Impact of Change in Loan Classification Scheme on

Banks Reported Performance- A study on Janata Bank

Limited.

Exam ID: 142454

 Internship Report on

Impact of Change in Loan Classification Scheme on Banks Reported Performance - A study on

Janata Bank Limited.

Prepared For

The Chairman

Internship Placement Committee

Prepared By

Exam Roll Number: 142454

4th year, 8th semester

Batch number: 25th, BBA Program

Academic Session: 2015-16

Institute of Business Administration (IBA-JU)

Jahangirnagar University, Savar, Dhaka- 1342

Date: July 6, 2020

DECLARATION

I do hereby declare that the internship report entitled as Impact of Change in Loan Classification
Scheme on Banks Reported Performance- A study on Janata BankLimited has been prepared on
the basis of three months Internship activities on the titled organization and it is an original work done
by me.

The report is a unique one which is not submitted to anywhere for any academic purpose. The data
and information which are mentioned here are also collected and organized by myself. I am solely
responsible for any kind of misleading or manipulation of data or information in this report.

Finally, this report is submitted to the Institute of Business Administration, Jahangirnagar University
for the partial fulfillment of the requirements of the Degree of Bachelor of Business Administration.

Signature of the Intern/Student:

Exam ID: 142454 Class ID: 2121

Batch No.: 25th Academic Session: 2015 - 16

Major area of concentration: Marketing

Institute of Business Administration (IBA-JU)
Jahangirnagar University

i
 CERTIFICATE OF THE SUPERVISOR
This is to certify that Exam ID: 142454, Batch: 25th, Academic Session: 2015-2016, a student of
BBA program, Institute of Business Administration, Jahangirnagar University, has completed
internship program on “Impact of Change in Loan Classification Scheme on Banks Reported
Performance”- A study on Janata Bank Limited” under my supervision.

I have gone through the report and it seems satisfactory to submit for the award of the Degree of
Bachelor of Business Administration.

I wish his/her success in life.

(Sign of Supervisor)

…………………………………

Name of the Teacher: Mr. Mohammad Nazmul Islam

Designation: Associate Professor

Institute of Business Administration

Jahangirnagar University

ii
iii
Chairman
Internship Placement Committee
Institute of Business Administration
Jahangirnagar University
Savar, Dhaka-1342

Subject: Submission of Internship Report.

Dear Sir,

It is indeed, an honor to deliver my internship report on “Impact of change in loan classification

scheme on banks reported performance”- a study on Janata Bank Limited as a prerequisite for the
completion of my BBA program. This report is based on secondary data available as well as the
information generated from my investigation. I have invested the best effort I can to prepare this
report and eventually come up with a worthwhile conclusion.

I will enthusiastically look forward to consider and evaluate my efforts. I‟ll be obliged to clarify any
matter or to provide any further information regarding this report. I hope that this report will be up to
your expectation and draw your appreciation.

Sincerely yours,

Exam ID: - 142454

BBA 25th batch

Session: 2015-2016

Institute of Business Administration

Jahangirnagar University

iv
 Acknowledgement
At the very beginning I would like to express my deepest gratitude to the Almighty God for giving
me the strength and the composure to finish the task within scheduled time. My internship at Janata
Bank Limited was an exclusive opportunity for me to understand the real life corporate culture. I‟ve
learned a lot about banking operations, customer expectation, limitations, and prospects. Moreover, in
personal level, this internship has helped me to understand & cope with corporate environment,
develop interpersonal skills and self-confidence.

I express my heartiest gratitude and deepest respect to my teacher Mohammad Nazmul Islam,
supervisor of my internship program, for his brilliant and excellent guidance and assistance to
complete this report.

I am grateful to all officials and staffs of Janata Bank limited, Savar Corporate Branch for their huge
cooperation. I would like to thank Mr. Syed Jamal Hossain, General Manager, Savar corporate
Branch. I express my sincere gratitude to senior executive officer of Savar corporate branch Mrs.
Marium Haque for his extreme support and cooperation during my internship program.

Finally, I would like to express my gratitude to all faculty members of IBA-JUand the writers of the
articles whose contributions helped me reach this point and make this report.

v
Contents
Executive Summary .........................................................................................................................viii
1.0 Introduction ................................................................................................................................ 1
1.1 Abstract: .................................................................................................................................. 1
1.2 Objectives of the research: ...................................................................................................... 1
1.2.1 Some other objectives of the study: .................................................................................. 1
1.3 Methodology of the study: ...................................................................................................... 2
1.3.1 Sources of Data: ................................................................................................................ 2
1.3.2 Time Period: ..................................................................................................................... 2
1.3.3 Data processing and Analysis: ........................................................................................... 2
1.4 Limitation of the Report: ......................................................................................................... 2
2.0 Literature Review ........................................................................................................................ 3
3.0 Organizational Overview ............................................................................................................. 4
3.1 Overview and history of Janata Bank Limited: .......................................................................... 4
3.1.1 Human Resource: ................................................................................................................. 4
3.2 Corporate vision and mission: .................................................................................................. 4
3.3 Organizational Structure: ......................................................................................................... 5
3.3.1 Management Aspect: ........................................................................................................ 5
3.3.2 Board of Directors: ............................................................................................................ 6
3.3.3 Functional Department: .................................................................................................... 6
3.4 Products and Services: ............................................................................................................. 7
3.5 Key Financial Performance: In the Financial Year 2018 ............................................................. 7
3.5.1 Operating Profit: ............................................................................................................... 7
3.5.2 Profit after Tax: ................................................................................................................. 7
3.5.3 Loans and Advances: ......................................................................................................... 7
3.5.4 Deposits and Growth: ....................................................................................................... 8
3.6 Contribution of JBL in the Banking sector: ................................................................................ 8
4.0 Conceptual Framework ............................................................................................................... 9
4.1 What is Loan? .......................................................................................................................... 9
4.2 Classified Loan: ........................................................................................................................ 9
4.2.1 Why Classification is required?.......................................................................................... 9
4.3 Background of Classified Loan in Bangladesh: ........................................................................ 10

vi
 4.4 Nature of the Problem: .......................................................................................................... 10
4.6 Loan classification policy, 2012: ............................................................................................. 12
4.7 Changing in loan classification scheme in 2018: ..................................................................... 12
4.8 Types of Loans and Advances:................................................................................................ 14
4.9 Basis for loan classification: ................................................................................................... 14
4.9.1 Objective Criteria: ........................................................................................................... 14
4.9.2 Qualitative Judgment: ..................................................................................................... 15
4.9.3 Provision for Classified loans: .......................................................................................... 15
4.9.4 Rescheduling: ................................................................................................................. 15
5.0 Analysis and Findings................................................................................................................. 17
5.1 Banks Reported financial performance for the year of 2016, 2017, and 2018: ........................ 17
5.1.1 Trend of classified loans as a percentage of total loans: .................................................. 17
5.1.2 Required Provision: ......................................................................................................... 18
5.1.3 Maintained Provision: ..................................................................................................... 19
5.1.4 Provisioning Surplus:....................................................................................................... 19
5.1.5 Net classified loan ratio:.................................................................................................. 20
5.1.6 Gross classified loan coverage: ........................................................................................ 20
5.2 Changes in Profitability: ......................................................................................................... 21
5.2.1 Profit after Tax: ............................................................................................................... 21
5.2.2 Return on asset (ROA): .................................................................................................... 22
5.2.3 Return on Equity (ROE): .................................................................................................. 22
5.3 Impact on quarterly performance in 2018: ............................................................................. 23
5.3.1 Impact on Loans and Advances: ...................................................................................... 23
5.3.2 Impact on Profitability: ................................................................................................... 23
5.3.3 Cost-income ratio: .......................................................................................................... 24
5.3.4 Change in ROA & ROE: .................................................................................................... 25
5.4 Some Observations: ............................................................................................................... 26
6.0 Concluding Remarks .................................................................................................................. 27
6.1 Conclusion: ............................................................................................................................ 27
6.2 Recommendation: ................................................................................................................. 27
References ...................................................................................................................................... 28
Appendix A

vii
Executive Summary
This report intends to exemplify the impact of change in loan classification scheme on banks reported
performance. As well as the study shows the actual scenario of classified loans of Janata Bank
Limited.

The introduction part of the report basically shows the background of the study along with relevant
methodology and objectives of the research. Apart from these the introductory part has been ended up
by describing limitation of the report.

The part of analysis of the organization starts with overview and history of Janata Bank Limited.
Financial trends and growth of Janata Bank explain through some factors like deposits, net profit after
tax, and earnings per share scenario. Janata Banks product, customer mix and operations also
included in the report.

After organizational part the report discusses the impact of change in loan classification policy on
banks reported performance. The project part starts with the specification of the loans and
classification of loans, then the background and history, size and duration and related criteria of loan
classification. Then the report discusses the basis of loan classification, objective criteria, and
qualitative judgment. After discussing these theoretical concepts the report shows the impact of new
policy on banks financial performance comparing two consecutive financial years; one is the previous
year of the change and another one is the next year of the change. The report also compares the
quarterly financial performance of 2018 of the bank. The trend and growth of profitability and other
related factors discuss through the figures.

Finally, there are some major findings and recommendations included in the report. After analyzing
the financial performance we can see that JBL has faced a huge amount of classified loans in last few
decades. But there are some improvement has been found after adopting new loan classification
policy in 2018. The percentage of 2018 is 33.72% higher than the previous two years. This situation
clearly indicates the dissatisfactory performance of the Janata Bank Limited. Apart from these Janata
bank has maintained a provisional surplus in recent few years which indicates the lower loan risk.

Mostly in my internship period I work in general banking area where I learn the term, policies and
procedures of banking operation. I gathered knowledge about communication, interpersonal skills,
teamwork and real world experience. From this real job experience I also find way to improve self
performances. After that with a relevant conclusion this report becomes completed.

viii
1.0 Introduction

1.1 Abstract:
This report aims to discuss the impact of change in loan classification scheme on banks reported
performance. The banking sector of Bangladesh is very dynamic. After liberation there are some
changes regarding loan classification are made by Bangladesh. Recently it brought new policy in
2018 where Bangladesh Bank relaxes the loan classification policy. Basically, Bangladesh Bank
changes the time period of loan classification. This report shows the impact of this change using
financial years of 2016, 2017, and 2018. First of all the comparison between these three is shown in
the report. 2016 and 2017 are considered as the years before change and 2018 is considered the year
after change. Some financial constraints like ROA, ROA, profit after tax etc are used for analyzing to
show the impact of the change. The quarterly financial statement is used for analyzing as well. Where
the first two quarter of 2018 is considered as before changed and last two quarter of 2018 is
considered as after changed. After analyzing this financial information the report ended with some
findings and recommendations.

This report intends to exemplify the impact of change in loan classification policy on the reported
performance of Janata Bank Limited. After liberation, our banking business had been performing well
but very recent time most of the banks face a problem of loan classification. So they loss some profit
and fall under trouble for the loan run. There are several reasons such as political, demographical,
previous history and negative attitudes of borrowers to classify the loan of commercial bank. At the
beginning of the banking business of Bangladesh loan classification was present in the book to gather
knowledge about this theoretically but now a day it is very common word to the people of
Bangladesh. As a result of this culture, every bank counts loss regularly and government deprives
from tax income. Loan officers are not efficient enough to assess the borrowers and the regulator of
banks fails to control the loan classification of the bank. For minimizing classified loans Bangladesh
Bank takes strong attempts and brings required changes to the loan classification policy. This research
focuses on the major impact of the new loan classification policy on Janata bank‟s financial
performance. This study also conveys the message that if Janata bank reduces the loan classification,
a very good loan culture will create.

1.2 Objectives of the research:

This research is conducted on state owned Janata Bank Limited to understand the impact of change in
loan classification policy on banks reported performance.

1.2.1 Some other objectives of the study:

 To know about the historical background of loan classification policy in Bangladesh.
 To know about the various aspects of loan classification policy in Bangladesh.
 To know about the changes that has been adopted in loan classification policy over time.
 To know about the impact of changes in loan classification policy that has been adopted in
2018 on the reported financial performance of Janata Bank.

Page 1 of 28
1.3 Methodology of the study:
The research methodology of the study has been enumerated below:

1.3.1 Sources of Data:

Data has been collected from the various secondary sources like research works of individuals,
different publications, journal of different institutions, reading materials, books, Bangladesh bank,
library sources, financial highlights and annual report of Janata bank limited etc.

1.3.2 Time Period:

There is some time periods considered to do this research. The loan classification policies of 2012 and
2018 by Bangladesh bank have been focused more. To show the impact the annual report of 2016,
2017 and 2018 are used in this research work.

1.3.3 Data processing and Analysis:

Data processing has been done manually after checking and editing. Tabular techniques are used to
present data in this paper. For highlighting the impact there are some profitability constraint ratios are
used such as, Return on Asset (ROA), Return on Equity (ROE), Return on Capital etc. and also
conduct some growth and trend analysis to show the impact.

1.4 Limitation of the Report:

The main limitation of this report is that all data are secondary data.

 The allotted time frame for the report was insufficient.

 Lack of published journal on the topic of loan classification.
 Much confidential information was not disclosed by respective personal of the department.
 The annual report of 2019 of Janata Bank limited has not published yet. So, the research
conducts on the basis of the annual report of 2018.

Page 2 of 28
2.0 Literature Review

The immediate outcome of large amount of classified loans in the banking system is bank failure as
well as economic slowdown. The reasons of non-performing loans are typically accredited to the lack
of efficient monitoring and supervision on the part of banks, lack of efficient bankers, faults of legal
infrastructure and lack of effective loan recovery systems (Adhikary, 2006).

At the practical level, there is no criterion to describe the non-performing loans. There are several
disparities in the classification of loans, the scope, and contents. Non-performing loans have non-
linear negative effect on banks‟ lending behavior (Hou, 2001).

It is alarming for the economy of our country that the classified loans are increasing in the both State
Owned Commercial Banks (SOCBs) and other Financial Institutions (FIs), along with preservation of
insufficient loan provisions, moderates the overall credit quality of Bangladesh. Poor enforcement of
laws unfolding to resolve of non-performing loans, followed by inadequate debt recovery appraises
on the part of the banks, has also exaggerated the financial depression. (Adhikary, 2007).

The loan performance is put into relation with macroeconomic indicators such as nominal interest
rate, inflation rate, change in real GDP, economic growth, unemployment, and the change in terms of
trade. One of the problems of such approach, taking macroeconomic variables as exogenous is that
they are concurrently affected by a distress in the banking sector. (Fogila, 2008).

Day by day the classified loans are increasing for lacking of risk management system of the banks
which menaces the profitability of banks. This research presents the proposition that banking sector
can avoid their non performing loans by adopting methods suggested by the central bank of
perspective country (Haneef&Riaz, 2012)

Roy et al. (2014) analyzed the determinants of macro-economic variables on the non performing
loans of local private commercial banks of Bangladesh. The data range from year 2004 to 2013
covering 18 scheduled banks. Macro-economic variables i.e. GDP growth, inflation and interest
spread are selected as the determinants of non-performing loans.

The dramatic changes in lending interest rates are associated with the level of classified loans,
because high lending interest rates will broaden the debt burden of borrowers eventually causing
loans defaults. (Pullicino, 2016).

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3.0 Organizational Overview
3.1 Overview and history of Janata Bank Limited:
Janata Bank Limited is one of the largest commercial bank in Bangladesh. This bank was established
under the Bangladesh bank presidency order 1972. Former two private banks United Bank Limited
and Union Bank Limited that were performing banking all over the country later Janata Bank taking
branches of these two banks. After the independence the new country Bangladesh born in 1971, then
the newly started Janata Bank started mass banking all over the country and get facilities from the
government as a nationalized commercial bank. In course of time Janata bank provide a huge facility
and spread all over the country widely and with the increasing responsibility Janata bank becomes the
second largest state owned commercial bank in Bangladesh. Janata bank has 909 branches in the
country and 4 overseas branches in United Arab Emirates. This bank has linked over 1239 foreign
correspondent that spread all over the world. Total employee of this bank is nearly twelve thousands
(11849). The head office located at Motijheel C/A Janata Bhaban the heart of the capital city of
Dhaka.

3.1.1 Human Resource:

The higher management of JBL always gives emphasis on development of human resources. To
ensure that JBL has adopted a number of policies including performance based promotion, posting
and transfer, employee‟s welfare, training activities and skill development. At present 11,578
employees are working in the bank.

3.2 Corporate vision and mission:

Mission:

Janata Bank Limited will be an effective commercial bank by maintaining a stable growth
strategy, delivering high quality financial products, providing excellent customer service
through an experienced management team and ensuring good corporate governance in every
step of banking network.

Vision:

To become the effective largest commercial bank in Bangladesh to support socioeconomic

development of the country and to be a leading bank in South Asia

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3.3 Organizational Structure:
3.3.1 Management Aspect:
Like every other business organization, the foremost duty of the top management is to make all the
major decisions of Janata Bank. The board of directors is being at the top most level of organizational
structure plays an important role in policy formulation and successful execution, but it is not a direct
concern of the day to day operations of the bank. The duty was delegated to the management
committee. The board mainly sets the objectives and policies of the bank. The management consists
of one chairman, eleven directors, one CEO&MD and one company secretary. Mid and lower level
employees get the direction and instruction from the board of directors about the task they have to
meet. The chief executive provides the guideline to the managers and employees, but bears the
responsibility for determining how task and goals are to be attained.

Organization Monogram

Chairman

Managing Director

General manager

Deputy general manager

Assistant General Manager

Senior Principal Officer

Principal Officer

Senior Officer

Officer

Sub Accountant

Senior Clark

Page 5 of 28
3.3.2 Board of Directors:
Board of Directors, constituted by 13 members, has authority to organize, operate and manage its
affairs on commercial consideration within the board policy of government. The Directors are
representatives from both public and private sectors. Members of the Board including M.D are
government appointed out of that at least three have the experience in the field of Finance, Banking,
Trade, Commerce, Industry and Agriculture. The managing director is the chief Executive of Bank.
The Board of Directors is composed of 11 members headed by a Chairman. The name and position of
directors are as under.

Khondokar Sabera Islam

Md. Mofazzal Hussain

Masih Malik Chowdhury

A.K. Fazlul Ahad

Selima Ahmed, MP
Luna
Board of Directors Shamsuddoha Members Mohammad Abul Kashem
(Chairman)
Dr. Md. Jafar Uddin

Ajit Kumar Paul, FCA

Meshkat Ahmed Chowdhury

K.M. Shamsul Alam

Md. Abdus Salam Azad

FF, (CEO&MD)

3.3.3 Functional Department:

Functional department of Janata bank is divided into two parts. One is general banking
division and another one is loans and advances division. General banking division basically
works with deposit, remittance, A/C opening, cash department, clearing, and account
department.

Page 6 of 28
3.4 Products and Services:
Product and services is the core assets of any organization. JBL is playing the most momentous role
inoffering particular services to different clients or agencies through the country. The following
product and services are available of Janata Bank Ltd.

Deposit Loans and Advance

Current deposit Agriculture Loans
Savings deposits Working Capital Loan
Special note deposit Rural Credit
Fixed deposit Real Estate Loan
Schemes Housing Loan
Education Loan
Health Loan
Special Loan

3.5 Key Financial Performance: In the Financial Year 2018

Particulars Amount (in millions)
Operating Profit 9789
Profit After Tax 249
Total Deposit 675548
Loans & advances 533707

3.5.1 Operating Profit:

In 2018, operating profit of JBL fall BDT 9,788.96 million from BDT 11,369.48 million in 2017,
which is 13.90% lower. Though operating profit is lower, interest income increased by 10.73% in the
year 2018.

3.5.2 Profit after Tax:

Profit after tax stood at BDT 248.97 million in 2018 from BDT 2686.50 million of the previous year.
Some of the rescheduled loan have been adversely classified in terms of qualified judgment by
Bangladesh Bank which increased the required provision causing lessen profit before tax as well as
profit after tax.

3.5.3 Loans and Advances:

There are a significant change occurred in loans and advances in JBL‟s reported financial statement.
The loans and advances increased to BDT. 533707.16 million In 2018. Where there was BDT.
459580.05 million In 2017. So the growth rate is 16.13 percent. Total outstanding loans to SME stood
at BDT. 96811.60. When the Bangladesh Bank relaxes the policy for classified loans the banks
sanction more loans to the customers. As a result the outstanding loans and its growth rate increased
more than the previous year. And one of the most vital reasons for this growth is that it was backed by
continued diversification of the bank‟s portfolio to have a varied client base. And the bank distributed
this portfolio across the sectors in order to reduce client. This would help the bank to reduce overall
portfolio risk in future.

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3.5.4 Deposits and Growth:
Overall deposits of the Bank improved by 4.00 percent and stood at BDT 675,548.45 million at the
end of 2018. Savings deposits increased to BDT 163,436.00 million from BDT 151,194.19 million of
the preceding year showing a growth of 8.09 percent, which helped to reduce the cost of fund and
brought the ratio of high cost and low-cost deposit to 55:45. The growth was facilitated by improved
service provided to customers. Besides initiatives carried out for mobilization of deposits did help.

3.6 Contribution of JBL in the Banking sector:

Banking sector of Bangladesh is being operated by 57 banks having more than 9 (nine) thousand
branches. Janata Banl Limited has earned BDT. 9,788.96 million Operating profit in 2018.

SL. Components Amounts (BDT in Growth

millions)
1 Total Asset 866,046.48 7.45%
2 Deposit 675,548.45 4.02%
3 Loans and Advances 533,707.16 16.13%
4 Import 220,413.70 53.51%
5 Export 114,681.00 (18.04%)
6 Foreign Remittance 76,078.10 5.63%

Page 8 of 28
4.0 Conceptual Framework
4.1 What is Loan?
A loan is money, property, or other material goods given to another party in exchange for future
repayment of the loan value or principal amount, along with interest or finance charges. A loan may
be for a specific, one-time amount, or it can be available as an open-ended line of credit up to a
specified limit. Loan is basically sanctioned by corporations, financial institutions and government.
The interest fee of loan is a big source of revenue for many banks. The banks and other financial
institution provide loans to the new business for ensuring the economic growth of the country.

4.2 Classified Loan:

A classified loan is the term used for any loan that a bank examiner has examiner has deemed to be in
danger of defaulting. The borrowers do not necessarily need to miss payments order for a bank to
label the account in this manner. A borrower can have what the bank calls a classified loan for
different reasons. This is simply a precaution that financial institutions take to prepare for a possible
loss and to prevent any further risk.

4.2.1 Why Classification is required?

Loan classification means giving each and every loan case a status like unclassified, substandard,
doubtful and bad or loss through verification of borrowers‟ repayment performance on a particular
date while provisioning means setting aside fund from the profit against possible loan loss. This is
obviously essential for determining the financial health and efficiency of the bank. Besides, a proper
loan classification and provisioning system ensures credibility of the financial system that will help to
restore the trust and confidence in the minds of the depositors and investors. Banks basically work as
an intermediary between depositors and borrowers. Nowadays the banking sector of Bangladesh is
facing a great problem of default loans. So they always are worried about their deposited money
because bank lends the money to the borrowers and there is a chance of default those loans. In loan
classification system bank basically maintain a provision against those defaulted loans which may
mitigate the risk of loan losses. This is the main reason why the banks classify the loans. There are
also some objectives of loan classification. Those are given below:

 Find out the net worth of a bank.

 Help for assessing financial soundness of a bank.
 Help for determining required provision and the amount of interest suspense.
 Put the bank on sound footing in order to develop sound banking practice in Bangladesh.

Importance of loan classification:

 Strength credit discipline.

 Improve loan recovery positions and
 Make future planning of loan

Page 9 of 28
4.3 Background of Classified Loan in Bangladesh:
The banking sector of Bangladesh is illustrated by low profitability and insufficient capital base
because there are lots of banks in Bangladesh. There is a great competition among those banks. So the
profit of these banks is low. And the root of less profitability is high percentage of classified loans
over a long period of time. The problem is most serious for the state owned commercial banks. It is
alarming for the economy of our country that the classified loans are increasing in the both state
owned banks and other financial institutions. Besides, preservation of insufficient loan provisions,
moderation of the overall credit quality, poor enforcement of laws to resolve classified loans have
increased the financial depression. Classified loans are negatively related with the GDP growth. If
classified loans are increased, the GDP growth will be decreased. Good loan helps to the development
of the economy of the country. The efficiency of the profitability of large commercial banks depends
on the reduction of classified loans. Classified loans and profitability are negatively related. Poor
management of the banks results in bad quality of loans which indicates the increasing of classified
loans. At present banks are so much aware of selecting the customers to reduce the bad loans or
classified loans. Classified loans are the concerned issue from last few decades. Bangladesh has been
facing the alarming of increasing classified loans. But these classified loans are not raised in one time.
It has been taking about two decades after the liberation war. After the independence the banking
sector of Bangladesh expand very rapidly and the war destructed country needed to restructured and
because of that the bank issued huge amount of loans. And then the banking system adopted the
process of direct lending, basically, banks provided loan on a priority based determined by the
government at an administered rates of interest. Generally, it required a very long period of time for a
loan to be identified as classified and the provisioning requirement is less important which resulted in
a huge classified loans. And before 1991 there was no control of central bank over the commercial
and state owned banks. As a result the classified loans were increased readily. In the early 1991
Bangladesh bank introduced the “Bank Companies Act 1991”.which had brought a control to the
central bank over the state owned and other commercial bank except co-operative banks or any other
financial institution registered under the Cooperative Societies Ordinance.

4.4 Nature of the Problem:

The basic function of commercial banks is financial intermediation between savers and borrowers.
Banks are financial intermediaries that mobilize funds from surplus economic units and allocate those
funds to deficit economic units. Banks mobilizes fund mainly through collecting deposits and allocate
those funds by providing loans. Bank credit is the principal sources of loan able fund for millions of
households and the government. Agricultural, commercial, and industrial activities of a nation are
often financed by bank credit. Without adequate financing there can be no growth or maintenance of
stable output. Thus, the bank credit influences total economic environment by affecting money
supply, investment, total output, and employment.

This process is an ongoing one that begins when a loan application is made and screened and
continuous until the loan is repaid. As unpaid loans are incomplete transactions for lenders this
incomplete transaction will not add any value rather destroy it. And this unpaid or default loan causes
constraints on the process of economic development.

Page 10 of 28
4.5 Emergence of Classified loans:

As banking remains the main intermediary vehicle of harnessing investible capital for accelerating the
growth of the productive sectors in Bangladesh, the continuing crisis of accumulation of non-
performing and defaulted bank loans has emerged as one of the most serious constraints in the path of
economic development of our country. Now we will discuss how the loan default problem has
emerged in our country by year wise.

4.5.1 Pre liberation periods:

Before the liberalization of Bangladesh the economic development policies of Pakistan was centered
around growth oriented wherein industrialization was assigned the top priority in the allocation of
investible funds from the institutional credit sources in the name of providing employment to the vast
multitude of the so called disguisedly unemployed labor force. Thisattempt of development of an
industrial entrepreneurial class in Pakistan miserably failed to provide adequate quantum of formal
industrial employment even in West Pakistan. This is regarded as one of the main factors behind the
rapid growth of regional economic disparity between the two Pakistan. Then banking was blamed as a
principal mechanism of siphoning off capital from the East Pakistan. Nationalization of the banks and
insurance companies became one of the most popular issues in the election manifesto of the Awami
League during the 1970 election of Pakistan.

4.5.2 Post liberation period:

After the liberation of Bangladesh the government decided to nationalize the banks and insurance
companies operating in Bangladesh should be considered a logical step but the task of re-organization
of the nationalized banks in the was so difficult and a very rapid expansion of banking network in
rural Bangladesh created some problems for the banking sector. There was no time after
nationalization as the most corrupt, undisciplined, and mismanaged concerns mired in a sea of
recurrent losses in the backdrop of the political and administrative inexperience of the post liberation
regime. In this scenario, the nationalized banks were involved in two sorts of pressure situations.
Firstly, the almost insatiable demand for credit from the loss making state owned enterprises kept the
banks under constant pressure due to a shortage of adequate liquidity and secondly the newly
emerging business man with connection with politics and politicians. Top bureaucrats and top
bankers constantly lobbing for access to bank credit and in the process were vitiating the work
atmosphere in the banks by alluring a section of the bankers to indulge in corruption and
malpractices. It is now widely recognized that today‟s millionaires of Bangladesh came mostly from
the ranks of those business man and the mentioned group. They could successfully establish and
maintain these types of patron client relationship with the bankers and in the process created a host of
millionaires from amongst those bankers themselves. They had actively connived and harvested the
illicit margins in exchange of the favors rationed out to those fortunate borrowers. And this rapid
sanction of loans may result a huge amount of classified loans soon after few years.

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 4.6 Loan classification policy, 2012:
According to BRPD Circular 14, 2012 More than 20 years have passed since the adoption of „Bank
companies Act 1991‟ in the banking system of Bangladesh in 1991. Unfortunately, the banking
system was still burdened with an alarming amount of classified loans. Bangladesh has had a two
decades long experience of loan classification problem and the banking system is burdened with huge
amount of classified loans after 1990s. Day by day the classified loans are increasing for lacking of
risk management system of the banks which reduces the profitability of banks. Afterwards
Bangladesh Bank introduced classified loans policy by fixing provision rate for state owned and other
commercial banks in 2012. It was aligning with the international standards. The percentage of
provisioning is given below –

Short term All

Agriculture other
Particulars & Micro Consumer Financing Credit
credit SMEF BHs/MBs/SDs
Other HF LP
than
HF, LP

Standard 2.5% 5% 1% 2% 0.25% 2% 1%

UC
SMA _ 5% 2% 2% 0.25% 2% 1%

SS 5% 20% 20% 20% 20% 20% 20%

Classified DF 5% 50% 50% 50% 50% 50% 50%

BL 100% 100% 100% 100% 100% 100% 100%

HF=Housing Finance, LP=Loans for professionals to setup business, SMEF=Small &

Medium Enterprise Financing, BHs= Loans to Brokerage House, MBs= Loans to
Merchant Bank, SDs = Loans to Stock Dealers .

In terms of the above policies, the banks will conduct their classification activities on ratio basis
which is very helpful to reduce the classified loans. The classification of each individual loan must be
justified in writing and it helps the assigned person to review it.

4.7 Changing in loan classification scheme in 2018:

Bangladesh bank brings some changes in the loan classified policy in 2018. The central bank of
Bangladesh has made this change in order to reduce the massive amount of defaulted loans. Banking
sector of Bangladesh has faced a huge sum of money after the liberation which was about
BDT.100000 crore. After investigating the core reason behind this central bank found that most of the
bank could not able to meet up the required time for loan classification which was fixed in 2012 loan
classification policy. Since most of the bank failed to meet the standard of 2012, Bangladesh bank

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relaxed it in 2018 for reducing the amount of classified loans. The comparison between the 2012 &
2018 loan classification policy is given below –

Types of classification

year Sub-standard Doubtful Bad/Loss

2012 Once overdue for six After six months. After nine months.
months.

2018 Overdue for more than Overdue for between nine Overdue more than twelve
three months and less and twelve months. months.
than nine months.

Besides, this central bank found that there are some other reasons for increasing defaulters. The
findings showed loan write-off is also responsible for increasing default loans. The limit of loan
write-off for bad debt which is not collectable was BDT. 50000/-. Bangladesh bank makes it up to
BDT. 200000/-, which clearly show the classified loan less than it showed before.

Other major changes of 2018:

 Bangladesh Bank relaxed the policy of loan write-offs. Where there was a limit of BDT.
50000/- for loan write-off. In February, 2018 Bangladesh Bank made it up to BDT. 200000/-
 Bangladesh Bank reduces the mandatory cash reserve ratio to 5.5% where it was 6.5% in the
past.
 Bangladesh Bank increased the deposit of state agencies to 50 percent of their funds in
private commercial banks. Where it was 25 percent in the past.

Rate of Provision

year Sub-standard Doubtful Bad/Loss

2012 20% 50% 100%

2018 20% 50% 100%

Here we can see that there is no change brings in the rate of provision. The rate of provision of 2012
remains same in the year of 2018. So the main changes occurred in the time period of the classified
loans types which are mentioned above. Besides this there are some changes occurred in terms of loan
write-off, mandatory cash reserve ratio and the deposit of state agencies. Bangladesh Bank relaxed
the loan classification rules with a view to reducing the classified loans which impacted the overall
financial performance of the bank. The change of loan classification policy brings a drastic change in
the bank‟s reported performance. Bank has faced a massive change in the financial statement
compared to the past.

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4.8 Types of Loans and Advances:
There are four types of loans and advances for classifying. The loans have been divided into
following categories:

 Continuous loan: The loan which is sanctioned without specific repayment schedule but
there is a specific expiry date for repayment and credit limit can be treated as continuous
loan. For examples: O/D, CC etc.
 Demand loan: when loan is sanctioned on the basis of repayment depends upon the demand
of bank can be treated as demand loan. Several liabilities which are converted into forced
loan are also considered as demand loan. Such as: FBP, IBP etc.
 Term loan: The loan which has a specific expiry date for repayment and for which
repayment is schedule through specific repayment schedule is considered as term loan. For
example: Project finance, industrial finance etc.
 Short term agricultural and micro-credit: Short-term agricultural credit means the credit
which is enlisted as short term credit under the annual credit program announced by
agricultural credit department of Bangladesh bank. On the other hand, Short-term micro-
credit means the credit which have loan limit less than TK. 25000/- and repayable within 12
months.

4.9 Basis for loan classification:

4.9.1 Objective Criteria:
The loans were usually classified by the lending bank had reasons to believe that the borrower would
not be able to repay the loan. This judgment was made regardless of whether the loan is overdue or
not. Banks formulated specific conditions for classification on a qualitative basis. Loans were
classified into the following three categories:

 Substandard: If a loan or any portion of a loan or interest is remained overdue for one year or
more but less than three years.
 Doubtful: if the loan or any portion of loan or interest is remained overdue for three years or
more but less than five years, or legal action for recovery of the loan had been initiated.
 Bad/Loss: If the loan or any portion of loan or interest is remained overdue for five years or
more or if legal action had been initiated and no court decision had been obtained within five
years of initiation of action.

Classification of Continuous Loan:

If the loan is past due or overdue for three months or beyond but less the six months, it will classified
as sub-standard. If the loan is overdue for six months or beyond but less than nine months, it will
classified as doubtful. And if the loan is overdue for nine months or beyond, it will be classified as
Bad/Loss.

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Classification of Demand Loan:

The loan is classified as sub-standard if the loan overdue for three months or beyond but not over six
months from the date of expiry or claim by the bank or from the date of creation of the forced loan.
The loan is classified as doubtful if it remains overdue for six months or beyond but not over nine
months from the date of expiry or claim by the bank or from the date of creation of forced loan. And
the loan is classified as Bad/loss if it remains overdue for nine months or beyond from the date of
expiry or claim by the bank or from the date of creation of forced loan.

Classification of Fixed Term Loan:

The loan is classified as sub-standard if the amount of past due installment is equal to more than the
amount of installment due within three months. The loan is classified as doubtful if the amount of
past due installment I equal to or more than the amount of installment due within six months. And the
loan is classified as bad/loss if the amount of past due installment is equal to or more than the amount
of installment due within nine months.

4.9.2 Qualitative Judgment:

If any uncertainty or doubt arises in respect of recovery of any continuous loan, demand loan or Fixed
term loan, the same will have to be classified on the basis of qualitative judgment be it classifiable or
not on the basis of objective criteria. If any situational changes occur in the stipulations in terms of
which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or
if the value of the collateral decreases or if the recovery of the loan becomes uncertain due to any
other unfavorable situation, the loan will have to be classified on the basis of qualitative judgment.
The loan which is on the basis of qualitative judgment will be classified as sub-standard, if there is
any hope for change of the existing condition by resorting to proper steps. If the loan resorting to
proper steps and there exists no certainty of total recovery, it will be classified as Doubtful. Finally, if
there is no chance of recovery, it will be classified as Bad/loss.

4.9.3 Provision for Classified loans:

The base for provisions on substandard loans was the balance outstanding in the loan ledger for the
loan less any interest taken in an interest suspense account. The base for provisions for doubtful and
bad loans was the balance outstanding less any interest included the balance outstanding but adjusted
in an interest suspense account. A 1% provision is taken for all non classified outstanding loans. And
the rate of provision for loans classified as substandard is 20%, for doubtful 50%, and for bad loans
100%.

4.9.4 Rescheduling:
Bangladesh Bank recognizes that in some cases a legitimate banking practice may allow for the
renewal of a continuous loan. Occasionally a term loan is renewed or extended under unfortunate
circumstances that are beyond the control of the borrower and do not signify that the borrower's
willingness or ability to repay has weakened the loan. Bangladesh Bank is concerned that
rescheduling may sometimes result in an overstatement of capital when loans that have a low
probability of repayment are carried at full value on banks' balance sheets. Bangladesh Bank is hereby
issuing circular in order to communicate its policy stance that rescheduling should be done only in
limited circumstances and under restrictions. The rescheduling criteria are given below:

Page 15 of 28
 Application for first time rescheduling will be taken into consideration upon receiving cash
payment of at least 15% of the overdue installments or 10% of the total outstanding amount
of loan, whichever is less. And that was 20% earlier.
 Application for second time rescheduling will be considered upon receiving cash payment of
minimum 30% of the overdue installments or 20% of the total outstanding amount of loan,
whichever is less.
 Application for rescheduling third time will be considered upon receiving cash payment of
minimum 50% of the overdue installments or 30% of the total outstanding amount of loan,
whichever is less.
 The rate of down payments for short-term agricultural and micro-credit will be same as
above.

Page 16 of 28
5.0 Analysis and Findings
5.1 Banks Reported financial performance for the year of 2016, 2017, and 2018:
Before Change After Change
Particular 2016 2017 2018
Loans and Advances 403037.42 459580.05 533707.16
Classified loans & advances 59359.80 75995.50 179984.46
Percentage of classified loans to 14.73% 16.54% 33.72%
total loans
Net classified loan ratio 4.71% 3.73% 19.50%
Gross classified loan coverage 67.99% 77.46% 42.18%
Required provision for loans & 23565.50 28344.60 32909.70
advances
Provision maintained for loans & 23817.06 28403.99 32910.60
advances
Provision Surplus/ (Shortfall) 251.56 59.39 0.90

5.1.1 Trend of classified loans as a percentage of total loans:

It is stated earlier that the banking sector of Bangladesh has been experiencing default loan problem.
In order to gain a deeper understanding of the magnitude of classified loans in Janata Bank limited,
the ratio of classified loans to total loans of Janata Bank must be examined.

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
2016 2017 2018

It is observed that with respect to the ratio of classified loans to the total loans is 14.73% in the year
2016. The classified loan ratio showed that there is an increase of 1.81% in the year 2017 than the
previous year. While the percentage of classified loan to total loan was 14.73% in 2016, it would
become 16.54% in 2017. The change is not very significant between these two years and this also
indicates that the assigned authority executes their responsibility efficiently and being very cautious

Page 17 of 28
for choosing the customers. After changing in loan classification policy in 2018 there is a very
notable change comes in the percentage of classified loans to total loans. The ratio is raised to
33.72%. The ratio is increased by 17.18% from the previous year. And it is almost twice of the ratio
of 2017. With regard to the flow of classified loans it is observed that among the new outstanding
loans disbursed in the year 2018, the rate of classified loans is much higher than the year of 2016 and
2017.

5.1.2 Required Provision:

There is a amount required for minimizing the possible loan losses. The bank predicts the possible
required provision on the basis of total loans and advances which may have a possibility to be
defaulted. Janata bank limited has decided required provision to minimize the risk of loan losses so
that the depositors and investors remain relax about the possible loan losses.

In million taka
35000

30000

25000

20000

15000

10000

5000

0
2016 2017 2018

The required provision for loans and advances was BDT. 23817.06 million In the year 2016 and it
would increase to BDT 28344.60 million in 2017. And after publishing new policy of classified loan
policy the required amount is increased to 32909.70 million in 2018. We can see a upward trend in
the amount of required provision for loans and advances. This indicates that Janata bank limited
forecasts and maintained sufficient provision for loans and advances to minimize the loan losses.

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5.1.3 Maintained Provision:

In million taka
35000

30000

25000

20000

15000

10000

5000

0
2016 2017 2018

Janata bank maintained a sufficient provision for loans and advances. The amount of maintained
provision for loans and advances was BDT. 23817.06 million In the year 2016 and it would increased
to BDT 28403.99 million in 2017. Due to publish the new policy the amount of classified loans is
increased in 2018 and the bank maintained provision BDT 32910.60 million as well. Since Janata
bank has maintained sufficient provision for loans and advances it would help the depositors and
investors to invest in Janata bank.

5.1.4 Provisioning Surplus:

A surplus is an amount of cash that remains available after meeting up financial obligation or liability.
It may indicate good financial management practices. Janata Bank has been experiencing
provisioning surplus in the last few years. And it is indicating the strong financial health of the bank.

In million taka
2300
2250
2200
2150
2100
2050
2000
1950
1900
1850
2016 2017 2018

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The bank faced a provisioning surplus of BDT. 251.56 million In the year 2016 and the amount is
declined to BDT. 59.39 million In the year 2017. And after publishing the new policy of classified
loan in 2018 the total amount of provisioning surplus is declined to BDT 0.90 million in 2018.
Provisioning surplus has a downward trend in the last couple of years, although a slight improvement
is seen after publishing the new loan classification policy in 2018.

5.1.5 Net classified loan ratio:

20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2016 2017 2018

Net classified loan ratio of Janata bank was 4.71% in the year 2016. The overall net classified loan
ratio of the bank went down to 3.73% in the year 2017. Lower net classified loan ratio indicates the
higher resilient they are thought to be to withstand stability threats. So the bank faced this stability
threat in the year of 2016 and it became more intense in the year 2017. But after publishing the new
policy in the year 2018 the net classified loan ratio increased to 19.50% in the year 2018.

5.1.6 Gross classified loan coverage:

80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2016 2017 2018

Page 20 of 28
The gross classified loan ratio of 2016 was 67.99% and it would increase to 77.46% in the year 2017.
The gross classified loan ratio is increased by 9.47% over the year. The ratio went down to 42.18% in
the year 2018. Basically, gross classified loan ratio negatively related with the reschedule loan. If the
amount of reschedule loan is increased, the gross classified loan will be declined. On the other hand,
if the amount of reschedule loan is deceased, the gross classified loan ratio will be increased. After
publishing the new policy in 2018 the amount of reschedule loan is increased and that is caused to the
gross classified loan ratio to decline.

5.2 Changes in Profitability:

Before Change After Change
Particulars 2016 2017 2018
Profit after tax 2605.48 2686.50 248.97
Return on asset 0.03% 0.33% 0.03%
Return on equity 0.46% 5.23% 0.46%

5.2.1 Profit after Tax:

In million taka
3000

2500

2000

1500

1000

500

0
2016 2017 2018

Profit after tax can be termed as the net profit available for the shareholders after paying all the
expenses and taxes. After paying all operating expense, non-operating expenses and deducting tax the
bank is left out with profit after tax. Profit after tax of JBL was BDT 2605.48 million in 2016 and
increased to BDT 2686.50 million in the 2017. The profit after tax stood at BDT 248.97 million in
2018. The profit falls down in 2018 with a large amount, and classified loan is one of the most
influential factors of this. Because of high classified loans bank had to charge the required provision
and it would increase the expense of the bank as a result profit would decrease.

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5.2.2 Return on asset (ROA):

0.35%

0.30%

0.25%

0.20%

0.15%

0.10%

0.05%

0.00%
2016 2017 2018

ROA of Janata bank limited shows smaller fluctuations. The ROA of 2016 was 0.03% and it would
increase to 0.33% in the year 2017. The ROA of 2017 is 0.33% but it become 0.03 in 2018 which
means that the bank is not able use their total assets in efficient manner. Since the classified loans are
increased in 2018 than 2017, it may have impacted the ROA negatively.

5.2.3 Return on Equity (ROE):

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
2016 2017 2018

The ROE of Janata bank limited fluctuated largely among 2016, 2017 & 2018. The ROE of 2016 was
0.46% and the ROE of 2017 is 5.23% but in 2018 it falls down to 0.46% due to changes of loan
classification policy. And it would affect the shareholder‟s equity negatively. And lower ROE of
2018 indicates that shareholder‟s value is decreasing over the period.

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5.3 Impact on quarterly performance in 2018:
5.3.1 Impact on Loans and Advances:

In million taka
FY 2018
540000
530000
520000
510000
500000
490000
480000
470000
460000
450000
March June September December

There are some changes occurred to the balance sheet items of Janata bank because of the new policy
of classified loans in 2018. Before this change total loans and advances of first quarter were tk.
482106.10 million and in next quarter it would increase to tk. 498537.90. After publishing the circular
the amount would increase to 508237.20 million in third quarter and became 533707.20 in the last
quarter. There is a significant change happened to the shareholders‟ equity because after publishing
the new circular classified loans had been increased and bank had to maintain the required provision.
As a result costs are increased and because of that shareholders equity shows lesser regarding the
expectation. Similarly, total asset would not increase as it was expected.

5.3.2 Impact on Profitability:

Bangladesh bank relaxes the policy for loan classification in 2018 and after changing this policy
every commercial bank of Bangladesh has found some significant changes in their financial
statement. Since the new policy change the time period for loan classification, the banks have
experienced some impacts of it on the financial performance. Janata bank limited also found some
change on their financial statement. The new policy impacted mostly on the profitability of the bank.
There is a change also occurred to the quarterly financial statement. The quarterly profitability
statement is given below:

Page 23 of 28
5.3.3 Cost-income ratio:

After Before
Particulars December September June March
2018 2018 2018 2018
Total income 14611.40 10790.40 14822.90 10480.20

Total expense 8601.90 11421.6 11223.90 9668.50

Cost-income ratio 58.87% 105.85% 75.72% 92.25%

FY 2018
120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%
March June September December

The cost-income ratio shows the amount of total cost to income. Higher rate indicates the high cost of
the bank. In the year 2018 Janata bank has different cost-income ratio shows in different quarter. In
the first quarter the ratio was 92.25%, this refers a high amount of cost. But in the second quarter it
decreased to 75.72% and then Bangladesh bank publish the new policy of classified loan. And it
affected overall profitability of the bank. Consequently, there is a change occurred to the next two
quarter. After publishing the new policy there is a drastic change come in the next two quarter. The
cost-income ratio of the third quarter was raised to 105.85% which is greater than the previous quarter
but it would decrease to 58.87% in the fourth quarter. This indicates that because of new policy the
cost-income ratio to total income is decreased.

Page 24 of 28
5.3.4 Change in ROA & ROE:
Before After
Particulars 2018 2018 2018 2018
March June September December
Net income 811.70 4410.70 3779.50 9789.00

Shareholders‟ Equity 43798.20 39972.90 25178.00 54556.40

Total Asset 803128.20 834291.80 831805.50 866046.50

Return on Equity (ROE) 1.8% 11% 15% 17.94%

Return on asset (ROA) 0.10% 0.53% 0.45% 1.13%

 Return on Equity:
The ROE of Janata bank limited did not fluctuate largely in different quarter. If we
concentrated on the last two quarter of 2018, we can see that in third quarter it was 15% and
it was increased to 17.94% in the last quarter. This flow indicates the smoothness of
profitability of the bank and inspired the shareholders to reinvest their profit.

 Return on Asset:
The ROA of Janata bank limited in the last two quarter after publishing the circular shows an
imbalance where we can see that before publishing the new policy the ROA of second quarter
was 0.53% and after publishing it would decrease to 0.45% which indicate that the bank face
less profitability than the previous quarter but in the last quarter it would increase to 1.13%
which indicate a stable profitability and efficiency of generating revenue.

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5.4 Some Observations:
Janata Bank limited has faced a huge amount of classified loans in last few decades. But substantial
improvement has been noticed recently due to the adoption of new loan classification policy in 2018.
In this circular Bangladesh Bank brings some changes regarding loan classification and provisioning
system. In 2018 the percentage of classified loans to total loan is 33.72% and before publishing the
new policy the rate was 16.54% in 2017 and 14.73% in 2016. The ratio of 2018 is higher than
previous two years. Since the new circular illustrates that the time frame for classifying the loan has
been changed consequently the amount of classified loans grown up. And the rapid growth of
classified loans also indicates the dissatisfactory performance of the management of Janata bank
limited. This situation clearly demonstrates the inefficacy of the banking system to tackle the flow
problem of bad loans. Therefore, the first challenge facing the Janata bank is how to constitute
sufficient measures to address the flow problem of bad loans effectively. In a bank-centered financial
system, it is very crucial to determine whether the defaulter is a willful one or a genuine one. In the
case of the former, if timely and adequate measures are not taken and problems are left unresolved,
the willful defaulters can have a psychological impact on good borrowers, acting as a catalyst to
financial degradation. In fact, in developing countries like Bangladesh, a large number of willful
defaulters operate in the financial market and trying to degrade the credit environment. Apart from
these Janata bank has maintained a provisional surplus in recent few years which indicates the lower
loan risk. As a result investors become more interested to invest in the bank. Besides, the depositors
feel less risk depositing their money in the bank. Thus, Janata bank retains more capital from the
customer which would help to increase the profitability. This study basically trying to show the
impact of classified loans on banks overall financial performance as well as shows the impact of new
loan classification policy of 2018 on the bank‟s reported performance. From this study we can come
to know about the classified loan status of Janata Bank Limited.

Finally, maintenance of an ethical standard in the banking profession from all concerns can be viewed
as an important means for making credit environment credible and vibrant. Ethics contributes great
deals to fair practices of lending when law itself becomes impotent due to invisible contingencies.
Hence, the importance of ethics in financial institutions should not be overlooked.

Page 26 of 28
6.0 Concluding Remarks
6.1 Conclusion:
The banking business is one of the fast growing businesses in Bangladesh. After the liberation it
expands very rapidly. But nowadays, the sector is facing a very hard time on the growth path due to
the growing proportion of classified loan. The classified loan has imposed a negative influence on the
growth of banking business. Bangladesh Bank changes the loan classification policy several times.
This study has compared the severity of the impact of change in loan classification scheme on banks
reported performance on the basis of banks financial statement. This report basically tries to find out
the impact over the Janata Bank limited. Along with this the study shows other variables of the bank
such as governance of the banks, bureaucracy and size of the bank, the difference in deposit ratio,
capital adequacy ratio, and interest rates have different impacts on classified loans. The study has
explained the impact of the variables on the bank performance as per mainstream banking operational
model. Finally, I have proposed some evocative measures through which the classified loan can be
minimized.

6.2 Recommendation:
To resolve this issue, the loan syndication technique might be considered as an effective financial
tool. Proper application of this technique requires cooperation, sincerity and transparency within the
bank which is not practiced now. Moreover, bankers have been observed to engage in unhealthy
competition in the market. Therefore another issue is how to exercise syndicated financing technique
minimizing unhealthy competition among the bank of Bangladesh. After analyzing the researcher has
tried to mention some advices for minimizing the amount of classified loan and for more
improvement in these sectors –

 To work out syndicated financing for large loans facility and to diminish the detrimental
antagonism among banks in Bangladesh.
 Bangladesh Bank should increase the supervisory power and monitoring functions to control
the banks that engage in malpractice.
 Bankers should apply the human skill, diligence, prudence while delivering credit. To ensure
this ability of employees, training should be provided. More awareness needs to be
developed.
 Identification of highly risk sensitive borrowers in the credit portfolio. Banks should take
information about the clients before giving loans. Banks could go Bangladesh Bank to collect
the information and verify the financial statement carefully from reliable sources to identify
the risky borrowers.
 To increase the explicit techniques to differentiate the intractable defaulters from the
indisputable ones.
 Banks should continuously review loan accounts to meet credit requirements of existing
borrowers and to take corrective actions to seize the growth of classified loans.

Page 27 of 28
References

 Podder, J., & Al Mamun, A. (2004, August 1). Loan loss provisioning system in Bangladesh
banking. Managerial Auditing Journal.
 Murtuza, H. (2019, April 22). BB gives banks big breaks over defaulted loans. The new age.
 Parven, S. (2011). Nonperforming loans of commercial banks in Bangladesh. Munich
Personal RePEc Archive.
 Hossain, M. (2020, March 16). Default loans; cancer of the banking system. The Financial
Express.
 Hassan, M. (2019, April 22). Bangladesh bank relaxes loan classification policy. Dhaka
tribune.
 Star business report. (2019, April 23). BB loosens rules for loan classification. The daily star.
 Rashid, M., (2010, September 19). Banking sector challenges in Bangladesh. The daily star.
Retrieved from: https://www.thedailystar.net/news-detail-154934
 Uddin, Z. (2019, February 27). Default loans soar 26pc. The daily star.
 Islam, S. (2019, November 28). Volume of NPL up 24pc in Q3. The financial express.
 Bangladesh Bank‟s website. Retrieved from: https://www.bb.org.bd/
 Editors. (2019, April 29). Bangladesh bank relaxes loan classification rules. Regulation Asia.
 Janata Bank‟s website. Retrieved from: https://www.jb.com.bd/
 Banglapedia website. Retrieved from: https://www.banglapedia.org.bd/
 Non-performing loan. (2020, April 30). Retrieved June 16, 2020, from
https://en.wikipedia.org/wiki/Non-performing_loan
 Website of investopedia. Retrieved from: https://www.investopedia.com
 Website of Wikipedia. Retrieved from: https://www.wikipedia.org

Page 28 of 28
APPENDIX A
A01: Comparison among Financial year 2016, 2017, & 2018 of Janata Bank Limited
A02: Comparison among quarterly financial statement of 2018 of Janata Bank Limited