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EXECUTIVE SUMMARY

Loans comprise the most important asset as well as the primary source of earning for the banking
financial institution. On the other hand, this (loan) is also the major source of risk for the bank
management. A prudent bank management should always try to make an appropriate balance
between its in return and risk involved with the loan portfolio. An unregulated banking financial
institution might be fraught with unmanageable risks for the purpose of maximizing its potential
return. In such a situation, the banking financial institutions might find itself in serious financial
distress instead of improving its financial health. Consequently, not only the depositors but also
the general shareholders will be deprived of their money from the bank. The deterioration of loan
quality also affect the intermediary efficiency of the financial institutions and thus the economic
growth process of the country. This is the reason for which the banking financial institutions are
being regulated in all countries. The banking financial institutions are also the most regulated
among all types of financial institutions in all countries, because of their substantial role in the
payment mechanism (in addition to protecting the loan portfolio from decaying). But in the view
point of reformation the above regulations are being changed to match with the global and
situational requirements. Even credit risk grading system is changed in 2006 and introduced
since 1st April,2006. Its impact is not still evaluated. As a student of finance I find interest to
conduct a study on the topic.

TABLE OF CONTENTS
PAGE

CHAPTER ONE

1. I N T R O D U C T I O N

1.1 PRELUDE
1.2. BACKGROUND OF THE STUDY
1.3 Objectives of the study
1.4 Scope of the study
1.5 Methodology of the study
1.6 Limitations of the Study

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CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Historical Background
2.2 Characteristics Of Central Bank
2.3 Nature Of Central Banking
2.4 Comparison between Central Banking and Commercial Banking
2.5 Functions Of A Central Bank

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CHAPTER THREE
3.1 BANGLADESH BANK
3.2 Objectives of Bangladesh Bank
3.3 Function Of Bangladesh Bank
3.3.1 General Function / Activities
3.3.2 Controlling Activities
3.3.3 Promotional Activities
3.4 Role Of Bangladesh Bank
Interest rates
CRR
SLR
Bank Rate
EDF
3.5 CAMEL RATING
3.6 Management of Bangladesh Bank
3.6.1 Board of Directors

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CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

3.6.2 Departments of Bangladesh Bank


3.6.3 Branches of Bangladesh Bank
3.6.4 Scheduled Banks
3.6.5 Financial Institutions
3.7 Human Resource Management In Bangladesh Bank
3.7.1 Recruitment
3.8 Organogram of BB

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CHAPTER FOUR
4.1.Definition of Credit Risk Grading
4.2. Functions of Credit Risk Grading
4.3. Use of Credit Risk Grading
4.4. Number And Short Name Of Grades Used In The CRG
4.4.1 GRADES OF CRG
a). Superior
b). Good
c). Acceptable
d). Marginal/Watchlist
e). Special Mention
f). Substandard
g). Doubtful
h). Bad & Loss

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CHAPTER FIVE
5.1 CREDIT RISK GRADING PROCESS
5.2 EARLY WARNING SIGNALS (EWS)
5.3 EXCEPTIONS TO CREDIT RISK GRADING
5.4 CREDIT RISK GRADING REVIEW
5.5 MIS ON CREDIT RISK GRADING
5.6 FINANCIAL SPREAD SHEET
APPENDIX-A
APPENDIX-B
APPENDIX-C
APPENDIX-D
APPENDIX-E

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CHAPTER SIX

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

STEPS USED IN CREDIT RISK GRADING ( CRG)


6.1 Identify all the Principal Risk Components
6.2 Allocate weightages to Principal Risk Component s
6.3 Establish the Key Parameters
6.4 Assign weight ages to each of the key parameters
6.5 Input data to arrive at the score on the key parameters
6.6 Arrive at the Credit Risk Grading based on total score obtained

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CHAPTER SEVEN
7.1. CREIDT RISK MANAGEMENT IN PAKISTAN
Components of credit risk management
Board and Senior Managements Oversight
Organizational Structure
Systems and Procedures of Credit Origination
Limit setting
Credit Administration

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Measuring credit risk.

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Internal Risk Rating

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Credit Risk Monitoring & Control

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Risk review

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7.2. CR. RISK MANAGEMENT IN INDIA


MANAGEMENT OF LOANS AND ADVANCES
Background

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Working Capital requirements UPTO Rs. 1 crore

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Working Capital Requirements ABOVE Rs. 1 crore

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3.1 Method of Assessment


3.2 Norms for Inventory/Receivables
3.3 Classification of Current Assets and Current Liabilities
3.4 Bills Discipline
3.5 Grant of Ad hoc Limits
3.6 Commitment Charge
3.7 Consortium Arrangement
3.8 Syndication of Credit

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3.9 Loan System for Delivery of Bank Credit


3.9.2 Loan Component and Cash Credit Component
3.9.3 Ad hoc Credit Limit
3.9.4. Sharing of Working Capital Finance
4.0 Credit Administration
4.1 No Objection Certificate
4.2 Opening of Current Accounts
4.3 Certification of Accounts of Non-Corporate Borrowers by
Chartered Accountants

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CHAPTER EIGHT

RESEARCH AND ANALYSIS


INCOME STATEMENT
CRG SCORE SUMMARY
Working Notes

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CHAPTER. NINE

FINDINGS AND CONCLUSION


7.0. Finding of the study
7.1 The situation Before Credit Risk Grading started
7.2 Measures taken by Banks
7.3 Implementation status
7.4 Problems of Implementation
7.5 Achievement of the Measures
7.6 Causes of Non-fulfillment of Objectives
7.7. Recommendation
7.8. Conclusion

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ANNEXURE
ABBREVIATION
Bibliography
Websites

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CHAPTER ONE

INTRODUCTION
1.1 PRELUDE
Bangladesh Bank, the Central Bank of the country, pursued liberal monetary policy since
Independence mainly for reconstruction and rehabilitation requirements. In 1974/1975 under
inflationary pressure the measures were shifted to tight monetary policy, interests rates were
restructured, bank rate was enhanced, and Tk. 100 denomination was demonetized. From late
1970 to late 1980 liberal monetary policy was pursued once again. The policy package included
administered interest rate, Credit ceiling and directed credit programs, combined with generous
refinancing facilities on loans to priority sectors. Most of the nationalized commercial banks and
DFIs faced massive loan defaults, financial losses and erosion of their capital base.

In this backdrop, the Government in 1986 appointed a National Commission on Money, Banking
and Credit with representatives from Bangladesh Bank to prepare recommendations for financial
sector More over, in order to make necessary recommendations to ensure proper management
and to improve efficiency of the nationalized banks, and especially to create better environment
for smooth disbursement and recover of loans, a high level Task Force was set up. Consecutive
divesting floods of 1987 and 1988, and other national calamities created some problems for
monetary authority. The credit measures had to be liberal to ensure unhindered production
process in the agriculture and industrial sectors. In the field of agriculture credit disbursement
and repayment periods were rescheduled and TK 100 core agriculture loan program was
launched. Special credit program was adopted for rehabilitation of the industrial sector and

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

interference of the central bank in loan sanction/ rescheduled. In the light of recommendations
presented by the National Commission on Money, Banking and Credit and on the basis of an
IDA study, Bangladesh Bank on behalf of the Government formulated a program of Financial
Sector. The main objective of the Financial Sector Reform Program (FSRP) is to ensure a more
effective role of banking sector in supporting the countrys development programs, and in
mobilization and allocation of resources. The desired objective of the FSRP is expected to be
achieved through:
a) Adoption of a flexible market oriented interest rate policy for gradual removal of the
allocative efficiency of scare financial resources.
b) Providing incentives for lending to priority sectors and making subsidies in these sectors
explicit and transparent.
c)

Promoting better monetary management by moving towards flexible and indirect


instruments of monetary control.

d) Putting the banking sector on a sound financial footing by restructuring the capital and
establishing appropriate accounting principles of banks, and strengthening Central Banks
supervisory and regulatory role in the banking system.
e) Improving of loans through establishment of efficiency recovery procedures and stricter
legal environment and
f) Improving the capital market of the country.

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

The ultimate aim of the FRSP is to gradually move towards a market- oriented competitive
economy, ensuring thereby a larger role of the private sector. Several Reform for improvement of
loan and making proper loan classification procedure been introduced. Bangladesh Bank has
changed loan classification procedure to place primary responsibility for classification on the
banks and focus bank inspection attention on monitoring these classifications. Bangladesh Bank
introduced new loans grading system named Credit Risk Grading Manual since 1st April 2006.

In the country, now 49 Banks (Nationalized Commercial Banks-4, Specialized Commercial


Banks-5, Private & Foreign Banks-40 ) are functioning under the guidance of Bangladesh Bank.
All the credit risk analysis systems are developed by Bangladesh Bank for Banks use. I think the
systems are very useful to take credit related decision.

1.2.

BACKGROUND OF THE STUDY

Credit risk grading is an important tool for credit risk management as it helps the Banks &
financial institutions to understand various dimensions of risk involved in different credit
transactions. The aggregation of such grading across the borrowers, activities and the lines of
business can provide better assessment of the quality of credit portfolio of a bank or a branch.
The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as
post-sanction stage.

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend
or not to lend, what should be the loan price, what should be the extent of exposure, what should
be the appropriate credit facility, what are the various facilities, what are the various risk
mitigation tools to put a cap on the risk level.

At the post-sanction stage, the bank can decide about the depth of the review or renewal,
frequency of review, periodicity of the grading, and other precautions to be taken.
Having considered the significance of credit risk grading, it becomes imperative for the banking
system to carefully develop a credit risk grading model which meets the objective outlined
above.
The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank has been
in practice for mandatory use by the Banks & financial institutions for loan size of BDT 1.00
crore and above. However, the LRA manual suffers from a lot of subjectivity, sometimes creating
confusion to the lending Bankers in terms of selection of credit proposals on the basis of risk
exposure. Meanwhile, in 2003 end Bangladesh Bank provided guidelines for credit risk
management of Banks wherein it recommended, inter alia, the introduction of Risk Grade Score
Card for risk assessment of credit proposals.

Since the two credit risk models are presently in vogue, the Governing Board of Bangladesh
Institute of Bank Management (BIBM) under the chairmanship of the Governor, Bangladesh
Bank decided that an integrated Credit Risk Grading Model be developed incorporating the
significant features of the above mentioned models with a view to render a need based simplified

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and user friendly model for application by the Banks and financial institutions in processing
credit decisions and evaluating the magnitude of risk involved therein.

Bangladesh Bank expects all commercial banks to have a well defined credit risk management
system which delivers accurate and timely risk grading. This manual describes the elements of an
effective internal process for grading credit risk. It also provides a comprehensive, but generic
discussion of the objectives and general characteristics of effective credit risk grading system. In
practice, a banks credit risk grading system should reflect the complexity of its lending activities
and the overall level of risk involved.
Bangladesh financial system has started adopting wide ranging reform measures with a view to
enforcing financial discipline and improving financial efficiency.

The loan regulations in

the context of Bangladesh financial system will comprise the following :


i)

Loan Classification and Provisioning.

ii)

Loan insiders and Connected Parties (The Companies Act-1991 with amendments).

iii)

Lending Risk Analysis (LRA).

iv)

Performance Planning System (PPS)

v)

New Loan Ledger Card (NLLC).

vi)

Large Loan Reporting System (LLRS)

vii)

Credit Information Bureau (CIB)

viii) Off-site supervision


ix)

Interest Rate Deregulation (Loan Pricing)

x)

Risk-Based Capital Adequacy.

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xi)

Artha Rin Adalat Act-1990 with amendments.

xii)

Bankruptcy Act-1997.

But in the view point of reformation the above regulations are being changed to match with the
global and situational requirements. Even credit risk grading system is changed in 2006 and
introduced since 1st April,2006. Its impact is not still evaluated.
1.3 Objectives of the report
The objectives of the study are:
a) To identify the different forms of bank credit in Bangladesh
b) To familiarize with techniques of selecting the borrowers.
c) To familiarize with techniques of credit appraisal methods.
d) To familiarize with various operational procedure.
e) To provide reliable financial information about economic resources and obligations of an
enterprise.
f) To identify the ways and means for improving the quality of loan portfolio and
operational efficiency in banks

1.4 Scope of the report:


This study has been made on credit analysis techniques of effective inspection & supervision of
commercial banks by Bangladesh Bank. However the system is on the process of developing
with the help of foreign financial sector experts. Literatures are not sufficiently available. But the

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issue is multidimensional and vital. So, the study is limited on the Manuals, Acts, Off-site
Reports, Forms used by Banks and etc.

1.5 Methodology of the report:


The research used in the study is shown (Figure-1) schematically as follows:
Figure-1

Determination of the objectives

Survey of Literature

Identification of sources of data

Primary
Data

Secondary
Collection of data

Data

Analyzing of data

Identification of problem Areas

Summary & Conclusion

1.6 Limitations of the report:

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The study suffers from the following limitations:


1.

Borrowers are not interested to supply any data and information about their loans
advances taken from the banks.

2. Borrowers data in Banks is confidential which is not possible to observe.


3. As the Credit Risk Grading Manual is just introduce on 1st April,2006, its created impacts
are not possible to observe.
4.

Sylhet is a deposit oriented but not invested oriented area. So the primary data about impact
of bank credit is not sufficiently available.

5.

Shortage of time and money.

CHAPTER---TWO

LITERATURE REVIEW
2.1 Historical Background
According to Will Rogers, there have been three great inventions since the beginning of time:
fire, the wheel and central banking. Although it might be seriously doubted if central banking
could be ranked so high, it can hardly be questioned that a central bank occupies a central or

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pivotal position in the monetary and banking structure of the country in which it operates. To
meet the objective of monetary management, within the national framework, central banking has,
of late, achieved a new dignity and status which it had certainly not possessed before.

2.2 CHARACTERISTICS OF CENTRAL BANK


In practice, a central bank performs not one but several functions and all those functions are
interrelated and complementary. De kock, in his famous book, central banking, has defined a
central bank being generally recognized as a bank which constitutes the apex of the monetary
and banking structure of its country. He has enumerated seven important functions of a central
bank which it performs as best as it can in the national economic interest. This function
according to DE Kock, are to act as bank of issue; as the governments banker, agent and adviser,
as the custodian of cash reserves of the commercial banks; as the custodian of nations reserves of
international currency; as the bank of rediscount and the lender of last resort; as a bank of central
clearance, settlement and transfer; and as the controller of credit.

The above stated functions of a central bank clearly justify its need and importance. In the words
of Kent, As the special powers of the central banks are designed to enable it to control the
volume of hand-to-hand money and bank credit available in the country, it may be defined as an
institution which it charged with the responsibility of managing the expansion and contraction of
the volume of money in the interests of the general public welfare.

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2.3 NATURE OF CENTRAL BANKING


The significance of central bank lies in its function of managing the monetary system of the
country, internally as well as externally. By the nature of its business, the general bank is
intimately connected with the banking system money market of the country and can definitely
regulate the monetary system of the country in the general interest of the nation. A central bank
can act in the public interest more effectively if it is guided by some principles. These are as
follows:
1. A central bank is not primarily a profit seeking enterprise: Because the applications
of the central bank are such as profoundly to affect the monetary and credit situation, they
cannot undertaken solely for the purpose of making profit. This however, does not mean
that the central bank should suffer losses while working in national interests. What it
implies is that the profit motive should only be a secondary consideration, and not the
primary motive for central banking operations.

2. A central bank acts as the lender of the money market and supervises, controls, and
regulates the activities of the commercial banking system:
A central bank is recognized as the apex monetary institution or the highest financial
authority whose main objective is to help, control and stabilize the monetary and banking
system of the country in the national economic interest. As bankers bank it confines the
major part of the activities to transactions with other baking institutions. The central bank
must be in a position to control the size of bank reserves as a means of controlling the
volume of money in circulation.

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3. There must always be a close working relationship between the central bank and the
national government: Although the central bank is normally endowed with the capacity
to regulate the volume of bank notes and demand deposits; that capacity is subject to the
policy and the actions of the government. The government now hardly be expected to
surrender their power of policy formulation to the central banks. The latter can serve a
useful purpose if it is accepted as the principal financial adviser to the Government. In the
words of Kent, A close working relationship must continuously exist between the two
institutions, so that one will not embark upon a course of action in direct conflict with
aims and objectives of the other.

2.4 Comparison between Central Banking and Commercial Banking

Both the central bank and the commercial banks are basically monetary institutions. Both
deal money in one form or the other. The central bank creates money, whereas the
commercial banks deal in money. The central bank creates credit when it issues paper
currency without keeping securities of equivalent value in reserves. Likewise, the
commercial banks also create credit on the basis of their derivative deposits. Both the
institutions extend short term loans only because this helps them in maintaining liquidity
in their resources. But the similarities end here. A central bank is an organization with a
distinct entity and with functions different from those of commercial banks.

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The central bank is different from commercial banks in the following respects:

1. the central bank is the apex institution of the monetary and banking system of the
country. It controls the monetary system and the overall credit operations of the
banks. On the contrary, the commercial bank is only a constituent unit of the banking
system which is subordinate to the central bank.
2. the central bank posses the monopoly of note-issue. There was a time when certain
commercial banks also used to issue notes. This right is no longer held by commercial
banks now.
3. the central bank is not a profit making institution. Its main concern is to promote the
general economic policy of the government. It acts only in the public interest without
regard to profit as a primary consideration. As against this, the primary objective of
commercial banks is to earn profits for its share-holders.
4. The central bank maintains the foreign exchange reserves of the country and attempts
to maintain the stability in the exchange rates. The commercial banks only deal in
foreign exchange under the directions of the central bank. They do not have the
responsibility of maintaining the foreign exchange reserves and stability in exchange
rates.
5. the central bank is normally owned by the state, while commercial banks are mostly
privately owned. State ownership of commercial banks is not considered to be as
much essential as that of the central bank.

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6. the central bank does not deal directly with the public. The central bank mainly deal
with the government and the banking institutions. Hence, it cannot undertake the
functions normally performed by the commercial banks.
7. the central bank is closely related to the government as its banker and the financial
adviser. It is generally an organ of the government and its actions are closely
coordinated with those of the other departments, particularly with the department of
finance or the treasury. Commercial banks on the other hand act as bankers and
advisers to the general public only.
8. the central bank has a special relation with the commercial banking system of the
country. It is given special powers to control, supervise and regulate the working of
the latter. The commercial banks are required to act in accordance with the directives
issued by the central bank.
9. the central bank functions as a bankers bank. As a lender of the last resort, it provides
rediscounts and advances to the commercial banks in times of credit stringency. It
also performs the clearing house functions for the benefit of banking system.
Commercial banks maintain their cash reserves and deposits with the central banks.
10. the central bank does not compete with the central banks. If the central banks were to
compete with the commercial banks, it would be departing from its functions as the
bankers bank and as a lender of the last resort. The commercial banks, on the other
hand, are likely to compete with each other in order to maximize their business and
profits.

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2.5 FUNCTIONS OF A CENTRAL BANK


The structure, management and policies of central banks differ from country to country.
The methods or techniques of the central banks also vary in kind and in degree as
between one period and another, depending upon the nature of the economic conditions
in the different countries. However underneath all these variations there lies a large
measure of agreement in practice with regard to certain functions which are commonly
performed by the central banks:

The performance of various functions by a central bank is based on its powers with respect to
the issuance of notes, its powers as controller of banking reserves, and its position as principal
financial adviser of the national government.

1. Bank of Issue: The issue of paper money is the most important function of the central
bank. In fact, the privilege of note issue was almost everywhere associated with the origin
and development of central banks. Central bank is known as the bank of issue until the
beginning of the twentieth century.
De kock has mentioned four reasons for the concentration of note issue in a
central bank. These are:
(1) Uniformity in note circulation to attain effective state supervision;
(2) Control over undue credit expansion by the commercial banks.
(3) To give distinctive prestige to the note issue, which is of immense value
particularly during a crisis; and

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(4) To provide for participation of the state in the profits of the central bank.

2. Banker, Agent and Adviser to the Government:


A central bank functions as a banker to the government of the country. In this capacity it
conducts the banking accounts of govt. departments, institutions and enterprises. It makes
short term advances to the government in normal conditions, and extra ordinary advances
during a depression, war, or other emergency. It carries out the government transactions
involving purchases and sales of foreign currencies. As the governments banker the
central bank actually performs the same functions as the commercial bank ordinarily
performs for its customers.

3.

Custodian of the nations Reserves of international Currency:


A central bank holds reserves of gold and foreign currencies mainly for two purposes:
(1) to safeguard the value of the national currency and to maintain the monetary
standard adopted by the state; and
(2) to have at its disposal a reserve of international currency with a view to
meeting at any time an adverse balance of payments and maintaining the
external value of its currency.

4. Custodian of the cash reserves of the commercial banks: The commercial banks in
the country keep a part of their cash balances s deposits with the central bank, either
voluntarily because of convention or because of some legal obligation. The central bank

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function of holding the cash reserves of commercial banks is so important that many of
the central banks have come to be called as Reserve Banks.

5. Lender of the last resort:


The expression lender of the last resort was coined by Bagehot. It implied the
assumption of the responsibility of meeting, directly or indirectly, reasonable demands
for accommodation from commercial banks. In the earlier stages, the central banks
performed this function most ungenerously. As a lender of last resort, the central bank
gives short term accommodation to commercial banks, mostly by rediscounting their
eligible bills. This aid or accommodation is given at the requests of the commercial
banks. In order to prevent the commercial banks from abusing such facilities the central
bank normally imposes rigorous conditions upon its aid and charges a rate of interest
which is generally above other short term interests rates.

6. Central clearance, Settlement and Transfer:


As the central bank is the custodian of cash reserves of the commercial banks; it can
easily assume the function of acting as a clearing house or as a settlement bank for other
banks in the country. As all banks maintain their account with the central bank, the claims
of banks against one another are settled by simple transfer from and to their accounts. It
tends generally to strengthen the banking system of a country. It affords the central bank
a valuable means of ascertaining the relative trends of the operations of individual banks.

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7. Controller of Credit:
The control of credit is considered to be the main function of a central bank. De Kock
observes, it is the function which embraces the most important questions of central
banking policy and the one through which practically all the other functions are united
and made to serve a common purpose. The central bank purpose of note issue, the
management of government accounts, the custody of commercial banks cash reserves,
along with those of rediscount and the lender of the last resort, are requires centralized
control over both currency and credit.

8. Promoter of Economic Development:


The modern central bank is an institute responsible not only for the maintenance of
economic stability, it also performs a variety of developmental or promotional functions
which were regarded in the past as being outside the normal purview of central banking.
The main objective of a central banks monetary policy is to achieve growth with
stability within the framework of the general economic policy of the state. For the sake
of economic development a central bank should provide sufficient quantity of money
appropriate to growth process. A growing volume of production and investment cannot be
maintained without an increasing supply of money and credit. The money supply should
grow at least at a rate roughly equal to that of increase in real income. It may be essential
to mobilize domestic savings for productive uses and the flow of funds has to be guided,
qualitatively as well as quantitatively, to proper lines of investments.

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In a developing country, particularly, the central bank has important roles to play in the
process of development. The under developed economies have under developed money
markets where banking system is not properly organized. There are institutional gaps in
the money and capital markets which hinder economic growth. Thus promotion of sound,
organized, well integrated institutions and agencies of money and capital markets
becomes the important function of a central bank in a developing economy.

CHAPTER---THREE

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3.1 Bangladesh Bank.


Bangladesh Bank, the apex body of Financial Structural System, came into existence as the
Central Bank of Bangladesh with effect from December 16, 1971, through the Presidents Order
No 127 of 1972,under the name of Bangladesh Bank Order 1972. This order replaced the
State Bank Act, 1956(Act XXX111 of 1956) and the Bangladesh Bank (Temporary) Order
1971(A.P.O No.2 of 1971).

It is the statutory authority to regulate, control and facilitate

economic activities through proper formulation of Monetary Policy.

3.2 Objectives of Bangladesh Bank.

As the central bank of the country the objectives of Bangladesh Bank, as outlined in the
Bangladesh Bank Order 1972 are:
a. To regulate the issue of currency and the keeping of reserves;
b. To manage the monetary and credit system of Bangladesh with a view to stabilizing
domestic monetary value;
c. Preserving the par value of Bangladesh Taka;
d. Promoting and maintaining a high level of production, employment and real income in
Bangladesh and
e. Fostering growth and development of our productive resources in the best national
interest.

The above mentioned 5 points are discussed in brief:

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25

a. Regulating the issue of currency and the keeping of reserves:


To regulate the issue of currency and the keeping of reserves Issue of currency is exclusively
regulated by the central bank of any country. In our country, currency consists of Bank notes and
coins. Bank notes are issued by Bangladesh Bank and coins are issued by the Government.
Government can issue coins only through Bangladesh Bank. Keeping of reserves means keeping
of approved foreign exchange on behalf of the Government.

b. Managing the monetary and credit system :

To manage the monetary and credit system of Bangladesh with a view to stabilizing
domestic monetary value. Bangladesh Bank regulates and manages the monetary and credit
systems of the country as the guardian of the money market through its monetary policy
instruments like bank rate, reserve requirement for the scheduled banks, open market
operation, directed lending, moral persuasion etc. One of the aims of the monetary policy is
to contain the inflation at a reasonable level

c. Preserving the par value of Bangladesh Taka.


One of the important functions of the Bangladesh Bank, as a central Bank of the country is to
maintain a stable value of our currency in relation to other currencies. Because volatility of par
value of a currency in relation to other currencies may destroy competitive edge of a country in
foreign trade. At present the exchange rate of our currency is floating and decided by market.

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The role of Bangladesh Bank on the above three objectives are traditional for a central
bank. But the role of the Bangladesh Bank in achieving following objectives discussed
below are developmental ones.

d) Promoting and maintaining a high level of production, employment and real income in
Bangladesh.
The aim of the monetary policy pursued by Bangladesh Bank is to increase production,
employment and real income. Bangladesh Bank directs commercial banks to lend to the priority
sector of the economy at a concessional rate. It also releases fund for development activities.
Side by side, Bangladesh Bank also tries to keep the purchasing power of the people through its
monetary policy, so that real income of the people be increased or maintained.

e) Fostering growth and development of our productive resources in the best national
interest.

Bangladesh Bank, in close cooperation with the Government, releases funds for various
developmental projects and also ensures timely disbursement of fund for successful
implementation of the projects. Bangladesh Bank does also have its own projects in the field of
agriculture. Functions of Bangladesh Bank are also to research on economic condition of
Bangladesh, publish data on economic matters and advise the Government on its policy
formulation. Bangladesh Bank also plays a vital role to promote foreign trade of our country and
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27

remove Balance of Trade difficulties through its foreign exchange policies. So by these ways
Bangladesh Bank foster the growth and development of our productive resources.

3.3 FUNCTION OF BANGLADESH BANK

3.3.1 GENERAL FUNCTION / ACTIVITIES.

In order to achieve the objectives general function of Bangladesh Bank are as follows:

1. Issuance of notes: Ensure note circulation throughout the country to facilitate trade and
commerce. It maintains currency chest in 66 places throughout the country through
Sonali Bank.

2. Banker to other Banks: Receive statutory cash reserve requirement and extends loans to
the scheduled Banks. Often refinance, rediscounting facilities etc are provide to
scheduled Banks.

3. Banker to the Government: Accept money deposit without interest from the
Government and collection of money for the Government from local authorities, banks
and other persons. It also extends loans to Govt under ways and means head.

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4. Lender to the last resort : Through purchase, Sale and rediscount of Bill of exchange,
Promissory note, Treasury bills and Lending to the scheduled banks when required.

5. Clearing House facilities: Extends clearing house facilities to settle transactions between
member banks.

3.3.2 CONTROLLING ACTIVIES:

1. Credit Control: Formulate credit norms, restrict credit and facilitate credit to any specific
sector for national interest.
2. Formulation of monetary policy: Determine Bank rate, setting of interest rate on deposits
and investment, open market operation, credit restriction, statutory cash reserve
requirement, fixing minimum paid up capital requirement for a scheduled bank.
3. Foreign exchange regulation and liberalization: To ensure sufficient reserve of foreign
exchange, facilitate import business of the country and to restrict illegal outflow of
foreign.

3.3.3 PROMOTIONAL ACTIVITIES:

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It involves creation, promotion and maintenance of high level of production employment and
real income in Bangladesh. It is done through monetary policy, in the form of credit restrictions,
offering subsidy and participating with commercial banks in developing / uplifting of economic
activities through rural credit disbursement etc. Participation in promotional activities are as
follows:

To extend refinance facilities.


To finance industrial project.
To finance interest subsidy to the priorities sector.
To finance shrimp culture.
To finance Rural House Building.
To introduce 91 days Bangladesh Bank bill.
Contract with foreign agencies to have long term loan and facilitate
development activities through Banking channel.

3.4 ROLE OF BANGLADESH BANK

Bangladesh Bank, the Central Bank of the country, pursued liberal monetary policy since
Independence mainly for reconstruction and rehabilitation requirements. In 1974/1975 under
inflationary pressure the measures were shifted to tight money policy, interests rates were
restructured, bank rate was enhanced, and Tk. 100 denomination was demonetized. From late
1970 to late 1980 liberal monetary policy was pursued once again. The policy package included

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administered interest rate, Credit ceiling and directed credit programs, combined with generous
refinancing facilities on loans to priority sectors. Most of the nationalized commercial banks and
DFIs faced massive loan defaults, financial losses and erosion of their capital base. In this back
drop, the Government in 1986 appointed a National Commission on Money, Banking and Credit
with representatives from Bangladesh Bank to prepare recommendations for financial sector
More over, in order to make necessary recommendations to ensure proper management and to
improve efficiency of the nationalized banks, and especially to create better environment for
smooth disbursement and recover of loans, a high level Task Force was set up. Consecutive
devastating floods of 1987 and 1988, and other national calamities created some problems for
monetary authority. The credit measures had to be liberal to ensure unhindered production
process in the agriculture and industrial sectors. In the field of agriculture credit disbursement
and repayment periods were rescheduled and TK 100 core agriculture loan program was
launched. Special credit program was adopted for rehabilitation of the industrial sector and
interference of the central bank in loan sanction/ rescheduled. In the light of recommendations
presented by the National Commission on Money, Banking and Credit and on the basis of an
IDA study, Bangladesh Bank on behalf of the Government formulated a program of Financial
Sector. The main objective of the Financial Sector Reform Program (FSRP) is to ensure a
more effective role of banking sector in supporting the countrys development programs, and in
mobilization and allocation of resources. The desired objective of the FSRP is expected to be
achieved through:
a. Adoption of a flexible market oriented interest rate policy for gradual removal of the
allocative efficiency of scare financial resources.

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b. Providing incentives for lending to priority sectors and making subsidies in these sectors
explicit and transparent.
c. Promoting better monetary management by moving towards flexible and indirect
instruments of monetary control.
d. Putting the banking sector on a sound financial footing by restructuring the capital
and establishing appropriate accounting principles of banks, and strengthening Central
Banks supervisory and regulatory role in the banking system.
e. Improving of loans through establishment of efficiency recovery procedures and
stricter legal environment and
f. Improving the capital market of the country.
g. The ultimate aim of the FRSP is to gradually move towards a market- oriented
competitive economy, ensuring thereby a larger role of the private sector. Several
reform for improvement of loan and making proper loan classification procedure been
introduced. Bangladesh Bank has changed loan classification procedure to place primary
responsibility for classification on the banks and focus bank inspection attention on monitoring
these classifications. Bangladesh Bank introduced new loans grading system named Credit Risk
Grading Manual since 1st April 2006.

Interest rates on deposit and advances:


Bangladesh Bank introduced a market oriented flexible interest rate for the certain sectors within
which banks are free to determine their own rates, with effect from January 01 1990. Now
interest rate bands are mostly withdrawn.

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Here in the following table the average interest rate on deposits and advances of Scheduled Bank
from financial year 2002 to 2006 is shown:

Table-1

Table of Scheduled Banks interest rate:

Area of Interest
Interest rate on Deposits.
Interest rate on Advances.
Spread of Interest rate.

2002
6.7
13.2
6.5

2003
6.3
12.8
6.5

After June
2004
2005
5.7
5.6
11.0
10.9
5.3
5.3

2006
6.7
12.1
5.4

From table above it may be considered that the interest rate and the spread of interest rate is
decreasing gradually.

Cash Reserve Requirement (CRR)


The cash Reserve Requirement (CRR) for the scheduled banks with the Bangladesh bank has
been revised upward to 5.0 percent of their total demand and time liabilities from 1 october 2005,
which was 4.5% since March, 2005. It was 4.0% since 1st October 1999.
Issues:
a) level and remuneration of reserves (minimum).
b) Averaging of reserve (weekly or months).
c) Frequency of changes
d) Definition of base (no double counting).
e) Uniformity and coverage (for all deposits).
f) Penalty (prudential guidelines).
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Statutory Liquidity Ratio (SLR)


The Statutory Liquidity Ratio (SLR) for the scheduled Banks, except banks operating under
Islami shariah and the Specialized Banks has been revised upward in 01 October 2005 at 18.0
percent of their demand and time liabilities, excluding inter bank items. This rate is 10% for
Islami Banks.The specialized Banks are exempted from this arrangement.

Bank Rate:
The bank rate remained unchanged at 5% in FY06. This rate has been in effect since 6 November
2003.

Operation of the Export Development Fund (EDF)


Bangladesh Bank has a Fund of Foreign Currency to import of raw materials, accessories, spare
perts and packing materials for export production decreased in FY06. total disbursement from
EDF during FY06 stood at US$ 172.22m as against US$ 216.37m in FY05.The lion part of the
EDF is used in the export oriented garments sector. To reap the benefits of financial sector
reform monetary policy must be made consistent with fiscal policy of the Government. Besides
appropriate Human Resource Development measures should be taken.

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3.5 CAMEL RATING


Camel rating is the rating accorded to a bank through the analysis of five crucial dimensions of
that bank such as Capital Adequacy, Asset Quality, Management, Earning and Liquidity for the
determination of financial soundness of the bank. Each letter of the term CAMEL represents a
dimension of a bank under consideration. They are as follows:

C=Capital Adequacy
A=Asset Quality
M=Management
E=Earning
L=Liquidity

Each of the dimensions is rated on a scale of 1 through 5 and a composite rating is accorded to
each bank calculated on the basis of the evaluation of specific performance of each dimension
/component.

3.5.1 Special Features of CAMEL Rating System


CAMEL rating is for the internal use only by the central bank
CAMEL rating for each component is guidelines for the determination of financial
soundness of Banks.
Each bank is accorded a CAMEL rating.

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The composite CAMEL rating is not to be disclosed to the bank.

3.5.2 Background and Uses of CAMEL rating

Under the Financial Sector Reform Project (FSRP) Bangladesh Bank started off-site
supervision using CAMEL Rating analysis in 1993. Using data provided by the banks.
Bangladesh Bank determine the CAMEL rating through the analysis of the five
dimensions mentioned earlier. Through the analysis of CAMEL rating DBOD of
BANGLADESH BANK identifies financial weakness of scheduled banks and issues
necessary instructions to concern banks for the corrections of those weaknesses.

On the other hand, in the process of preparing comprehensive report on the head office
inspection, Bangladesh Bank (DBI) accord CAMEL rating on each bank through the
guidelines of Inspection Manual. Through the composite rating is not disclosed to the
inspected bank. The bank is asked to provide clear written explanation on the problems
identified with each component of the CAMEL.

Main considering factors and reasons for the consideration of components of CAMEL

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Capital adequacy:--- % of risk weighted assets (RWA) to capital and reserve.


Risk weighted Assets:
All of the assets owned by a bank do not have the same risk. The degree of risk depends on the
nature of the particular asset. Therefore, different weights are given to different assets depending
on the degree of risk associated with the assets and the total Risk Weighted Assets are calculated.
The assets are weighted on scale of 1% to 100%.
Example of RWA calculation
Nature of Assets
Amount
Investment in Treasury Bills 100TK
Advance made TO Mr. X
100TK
RWA

Risk
0%
50%

Weight
100%
50%

RWA
100TK
50TK
150TK

Core capital is considered on qualitative judgment (4% core capital to RWA is acceptable).

Main reasons:-- To judge the level and growth of capital.


To asses fund raising ability
To asses dividend rate maintaining pressure.

Asset Quality (A):

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Main considerations-- % of classified loans and advances.


Provision shortfall and qualities of other assets.

Main reasons:-- To see if the bank is house cleaning


To see the probability of writing off bad debt
To know adequacy of reserve level

Management (M):
Management itself has no rating. However it is determined on the average of rating
attributed to C, A, E, and L-------- M = C + A + E + L / 4

Earnings (E):
Main considerations--- Return of asset (ROA)
Return on equity (ROE)for qualitative judgement.
Net interest Margin (NIM) for qualitative judgement

Main Reasons--- To know level and trend of earning

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To see if the earning is reported in a valid way

Liquidity (L):
Main considerations--- Statutory liquid asset to total deposit
Other liquid and off balance sheet assets--- for qualitative judgement.

Main Reasons:
To see if the bank is dependent on borrowed money
To understand how the asset growth has been funded

3.5.3 Calculation Of Composite Rating

Composite Rating:
Composite Rating is the summations of the ratings of all specific dimensions divided by 5 that is
= C +A+ M + E + L / 5
Example: if C=1, A=2, M=3, E=2 and L=2 then CAMEL= 1+ 2 + 3 + 2 + 2 / 5 = 2
CAMEL rating matrix in the context of Bangladesh:
Indicator

Capital Adequacy (C)

percentage
9% and above
8% but less Than 9%
7% but less Than 8%
6% but less Than 7%
5% but less Than 6%

Rating
1
2
3
4
5

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Asset Quality (A)

Management (M)

Earning (E)

Liquidity (L)

3%
<3% to 5%
<6% to 10%
<10% to 1 5%
<15

1
2
3
4
5

M = C +A+ E + L/ 4
ROA 1.80%
ROA = 0.60% to 1.80%
ROA = 0.50%
ROA= 0.25%
ROA< 0.10%
25% to 30%
20%><25%
15%><20%
10%><15%
>10%

1
2
3
4
5
1
2
3
4
5
1
2
3
4
5

Rating and performance evaluation:


The dimensions are rated in ascending order or performance deficiency. Thus the rating 1
represents the highest and 5 represents the lowest level of performance. The ratings and their
performance status are shown in the following table:

Ratings
1
2
3
4
5

Performance Status
Strong
Satisfactory
Fair
Marginal
Unsatisfactory

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Strong (composite 1): The banks with such rating is sound in almost every aspect and
resistant to external economic and financial shocks.
satisfactory(composite 2): The banks with such rating are also fundamentally sound
institutions. However they may have some modest weakness, which are correctable in the
normal course of business.
fair(composite 3): the banks with such ratings reflects financial weakness. Corrections
of these weaknesses need routine checking.
Marginal(composite 4): Banks with such rating have a substantial amount of asset
weakness or a combination of other weakness. Prompt and effective financial and
administrative measures are needed at this stage.
unsatisfactory(composite 5) :Banks with such rating reflects critically deficit
performance and need immediate remedial attention. The probability of failure of such
banks is very high.

Note: Whenever any bank is rated as composite 4, Bangladesh bank declares that bank as
problem bank and brings that bank under intensive monitoring and supervision.

3.6 Management Of Bangladesh Bank.

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The general superintendence and direction of the affairs and business of the Bank is entrusted to
a Board of Directors which exercise all the powers and does all the acts that may be exercised
and done by the Bank.

3.6.1 Board of Directors.


Constituents of the Board of Directors:
a. The Chairman: Governor is the chairman of the Board.
b. A Deputy Governor is nominated by the Government.
c. Four Directors nominated by the Government.
d. Three Government Officials nominated by the Government to hold Office at the pleasure
of the Government. The Governor is the Chief Executive Officer of the Bank. He directs
and controls the whole affairs of the Bank on behalf the Board of Directors.

3.6.2 Departments of Bangladesh Bank:


Bangladesh Bank head office is in Dhaka consists of the following departments:
Accounts & Budgeting Department.
Agriculture & Special Programs Department.
Anti Money Laundering Department.
Bangladesh Bank Training Academy.
Banking Regulations & Policy Department.
Common Services Department.

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Credit Information Bureau.


Department of Currency management & Payment Systems.
Department of Off-Site Supervision.
Public Relation & Publication Department.
Department of Banking Inspection -1.
Department of Banking Inspection-2
Department of Foreign Exchange Inspection (DBI-3)
Expenditure Management Department.
Department of Financial Institutions.
Foreign Currency Investment Department.
Foreign Exchange Policy Department.
Foreign Exchange Reserve & Treasury Management Department.
Governors Secretary Department.
Human Resources Department.
IT Operation & Communication Department.
Information Systems Development Department.
Internal Audit Department.
Law Department.
Monitory Policy Department.
Research Department.

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Secretarys Department.
Department of Security Management.
Statistics Department.

3.6.3 Branches of Bangladesh Bank:


There are 9 branches of BB including 2 branches in Dhaka. Locations of the branches of BB are
as follows:
a) Motijheel Office, Dhaka.
b) Sadarghat Office, Dhaka.
c) Bogra Office, Bogra.
d) Rajshahi Office, Rajshahi.
e) Khulna Office, Khulna.
f) Chittagong Office, Chittagong.
g) Sylhet Office,Sylhet.
h) Barisal Office, Barisal.
i) Rangpur Office, Rangpur.

3.6.4 Scheduled Banks:


Nationalized Commercial Banks(4):
Agrani Bank.
Janata Bank.

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44

Rupali Bank Ltd.


Sonali Bank

Specialized (Commercial) Banks(5):

Govt. controlled Banks (4+5=9)

Bangladesh Krishi Bank.


Bangladesh Shilpa Bank.
Bangladesh Shilpa Rin Sangstha.
BASIC Bank Ltd.
Rajshahi Krishi Uannayan Bank.

Private Commercial Banks (30):


Al Arafah Islami Bank Ltd.
Arab Bangladesh Bank Ltd.
Bangladesh Commerce Bank Ltd.
Bank Asia Ltd.
Brac Bank Ltd.
Dhaka Bank Ltd.
Dutch Bangla Bank Ltd.
Eastern Bank Ltd.
EXIM Bank of Bangladesh Ltd.
First Security Bank Ltd.

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IFIC Bank Ltd.


Islami Bank Bangladesh Ltd.
Jamuna Bank Ltd.
Mercantile Bank Ltd.
Mutual Trust Bank Ltd.
National Bank Ltd.
National Credit & Commerce Bank Ltd.
One Bank Ltd.
Prime Bank Ltd.
Pubali Bank Ltd.
Shahjalal Islami Bank Ltd.
Social Investment Bank Ltd.
South East Bank Ltd.
Standard Bank Ltd.
The City Bank Ltd.
The Oriental Bank Bangladesh Ltd.
The Premier Ban Ltd.
The Trust Bank ltd.
United Commercial Bank Ltd.
Uttara Bank ltd.

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Foreign Commercial Banks(10):


Bank Al-Falah Ltd.
City Bank N.A.
Commercial Bank of Ceylon Ltd.
Habib Bank Ltd.
National Bank of Pakistan.
Standard Chartered Bank.
State Bank of India.
The HSBC Ltd.
Woori Bank Ltd.

**Rupali Bank is now in the process to being privatized.

2.6.5 Financial Institutions:

Bangladesh Finance & Investment Ltd.


Bangladesh Industrial Finance Company Ltd.
Bay leasing & Investment Ltd.
Delta Brac Housing Finance Corporation Ltd.
Far East Finance & Investment Ltd.

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47

Fedality Assets & Securities Company Ltd.


First Lease International Ltd.
GSP Finance (Bangladesh) Ltd.
I&I Development Finance Company Ltd.
IDL Company of BD Ltd.
IP&D Company of BD Ltd.
ID Company Ltd.
IL& F Services Ltd.
Islamic F&I Ltd.
Midas Financing Ltd.
National HF&I Ltd.
Oman BD Leasing &Finance Ltd.
Peoples L&F Services Ltd.
Phoenix Leasing Company Ltd.
Premier Leasing Int Ltd.
Prime F&I Ltd.
Saudi BD I&AI Company Ltd.
Self EF Ltd.
The UAE -BD Investment Company.
Union Capital Ltd.

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United Leasing Company Ltd.


Uttara F&I Ltd.
Lonka Bangla Finance Ltd.

3.7 Human Resource Management In Bangladesh Bank :

The success of any organization depends on its manpower. So the recruitment and management
of manpower is a very important task for any organization. The human Resource Department of
Bangladesh Bank is entrusted with the responsibilities of selection, recruitment, Promotion,
demotion, and transfer of the staff of the BB.

3.7.1 Recruitment :

There are three methods by which posts in different categories of staff can be filled in, viz.
By direct recruitment.
By promotion from one class to another or to a higher grade or appointment in the same
class and
By transfer from one cadre/ department/office to another.

Appointments to the service of the Bank shall be made by the Governor, subject to the approval
of the Board. Recruitment in the Bank is made through the competitive examination. In

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49

recruiting the officers certain ratio for direct recruitment and promotion is maintained. The ratio
is determined by competent authority. At present one Assistant Director will be recruited for one
Assistant Director promoted from lower positions. In every two vacancies the first one will be
filled up by promotion and the second one by direct recruitment. This ratio of 1:.1 for direct
recruitment to promotion has been made effected from 1st January 2003.

Earlier in every three vacant posts of officers the first two posts were filled up by promotion and
the third one by direct recruitment. But at present the recruitment of clerical level has been
stopped. But employees in the post of Stenographer, Data Entry/ Control Operator, Telephone
Operators etc may be promoted to the post of officers after completion of certain years of
services. Now the ratio of direct recruitment to promotion is 9:1.

If suitable candidates are not available in for promotion and/or direct recruitment, the number of
vacant posts by quota may be carried over to the next year or even after that and may be filled in
by respective promotion and/or direct recruitment, as the case may be, by observing the
concerned formalities.

Educational & Professional Qualifications:


Marks for educational and professional qualifications shall be distributed as follows:

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Qualifications
a)

b)

Marks

i)

Masters / Four year Graduation

14

ii)

3 years honors / Graduation

10

iii) 2 years pass course / Graduation

09

iv) H.S.C

07

DAIBB(Part 1& 2)

03+ 03 =

06

3.8 ORGANOGRAM of BB:


BANGLADESH BANK
ORGANOGRAM
BOARD

OF

DIRECTORS

GOVERNOR

DEPUTY
GOVERNOR

EXECUTIVE
DIDECTOR

GENERAL
MANAGER

DEPUTY
GOVERNOR

ECONOMIC
ADVISOR

GENERAL
MANAGER

EXECUTIVE
DIRECTOR

GENERAL

Error: Reference source not found


DEPUTY
GENERAL
MANAGER

DEPUTY
GENERAL
MANAGER

DEPUTY
GOVERNOR

EXECUTIVE
DIRECTOR

GENERAL
MANAGER

SECRETARY
GENERAL

DEPUTY
GENERAL
MANAGER

DEPUTY
GENERAL MANAGER
CURRENCY

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51

JIONT-Director

JIONT-Director

JOINT
MGR(CASH)

JIONT-Director
JIONT-Director

Dep-

DEPUTY
MANAGER
(CASH)

DepDIR

ASSISTANT
DIDECTOR

ASSISTANT
DIDECTOR

ASSISTANT
DIDECTOR

ASSISTANT
DIDECTOR

CHAPTER-----FOUR

ASSISTANT
DIDECTOR

ASSISTANT
MGR(HCAS))

OFFICER
(CASH)

CREDIT RISK GRADING


Conceptual Framework(CRG)

4.0.Components of credit Risk


4.1.Definition of CRG
4.2.Functions of CRG
4.3.Use of CRG
4.4.Number & Short name of grades used in CRG

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Error: Reference source not foundSource:

4.1.DEFINITION OF CREDIT RISK GRADING (CRG)


The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale
and reflects the underlying credit-risk for a given exposure.
A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary
indicator of risks associated with a credit exposure.

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53

Credit Risk Grading is the basic module for developing a Credit Risk Management
system.

4.2. FUNCTIONS OF CREDIT RISK GRADING


Well-managed credit risk grading systems promote bank safety and soundness by facilitating
informed decision-making. Grading systems measure credit risk and differentiate individual
credits and groups of credits by the risk they pose. This allows bank management and examiners
to monitor changes and trends in risk levels. The process also allows bank management to
manage risk to optimize returns.

4.3. USE OF CREDIT RISK GRADING


The Credit Risk Grading matrix allows application of uniform standards to credits to
ensure a common standardized approach to assess the quality of individual obligor, credit
portfolio of a unit, line of business, the branch or the Bank as a whole.
As evident, the CRG outputs would be relevant for individual credit selection, wherein
either a borrower or a particular exposure/facility is rated. The other decisions would be
related to pricing (credit-spread) and specific features of the credit facility. These would
largely constitute obligor level analysis.
Risk grading would also be relevant for surveillance and monitoring, internal MIS and
assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level
analysis.

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4.4. NUMBER AND SHORT NAME OF GRADES USED IN THE CRG


The proposed CRG scale consists of 8 categories with Short names and Numbers are
provided as follows:

GRADING
Superior
Good
Acceptable
Marginal/Watchlist
Special Mention
Sub standard
Doubtful
Bad & Loss

SHORT NAME
SUP
GD
ACCPT
MG/WL
SM
SS
DF
BL

NUMBER
1
2
3
4
5
6
7
8

4.4 GRADES OF CRG

.a) Superior (Sup)


b) Good (GD)
c) Acceptable (Accpt)
d) Marginal/ Watchlist (MG/ WL)
e) Special Mention (SM)

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

55

f) Sub-standard (SS)
g) Doubtful (DF)
h) Bad/ Loss (BL)

A clear definition of the different categories of Credit Risk Grading is given as follows:

a) Superior - (SUP) - 1

Credit facilities, which are fully secured i.e. fully cash covered.
Credit facilities fully covered by government guarantee.
Credit facilities fully covered by the guarantee of a top tier international Bank.

b). Good - (GD) - 2

Strong repayment capacity of the borrower


The borrower has excellent liquidity and low leverage.
The company demonstrates consistently strong earnings and cash flow.
Borrower has well established, strong market share.
Very good management skill & expertise.
All security documentation should be in place.
Credit facilities fully covered by the guarantee of a top tier local Bank.

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

56

Aggregate Score of 85 or greater based on the Risk Grade Score Sheet

c). Acceptable - (ACCPT) - 3


These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate
consistent earnings, cash flow and have a good track record.
Borrowers have adequate liquidity, cash flow and earnings.
Credit in this grade would normally be secured by acceptable collateral (1st
charge over inventory / receivables / equipment / property).
Acceptable management
Acceptable parent/sister company guarantee
Aggregate Score of 75-84 based on the Risk Grade Score Sheet

d). Marginal/Watchlist - (MG/WL) - 4


This grade warrants greater attention due to conditions affecting the borrower, the
industry or the economic environment.
These borrowers have an above average risk due to strained liquidity, higher than
normal leverage, thin cash flow and/or inconsistent earnings.
Weaker business credit & early warning signals of emerging business credit
detected.
The borrower incurs a loss
Loan repayments routinely fall past due

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Account conduct is poor, or other untoward factors are present.


Credit requires attention
Aggregate Score of 65-74 based on the Risk Grade Score Sheet

e). Special Mention - (SM) - 5


This grade has potential weaknesses that deserve managements close attention.
If left uncorrected, these weaknesses may result in a deterioration of the
repayment prospects of the borrower.
Severe management problems exist.
Facilities should be downgraded to this grade if sustained deterioration in
financial condition is noted (consecutive losses, negative net worth, excessive
leverage),
An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.
f). Substandard - (SS) - 6
Financial condition is weak and capacity or inclination to repay is in doubt.
These weaknesses jeopardize the full settlement of loans.
Bangladesh Bank criteria for sub-standard credit shall apply.
An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.

g). Doubtful - (DF) - 7

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

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Full repayment of principal and interest is unlikely and the possibility of loss is
extremely high.
However, due to specifically identifiable pending factors, such as litigation,
liquidation procedures or capital injection, the asset is not yet classified as Bad &
Loss.
Bangladesh Bank criteria for doubtful credit shall apply.
An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.

h). Bad & Loss - (BL) - 8


Credit of this grade has long outstanding with no progress in obtaining repayment
or on the verge of wind up/liquidation.
Prospect of recovery is poor and legal options have been pursued.
Proceeds expected from the liquidation or realization of security may be awaited.
The continuance of the loan as a bankable asset is not warranted, and the
anticipated loss should have been provided for.
This classification reflects that it is not practical or desirable to defer writing off
this basically valueless asset even though partial recovery may be affected in the
future. Bangladesh Bank guidelines for timely write off of bad loans must be
adhered to. Legal procedures/suit initiated.
Bangladesh Bank criteria for bad & loss credit shall apply.
An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

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CHAPTER FIVE

5.1 CREDIT RISK GRADING PROCESS

Data collection checklist


Limit utilization form
CRG score sheet
CRG form
MIS Report on CRG
Financial Spread sheet

5.1 CREDIT RISK GRADING PROCESS

Credit Risk Grading should be completed by a Bank for all exposures (irrespective of
amount) other than those covered under Consumer and Small Enterprises Financing
Prudential Guidelines and also under The Short-Term Agricultural and Micro - Credit.

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

60

For Superior Risk Grading (SUP-1) the score sheet is not applicable. This will be
guided by the criterion mentioned for superior grade account i.e. 100% cash covered,
covered by government & bank guarantee.

Credit risk grading matrix would be useful in analyzing credit proposal, new or renewal
for regular limits or specific transactions, if basic information on a borrowing client to
determine the degree of each factor is a) readily available, b) current, c) dependable, and
d) parameters/risk factors are assessed judiciously and objectively. The Relationship
Manager as per Data Collection Checklist as shown in Appendix-A should collect
required information.

Relationship manager should ensure to correctly fill up the Limit Utilization Form as
shown in Appendix-B in order to arrive at a realistic earning status for the borrower.

Risk factors are to be evaluated and weighted very carefully, on the basis of most up-todate and reliable data and complete objectivity must be ensured to assign the correct
grading. Actual parameter should be inputted in the Credit Risk Grading Score Sheet as
shown in AppendixC.

Credit risk grading exercise should be originated by Relationship Manager and should
be an on-going and continuous process. Relationship Manager shall complete the Credit

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

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Risk Grading Score Sheet and shall arrive at a risk grading in consultation with a Senior
Relationship Manager and document it as per Credit Risk Grading Form as shown in
Appendix-D, which shall then be concurred by the Credit Officer in consultation with a
Senior Credit Officer.

All credit proposals whether new, renewal or specific facility should consist of a) Data
Collection Checklist, b) Limit Utilization Form c) Credit Risk Grading Score Sheet, and
d) Credit Risk Grading Form.

The credit officers then would pass the approved Credit Risk Grading Form to Credit
Administration Department and Corporate Banking/Line of Business/Recovery Unit for
updating their MIS/record.

The appropriate approving authority through the same Credit Risk Grading Form shall
approve any subsequent change/revision i.e. upgrade or downgrade in credit risk grade.

5.2 EARLY WARNING SIGNALS (EWS)

Early Warning Signals (EWS) indicate risks or potential weaknesses of an exposure requiring
monitoring, supervision, or close attention by management.

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62

If these weaknesses are left uncorrected, they may result in deterioration of the repayment
prospects in the Banks assets at some future date with a likely prospect of being downgraded to
classified assets.
Early identification, prompt reporting and proactive management of Early Warning Accounts are
prime credit responsibilities of all Relationship Managers and must be undertaken on a
continuous basis.

Despite a prudent credit approval process, loans may still become troubled. Therefore, it is
essential that early identification and prompt reporting of deteriorating credit signs be done to
ensure swift action to protect the Banks interest. The symptoms of early warning signals as
mentioned below are by no means exhaustive and hence, if there are other concerns, such as a
breach of loan covenants or adverse market rumors that warrant additional caution, a Credit Risk
Grading Form (Appendix-D) should be presented.

Irrespective of credit score obtained by any obligor as per the proposed risk grade score sheet,
the grading of the account highlighted as Early Warning Signals (EWS) accounts shall have the
following risk symptoms.

a) Marginal/Watchlist (MG/WL - 4): if Any loan is past due/overdue for 60 days and above.
Frequent drop in security value or shortfall in drawing power exists.

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b) Special Mention (SM - 5): if Any loan is past due/overdue for 90 days and above
Major document deficiency prevails (such deficiencies include but not limited to; board
resolution for borrowing not obtained, sanction letter not accepted by client,
charges/hypothecation over assets favoring bank not filed with Registrar, Joint Stock
Companies, mortgage not in place, guarantees not obtained, etc.)
A significant petition or claim is lodged against the borrower.

The Credit Risk Grading Form of accounts having Early Warning Signals should be completed
by the Relationship Manager and sent to the approving authority in Credit Risk Management
Department. The Credit Risk Grade should be updated as soon as possible and no delay should
be there in referring Early Warning Signal accounts or any problem accounts to the Credit Risk
Management Department for their early involvement and assistance in recovery.

5.3 EXCEPTIONS TO CREDIT RISK GRADING

Head of Credit Risk Management may also downgrade/classify an account in the


normal course of inspection of a Branch or during the periodic portfolio review. In such
event, the Credit Risk Grading Form will then be filled up by Credit Risk Management
Department and will be referred to Corporate Banking/Line of Business/Credit
Administration Department/Recovery Unit for updating their MIS/records.

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

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Recommendation for upgrading of an account has to be well justified by the


recommending officers. Essentially complete removal of the reasons for downgrade
should be the basis of any upgrading.

In case an account is rated marginal, special mention or unacceptable credit risk as per
the risk grading score sheet, this may be substantiated and credit risk may be accepted if
the exposure is additionally collateralized through cash collateral, good tangible
collaterals and strong guarantees. These are exceptions and should be exceptionally
approved by the appropriate approving authority.

Whenever required an independent assessment of the credit risk grading of an


individual account may be conducted by the Head of Credit Risk Management or by the
Internal Auditor documenting as to why the credit deteriorated and also pointing out the
lapses.

If a Bank has its own well established risk grading system equivalent to the proposed
credit risk grading or stricter, then they will have the option to continue with their own
risk grading system.

5.4 CREDIT RISK GRADING REVIEW

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65

Credit Risk Grading for each borrower should be assigned at the inception of lending and should
be periodically updated. Frequencies of the review of the credit risk grading are mentioned
below.

Number
1
2
3
4
5
6
7
8

Risk Grading
Superior
Good
Acceptable
Marginal/Watchlist
Special Mention
Sub-standard
Doubtful
Bad & Loss

Short
SUP
GD
ACCPT
MG/WL
SM
SS
DF
BL

Review frequency (at least)


Annually
Annually
Annually
Half yearly
Quarterly
Quarterly
Quarterly
Quarterly

5.5 MIS ON CREDIT RISK GRADING

Bank should have comprehensive MIS reports on credit risk grading to evaluate
entire credit portfolio of the Bank. Format of such MIS reports on credit risk grading
has been presented in Appendix - E.

Credit Risk Grading Report (Consolidated)

Credit Risk Grading Report (Branch Wise)

Credit Risk Grading Report (Branch & Risk Grade Wise)

Credit Risk Grading Report (Grade Wise Borrower List)

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

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MIS reports as mentioned above should be prepared and circulated at least on a


quarterly basis.

5.6 FINANCIAL SPREAD SHEET (FSS)


A Financial Spread Sheet (FSS) has been developed which may be used by the Banks while
analyzing the credit risk elements of a credit proposal from financial point of view.
The FSS is well designed and programmed software having two parts. Input and Output Sheets.
The financial numbers of borrowers need to be inputted in the Input Sheets which will then
automatically generate the Output Sheets. The Financial Spread Sheet (FSS) is attached as
Appendix - F.

APPENDIX-A
DATA COLLECTION CHECK LIST
ABC BANK LIMITED- Dhanmondi Branch
DATA COLLECTION CHECK LIST
Documents/items required for Credit Risk Grading
Company accounts for at least 3 years

Required? Obtained?
YES
YES NO
NO

Bank statements for prior 12 months from previous bank (for new
customer)
Set of accounts for at least two competitors (if published)
Industry average figures (If available)

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Financial projection required for:


Term loans; forecasts should be for the duration of the term loan.
Financial Spread Sheet (FSS)
Customer Limit Utilization Form
Current CIB Report of the Obligor
Organization chart
Biodata for
All Directors Other key executives
Head of operations/marketing
Copies of all reports on site visits made during the last 12 months.
Valuations of securities/collateral offered
Memorandum/articles of association/certificate of incorporation
Business plan/Project Feasibility Report (required for start up company)
Receivables Aging
Clients declaration of Stock/Inventory and Book Debts for the last 12
months
Trade License
TIN Certificate

Pending Item Checklist


Item

Responsibility

_________________________
Manager (RM)

Due Date

Status

__________
Relationship
Senior Relationship Manager (SRM)

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APPENDIX-B

LIMIT UTILIZATION FORM


Borrower: XYZ Company Limited Principal Branch

Date:

Period: For the Period from ----------- to -------------- (12 months Actual/Projected)
Account Performance:
Nature of the Account

Debit
Summation

Credit
Summation

Current Deposit Account


Overdraft (OD)
Cash Credit (CC)
Term Loan
Import Loan
Local/Export Bills outstanding
Guarantee

N/A
X
X
N/A
N/A
N/A
N/A

N/A
X
X
N/A
N/A
N/A
N/A

Account Volume:
Facilities
Letter of Credits
Guarantees
Local/Export Bills Handled

Total No. of transaction


X
X
X

(Amount in 000 Taka)


Balance/Outstanding
Maximum Minimum
X
X
X
X
X
X
X

X
X
X
X
X
X
X

Amount in 000 Taka


X
X
X

Account Profitability:
Nature of
Account/Facility
Current Account
Overdraft/Cash Credit
SLC
Term Loan
Import Loan-Hypo
Demand Loan-Hypo
Guarantees
LBDP/Export Bills
Handled

Average Rate of
Utilization Interest

Interest
Income
X
X
X
X
X
X

(Amount in 000 Taka)


Commission Other
Total
Revenue
X
X
X
X
X
X
X
X
X
X
X
X

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Gross Earnings
Less: Cost of Fund
Net Earnings

XXX
XX
XXX

XXX

XXX

XXX

XXX

XXX
XX
XXX

Comment on Relationship/Earnings:

Our earnings from borrower for the last year was BDT------------- and from Group
BDT------Our projected earnings from borrower for the next year will be BDT------ and Group
BDT--Account Turnover and utilization of limit during the last year was satisfactory.

_________________________
__________________________
Relationship Manager (RM)
(SRM)

Senior Relationship Manager

APPENDIX-C

CREDIT RISK GRADING SCORE SHEET

CREDIT RISK GRADING SCORE SHEET


Reference No:

Date:

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

70

Borrower:
Group Name (if
any):
Branch:
Industry/Sector:
Date of Financials:
Completed by:
Approved by:

Aggregate Score: _________

Risk Grading:

Number

Grading

Short

Superior

SUP

2
3
4
5
6
7
8

Good
Acceptable
Marginal/Watchlist
Special Mention
Substandard
Doubtful
Bad & Loss

Criteria
A. Financial Risk
1. Leverage: (15%)

Weight
Parameter
50%

Debt Equity Ratio () - Times

Total Liabilities to Tangible Net


worth

All calculations should be based

on annual financial statements of


the borrower (audited preferred).

Less than 0.25


0.26 to 0.35 x
0.36 to 0.50 x
0.51 to 0.75 x
0.76 to 1.25 x
1.26 to 2.00 x
2.01 to 2.50 x
2.51 to 2.75 x
More than 2.75

_________

Score

Fully cash secured, secured by


Government/International Bank
Guarantee
GD
85+
ACCPT
75-84
MG/WL
65-74
SM
55-64
SS
45-54
DF
35-44
BL
<35
Score

Actual
Score
Parameter Obtained

15
14
13
12
11
10
8
7
0

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2. Liquidity: (15%)
Current Ratio () - Times
Current Assets to Current
Liabilities

3. Profitability: (15%)
Operating Profit Margin (%)
Operating Profit
100
Sales

4. Coverage: (5%)
Interest Coverage Ratio ()Times
Earning Before Interest & Tax
(EBIT)
Interest on debt

Greater than 2.74


2.50 to 2.74 x
2.00 to 2.49 x
1.50 to 1.99 x
1.10 to 1.49 x
0.90 to 1.09 x
0.80 to 0.89 x
0.70 to 0.79 x
Less than 0.70
Greater than 25%
20% to 24%
15% to 19%
10% to 14%
7% to 9%
4% to 6%
1% to 3%
Less than 1%
More than 2.00
More than 1.51 Less than
2.00
More than 1.25 Less than
1.50
More than 1.00 Less than
1.24
Less than 1.00

Total ScoreFinancial Risk

Criteria
Weight
B. Business/Industry
Risk
18%
1. Size of Business (Sales in BDT
crore)

The size of the borrowers business


measured by the most recent years
total sales. Preferably based on
audited financial statements

15
14
13
12
11
10
8
7
0
15
14
13
12
10
9
7
0
5
4
3
2
0

50

Parameter
> 60.00
30.00 59.99
10.00 29.99
5.00 - 9.99
2.50 - 4.99
< 2.50

Score

Actual
Score
Parameter Obtained

5
4
3
2
1
0

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2. Age of Business

The number of years the borrower


has been engaged in the primary
line of business.
3. Business Outlook

A critical assessment of the medium


term prospects of the borrower,
taking into account the industry,
market share and economic factors.
4. Industry Growth

5. Market Competition

6. Entry/Exit Barriers

> 10 years
> 5 - 10 years
2 - 5 years
< 2 years

3
2
1
0

Favorable
Stable
Slightly Uncertain
Cause for Concern

3
2
1
0

Strong (10%+)
Good (>5% - 10%)
Moderate (1% - 5%)
No Growth (<1%)
Dominant Player
Moderately Competitive
Highly Competitive
Difficult
Average
Easy

3
2
1
0

Total Score-Business/Industry Risk

Criteria
C. Management Risk

Weight
12%

1. Experience
(Management & Management
Team)

Parameter

More than 10 years in the


related line of business
510 years in the related line
The quality of management based of business
on the aggregate number of years 15 years in the related line of
that the Senior Management Team business
No experience
has been in the industry.

2
1
0
2
1
0
18

Score

Actual
Score
Parameter Obtained

5
3
2
0

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73

2. Second Line/ Succession

3. Team Work

Ready Succession
Succession within 1-2
years
Succession within 2-3
years
Succession in question
Very Good
Moderate
Poor
Regular Conflict

4
3
2
0

3
2
1
0

Total Score-Management Risk

12

Criteria
D. Security Risk

Score

Weight
10%

Parameter

1. Security Coverage (Primary) Fully


pledged
facilities/substantially
cash
covered/Reg. Mortg, for HBL
Registered Hypothecation
(1st charge/1st Pari passu charge)
2nd Charge/Inferior charge
Simple hypothecation/negative
lien on assets.
No security
2. Collateral Coverage
Registered
Mortgage
on
(Property Location)
Municipal Corporation/Prime
area property.
Registered
Mortgage
on
Pourashava/semi-urban
area
property
Equitable Mortgage or No
property but plant & machinery
as collateral
Negative lien on collateral
No collateral

Actual
Score
Parameter Obtained

4
3
2
1
0
4
3
2
1
0

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74

3. Support (Guarantee)

Personal guarantee with high


net worth or Strong Corporate
Guarantee
Personal
Guarantees
or
Corporate
Guarantee
with
average financial strength
No Support/Guarantee

Total Score- Security Risk

Criteria
E. Relationship
Risk
1. Account Conduct

Weight
10% Parameter

2. Utilization of Limit
(actual/projection)
3. Compliance of
Covenants / Conditions

More than 3 (three) years


accounts with faultless record
Less than 3 (three) years
accounts with faultless record
Accounts having satisfactory
dealings with some late
payments
Frequent Past dues & Irregular
dealings in account
More than 60%
40% - 60%
Less than 40%
Full Compliance
Some Non-Compliance
No Compliance

1
0
10

Score

Actual
Score
Parameter Obtained

5
4
2
0

2
1
0
2
1
0

4. Personal Deposits

Personal accounts of the key 1


business Sponsors/ Principals
The extent to which the bank are maintained in the bank, with
maintains a personal banking significant deposits
relationship with the key business No depository relationship
0
sponsors/principals.
Total Score-Relationship Risk
10
Grand Total- All Risk
100

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75

APPENDIX-D

CREDIT RISK GRADING FORM


Date:
Borrower:
Incorporated:
Client Since:
CIB date & status:

Branch:
Legal Status:
Business:
Risk
Existing
New
Grading
Next Grading Review Date:
Grade Score Existing
New
Credit Risk Grade Score Sheet Ref. No ----------------- & dated ---------------- enclosed.
Facilities

Amount in 000 TK
Limit Outstandings

Expiry/
Maturity

Days Past
due

Interest
Suspense

Provision
Held

SLC/PAD
LTR
ULC/Acceptance
Overdraft
Cash Credit
Demand Loan
Term Loan
Guarantee
Total
Key Financials
Period
Sales
Net Profit
Current Ratio (X)
Leverage (X)
Operating Profit/Sales (%)
Interest Coverage (X)

FYE December 2001 FYE December 2002 FYE December 2003

Query:
Are we receiving Financials regularly?
Monthly sales deposit receipt and adjustment by the Bank:
(For last 6 months.)
Is client in business?

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

76

What is happening to sister company cash flow?


Do we have corporate guarantee? What is the risk grade of
guarantor?
Is loan documentation 100% OK?
Are stock of client verified/When/What is the valuation?
When last client/factory visit was made by RM and comment
by RM?
Is Registered Mortgage in place/ What is the value?
Are all the approval conditions/covenants complied by
borrower?
Reason for change (if any) in credit risk grading:
General comment by RM or Recommended action steps for upgrade if required:

_________________________

___________________

Relationship Manager (RM)


(SRM)

Senior Relationship Manager

GRADING APPROVAL
Credit Officer, CRM

Senior

Credit Officer, CRM

APPENDIX-E
MIS REPORTS ON CREDIT RISK GRADING
ABC BANK LIMITED

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77

CREDIT RISK GRADING REPORT (CONSOLIDATED)


AS ON DECEMBER 31, 2004

K GRADE

NUMBER
OF
BORROWE
R

IN %

LIMIT
(TK IN 000)

IN %

OUTSTAND
ING
(TK IN
000)

IN %

PERIOR - 1
OD - 2
CEPTABLE - 3
RGINAL/WATCHLIS

CIAL MENTION -

B STANDARD - 6
UBTFUL - 7
D & LOSS - 8
TAL

100%

100%

100%

ABC BANK LIMITED


XYZ BRANCH
CREDIT RISK GRADING REPORT (BRANCH WISE)
AS ON DECEMBER 31, 2004

K GRADE

NUMBER OF
BORROWER

IN %

LIMIT
(TK IN
000)

IN % OUTSTAND
ING
(TK IN
000)

IN %

100%

100%

PERIOR - 1
OD - 2
CEPTABLE - 3
RGINAL/WATCHLIST-

CIAL MENTION - 5
B STANDARD - 6
UBTFUL - 7
D & LOSS - 8
TAL

100%

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AN

78

ABC BANK LIMITED


CREDIT RISK GRADING REPORT (BRANCH & RISK GRADE WISE)
AS ON DECEMBER 31, 2004
RISK GRADE

NUMBER OF
BORROWER

IN %

LIMIT
(TK IN
000)

IN % OUTSTAND IN %
ING
(TK IN
000)

NCIPAL SUPERIOR - 1
GOOD - 2
ACCEPTABLE - 3
MARGINAL/WATC
HLIST- 4
SPECIAL MENTION
-5
SUB STANDARD 6
DOUBTFUL - 7
BAD & LOSS - 8
b Total (Principal Branch)
RABAD SUPERIOR - 1
GOOD - 2
ACCEPTABLE - 3
MARGINAL/WATC
HLIST- 4
SPECIAL MENTION
-5
SUB STANDARD 6
DOUBTFUL - 7
BAD & LOSS - 8
b Total (Agrabad Branch)

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79

ABC BANK LIMITED


CREDIT RISK GRADING REPORT (GRADE WISE BORROWER LIST)
AS ON DECEMBER 31, 2004
CREDIT RISK GRADE:
BRANCH

NAME OF BORROWER

SUP- 1

LIMIT
OUTSTANDING CREDIT
(TK IN 000) (TK IN 000) EXPIRY

PRINCIPAL
AGRABAD
TOTAL SUPERIOR GRADE
CREDIT RISK GRADE:
BRANCH

NAME OF BORROWER

GD-2

LIMIT
OUTSTANDING CREDIT
(TK IN 000) (TK IN 000) EXPIRY

PRINCIPAL
AGRABAD
TOTAL GOOD GRADE
CREDIT RISK GRADE:
BRANCH

NAME OF BORROWER

ACCPT-3

LIMIT
OUTSTANDING CREDIT
(TK IN 000) (TK IN 000) EXPIRY

PRINCIPAL

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AGRABAD
TOTAL ACCEPTABLE GRADE

CREDIT RISK GRADE:


BRANCH

NAME OF BORROWER

MG/WL-4

LIMIT
OUTSTANDING CREDIT
(TK IN 000) (TK IN 000) EXPIRY

PRINCIPAL
AGRABAD
TOTAL MARGINAL/WATCHLIST
GRADE

CREDIT RISK GRADE:


BRANCH

NAME OF BORROWER

SM-5

LIMIT
OUTSTANDING CREDIT
(TK IN 000) (TK IN 000) EXPIRY

PRINCIPAL

AGRABAD
TOTAL SPECIAL MENTION GRADE
CREDIT RISK GRADE:
BRANCH

NAME OF BORROWER

SS-6

LIMIT
OUTSTANDING CREDIT
(TK IN 000) (TK IN 000) EXPIRY

PRINCIPAL

AGRABAD
TOTAL SUB STANDARD GRADE

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CREDIT RISK GRADE:


BRANCH

NAME OF BORROWER

DF-7

LIMIT
OUTSTANDING CREDIT
(TK IN 000) (TK IN 000) EXPIRY

PRINCIPAL

AGRABAD
TOTAL DOUBTFUL GRADE
CREDIT RISK GRADE:
BRANCH

NAME OF BORROWER

BL-8
LIMIT
OUTSTANDING CREDIT
(TK IN 000) (TK IN 000) EXPIRY

PRINCIPAL

AGRABAD
TOTAL BAD & LOSS GRADE

Chapter Six

STEPS USED IN CREDIT RISK GRADING ( CRG)

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6.1 Identify all the Principal Risk Components


6.2 Allocate weightages to Principal Risk Components
6.3 Establish the Key Parameters
6.4 Assign weightages to each of the key parameters
6.5 Input data to arrive at the score on the key parameters
6.6 Arrive at the Credit Risk Grading based on total score obtained

The following step-wise activities outline the detail process for arriving at credit risk grading.

Step I

: Identify all the Principal Risk Components

Credit risk for counter-party arises from an aggregation of the following:

Financial Risk
Business/Industry Risk
Management Risk
Security Risk
Relationship Risk

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Each of the above mentioned key risk areas require to be evaluated and aggregated to arrive at an
overall risk grading measure.

a) Evaluation of Financial Risk:


Risk that counter-parties will fail to meet obligation due to financial distress. This typically
entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest
coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity,
low profitability & insufficient cash flow.

b) Evaluation of Business/Industry Risk:


Risk that adverse industry situation or unfavorable business condition will impact
borrowers capacity to meet obligation. The evaluation of this category of risk looks at
parameters such as business outlook, size of business, industry growth, market competition
& barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low
market share & poor industry growth.

c) Evaluation of Management Risk:


Risk that counterparties may default as a result of poor managerial ability including
experience of the management, its succession plan and team work.

d) Evaluation of Security Risk:

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Risk that the bank might be exposed due to poor quality or strength of the security in case
of default. This may entail strength of security & collateral, location of collateral and
support.

e) Evaluation of Relationship Risk:


These risk areas cover evaluation of limits utilization, account performance,
conditions/covenants compliance by the borrower and deposit relationship.

Step II

Allocate weight ages to Principal Risk

According to the importance of risk profile, the following weightages are proposed for
corresponding principal risks.

Principal Risk Components:

Weight:

Financial Risk

50%

Business/Industry Risk

18%

Management Risk

12%

Security Risk

10%

Relationship Risk

10%

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Step III

Establish the Key Parameters

Principal Risk Components:

Financial Risk
Business/Industry Risk

Key Parameters:

Leverage, Liquidity, Profitability & Coverage ratio.


Size of Business, Age of Business, Business

Outlook,

Industry Growth, Competition &

Barriers to Business
Management Risk
Security Risk
Relationship Risk

Experience, Succession & Team Work.


Security Coverage, Collateral Coverage and Support.
Account

Conduct

,Utilization

Compliance of
covenants/conditions & Personal Deposit.

Step IV

Assign weight ages to each of the key parameters.

Principal Risk Components:

Key Parameters:

Weight:

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Limit,

86

Financial Risk

50%

Leverage

15%

Liquidity

15%

Profitability

15%

Coverage

5%

Business/Industry Risk

18%

Size of Business

5%

Age of Business

3%

Business Outlook

3%

Industry growth

3%

Market Competition

2%

Entry/Exit Barriers

2%

Management Risk

12%

Experience

5%

Succession

4%

Team Work

3%

Security Risk

10%

Security coverage

4%

Collateral coverage

4%

Support

2%

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Relationship Risk
Account conduct

10%
5%
Utilization of limit

2%

Compliance of covenants
/condition
Personal deposit

Step V

2%
1%

Input data to arrive at the score on the key

After the risk identification & weightage assignment process (as mentioned above), the next steps
will be to input actual parameter in the score sheet to arrive at the scores corresponding to the
actual parameters.

This manual also provides a well programmed MS Excel based credit risk scoring sheet to arrive
at a total score on each borrower. The excel program requires inputting data accurately in
particular cells for input and will automatically calculate the risk grade for a particular borrower
based on the total score obtained. The following steps are to be followed while using the MS
Excel program.

a)

Open the MS XL file named, CRG_SCORE_SHEET

b)

The entire XL sheet named, CRG is protected except the particular cells to input data.
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c)

Input data accurately in the cells which are BORDERED & are colored YELLOW.

d)

Some input cells contain DROP DOWN LIST for some criteria corresponding to the Key
Parameters. Click to the input cell and select the appropriate parameters from the DROP
DOWN LIST as shown below.

e)

All the cells provided for input must be filled in order to arrive at accurate risk grade.

f)

We have also enclosed the MS Excel file named, CRG_Score_Sheet in CD ROM for use.

Step VI

Arrive at the Credit Risk Grading based on total score

The following is the proposed Credit Risk Grade matrix based on the total score obtained by an
obligor.

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Number
1

Risk Grading
Superior

Short Name
SUP

2
3

Good
Acceptable

4
5
6
7
8

Marginal/Watchlist
Special Mention
Sub-standard
Doubtful
Bad & Loss

Score
100% cash covered

Government guarantee

International Bank

GD
ACCPT

guarantees
85+
75-84

MG/WL
SM
SS
DF
BL

65-74
55-64
45-54
35-44
<35

CHAPTER=FIVE

CREDIT RISK MANAGEMENT IN INDIA AND PAKISTAN


1.Cr. Risk management in PAKISTAN
Credit risk arises from the potential that an obligor is either unwilling to perform on an
obligation or its ability to perform such obligation is impaired resulting in economic loss to
the bank.
Components of credit risk management
2.2.1 A typical Credit risk management framework in a financial institution may be
broadly categorized into following main components.

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a) Board and senior Managements Oversight


b) Organizational structure
c) Systems and procedures for identification, acceptance, measurement, monitoring and control
risks.

Board and Senior Managements Oversight


2.2.2 It is the overall responsibility of banks Board to approve banks credit risk strategy and
significant policies relating to credit risk and its management which should be based on the
banks overall business strategy. To keep it current, the overall strategy has to be reviewed by the
board, preferably annually. The responsibilities of the Board with regard to credit risk
management shall, interalia, include :
a) Delineate banks overall risk tolerance in relation to credit risk. For the purpose of these
guidelines the term Obligor means any party that has a direct or indirect obligation
under a contract.
b) Ensure that banks overall credit risk exposure is maintained at prudent levels and consistent
with the available capital
c) Ensure that top management as well as individuals responsible for credit risk management
possess sound expertise and knowledge to accomplish the risk management function
d) Ensure that the bank implements sound fundamental principles that facilitate the
identification, measurement, monitoring and control of credit risk.
e) Ensure that appropriate plans and procedures for credit risk management are in place.

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2.2.3 The very first purpose of banks credit strategy is to determine the risk appetite of the bank.
Once it is determined the bank could develop a plan to optimize return while keeping credit risk
within predetermined limits. The banks credit risk strategy thus should spell out
a) The institutions plan to grant credit based on various client segments and products, economic
sectors, geographical location, currency and maturity
b) Target market within each lending segment, preferred level of diversification/ concentration.
c) Pricing strategy.

2.2.4 It is essential that banks give due consideration to their target market while devising credit
risk strategy. The credit procedures should aim to obtain an indepth understanding of the banks
clients, their credentials & their businesses in order to fully know their customers.

2.2.6 The senior management of the bank should develop and establish credit policies and credit
administration procedures as a part of overall credit risk management framework and get those
approved from board. Such policies and procedures shall provide guidance to the staff on various
types of lending including corporate, SME, consumer, agriculture, etc. At minimum the policy
should include
a) Detailed and formalized credit evaluation/ appraisal process.
b) Credit approval authority at various hierarchy levels including authority for approving
exceptions.
c) Risk identification, measurement, monitoring and control
d) Risk acceptance criteria

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e) Credit origination and credit administration and loan documentation procedures


f) Roles and responsibilities of units/staff involved in origination and management of credit.
g) Guidelines on management of problem loans.

Organizational Structure.

2.3.1 To maintain banks overall credit risk exposure within the parameters set by the
board of directors, the importance of a sound risk management structure is second to none. While
the banks may choose different structures, it is important that such structure should be
commensurate with institutions size, complexity and diversification of its activities. It must
facilitate effective management oversight and proper execution of credit risk management and
control processes.

2.3.2 Each bank, depending upon its size, should constitute a Credit Risk Management
Committee (CRMC), ideally comprising of head of credit risk management Department, credit
department and treasury. This committee reporting to banks risk management committee should
be empowered to oversee credit risk taking activities and overall credit risk management
function. The CRMC should be mainly responsible for
a) The implementation of the credit risk policy / strategy approved by the Board.
b) Monitor credit risk on a bank-wide basis and ensure compliance with limits approved
by the Board.
c) Recommend to the Board, for its approval, clear policies on standards for presentation

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of credit proposals, financial covenants, rating standards and benchmarks.


d) Decide delegation of credit approving powers, prudential limits on large credit exposures,
standards for loan collateral, portfolio management, loan review mechanism, risk concentrations,
risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc.

2.3.3. Ideally, the banks should institute a Credit Risk Management Department (CRMD).
Typical functions of CRMD include:
a) To follow a holistic approach in management of risks inherent in banks portfolio and ensure
the risks remain within the boundaries established by the Board or Credit Risk Management
Committee.
b) The department also ensures that business lines comply with risk parameters and prudential
limits established by the Board or CRMC.
c) Establish systems and procedures relating to risk identification, Management Information
System, monitoring of loan / investment portfolio quality and early warning. The department
would work out remedial measure when deficiencies/problems are identified.
d) The Department should undertake portfolio evaluations and conduct comprehensive studies on
the environment to test the resilience of the loan portfolio.

Systems and Procedures of Credit Origination.


2.4.1 Banks must operate within a sound and well-defined criteria for new credits as well as the
expansion of existing credits. Credits should be extended within the target markets and lending

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strategy of the institution. Before allowing a credit facility, the bank must make an assessment of
risk profile of the customer/transaction. This may include
a) Credit assessment of the borrowers industry, and macro economic factors.
b) The purpose of credit and source of repayment.
c) The track record / repayment history of borrower.
d) Assess/evaluate the repayment capacity of the borrower.
e) The Proposed terms and conditions and covenants.
f) Adequacy and enforceability of collaterals.
g) Approval from appropriate authority

Limit setting
2.4.7 An important element of credit risk management is to establish exposure limits for single
obligors and group of connected obligors. Institutions are expected to develop their own limit
structure while remaining within the exposure limits set by State Bank of Pakistan. The size of
the limits should be based on the credit strength of the obligor, genuine requirement of credit,
economic conditions and the institutions risk tolerance. Appropriate limits should be set for
respective products and activities. Institutions may establish limits for a specific industry,
economic sector or geographic regions to avoid concentration risk.
Credit Administration.
2.5.1 Ongoing administration of the credit portfolio is an essential part of the credit

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process. Credit administration function is basically a back office activity that support and control
extension and maintenance of credit. A typical credit administration unit performs following
functions:
a. Documentation. It is the responsibility of credit administration to ensure completeness of
documentation (loan agreements, guarantees, transfer of title of collaterals etc) in accordance
with approved terms and conditions. Outstanding documents should be tracked and followed up
to ensure execution and receipt.
b. Credit Disbursement. The credit administration function should ensure that the loan
application has proper approval before entering facility limits into computer systems.
Disbursement should be effected only after completion of covenants, and receipt of collateral
holdings. In case of exceptions necessary approval should be obtained from competent
authorities.
c. Credit monitoring. After the loan is approved and draw down allowed, the loan should be
continuously watched over. These include keeping track of borrowers compliance with credit
terms, identifying early signs of irregularity, conducting periodic valuation of collateral and
monitoring timely repayments.
d. Loan Repayment. The obligors should be communicated ahead of time as and when the
principal/markup installment becomes due. Any exceptions such as non-payment or late payment
should be tagged and communicated to the management. Proper records and updates should also
be made after receipt.
e. Maintenance of Credit Files. Institutions should devise procedural guidelines and standards
for maintenance of credit files. The credit files not only include all correspondence with the

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borrower but should also contain sufficient information necessary to assess financial health of the
borrower and its repayment performance. It need not mention that information should be filed in
organized way so that external / internal auditors or SBP inspector could review it easily.
f. Collateral and Security Documents. Institutions should ensure that all security documents
are kept in a fireproof safe under dual control. Registers for documents should be maintained to
keep track of their movement. Procedures should also be established to track and review relevant
insurance coverage for certain facilities/collateral. Physical checks on security documents should
be conducted on a regular basis.

Measuring credit risk.


2.6.1 The measurement of credit risk is of vital importance in credit risk management.
A number of qualitative and quantitative techniques to measure risk inherent in credit portfolio
are evolving. To start with, banks should establish a credit risk rating
framework across all type of credit activities. Among other things, the rating framework may,
incorporate:
Business Risk
Industry Characteristics
Competitive Position (e.g. marketing/technological edge)
Management
Financial Risk
Financial condition
Profitability

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Capital Structure
Present and future Cash flows

Internal Risk Rating.


2.6.2 Credit risk rating is summary indicator of a banks individual credit exposure. An internal
rating system categorizes all credits into various classes on the basis of underlying credit quality.
A well-structured credit rating framework is an important tool for monitoring and controlling risk
inherent in individual credits as well as in credit portfolios of a bank or a business line. The
importance of internal credit rating framework becomes more eminent due to the fact that
historically major losses to banks stemmed from default in loan portfolios. While a number of
banks already have a system for rating individual credits in addition to the risk categories
prescribed by SBP, all banks are encouraged to devise an internal rating framework. An internal
rating framework would facilitate banks in a number of ways such as
a) Credit selection
b) Amount of exposure
c) Tenure and price of facility
d) Frequency or intensity of monitoring
e) Analysis of migration of deteriorating credits and more accurate computation of future loan
loss provision
f) Deciding the level of Approving authority of loan.

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Credit Risk Monitoring & Control


2.7.1 Credit risk monitoring refers to incessant monitoring of individual credits inclusive of OffBalance sheet exposures to obligors as well as overall credit portfolio of the bank. Banks need to
enunciate a system that enables them to monitor quality of the credit portfolio on day-to-day
basis and take remedial measures as and when any deterioration occurs. Such a system would
enable a bank to ascertain whether loans are being serviced as per facility terms, the adequacy of
provisions, the overall risk profile is within limits established by management and compliance of
regulatory limits. Establishing an efficient and effective credit monitoring system would help
senior management to monitor the
overall quality of the total credit portfolio and its trends. Consequently the management could
fine tune or reassess its credit strategy /policy accordingly before encountering any major
setback. The banks credit policy should explicitly provide procedural guideline relating to credit
risk monitoring. At the minimum it should lay down procedure relating to
a) The roles and responsibilities of individuals responsible for credit risk monitoring
b) The assessment procedures and analysis techniques (for individual loans & overall portfolio)
c) The frequency of monitoring
d) The periodic examination of collaterals and loan covenants
e) The frequency of site visits
g) The identification of any deterioration in any loan

Given below are some key indicators that depict the credit quality of a loan:
a. Financial Position and Business Conditions. The most important aspect about an obligor is
its financial health, as it would determine its repayment capacity. Consequently institutions need
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carefully watch financial standing of obligor. The Key financial performance indicators on
profitability, equity, leverage and liquidity should be analyzed.

b. Conduct of Accounts. In case of existing obligor the operation in the account would give a
fair idea about the quality of credit facility. Institutions should monitor the obligors account
activity, repayment history and instances of excesses over credit limits. For trade financing,
institutions should monitor cases of repeat extensions of due dates for trust receipts and bills.

c. Loan Covenants. The obligors ability to adhere to negative pledges and financial covenants
stated in the loan agreement should be assessed, and any breach detected should be addressed
promptly.

d. Collateral valuation. Since the value of collateral could deteriorate resulting in unsecured
lending, banks need to reassess value of collaterals on periodic basis. The frequency of such
valuation is very subjective and depends upon nature of collaterals.

Risk review
2.8.1 The institutions must establish a mechanism of independent, ongoing assessment of credit
risk management process. All facilities except those managed on a portfolio basis should be
subjected to individual risk review at least once in a year. The results of such review should be
properly documented and reported directly to board, or its sub committee or senior management
without lending authority. The purpose of such reviews is to assess the credit administration

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process, the accuracy of credit rating and overall quality of loan portfolio independent of
relationship with the obligor.

2.8.2 Institutions should conduct credit review with updated information on the obligors
financial and business conditions, as well as conduct of account. Exceptions noted in the credit
monitoring process should also be evaluated for impact on the obligors creditworthiness. Credit
review should also be conducted on a consolidated group basis to factor in the business
connections among entities in a borrowing group.

2. CR. RISK MANAGEMENT IN INDIA


Management Of Loans And Advances
Background
In the context of rapid growth of primary (urban) co-op. banks (PCBs), qualitative aspects of
lending, such as adequacy of lending to meet credit requirements of their borrowers and effective
supervision and monitoring of advances have assumed considerable importance. Previously
working capital finance provided by the banks to trade and industry was regulated by the
Reserve Bank of India through a series of guidelines/instructions issued. There were various
quantitative and qualitative restrictions on banks lending. The banks were also expected to
ensure conformity with the basic financial disciplines prescribed by the RBI from time to time
under Credit Authorization Scheme (CAS).

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1.2 However, consistent with the policy of liberalization and financial sector reforms, several
indirect measures to regulate bank credit such as exposure norms for lending to individual/group
borrowers, prudential norms for income recognition, asset classification and provisioning for
advances, capital adequacy ratios, etc. were introduced by RBI and greater operational freedom
has been provided to banks in dispensation of credit.

1.3 Banks are now expected to lay down, through their boards, transparent policies and
guidelines for credit dispensation, in respect of each broad category of economic activity,
keeping in view the credit exposure norms and various other guidelines issued by the
Reserve Bank of India from time to time. Some of the currently applicable guidelines are
detailed in the following paragraphs.

Working Capital requirements UPTO Rs. 1 crore

The assessment of working capital requirement of borrowers, other than SSI units, requiring fund
based working capital limits up to Rs.1.00 crore and SSI units requiring fund based working
capital limits up to to Rs.5.00 crore from the banking system may be made on the basis of their
projected annual.
2.2 In accordance with these guidelines, the working capital requirement is to be assessed at
25% of the projected turnover to be shared between the borrower and the bank, viz. borrower
contributing 5% of the turnover as net working capital (NWC) and bank providing finance at a
minimum of 20% of the turnover.

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2.3 The banks may, at their discretion, carry out the assessment based on projected turnover basis
or the traditional method. If the credit requirement based on traditional production/processing
cycle is higher than the one assessed on projected turnover basis, the same may be sanctioned, as
borrower must be financed up to the extent of minimum 20 per cent of their projected annual
turnover.
2.5 The borrowers would be required to bring in 5 per cent of their annual turnover as margin
money. In other words, 25 per cent of the output value should be computed as working capital
requirement, of which at least four-fifth should be provided by the banking sector, the balance
one-fifth representing the borrower's contribution towards margin for the working capital.
2.6 Drawals against the limits should, however, be allowed against the usual safeguards so as to
ensure that the same are used for the purpose intended. Banks will have to ensure regular and
timely submission of monthly statements of stocks, receivables, etc., by the borrowers and also
periodical verification of such statements vis--vis physical stocks by their officials.
Working Capital Requirements ABOVE Rs. 1 crore
3.1 Method of Assessment
3.1.1 The revised guidelines in respect of borrowers other than SSI units, requiring working
capital limits above Rs.1 crore and for SSI units requiring fund based working capital limits
above Rs.5 crore, from the banking system bestow greater level of flexibility to the primary
(urban) co-operative banks in their day-to-day operations without diluting the prudential norms
for lending as prescribed by Reserve Bank of India.

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3.1.2 The earlier prescription regarding Maximum Permissible Bank Finance (MPBF), based on
a minimum current ratio of 1.33:1, recommended by Tandon Working Group has been
withdrawn. Banks are now free to decide on the minimum current ratio and determine the
working capital requirements according to their perception of the borrowers and their credit
needs.
3.1. 3 .Banks may evolve an appropriate system for assessing the working capital credit needs of
borrowers whose requirement are above Rs.1 crore. Banks may adopt any of the under-noted
methods for arriving at the working capital requirement of such borrowers.
a). The turnover method, as prevalent for small borrowers may be used as a tool of assessment
for this segment as well,
b). Since major corporates have adopted cash budgeting as a tool of funds management, banks
may follow cash budget system for assessing the working capital finance in respect of large
borrowers.
c). The banks may even retain the concept of the MPBF with necessary modifications.
3.2 Norms for Inventory/Receivables
3.2.1 In order to provide flexibility in the assessment of credit requirements of borrowers based
on a total study of borrowers' business operations, i.e., taking into account the
production/processing cycle of the industry as well as the financial and other relevant parameters
of the borrower, the banks have also been permitted to decide the levels of holding of each item
of inventory as also of receivables, which in their view would represent a reasonable build-up of
current assets for being supported by bank finance.

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3.2.2. Reserve Bank of India no longer prescribes detailed norms for each item of inventory as
also of receivables.
3.3 Classification of Current Assets and Current Liabilities
3.3.1 With the withdrawal of MPBF, inventory norms and minimum current ratio, the
classification of current assets and current liabilities ceases to be mandatory. The banks may
decide on their own as to which items should be included for consideration as current assets or
current liabilities.
3.3.2 Banks may also consider evolving suitable internal guidelines for accepting the projections
made by their borrowers relating to the item "Sundry Creditors (Goods)" appearing as an item
under "Other Current Liabilities" in the balance sheet.
3.4 Bills Discipline
In respect of borrowers enjoying fund-based working capital credit limits of Rs. 5 crore and more
from the banking system, the banks are required to ensure that the book-debt finance does not
exceed 75 per cent of the limits sanctioned to borrowers for financing inland credit sales. The
remaining 25 per cent of the credit sales may be financed through bills to ensure greater use of
bills for financing sales.
3.5 Grant of Ad hoc Limits
To meet the contingencies, banks may decide on the quantum and period for granting ad hoc
limits to the borrowers based on their commercial judgment and merits of individual cases.
While granting the ad hoc limits the banks must ensure that the aggregate credit limits (inclusive
of ad hoc limits) do not exceed the prescribed exposure ceiling.

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3.6 Commitment Charge


The levy of commitment charge is not mandatory and it is left to the discretion of the financing
banks/ consortium/syndicate. Accordingly, banks are free to evolve their own guidelines in
regard to commitment charge for ensuring credit discipline.
3.7 Consortium Arrangement
The mandatory requirement of formation of consortium for extending working capital finance
under multiple banking arrangements has been withdrawn.
3.8 Syndication of Credit
The syndication of loans is an internationally practised model for financing credit requirements.
The banks are free to adopt syndication route, irrespective of the quantum of credit involved, if
the arrangement suits the borrower and the financing banks.
3.9 Loan System for Delivery of Bank Credit
3.9.1 Background
In order to bring about an element of discipline in the utilization of bank credit by large
borrowers, instill efficiency in funds management, loan system for delivery of bank credit was
been introduced for borrowers enjoying working capital credit limits of Rs.10 crore and above
from the banking system and the minimum level of loan component for such borrowers was
fixed at 80 per cent. These guidelines have been revised by RBI, in the light of current
environment of short-term investment opportunities available to both the corporates and the
banks. In case any primary (urban) co-operative bank is having borrowers with MPBF of Rs. 10

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106

crore and above where it has participated under consortium/syndication, it should ensure strict
compliance with the under-noted guidelines.
3.9.2 Loan Component and Cash Credit Component
i.

Banks may change the composition of working capital by increasing the cash credit
component beyond 20 per cent or to increase the loan component beyond 80 per cent, as
the case may be, if they so desire.

ii.

Banks are expected to appropriately price each of the two components of working capital
finance, taking into account the impact of such decisions on their cash and liquidity
management.

iii.

If a borrower so desires, higher loan component can be granted by the bank; this would
entail corresponding pro-rata reduction in the cash credit component of the limit.

iv.

In the case of borrowers with working capital (fund based) credit limit of less than Rs. 10
crore, banks may persuade them to go in for the Loan System by offering an incentive in
the form of lower rate of interest on the 'loan component' as compared to the 'cash credit
component' The actual percentage of 'loan component' in these cases may be settled by
the bank with its borrower clients.

v.

In respect of certain business activities which are cyclical and seasonal in nature or have
inherent volatility, the strict application of loan system may create difficulties for the
borrowers. Banks, may with the approval of their respective Boards, identify such
business activities which may be exempt from the loan system of credit delivery.

3.9.3 Ad hoc Credit Limit

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

107

The release of ad hoc/additional credit for meeting temporary requirements may be considered
by the financing bank only after the borrower has fully utilized/exhausted the existing limit.
3.9.4. Sharing of Working Capital Finance
i.

The ground rules for sharing of cash credit and loan components may be laid down by
the consortium, wherever formed, subject to the stipulations contained in Para. 3.9.2
above.

ii.

The level of individual bank's share shall be governed by the norm for single / group
borrowers credit exposure.

3.9.5 Rate of Interest


Banks are allowed to fix separate lending rates for 'loan component' and 'cash credit component'.
3.9.6 Period of Loan
The minimum period of the loan for working capital purposes may be fixed by banks in
consultation with borrowers. Banks may decide to split the loan component according to the
need of the borrower with different maturity bases for each segment and allow roll over.
3.9.7 Security
In regard to security, sharing of charge, documentation, etc., banks may themselves decide on the
requirements, if necessary, in consultation with the other participant banks.
3.9.8 Export Credit

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

108

Export credit limit would be allowed in the form hitherto granted. The bifurcation of the working
capital limit into loan and cash credit components, as stated in paragraph 3.9.2 (i) above, would
be effected after excluding the export credit limits (pre-shipment and post-shipment).
3.9.9 Bills Limit
Bills limit for inland sales may be fully carved out of the 'loan component'. Bills limit also
includes limits for purchase of third party (outstation) cheques/bank drafts. Banks must satisfy
themselves that the bills limit is not mis-utilized.
3.9.10 Renewal/Roll-over of Loan Component
The loan component , may be renewed/rolled over at the request of the borrower. However,
banks may lay down policy guidelines for periodical review of the working capital limit and the
same may be scrupulously adhered to.
3.911 Provision for Investing Short Term Surplus Funds of Borrowers
The banks, at their discretion, may permit the borrowers to invest their short term/temporary
surpluses in short-term money market instruments like Commercial Paper (CP), Certificates of
Deposit (CDs) and in Term Deposit with banks, etc.
3.9.12 Applicability
The loan system would be applicable to borrower accounts classified as 'standard' or 'substandard'.
4.0 Credit Administration
4.1 No Objection Certificate

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

109

The primary (urban) co-operative banks should not finance a borrower already availing credit
facility from another bank without obtaining a 'No Objection Certificate' from the existing
financing bank.
4.2 Opening of Current Accounts
4.2.1 Keeping in view the importance of credit discipline for reduction in NPA levels at the time
of opening of current accounts banks should:
i.

insist on a declaration from the account holder to the effect that he is not enjoying any
credit facility with any other commercial bank or obtain a declaration giving particulars
of credit facilities enjoyed by him with any other commercial bank/s.

ii.

ascertain whether he/she is a member of any other co-operative society/bank; if so, the
full details thereof such as name of the society/bank, number of shares held, details of
credit facilities, such as nature, quantum, outstanding, due dates etc should be obtained.

4.2.2 Further, in case he/she is already enjoying any credit facility from any other
commercial/co-operative bank, the bank opening a current account should duly inform the
concerned lending bank(s) and also specifically insist on obtaining a "No Objection Certificate"
from them. In case of a prospective customer who is a corporate or large borrower enjoying
credit facilities from more than one bank, the banks may inform the consortium leader, if under
consortium, and the concerned banks, if under multiple banking arrangement.
4.3 Certification of Accounts of Non-Corporate Borrowers by Chartered Accountants
As per the Income Tax Act, 1961, filing of audited balance sheet and profit & loss account is
mandatory for certain types of non-corporate entities. Therefore, the banks must insist on the

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

110

audited financial statements from the borrowers enjoying large limits; since such borrowers
would, in any case, be submitting audit certificate to the income-tax authorities, based on audit of
their books of accounts by a Chartered Accountant.

CHAPTER EIGHT

RESEARCH AND ANALYSIS


PRIME BANK LIMITED
Credit Risk Grading Model
Date: 11.02.2006

Reference No.:
Particulars

Projected

2006

2005

2004

Sales Revenues (Less return, VAT etc.)


Other operating income
Cost of Goods Sold
Gross Profit

75.00
0.00
53.00
22.00

60.00
0.00
42.00
18.00

50.00
0.00
35.00
15.00

45.00
0.00
33.00
12.00

General and Admin. Expenses


Selling Expenses
Total Admin. & Selling Exp.
Operating Profit (Loss)
Other Income
Depriciation
Taxes
Other Expenses
Financial Expenses (Interest)
Net Profit (Loss)
Dividend
Retain Earnings

1.44
0.00
1.44
20.56
0.00
0.00
0.00
1.00
5.00
14.56
0.00
14.56

1.44
0.00
1.44
16.56
0.00
0.00
0.00
1.00
5.00
10.56
0.00
10.56

1.44
0.00
1.44
13.56
0.00
0.00
0.00
1.00
5.00
7.56
0.00
7.56

1.44
0.00
1.44
10.56
0.00
0.00
0.00
1.00
4.00
5.56
0.00
5.56

2006

2005

2004

0.20
0.00
15.36
0.00

0.50
0.00
11.00
0.00

1.00
0.00
17.00
0.00

Particulars
Current Asset
Cash in Hand
Cash at Bank
Accounts Receivable

Projected
0.76
0.00
23.80
0.00

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

111

Inventory/Stock
Advance Deposit

60.00

55.00

52.06

58.56

0.00

0.00

0.00

0.00

Prepaid Expenses

0.00

0.00

0.00

0.00

0.00
84.56

0.00
70.56

0.00
63.56

0.00
76.56

103.00
0.00
103.00
0.00
0.00
0.00
0.50

103.00
0.00
103.00
0.00
0.00
0.00
0.50

103.00
0.00
103.00
0.00
0.00
0.00
0.50

103.00
0.00
103.00
0.00
0.00
0.00
0.50

Acc. Depriciation

0.00

0.00

0.00

0.00

Furniture & Fixture (Net of Dep.)


Other Fixed Assets

0.50
0.00

0.50
0.00

0.50
0.00

0.50
0.00

Acc. Depriciation

0.00

0.00

0.00

0.00

0.00
103.50
188.06

0.00
103.50
174.06

0.00
103.50
167.06

0.00
103.50
180.06

0.00

0.00

0.00

0.00

20.00
33.33

5.00
33.33

5.00
33.33

15.00
33.33

0.00

0.00

0.00

0.00

Other Current Liabilities


Total Current Liabilities (3.5 to 3.8)
Non-Current Liabilities
Long Term Loan
Other Non-Current Liabilities (Bank)
Total Non-Current Liabilities
Total Liabilities

0.00
53.33

0.00
38.33

0.00
38.33

0.00
48.33

0.00
0.00
0.00
53.33

0.00
0.00
0.00
38.33

0.00
0.00
0.00
38.33

0.00
0.00
0.00
48.33

Capital/Paid-up Capital

96.49

112.05

115.61

126.17

Retained Earnings

38.24

23.68

13.12

5.56

Other Current Assets


Total Current Assets
Fixed Asset
Land & Building
Depriciation
Land & Building (Netof Dep.)
Plant & Machinery
Acc. Depriciation
Plant & Machinery (Netof Dep.)
Furniture & Fixture

Other Fixed Assets (net of Dep.)


Total Fixed Assets
Total Assets

Liabilities and Owners Equity


Current Liabilities
Accrued Items
Accounts Payable/Sundry Creditors
Bank Loan (under 1 year)
Long Term Loan Installment due for 1 Year

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

112

Reserves

0.00

0.00

0.00

0.00

Less Intangible Assets (i.e. Goodwill, Patent)

0.00

0.00

0.00

0.00

Tangible Net Worth

134.73

135.73

128.73

131.73

Total Liabilities & Equity

188.06

174.06

167.06

180.06

Major Ratios

Projected

2006

2005

2004

0.29
0.19
0.27
0.08
0.11

0.30
0.18
0.28
0.06
0.08

0.30
0.15
0.27
0.05
0.06

0.27
0.12
0.23
0.03
0.04

1.59
0.46

1.84
0.41

1.66
0.30

1.58
0.37

0.72
0.40

0.58
0.34

0.48
0.30

0.43
0.25

Sales to Working Capital (times)


Receivable Turnover in days

2.40
115.83

1.86
93.44

1.98
80.30

1.59
137.89

Inventory Turnover in days

413.21

477.98

542.91

647.71

97.33

30.42

36.50

121.67

0.40
0.28

0.28
0.22

0.30
0.23

0.37
0.27

0.51
2.91

0.41
2.11

0.33
1.51

0.26
1.39

Profitability Ratios:
Gross Profit Margin (%)
Net Profit Margin (%)
Operating Profit Margin (%)
Return on Assets (%)
Return on Equity (%)
Liquidity Ratios:
Current Ratio
Quick Ratio
Asset Utilization Ratios:
Sales to Fixed Assets (times)
Sales to Total Assets (times)

Payable Turnover in days


Debt Utilization Ratios:
Debt to Equity (%)
Debt to Total Assets (%)
Coverage Ratios:
Debt Service Coverage (times)
Interest Coverage in Times
Particulars
Operating Activities
Net Profit
Add: Non-cash Expenses
Less: Dividend payments
Change in Accounts Receivable
Change in Inventory/Stock
Change in Advance Deposit
Change in Prepaid Expenses
Change in Other Current Assets
Change in Accounts Payable
Change in Bank Loan (under I year)
Change in term loan installment due for 1
(one) year
Chamge in Accruables

2006

2005

Change (+/-)

15.36
55.00
0.00
0.00
0.00
5.00
33.33

11.00
52.06
0.00
0.00
0.00
5.00
33.33

10.56
0.00
0.00
(4.36)
(2.94)
0.00
0.00
0.00
0.00
0.00

0.00

0.00

0.00

0.00

0.00

0.00

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

113

Change in Other Current Liabilities

0.00

0.00

Net Cash from operating activities

0.00
3.26

Investing Activities
Change in Land & Building
Change in Plant and Machinery

103.00
0.00

103.00
0.00

0.00
0.00

Change in Furniture and Fixtures

0.50

0.50

0.00

Change in Other Non-current Assets


Net cash from Investing activities
Financing Activities
Change in Long term Loan
Change in other non-current liability
Change in Capital
Change in Reserves

0.00

0.00

0.00
0.00

0.00
0.00
112.05
0.00

0.00
0.00
115.61
0.00

0.00
0.00
(3.56)
0.00

Net Cash from Financing Activities

(3.56)

Net change in Cash Flow

(0.30)

Opening Balance
(Cash Withdrawal) /
injection
Ending Balance

0.50
Cash

0.00
0.20

Prime Bank Limited


XXXXXXXXXX
Credit Risk Grading Model
Score Summary
Reference No.:

Date: 11.02.2006

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

114

Name of the Borrower


Key Person
Group Name (if any)
Branch:
Industry
Sector
Date of Financials
Originated by (RO/SRO)

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXXXX
Aggregate Score:
31.12.2006
X

65.50

Risk Grading:

Marginal/W
atch List

Completed by (RM/SRM)
Approved by (CO/SCO)

Numeric Grade

Grade

Superior

2
3
4

Good
Acceptable
Marginal/Watchlist

5
6
7
8

Special Mention
Substandard
Doubtful
Bad/Loss

Score
Fully cash covered, secured by
Bank
SUP Government/International
Guarantee

Short

85+
75-84
65-74

GD
ACCPT
MG/W
L
SM
SS
DF
BL

55-64
45-54
35-44
<35

Score Calculation Sheet (Considering first year)


Criteria
A. Financial Risk
A-1 Leverage
A-1.1 Debt-Equity (x) - Times

Weight
50%
10%
5%

Parameter

< 0.25 x

Score Actual Parameter

5.00

0.32

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

Score
Obtained

4.5

115

Total Liabilities to Tangible Net worth

A-1.2 Debt-Total Asset (x)- Times

5%

Total Liability to Total Assets

A-2 Liquidity
A-2.1Current Ratio (x) -Times

10%
5%

Current Assets to Current Liabilities

A-2.2 Quick Ratio (x) -Times

5%

Quick Assets to Current Liabilities

A-3 Profitability
A-3.1 Operating Profit Margin (%)
(Operating Profit/Sales) X 100

0.26 to 0.35 x
0.36 to 0.50 x
0.51 to 0.75 x
0.76 to 1.25 x
1.26 to 2.00 x
2.01 to 2.50 x
2.51 to 2.75 x
> 2.75
< 0.25
0.26 to 0.35 x
0.36 to 0.50 x
0.51 to 0.75 x
0.76 to 1.25 x
1.26 to 2.00 x
2.01 to 2.50 x
2.51 to 2.75 x
> 2.75

4.50
4.25
4.00
3.50
3.25
3.00
2.50
0.00
5.00
4.50
4.25
4.00
3.50
3.25
3.00
2.50
0.00

> 2.74
2.50 to 2.74 x
2.00 to 2.49 x
1.50 to 1.99 x
1.10 to 1.49 x
0.90 to 1.09 x
0.80 to 0.89 x
0.70 to 0.79 x
< 0.70
> 2.00
1.75 to 2.00 x
1.50 to 1.74 x
1.25 to 1.49 x
1.00 to 1.24 x
0.75 to 0.99 x
0.50 to 0.74 x
0.25 to 0.49 x
Less than 0.25
> 25%
23% to 25%
20% to 22%
17% to 19%
14% to 16%
11% to 13%
8% to 10%

0.24

5.00
4.50
4.25
4.00
3.50
3.25
3.00
2.50
0.00
5.00
4.50
4.25
4.00
3.50
3.25
3.00
2.00
0.00

1.69

0.36

5.00
4.50
4.00
3.50
3.25
3.00
2.50

26.06%

20%
5%

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

116

< 8%
Criteria
A-3.2 Net Profit Margin (%)

(Net Profit/Sales) X 100

A-3.3 Retrun on Asset

5%

(Net Profit/Total Asset) X 100

A-3.4 Return on Equity

5%

(Net Profit/Total Equity) X 100

A-4 Coverage
A-4.1 Interest Coverage () - Times

10%
5%

Earning before interest & tax (EBIT)


Interest on debt
A-4.2 Debt Service Coverage

> 15.00%
13% to 15%
11% to 12%
9% to 10%
7% to 8%
5% to 6%
3% to 4%
< 3%
> 30%
26% to 30%
22% to 25%
18% to 21%
14% to 17%
8% to 13%
5% to 7%
< 5%
> 15.00%
13% to 15%
11% to 12%
9% to 10%
7% to 8%
5% to 6%
2% to 4%
< 2%

5.00
4.50
4.00
3.50
3.25
3.00
2.50
0.00
5.00
4.50
4.00
3.50
3.25
3.00
2.50
0.00
5.00
4.50
4.00
3.50
3.25
3.00
2.00
0.00

15.03%

Score
Obtained
5

4.56%

5.96%

> 2.00
1.51 to 2.00
1.25 to 1.50
1.00 to 1.24
< 1.00
> 2.00
1.51 to 2.00
1.25 to 1.50
1.00 to 1.24
< 1.00

5.00
4.00
3.00
2.00
0.00
5.00
4.00
3.00
2.00
0.00
50.00

1.67

0.33

> 60.00

4.00

0.60

30.00 59.99

3.50

10.00 29.99

3.00

5.00 - 9.99

2.00

Weight
5%

5%

EBITDA/(Total Interest+CMLTD)

0.00
Parameter

Total Score- Financial Risk


B. Business/ Industry Risk
B-1 Size of Business (in BDT crore)
Size of the borrower's business
measured by the most recent year's

18%
4%

Score Actual Parameter

32.50

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

117

total
sales.
numbers.

Preferably

audited

B-2 Age of Business


Number of years the borrower is
engaged in the primary line of
business

3%

B-3 Business Outlook

2%

Critical assesment of medium term


prospects of industry, market share
and economic factors.
Criteria

1.00
0.00

> 10 Years
6 - 10 Years

3.00
2.00

2 - 5 Years

1.00

< 2 Years

0.00

Favorable

2.00

Stable

1.50

Slightly Uncertain

1.00

Cause for Concern

0.00

Weight

B-4 Raw Material Availability

B-5 Industry Growth

share,

2%

3%

B-6 Market Competition


Consider market
supply gap etc.

2.50 - 4.99
< 2.50

2%
demand

B-7 Entry/Exit Barrier

2%

(Technology, capital, regulation etc)

Parameter

C. Management Risk
C-1 Experience
Total length of experience of the
senior management in the related
line of business.

Slightly Uncertain

Score Actual Parameter

Locally available

2.00

Partially import dependent

1.00

Fully import dependent

0.50

Scarce

0.00

Strong (10%+)

3.00

Good (>5% - 10%)

2.00

Moderate (1%-5%)

1.00

No Growth (<1%)

0.00

Dominant Player

2.00

Moderately Competitive

1.00

Highly Competitive

0.00

Difficult

2.00

Average

1.00

Easy

0.00

Total Score- Business Risk

above 10

Score
Obtained

Partially import
dependent

Strong (10%+)

Highly Competitive

Easy

18.00

8.00

12%
5

More than 10 years

5.00

610 years

3.00

15 years

2.00

610 years

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

118

C-2 Trackrecord

Reputation, commitment, trackrecrod


of onwers in business.

C-3 Second Line/Succession

C-4 Team Work

No experience
Very Good

0.00
2.00

Moderate

1.00

Poor

0.50

Marginal

0.00

Ready Succession

3.00

Succession within 1-2 years

2.00

Succession within 2-3 years

1.00

Succession in question

0.00

Very Good

2.00

Moderate

1.00

Poor

0.50

Regular Conflict

0.00

Total Score- Management Risk

Criteria
D. Security Risk
D-1 Security Coverage (Primary)

Ready Succession

Very Good

12.00

Weight

Parameter

10.00

Score Actual Parameter

Score
Obtained

10%
4%

Fully
covered
by
underlying
assets/substantially
cash
covered
Registered Hypothecation
(1st
Charge/Pari
passu
Charge)

2nd charge/Inferior charge

Simple hypothecation
Negative lien on assets

D-2 Collateral Coverage (Property


Location)

Very Good

4%

Registered
Hypothecation (1st
Charge/Pari passu
Charge)

R/M on Municipal
corporation/Prime
Area property

No security

R/M
on
Municipal
corporation/Prime
Area
property

R/M on Pourashava/SemiUrban area property

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

119

D-3 Support (Guarantee)

2%

E/M or No property but


other Plant & Machinery as
collateral
Negative lien on collateral

No collateral

Personal Guarantee with


high net worth or Strong
Corporate Guarantee

Personal Guarantees or
Corporate Guarantee with
average financial strength

No support/guarantee

Total Score- Security Risk


E. Relationship Risk
E-1 Account Conduct

Personal
Guarantees or
Corporate
Guarantee with
average financial
strength

10
10%

E-2 Utilization of Limit


(actual/projection)-Consider
both
revolving & non-revolving limits.

Criteria
E-3 Compliance of Covenants

E-4 Personal Deposits

10%
5%

2%

Weight
2%

1%

More than 3 years Accounts


with faultless record

5.00

Less than 3 years Accounts


with faultless record

4.00

Accounts
having
satisfactory dealings with
some late payments.

2.00

Frequent
Irregular
account

0.00

Past dues
dealings

&
in

More than 80%


61% - 80%
40% - 60%
Less than 40%
Parameter

2.00
1.50
1.00
0.00

Accounts
having
satisfactory
dealings with some
late payments.

80%+

Score Actual Parameter

Full Compliance

2.00

Some Non-Compliance

1.00

No Compliance

0.00

Personal accounts of the


key business Sponsors/
Principals are maintained in
the bank, with significant
deposits

1.00

Full Compliance

Personal accounts
of the key business
Sponsors/
Principals
are
maintained in the
bank,
with
significant deposits

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION

Score
Obtained
2

120

No depository relationship
Total Score- Relationship Risk

0.00
10.00

7.00

Grand Total - All Risk

100.00

65.50

Note: All calculations should be based on annual financial statements of the borrower (audited preferred).

Working Notes:
Gross profit margin: gross profit/ sales
Net profit margin : net profit/ sales
Operating profit margin: operating profit / sales
Return on asset : net profit/ total asset
Return on equity: profit after tax/ net worth

Current ratio: current asset / current liabilities


Quick ratio: current asset-inventory/current liabilities
Working capital: current asset-current liabilities
Sales to working capital: sales/w.c
Sales to fixed assets: sales/ total fixed assets
Sales to total asset: sales/ total asset
Receivable turnover in days: (acc. Rec/sales) x 365
Inventory turnover: cogs/ inventory

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Inventory turnover in days: 365/ inventory turnover


Payable turnover in days: (payable/ sales) x 365
Debt equity ratio: Debt(total liab)/ Equity(net worth)
Debt to total asset: Debt(total liab)/ total asset
Interest coverage times: EBIT/interest

CHAPTER NINE
Findings and Conclusion

9.0. Finding of the study:


9.1 The situation Before Credit Risk Grading started:
9.1.a: There was no appropriate criterion for loan analysis, loan classification and provisioning.
Consequently, many non-performing loans were considered performing ones which resulted in
sufficient provision and high accounting profit.
9.1.b: There were so many financial indiscipline in Credit Analysis & Credit Management
Information System, Performing Planning System etc.
9.1.c Overall operational efficiency including administrative discipline went down.
9.1.d Legal frame work failed to take appropriate measures against the defaulting borrowers.
9.1.e Interest rate on both deposits and credits were determined exclusively by Bangladesh Bank.

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9.2 Measures taken by Banks:


9.2.a Loans are classified and provision made on the basis of new criteria.
9.2.b. Some effective banking tools like LRA(Lending Risk Analysis), NLLC( New Loan Ledger
Card), MIS( Management Information System), PPS(Performance Planning System) &
Computerization have been introduce and a good number of Officers have been trained to
implement these.
9.2.c Now, Banks fix interest rates for both deposits and most of the loans. But fixation of
interest rates on the basis of market forces are yet to be done.

9.3 Implementation status :


# Amount of classified loans & provision has increased after implementation of the new criteria
for loan classification and provision.
# Lending Risk Analysis (LRA) is compulsory for all loans of Tk. 1.00 crore and above) /
Credit Risk Grading (CRG)is compulsory for all loans irrespective of amount other than Short
Term Agricultural Credit & Micro- credit); New Loan Ledger Card (NLLC) is
done by all banks. Banks undertake computerization plan for automation.
# A good number of Officers are trained to implement LRA, CRG, NLLC, Performance planning
System (PPS) and Large Loan Reporting System (LLRS)
# Bangladesh Bank adopts a new modern view on Bank Credits to match with global situation.
# Bangladesh Bank increases effective On-site & Off-site supervision over the Banks.

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# Government has taken reforming measures and amended bank Companys Act,1991 to meet
the demand of open market economy.

9.4 Problems of Implementation :


Lack of environmental and logistic supports
Lack of understanding of working procedure & environment.
Shortage of effective & well trained manpower

9.5 Achievement of the Measures :


# Banks are now goal oriented
# More equipped with information and analysis.
# Commercial profit driven than social profit driven.
# More independent to decide strategy for growth.

9.6 Causes of Non-fulfillment of Objectives :


# Insufficient vision and leadership from the suffer hierarchy.
# Lack of sufficient political commitment on the part of the Government to implement reform
programs.
# Inappropriate legal frame work.
Here it is found from the above tables that the overdue loans of Banks are decreasing
over the time. It is a positive effects of measures taken by Banks, Bangladesh Bank &
Government, resulting better Financial Condition of the country.

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9.7. Recommendation:
9.7.1 A good plan is the half done of a job. so adoption of planning in every event and activity of
banking operations will harness achieving the target. The field of planning may be as follows :
Manpower Planning / HRD
Deposit & Credit Rationality including selection of good borrower.
Remittance & Foreign Exchange Business.
Motivation and Cost effectiveness.
Budgeting
9.7.2

Enforcing credit discipline, disciplining borrowers, bank owners, bank officers and
employees.

9.7.3

International Banking System (Globalization of banking system) should be


followed as far as possible. Cr. System should be updated.

9.7.4 Proper marketing of bank-services; observance of service-week / fortnight / month,


proper behavior and attitudes of the bankers towards customers.
9.7.5 Appropriate legal frame work is required against the default culture (the existing
legal frame work on the matter is not sufficient).
9.7.6 More political commitment on the part of the Government to implement reform
programs on credit system (political unrest also causes instability of the economy i.e.
financial system).

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9.7.7

Appropriate measures to develop capital market ( Capital market is not yet properly
structured in the country).

9.7.8

Specific problems of individual bank to be identified and appropriate measures be taken


to address them ( Bangladesh Bank now identifies problem banks and take special
necessary care. It must be continued independently / effectively / efficiently).

9.7.9 Credit related activities must be guided and supported from top-most hierarchy.

9.8. Conclusion :

A number of prudential Credit Analysis Techniques (reform measures) have been introduced and
economic regulations have been liberalized. The measures aimed at improving financial
discipline depending on the market forces and to improve operational efficiency. But appreciable
change in operational efficiency and management attitudes of banks are yet to be developed.

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The measures so far taken are appropriate and demand continuation and extension. There has
been improvement in the context of financial discipline and workings of the overall financial
system. Increasing competition and adaptation of advanced technology both domestically and
internationally require to upgrade the systems on regular basis to remain competitive. So, It
should be continued the activities in that direction.
It has been demonstrated that financial reform is more successful in countries that already have
relatively strong human capital base. Human capital is invaluable in the financing reform
process, but without a proper incentive system it can not be developed. Service should valued on
the basis of a market-based system. If salaries are not at the proper level, desired personnel
cannot be recruited and retained. If appropriate incentives and training are not given, motivation
and efficiency will be lacking. These are to be seriously taken care of to build up a well-knit and
efficient system.
I wish overall success of the system.

----------------------------------------------XXXXXXXXXX------------------------------------------------ABBREVIATION

ACSPD = Agricultural Credit and Special Programs Department


ADs = Authorized Dealers
BB= Bangladesh Bank
BCD = Banking Control Department
BRPD = Banking Regulation and Control department
BIBM = Bangladesh Institute of Bank Management
BBTA = Bangladesh Bank Training Academy

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BL = Bad & Loss


CAS = Credit Authorization Scheme
CP = Commercial Paper
CDs = Certificates of Deposit
CRR = Cash Reserve Requirement
CRG = Credit Risk Grading
CRMC = Credit Risk Management Committee
CRMD = Credit Risk Management Department
CBSP = Central Bank Strengthening Project
CIB = Credit Information Bureau
DF = Doubtful
DBI = Department of Bank Inspection
ERB = Economic Review of Bangladesh
EWS = Early Warning Signals
FCBs = Foreign Commercial Banks
FSS = Financial Spread Sheet
FSRP = Financial Sector Reform Program
IDA = International Development Association
IAS = International Accounting Standards
ISA = International Standard on Auditing
LLRS = Large Loan Reporting System
LRA = Lending Risk Analysis
MIS = Management Information System
MG/WL = Marginal/Watchlist
NLLC = New Loan Ledger Card
NWC = Net Working Capital
OBU = Offshore Banking Unit
PPS = Performance Planning System
PCBs = primary (urban) co-op. banks
SLR = Statutory Liquidity Reserve

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RBI = Reserve Bank of India


ROA = Return On Asset
ROE = Return On Equity
ROI = Return On Investment
RWA = Risk Weighted Asset
SM = Special Mention
SS = Substandard

BIBLIOGRAPHY

1. CREDIT RISK GRADING MAUAL 2006.


2. BANGLADESH BANK WIKIPEDIA.
3. BANGLADESH BANK ORDER, 1972(P.O.NO. 127 OF 1972).
[Published in the Bangladesh Gazette, Extraordinary, Part IIIA, dated the 3lst October,
1972]

4. BANGLADESH BANK ANNUAL REPORT 2005-2006


5. LOAN CLASSIFICATION MANUAL, 1989.
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129

6. BCD. CIRCULAR NO. 34/1989 & 20/1994.


7. BRDP. CIRCULAR NO. 16/1998, 20/2005 & 09/2005
8. MASTER CIRCULAR LOAN CLASSIFICATION AND PROVISION : BRDP
CIRCULAR NO. 05/06
9. MONEY LAUNDERING PREVENTION ACT, 2002
10. Master Circular on Management of Advances (Updated upto 30 June, 2006)--- by
RESERVE BANK OF INDIA
11. Risk Management -- Guidelines for Commercial Banks & DFIs by the State Bank of
Pakistan.
12. Primary data BY PRIME BANK LTD.
Websites:
www.bangladeshbank.org.bd
www.bangladesh-bank.org
www.saneinetwork.net
www.google.com
www.rbi.org.in
www.sbp.org
THE END

CREDIT RISK GRADING- A NEW CONCEPT OF MANAGING CREDIT RISK & LOAN CLASSIFICATION