The true financial position of the institution may not be ascertained with reasonable assurance due to the apparent impact of window dressing in the reporting of classified loans. A significant portion of loans that were previously classified as non-performing or adversely classified appears to have been rescheduled and subsequently reported as performing loans, following payment of only a nominal 1% down payment. Consequently, the reported level of non-performing loans (NPLs) may not reflect the underlying credit risk and actual quality of the loan portfolio.
The practice of allowing substantially overdue or distressed loans to regain performing status through rescheduling, without adequate evidence of the borrowers’ genuine repayment capacity and sustainable cash flows, raises significant concerns regarding the substance over form of loan classification. Such treatment may result in the temporary suppression of reported NPLs and the understatement of the institution’s actual credit-risk exposure.
In our assessment, a substantial proportion of long-term rescheduled loans may ultimately prove difficult to recover. If the underlying repayment capacity of the borrowers has not materially improved, there is a significant risk that these loans may again become non-performing in the future. Accordingly, the institution’s actual NPL position could be materially higher than the amount currently reported in the financial statements.
Therefore, management and the Board should undertake a comprehensive and independent assessment of all rescheduled and restructured loans, particularly long-term rescheduled loans, based on borrowers’ current financial capacity, repayment history, collateral realizability, cash-flow projections and other relevant credit-risk indicators. The assessment should also consider whether the reported classification and corresponding loan-loss provisions adequately reflect the substance and economic reality of the underlying exposures, rather than merely their formal rescheduling status.
Writer: Independent Director ,Bangladesh Commerce Bank Limited.
