Classification of Loans
Banks, finance companies and investment companies shall establish and maintain regular procedures for classifying loans and advances they extend to their customers, in a way that would allow them to monitor and identify such loans and advances that manifest features of weakness. For this purpose, loans and advances should be classified within levels (1) to (5), according to their conditions and per usual banking standards, as follows:-
1. Normal Loans
These are loans and advances which bear normal banking risk, whereby information available to the bank assure repayment as agreed.
2. Watch-List Loans
These are loans and advances which show some weaknesses in the borrower’s financial condition and credit-worthiness, requiring more than normal attention but not allocation of provisions.
3. Sub-Standard Loans
These are loans which may lead to incurring of some loss due to adverse factors (financial, economic, legal, political or managerial) which may hinder repayment, or due to weakening of security. Normally, this category includes loans and advances in which payment of principal is in arrears beyond 90 days. In such case, a provision of 25% of total loan balance is required.
4. Doubtful Loans
These are loans whose full recovery seems doubtful on the basis of information available, leading, generally, to a loss of part of these loans (when the financial position of the customer is not sound and securities are not sufficient). In such case, a provision of 50% of total loan balance is required.
5. Loss Loans
These are loans where the bank has exhausted all courses of action available but failed to recover anything, or where there is a possibility that nothing shall be recovered. In such case, a provision of 100% of total loan balance is required.