BB unveils guideline on non-banking assets

The Bangladesh Bank yesterday unveiled a guideline on non-banking assets to allow lenders to deal with the properties put up as collateral after borrowers default. 

When clients fail to pay back loans, banks can take over the assets through legal channels. These assets are called non-banking assets.

The guidelines asked banks to complete the registration and mutation of the assets, ensure the physical possession within the quickest possible time, and include the assets in the balance sheet after adjusting the dues.

The BB ordered banks to assess the value of the assets prudently. The valuation must be done by a three-member committee comprising officials who are experts in the field. 

If the valuation differs from the government-fixed rate for local properties, the assessment report must include rationality.

The assessment also has to be carried out by valuation firms or professional bodies, according to the BB. The lower value among the prices determined by the valuation committee and the valuation firms has to be considered as the market price of the assets.

At the time of the assessment of the value, assets such as tin-roofed or semi-pucca structures, unusable structures and machinery have to be sold as soon as possible and deposited the proceeds against the loans. These assets can't be included as non-banking assets.

The market price of the land on which the tin-roofed or semi-pucca structure, unusable structures and machinery are located has to be ascertained after deducting the expenditure needed to remove them.

If the valuation sees an abnormal reduction in the price compared to the last assessment carried out by the bank, the reasons have to be ascertained, and the persons responsible have to be identified, the BB said. 

Before adjusting the non-banking assets against loans, banks will have to determine the total outstanding dues, which comprise unrealised loans and interests. The unrealised interest has to be transferred to the interest suspense account.

If the market value of the assets is higher than the loan outstanding, the loans have to be adjusted, and the remaining portion cannot be part of the balance sheet. In such cases, the borrowers have will be released from any debt obligation and can't be shown as defaulters in the Credit Information Bureau (CIB).

If the market value is lower than the loan outstanding, the loans cannot be adjusted entirely. So, the borrower cannot be granted any acquittance.

Under such a scenario, the unadjusted debts have to be stated as loans, and all legal steps have to be taken to recoup the remainder of the financing, the guidelines said. 

In the case of the non-banking assets that stemmed from the write-off loans, the borrowers will be freed from the debt obligation and cannot be shown as defaulters if the market value of the assets goes past the total loans payable. But if the value is lower than the loans, the debtors would be shown as defaulters.

The central bank has ordered banks not to hold the non-banking assets beyond the permitted time. Banks have to move to sell them as soon as possible. They, however, can use the assets to run banking operations.

Such assets will be transferred to the portion of the tangible assets of banks, and the interest suspense or provision against the non-banking assets will directly move to the retained earnings portion. It cannot be shown as the income of the year.

If the proceeds from the sales of the assets are higher than the book value, the additional sums will be transferred to the balance sheet as retained earnings.

Similarly, the interest suspense or provisioning will be added to the retained earnings, and they cannot be transferred to the income portion.

If the proceeds from the sales of the assets are lower than book value, and the loans cannot be covered by using the interest suspense or provision against the bad loans, it has to be adjusted as the loss on sales and included in the profit-loss account.

Bankers welcomed the BB guidelines.

"If we can get the control of the mortgaged assets through courts, we can sell it easily and can possibly get a better price," said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.