The Bangladesh Bank issued a roadmap for scheduled banks to implement an expected credit loss (ECL) methodology-based provisioning system that aligns with international financial reporting standards by 2027.

Analysts had long called for the adoption of the latest 'IFRS 9' while the International Monetary Fund also attached the adoption of the latest standards as a condition for its $4.7 billion loan programme to the country.

Analysts opined that following the latest standards would ensure that banks' financial reports provide a clearer picture of their health, adding that some may initially see a plunge in profits.

The central bank issued the circular yesterday, adding that banks are presently following a rule-based loan classification and provisioning system.

"As a part of our ongoing efforts to enhance the risk management capabilities of banks and increase the transparency of the financial reporting, the Bangladesh Bank decided to adopt an ECL-based loan classification and provisioning system for banks."

This move means that banks will be required to analyse how current and future economic conditions impact the amount of loss.

Within the IFRS 9 framework, credit risk assessments must follow a forward-looking approach, which is primarily designed to mitigate procyclicality, the central bank said. When evaluating ECLs, it is essential to consider macroeconomic and financial factors, anticipated risks, and associated dynamics.

Procyclicality refers to the tendency of risk measurements to overestimate risk during a crisis and underestimate it during stable times.

Anis A Khan, a veteran of the banking industry, said it is necessary to adopt international standards although it may reduce the profits of some banks.

"Their profits will definitely fall since they will have to keep a higher amount of provision under the new system. Alongside that, they will have to keep more capital."

Although the banking sector remains in a fragile state, the long-term roadmap may make implementation more feasible, hoped Khan, also a former chairman of the Association of Bankers, Bangladesh Limited.

Timeline of the shift

The central bank's roadmap features specified timelines, with the first phase set to begin in March this year.

This initial phase will involve the formation of an 'IFRS 9 Implementation Team' at each bank, led by the managing director or CEO. The teams will be responsible for creating action plans for the transition, which must be approved by the banks' boards of directors.

By June 2025, banks will be required to develop a comprehensive database that will track key borrower information, including sector-wise classifications, loan defaults, and recovery rates since January 2022.

By September of this year, banks must submit a pre-assessment report to the BB as part of preparatory work. This report will detail transition plans, challenges, and necessary actions to implement the ECL model.

By December, banks must conduct training and capacity-building programmes to ensure their staff are equipped to handle the new system.

By January 2026, the BB will issue official guidelines on ECL-based loan classification. By June of the same year, banks must finalise their automated systems.

The IFRS 9 model will be rolled out in phases, starting with branches covering 25 percent of the loan portfolio by September 2026, and reaching 75 percent by June 2027.

By December, the banks will have to prepare half-yearly financial reports parallelly following the IFRS 9 and existing policy.

The full implementation of the ECL-based loan classification and provisioning under IFRS 9 is expected to be completed by December 2027.