangladesh has been seriously constrained by the continuing crisis of the accumulation of classified loans. This paper has been prepared for describing the regulatory regime of Southeast Asian countries like Bangladesh, India, Nepal, Pakistan and Sri Lanka and there regulatory measure regarding Loan classification and provisioning. Loan is the prime asset of a bank. So it is essential to know the asset quality of a bank and regulation helps to determine the financial health and efficiency of the banking sector. Besides, a proper loan classification and provisioning system ensures credibility of the financial system that in turn restores trust and confidence in the mind of depositors. Loan classification and provisioning system is also essential for regularizing follow-up, monitoring activities and improving the recovery position. However, the criteria for classifying and provisioning loan portfolios depend on the prudential policies of the central bank. There are several reasons of classified loans in our banking sector. A comparative analysis in this study among Southeast Asian countries shows the regulatory measure and corresponding deviation from international standard. There is huge amount of classified loans in our banking sector. But at present the trend of classified loans has begin to decline. So it is needed to maintain a standard asset quality and so need to follow related prudential regulation. The Bangladesh Bank has also given the guidelines regarding the provisioning system against classified loans through the BCD and BRPD (Banking Regulation and Policy Department) circulation. Due to increasing default risks of loans, the provisioning system has been revised several times. For protecting the depositor's interest and keeping the bank's financial condition solvent huge amount of provisions are kept against the classified loans. For the causes of classified loans, provision of the banking sector is increasing. As a result the profit of the banks is coming down. Besides, this government has also been deprived from current year taxes due to higher rate of provisioning. There are various practices regarding provisioning among Southeast Asian countries especially from the unclassified part. Risk exposure limits are also different among the concerned countries. All the concerned countries are not following the write off policy even. Directed lending is vital for India and Nepal for economic and regional development. But other concerned countries are not following the directed lending. From the comparative study we found that Bangladesh is maintaining a high rate of provisioning for unclassified loan. Risk exposure is also high in relation to other countries. There is specific guideline regarding write off policy in Bangladesh but there is no specific guideline in Nepal and Sri Lanka. There is specific regulation regarding directed lending in India and Nepal that may cause over investment in low return projects often result in low profitability and poor asset quality.

Keywords: Southeast Asian countries, Classified loans, Provisioning system, Risk exposure

1. Introduction

1.1 Background of the Study

Lending function of a bank needs to add value to the bank. The lending function comprises origination, funding, monitoring and servicing of loan. Loans are deemed as assets of a bank. To maintain asset to a standard quality various prudential regulation from various angle, issued by central bank such as, loan classification criteria, provisioning requirement , income recognition, write-off policy, risk diversification, directed lending, debt restructuring etc.

Since 1980s, the central banks of the developing countries, following the practices of the developed countries, have adopted the "prudential norms for asset classification" with a view to ensuring "transparency" and "quality" of the loan portfolios of the banks. It is a part of Financial Sector Reform Program (FSRP). …

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