New rating system to help curb bad loans

Jannatul Islam

19 January, 2019 12:00 AM printer

The new Internal Credit Risk Rating System (ICRRS) rolled out by Bangladesh Bank will help strengthen the risk management practices of banks and rein in bad loans, expect economists and bankers.

They say the new rating system will help banks review the previous performance of a credit holder automatically before processing new loans to rein in the increasing amount to non-performing loans (NPL),

Bangladesh Bank on Thursday rolled out the ICRRS to replace the Credit Risk Grading (CRG) model the banks are currently using to rate the borrowers. 

Economists say the ICRRS will help improve the quality of credit, but the banks should also address other issues like existing NPL management.

The ICRRS is a system that analyses a borrower’s repayment ability based on information about his/her financial condition.

Former Bangladesh Bank Governor Salehuddin Ahmed said the ICRRS will help bring good governance in the financial sector.

“Upgrade in the rating system will help bankers identify the bad borrowers. However, we should also concentrate on reducing the influence of directors in the loan approval process,” Salehuddin Ahmed told the daily sun.

He mentioned that the regulatory body should take firm action against the bad borrowers to make the automation successful.

The ICRRS will be applicable to all consumer loans, small enterprises with total loan exposure of less than Tk 50 lakh (5 million), short-term loans, microcredit and lending to banks, non-bank financial institutions and insurance.

The automation comprises 20 different rating templates for 20 industries, instead of just one template for all sectors like in the previous CRG model.

Officials said the guideline was launched following Finance Minister Mustafa Kamal’s recent remark that the country’s total non-performing loans, which is around Tk 1 lakh crore (1,000 billion), will not increase any further.

Centre for Policy Dialogue (CPD) Distinguished Fellow Prof Mustafizur Rahman also termed the launch of the ICRRS system a good step to control bad loans in new credit.

“However, we should keep in mind that the existing NPL has already become a burden for the country’s economy. To improve the situation, there should be reforms in the ways the sector addresses some issues like the relationship between the lender and borrower,” he told the daily sun.

In the last month, the central bank instructed the banks to reduce the amount of default loans to 10 per cent from the current 12 per cent, or Tk 99,370 crore, of the total outstanding loan.