Loan Classification Loan Loss Provision

Loan Classification & Loan Loss Provision as per Nepal Rastra Bank Unified Directive 2075 Directive 2

As per the Nepal Rastra Bank regulation, loan provided by banks are classified into following terms. The BFIs should compulsorily maintain the loss provision of loan amount.

Classification of Loan/Advances:

(A) Performing Loan

1. Pass Loan:

Loan/advances which have not overdue and which are overdue by a period upto one month are Pass loan.

Additional provisions relating to Pass Loan:

Loan/advances extended against the collateral of gold and silver upto 10 lakhs

Loan/advances of fixed receipts

Loan/advances of Government securities and loan/advances made against the collateral of NRB Bonds.

The working capital loan having the deadline of upto one year for repayment may be included in pass loan. In case the interest to be received from the loan of working capital nature is not regular, such loan have to be classified on the basis of duration of interest to be due.

Loan Classification	Loan Overdue Period	Loan Loss Provision
Pass Loan/Good Loan	0 to 30 days	1%

2. Watch List Loan:

Loans which principle and interest are due for more than 1 months and upto 3 months.

Loans provided to those customers whose loan in other financial institutions falls in NPA category

Loans provided to those firm, company or institution whose networth are negative and are in loss for past two years

Loan Classification	Loan Overdue Period	Loan Loss Provision
Watch List Loan	31 to 90 days	5%

(B) Non Performing Loan

3. Substandard Loan:

Loan/advances which are overdue by a period from three months to a maximum period of six months

Loan Classification	Loan Overdue Period	Loan Loss Provision
Sub-standard Loan	91 to 180 days	25%

4. Doubtful Loan:

Loan/advances which are overdue by a period from six months to a maximum period of one year

Loan Classification	Loan Overdue Period	Loan Loss Provision
Doubtful	181 to 365 days	50%

5. Loss Loan:

Loan/advances which are overdue by a period of more than one year.

Loan Classification	Loan Overdue Period	Loan Loss Provision
Bad	Above 1 year	100%

Additional provisions relating to Loss Loan:Incase there seems any of the following discrepancies in any of the following loans whether or not the deadline for the repayment of which is expired, such loan and advances has to be categorized as loss loan.

The market price of the collateral cannot secure the loan.

The debtor is bankrupt or has been declared to be bankrupt.

The debtor disappears or is not identified

Incase non-fund based facilities such as purchased or discounted bills and Letter of Credit and guarantee which have been converted into fund based loan are not revovered within 90 days from the date of their conversion into loan.

Loan is misused

Expiry of 6 months of date of auction process after the loan could not be recovered or a case pending at court under the recovery process.

Providing loan to a debtor who has been enlisted in black-list of Credit Information Bureau Limited.

The project/business is not in condition to be operated or project or business is not in operation.

The credit card loan is not written off within 90 days from the date of expiry of the deadline

While converting L/C, guarantee and other possible liabilities into a fund based loan under the regular process, if the said loan is not recovered within 90 days.

In case of expiry of deadline of trust receipt loan Additional provisions relating to Term Loan:

Incase of term loan extended in instalments, if the deadline of instalment of the principal amount expires remaining entire loan amount has to be classified based on expiry of deadline of instalment amount, provided that incase of instalment of the term loan given by licensed institution not having facility of engaging in overdraft transaction, entire loan amount to be categorized as loss loan only if the instalment amount has crossed deadline by a period of more than one year.

Incase the instalment amount has crossed deadline by a period of less than one year only such instalment amount has to classified in loss loan with a provision of loan loss. However, this clause shall not be deemed to have hindered if the licensed institution wants to classify entire loan amount as the loss loan.

Additional provisions relating to Gold Loan: The BFIs of Classes 'A', 'B'and 'C' may provide loan having mortgages gold/silver subject to the following conditions.

The provisions of providing loan by mortgaging gold/silver has to be stated in the credit policy/bylaws of institutions.

Prior to carry out transaction of gold/silver loan provisions relating to necessary security, evaluation of collateral, vault insurance and checkers have to be made.

Annual studies have to be conducted whether or not gold/silver loan is useful and profitable to financial institution and annual monitoring has to be conducted from BOD.

Loan classification and Provision
Loan Classification	Loan Overdue Period	Loan Loss Provision
Pass Loan/Good Loan	0 to 30 days	1%
Watch List Loan	31 to 90 days	5%
Sub-standard Loan	91 to 180 days	25%
Doubtful	181 to 365 days	50%
Bad	Above 1 year	100%

The loans which are in pass class and which have been rescheduled/restructured are called as the performing loan and the substandard, doubtful and loss categories are called Non performing loan.

Provisions for restructured and rescheduled Loan If it was in pass group before restructuring and rescheduling =12.5% If it was in any other group (except pass group) before restructuring and rescheduling = Same percent as it was before upto two years.