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Provisioning rules for banks are getting toughened under a new model that requires bankers to estimate potential credit losses in advance to help determine proper provisions.
Bangladesh Bank (BB) is set to introduce the IFRS 9-based Expected Credit Loss (ECL) provisioning framework avowedly as part of efforts to modernise the country's banking sector and align it with international financial reporting standards (IFRS).
According to the implementation guidance issued Sunday by the central bank, the new framework will come into effect both for funded and non-funded credit facilities from January 1, 2028 for all scheduled banks in Bangladesh.
The rules will later apply to other financial instruments from January 1, 2029.
Currently, banks classify loans and maintain provisions under BRPD Circular No. 15 of 2024, which follows a rules-based approach based on the incurred-loss model. Under the new system, banks will adopt a forward-looking Expected Credit Loss model that requires them to estimate and recognize potential credit losses in advance.
Officials say the reform will allow banks to identify risks earlier and maintain more prudent provisions against possible loan losses.
Seeking anonymity, a BB official has said the shift marks a significant departure from the current system, which relies on an incurred-loss approach where provisions are typically made only after loans show clear signs of deterioration.
Under the new framework, he says, banks will instead be required to estimate potential losses in advance by incorporating macroeconomic indicators such as GDP growth, inflation and interest-rate trends into their credit-risk assessments.
Under the IFRS 9 framework, credit exposures will be categorized into three stages. Performing loans will fall under Stage 1, where provisions will be calculated based on a 12-month expected credit loss. Loans showing a significant increase in credit risk will be placed in Stage 2 requiring provisions based on lifetime expected credit losses. Stage 3 will include credit-impaired exposures, which will also require lifetime loss provisioning.
The framework of operational rules will also extend provisioning requirements to off-balance-sheet exposures, including loan commitments, guarantees and unused credit lines, ensuring a more comprehensive assessment of banks' credit risks.
In addition, interest-income recognition will be linked to the stage classification of credit exposures, allowing a more accurate reflection of asset quality and bank earnings.
Banks will need to upgrade their data infrastructure and risk-modelling systems to implement the framework, while the central bank will provide regulatory guidance and supervisory support to ensure a smooth transition.
Talking to FE, Managing Director and CEO of NRBC Bank PLC Dr. Md. Touhidul Alam Khan, FCMA, opined that the adoption of IFRS 9 and the ECL framework is a watershed moment for Bangladesh's banking sector. By strictly adhering to a structured roadmap and prioritising institutional capacity building, banks can ensure a seamless migration into this new provisioning system. "This transition goes beyond mere compliance--it will fortify the financial health of our institutions, reinvigorate investor confidence, and underpin the overall economic stability of the nation," he said.
As the sector embarks on this transformative journey, he adds, Bangladesh is poised to emerge as a more resilient, transparent, and globally competitive financial player.
"While the path ahead presents challenges, the long-term dividends-enhanced stability, greater transparency, and deepened trust-are invaluable," the seasoned banker hopes.
Dr. Khan further informed the shift to IFRS 9 signals a new era aligned with global standards. By pivoting to a forward-looking approach in credit-loss provisioning, banks can proactively manage risk and foster stronger stakeholder trust.
Successful implementation demands rigorous planning, robust infrastructure, and a dedication to skills development in each bank. Ultimately, this is more than a procedural change--it represents a fundamental paradigm shift for the banking industry in Bangladesh, according to him.
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