BRPD Circular No. 22: Policy for Non-Banking Asset (NBA)

Banking Regulation and Policy Department Bangladesh Bank Head Office Dhaka. Ref No: BRPD-14(10)/NBA/2021 20 September 2021 BRPD Circular No. 22 Date: --------------------- 05 Ashwin 1428 To: Managing Director/Chief Executive Officer All Scheduled Banks operating in Bangladesh.

Dear Sir,

Policy on Non-Banking Asset (NBA).

In accordance with the directions of Section 38 of the Bank Companies Act, 1991, the balance sheet, profit and loss account, and financial reports of scheduled banks are prepared in accordance with the form in the First Schedule. According to Serial No. 09 of Instruction C for the preparation of financial statements in the First Schedule, any asset acquired by the bank in satisfaction of any claim or receivable must be shown in the bank's balance sheet as Non-Banking Asset (NBA). Generally, such assets arise when the bank acquires ownership of the security/collateral held against the loan through legal proceedings for non-payment of loans granted by the bank. In such cases, upon the court granting the ownership rights of the security/collateral held against the bank loan to the bank under Section 33(7) of the Money Loan Court Act, 2003, the bank must complete the necessary legal procedures, including registration and mutation of such assets in the bank's name and securing possession rights (Chayan Adhikar) at the earliest possible time, and include the acquired asset in the bank's accounts as Non-Banking Asset (NBA) after adjusting the loan. In the case of including Non-Banking Asset (NBA) in the bank's accounts after loan adjustment, the following instructions must be followed:

1. Valuation of Assets: Non-Banking Assets (NBA) must be valued with utmost caution when included in the bank's accounts. In the valuation of such assets, a committee comprising three officials/executives experienced in this matter must be formed to complete the valuation through them. If the value determined by the valuation committee differs from the value fixed by the government for the sub-registrar having jurisdiction over the asset's location, the valuation report must present the justification for this difference. Along with the valuation of assets by the committee formed by bank officials/executives, the valuation of assets must also be conducted through a valuer firm or professional institution. Of the two values determined by the valuer firm/professional institution and the committee, the lower one shall be considered the market value of the asset. After determining the market value of the asset, it must be approved by the Chief Executive of the bank. It is mentioned that tin/semi-pucca buildings, unusable structures, and machinery should be sold at the earliest possible time and the proceeds deposited against the loan. Such assets cannot be included as Non-Banking Assets (NBA) in any way. However, for land/property on which tin/semi-pucca buildings, unusable structures, and machinery are located, the market value of the land/property must be determined by deducting the cost of removing such structures/machinery from the determined market value of the land/property.

If it is found during the valuation of assets for inclusion as Non-Banking Assets (NBA) that the value of any asset has abnormally decreased from the last valuation conducted by the bank, the reason must be determined and liability (if any) must be determined.

2. Inclusion of Non-Banking Assets (NBA) in the bank's accounts through loan adjustment: Before adjusting the borrower's loan through Non-Banking Assets (NBA), the total receivable of the bank from the borrower (including all receivables with unapplied interest) must be determined and charged to the loan account (unless there are different directions from the court), and the total loan position must be determined. In this regard, unapplied interest must necessarily be transferred to the Unapplied Interest Suspense Account.

Non-Banking Assets (NBA) must be included in the bank's accounts through loan adjustment in the following ways [See Annexure C, Example-1]:

a) If the market value of the asset is equal to or more than the total loan position: The specific Non-Banking Asset (NBA) must be debited (account-wise) by an amount equal to the loan position to adjust the loan position. In this case, even if the market value of the asset is higher than the loan position, the remaining amount will not be included in the calculation of receivables after loan adjustment. In such a case, the entire loan position is adjusted; therefore, subject to compliance with the policy mentioned in Clause 4 of this policy, the borrower must be released from the loan liability, and the said borrower cannot be shown as a defaulter in CIB.

b) If the market value of the asset is less than the total loan position: The specific Non-Banking Asset (NBA) must be debited (account-wise) by an amount equal to the market value of the said asset to adjust an equal amount of loan position. Since the market value of the asset is less than the total loan position, the entire loan will not be adjusted in this case. Consequently, the borrower cannot be released from the entire loan liability. In this case, the unadjusted amount of the loan must be shown as a loan in the bank's accounts, and the borrower must be shown as a defaulter in CIB; all necessary legal procedures for the recovery of the remaining amount must remain ongoing. In taking legal action for the recovery of the said remaining amount, care must be taken that the period of limitation mentioned in Section 28(3) of the Money Loan Court Act is not exceeded.

c) Adjustment of Unapplied Interest Suspense Account held against the loan: Even though Non-Banking Assets (NBA) are included in the bank's accounts against the loan, there are various risks including the risk of depreciation and sale of the said asset. Therefore, the amount kept in the Unapplied Interest Suspense Account against the sale of such assets cannot be transferred to the Income Account unless the proceeds from the sale are realized in cash. However, if the loan is fully adjusted through such Unapplied Interest Suspense Account, the amount kept in the Unapplied Interest Suspense Account must be transferred to the Interest Income NBA Account and shown in the balance sheet among other liabilities. However, if any loan remains unadjusted, an equal amount of it (after deducting the unapplied interest) must be retained in the Unapplied Interest Suspense Account.

d) Adjustment of Provisions held against the loan: In the case of Non-Banking Assets (NBA), there are various risks including the risk of depreciation and sale. Therefore, the amount kept in the Provision Account against the said loan for the proceeds from the sale of such assets cannot be transferred to the Income Account unless the proceeds from the sale are realized in cash. In such a case, if the loan account is fully adjusted through Non-Banking Assets (NBA), the Provision held against the loan must be transferred to the Provision Income NBA Account and shown among other liabilities. However, if any loan remains unadjusted, an equal amount of provision (after deducting Unapplied Interest) must be retained in the Provision Account.

3. Inclusion of Non-Banking Assets (NBA) in the bank's balance sheet against written-off loans: Against written-off loans, the total receivable of the bank from the borrower (including all receivables with unapplied interest) must be determined before adjusting the loan of the written-off borrower through the acquired Non-Banking Assets (NBA) (unless there are different directions from the court), and Non-Banking Assets (NBA) must be included in the bank's accounts through loan adjustment in the following ways [See Annexure C, Example-2]:

a) If the value of the asset is equal to or more than the total determined receivable against the written-off loan: The specific Non-Banking Asset (NBA) must be debited (account-wise) by an amount equal to the total receivable of the bank, and an equal amount must be credited to the Provision Income NBA Account. In such a case, since the entire loan position is adjusted, subject to compliance with the policy mentioned in Clause 4 of this policy, the borrower must be released from the loan liability, and the said borrower cannot be shown as a defaulter in CIB.

b) If the value of the asset is less than the total determined receivable against the written-off loan: The specific Non-Banking Asset (NBA) must be debited (account-wise) by an amount equal to the market value of the said asset, and an equal amount must be credited to the Provision Income NBA Account. Since the value of the asset is less than the total receivable against the written-off loan, the entire written-off loan will not be adjusted in this case. Consequently, the borrower cannot be released from the entire loan liability. In this case, the unadjusted portion of the total receivable against the written-off loan must be separately retained after calculation, and the borrower must be shown as a defaulter in CIB; all necessary legal procedures for the recovery of the remaining amount must remain ongoing. In taking legal action for the recovery of the said remaining amount, care must be taken that the period of limitation mentioned in Section 28(3) of the Money Loan Court Act is not exceeded.

4. Release of the borrower from defaulter status after full adjustment of the loan/written-off loan: If the entire amount of the loan/written-off loan is adjusted through the inclusion of Non-Banking Assets (NBA) in the bank's accounts, the relevant borrower must be released from defaulter status. However, before releasing the borrower from defaulter status, the bank must obtain the approval of the Management Committee after obtaining the confirmation of the 'Head of Internal Control and Compliance' that all procedures mentioned in the policy have been followed correctly.

5. Sale and Use of Non-Banking Assets (NBA): A bank cannot keep any such asset acquired in satisfaction of any claim or receivable of the bank in its own possession for a period exceeding the time fixed under Section 10 of the Bank Companies Act, 1991, from the date of acquisition. Therefore, as soon as possible after the acquisition of the asset, steps must be taken for its sale. However, if necessary, the bank may use the said asset (fully or partially) in its own banking operations. If any part (asset) of the NBA is sold or used in banking operations, it must be adjusted in the following ways [See Annexure C, Example-3 and Example-4]:

a) In the case of sale of Non-Banking Assets (NBA):

i) If the sale price of the asset is more than or equal to the book value: The account must be adjusted by the proceeds from the sale of the Non-Banking Assets (NBA). If the sale price of the asset is more than the book value, the said excess amount must be directly transferred to the Profit and Loss Account. Similarly, if there is any Unapplied Interest Income NBA or Provision Income NBA against the sold Non-Banking Assets (NBA), it must also be directly transferred to the Profit and Loss Account. Under no circumstances can the said amount be transferred to the Income Account of the current year.

ii) If the sale price of the asset is less than the book value: The account must be adjusted by the proceeds from the sale of the Non-Banking Assets (NBA). In this case, the difference between the book value and the sale price of the asset, and the loss from the sale, must be adjusted by the amount retained in the Unapplied Interest Income NBA and Provision Income NBA (if any) against the said asset. If such loss cannot be fully adjusted by the amount retained in the Unapplied Interest Income NBA and Provision Income NBA against the said asset, it must be adjusted through the Loss on Sale of NBA Account, and the said loss must be shown as the profit and loss account of the current financial year. If any balance remains in the Unapplied Interest Income NBA or Provision Income NBA after adjusting the loss from the sale by the amount retained in the Unapplied Interest Income NBA and Provision Income NBA against the said asset, it must be directly transferred to the Profit and Loss Account. Under no circumstances can the said amount be transferred to the Income Account of the current year. If the sale price of the Non-Banking Assets (NBA) is less than its book value, the following procedures must be completed at the time of sale:

1. Determining the reason for the decrease in value;
2. Re-examining how the asset was valued when included in the bank's accounts;
3. Checking if there was any negligence on the part of the concerned official during the valuation when included as Non-Banking Assets (NBA);
4. Determining responsibility in the sub-branch operations.

After completing the appropriate procedure by the Internal Audit Department of the bank, the Management Committee must be presented for approval after determining responsibility in the sub-branch operations.

b) In the case of using Non-Banking Assets (NBA) in own banking operations: If any part (asset) of the Non-Banking Assets (NBA) is used in own banking operations, the said asset must be transferred from Non-Banking Assets (NBA) to the bank's Fixed Assets with the approval of the Management Committee, mentioning the reason and justification for the use. In this case, if there is any Unapplied Interest Income NBA or Provision Income NBA against the said Non-Banking Assets (NBA), it must be directly transferred to the Profit and Loss Account, and under no circumstances can the said amount be transferred to the Income Account of the current year. In this case, if the market value of the asset is determined to be less than the book value, the procedure mentioned in 5(a)(ii) must be completed, and if the market value is more than the book value, the excess value must be transferred to the Revaluation Reserve Account.

6. Disclosure: After inclusion of Non-Banking Assets (NBA) in the bank's accounts, the holding period of the asset must be shown separately account-wise in the bank's financial report (Financial Statement). In addition, income-generating and non-income-generating assets among such assets must be shown separately.

7. Accounting: After completing all processes mentioned in the circular regarding the inclusion of Non-Banking Assets (NBA) in accounts, the examples mentioned in Annexure-C must be followed in the accounting of this matter.

8. Reporting: Information regarding Non-Banking Assets (NBA) must be submitted to the Department of Off-Site Supervision of Bangladesh Bank in the format fixed by the said department on a quarterly basis by the bank.

9. These instructions are issued under the powers conferred by Section 45 of the Bank Companies Act, 1991.

These instructions will come into force immediately.

Yours faithfully, (Md. Ali Akbar Farazi) Deputy Governor Phone: 9530252

Annexure-C Accounting process for inclusion of Non-Banking Assets (NBA) in the bank's accounts through loan adjustment:

Example-1: In the context of filing a case in the Money Loan Court for recovery of dues from Mr. 'A', the bank acquires ownership of the mortgaged asset under Section 33(7) of the Money Loan Court. The amount of the said loan position is 5,000 Taka. The amount of Unapplied Interest Suspense Account against the said loan is 1,200 Taka, and the amount of Provision held against that loan is 1,500 Taka. After calculating after acquiring ownership of the mortgaged asset under Section 33(7) of the Money Loan Court, it is found that the amount of unapplied interest on the said loan is 2,000 Taka.

a) In this case, first, the total receivable of the bank must be calculated. The amount of the total receivable of the bank will stand at 7,000 Taka in total with unapplied interest of 2,000 Taka. For including the said unapplied interest in the account, the following entry must be made.

Unapplied Interest Suspense A/c Dr. 2,000 To Unapplied Interest A/c 2,000

b) Along with determining the total receivable of the bank, the value of the received mortgaged asset must be determined in the context of the court's verdict. Let us assume that the said mortgaged asset is Land and its market value (determined according to the instructions in Serial No. 1 mentioned in this circular) is determined to be 8,000 Taka. In this case, according to Serial No. 2(a) mentioned in this circular, to include Non-Banking Assets in the account through loan adjustment, the following entry must be made.

Non-Banking Assets-Land Dr. 7,000 To Unapplied Interest A/c 7,000

(In this case, even though the market value of the mortgaged asset is higher than the total loan position, the said excess amount cannot be included in the account.)

c) If the market value of the said mortgaged asset is determined to be 6,000 Taka. In this case, according to Serial No. 2(b) mentioned in this circular, to include Non-Banking Assets in the account through loan adjustment, the following entry must be made.

Non-Banking Assets-Land Dr. 6,000 To Unapplied Interest A/c 6,000

(In this case, since the market value of the mortgaged asset is less than the total loan position, the loan position of 1,000 Taka (7,000-6,000) will remain in the bank's accounts as unadjusted, and the borrower will be considered a defaulter.)

d) If the loan is fully adjusted, the following entry must be made for the adjustment of Unapplied Interest and Provision.

i) For Unapplied Interest- Unapplied Interest Suspense A/c Dr. 3,200 To Unapplied Interest Income NBA A/c 3,200

(1,200 + 2,000)

ii) For Provision Provision A/c Dr. 1,500 To Provision Income NBA A/c 1,500

iii) If the loan position is not fully adjusted, i.e., if there is a loan position of 1,000 Taka, the following entry must be made for Unapplied Interest and Provision.

i) For Unapplied Interest- Unapplied Interest Suspense A/c Dr. 2,200 To Unapplied Interest Income NBA A/c 2,200

ii) For Provision Provision A/c Dr. 1,500 To Provision Income NBA A/c 1,500

(In this case, since the loan position is not fully adjusted, i.e., a loan position of 1,000 Taka remains, an equal amount must be kept in Unapplied Interest and/or Provision. In the mentioned example, the entire amount of Provision is transferred to the Provision Income NBA Account, and 2,200 Taka of Unapplied Interest is transferred to the Unapplied Interest Income NBA Account, leaving the remaining 1,000 Taka in the Unapplied Interest Account. Any bank may choose to transfer 500 Taka of Provision to the Provision Income NBA Account and keep the remaining 1,000 Taka in the Provision Account, and transfer the entire amount of Unapplied Interest to the Unapplied Interest Income NBA Account.)

Accounting process for inclusion of Non-Banking Assets (NBA) in the bank's balance sheet against written-off loans:

Example-2: In the context of filing a case in the Money Loan Court for recovery of dues of a written-off loan in the name of Mr. 'A', the bank acquires ownership of the mortgaged asset under Section 33(7) of the Money Loan Court. At the time of writing off, the amount of the loan position (amount of receivable) was 3,000 Taka. After calculating after acquiring ownership of the mortgaged asset under Section 33(7) of the Money Loan Court, it is found that the amount of unapplied interest on the said loan is 1,000 Taka.

a) In this case, the total receivable of the bank from Mr. 'A' will stand at 4,000 Taka (3,000 + 1,000) Taka.

b) If the market value of the mortgaged asset (Land) (determined according to the rules mentioned in Serial No. 1) is fixed at 5,000 Taka, then according to Serial No. 3(a) of the policy, the following entry must be made.

Non-Banking Assets-Land Dr. 4,000 To Provision Income NBA A/c 4,000

(In this case, even though the market value of the mortgaged asset is higher than the total loan position, the said excess amount cannot be included in the account.)

c) If the market value of the mortgaged asset (determined according to the rules mentioned in Serial No. 1) is fixed at 2,800 Taka, then according to Serial No. 3(b) of the policy, the following entry must be made.

Non-Banking Assets-Land Dr. 2,800 To Provision Income NBA A/c 2,800

(In this case, since the market value of the mortgaged asset is less than the total loan position of the written-off loan, the position of the written-off loan of 1,200 Taka (4,000-2,800) will remain, and the borrower will be considered a defaulter.)

Accounting process regarding the sale of Non-Banking Assets (NBA):

Example-3: The book value of a Non-Banking Assets-Land of 'A' Bank is 7,000 Taka. The amount of Unapplied Interest Income NBA against that asset is 3,200 Taka, and the amount of Provision Income NBA is 1,500 Taka.

a) If the asset is sold for 8,000 Taka, the following entry must be made.

i) For the sale of the asset- Cash A/c Dr. 8,000 To Non-Banking Assets-Land 7,000 To Profit and Loss A/c 1,000

ii) For Unapplied Interest Income NBA and Provision Income NBA- Unapplied Interest Income NBA A/c Dr. 3,200 Provision Income NBA A/c Dr. 1,500 To Profit and Loss A/c 4,700

b) If the asset is sold for 6,500 Taka, the following entry must be made.

i) For the sale of the asset- Cash A/c Dr. 6,500 Provision Income NBA A/c Dr. 500 To Non-Banking Assets-Land 7,000

ii) For the remaining part of Unapplied Interest Income NBA and Provision Income NBA- Unapplied Interest Income NBA A/c Dr. 3,200 Provision Income NBA A/c (1,500-500) Dr. 1,000 To Profit and Loss A/c 4,200

c) If the asset is sold for 2,000 Taka, the following entry must be made.

Cash A/c Dr. 2,000 Unapplied Interest Income NBA A/c Dr. 3,200 Provision Income NBA A/c Dr. 1,500 Loss on Sale of NBA (Unapplied Interest) Dr. 300 To Non-Banking Assets-Land 7,000

Accounting process regarding the use of Non-Banking Assets (NBA) in banking work:

Example-4: The book value of a Non-Banking Assets-Land of 'A' Bank is 7,000 Taka. The amount of Unapplied Interest Income NBA against that asset is 3,200 Taka, and the amount of Provision Income NBA is 1,500 Taka. If the bank uses the said asset in its own banking work, the following entry must be made.

a) In this case, if the market value of the asset is determined to be 8,000 Taka-

i) For transfer as Fixed Assets- Fixed Assets-Land Dr. 8,000 To Non-Banking Assets-Land 7,000 To Revaluation Reserve-Land 1,000

ii) For adjustment of Unapplied Interest Income NBA and Provision Income NBA- Unapplied Interest Income NBA A/c Dr. 3,200 Provision Income NBA A/c Dr. 1,500 To Profit and Loss A/c 4,700

b) In this case, if the market value of the asset is determined to be 6,000 Taka-

i) For transfer as Fixed Assets- Fixed Assets-Land Dr. 6,000 Provision Income NBA A/c Dr. 1,000 To Non-Banking Assets-Land 7,000

ii) For adjustment of Unapplied Interest Income NBA and Provision Income NBA- Unapplied Interest Income NBA A/c Dr. 3,200 Provision Income NBA A/c Dr. 500 To Profit and Loss A/c 3,700