Certified Expert in Credit Management (CECM)

(4th Intake)

Assignment-I
On
Credit Activities and Working Capital Financing by a Bank

Name of Participant : Al Mamun Sanaul Bari

ID# of the Participant : 16
Name of Affiliated Institute : NRB Commercial Bank Ltd.
Cell Phone Number : 01717 717239
Email Address : sanaul.bari@nrbcommercialbank.com

Date of Submission : May 31, 2020.

Bangladesh Institute of Bank Management (BIBM)

Mirpur-2, Dhaka

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1. Discuss, in brief, the activities associated with credit operations of bank

As part of major operational task every banks’ follow some step by step guidelines consisting of
list and sequence of several activities associated with its credit operation. In Bangladesh these
guidelines are prepared in accordance of Credit Risk Manual (CRM) principles instructed by
Bangladesh Bank. However, in bank’s own credit policy they encompass their own vision,
mission and management policies. Besides this, they also follow monitoring authorities’ regular
instructions which are mandatory for operations.
Credit operations activities start with discussion between bank and client and end with recovery
of loan amount. Usually Bank follows centralized or decentralized operations procedures to
perform the functions. However, the overall activities of the credit operations of a bank are
discussed below:

Stage 1: Origination of Credit:

Each year the Bank Management prepares a credit budget indicating the amount of credit to be
sanctioned and disbursed in different areas, categories, products and sectors. Credit
committee/CRM is entrusted to sanction and disburse the budgeted amount prudently. Generally,
there is a credit committee /CRM in every region, area, division and head office of each bank
which reviews every aspect of a loan proposal to be considered in approving and sanctioning
loan. Relationship Management/ Marketing (RM) unit acts as a primary bank contact with a
borrower.
At first, the banker and the customer discuss with each other about the credit facilities offered by
the bank and required by the customer. Through discussion, RM is to ensure that proposed credit
is from expected business segment/sector and for permissible and expected credit facility. He
also ensures that there is a scope of lending to the client. After a successful discussion, customer
is to apply for credit in a prescribed format provided by the bank. After receiving loan
application from the prospective borrower, RM scrutinizes the submitted information and
collects all other required information from different parties including Credit Information Bureau
(CIB) report.

Stage 2: Approval of Loan Proposal:

The authority to sanction/approve loans is clearly delegated to senior credit executives by the
Managing Director (MD)/Chief Executive Officer (CEO) and Board of Directors (BOD).
Approval authority is required to be delegated to individual executives based on the executive’s
knowledge and experiences. The recommending/ approving executives should take responsibility
for and be held accountable for their recommendation/ approval. Before approval, the Head of
CRM forward the loan proposal to Risk management Unit (RMU) for their observation regarding
risk. After getting observations from RMU, the Head of CRM process for approval. Afterwards,
the loan proposal will be approved/ rejected and send back to RM through following due process.

CECM 4th Intake, Assignment-1

Stage 3: Documentation and Disbursement of Credit:
Getting the approval for the loan proposal, RM makes two copies of the proposal and sends one
copy to RMU and the other to Credit Administration Department (CAD) for documentation.
Then, CAD issues sanction /offer letter to the customer through RM. Customer should agree with
the terms and conditions incorporated in the offer letter. Subsequently, RM completes the Loan
Documentation Check List (LDCL) and forwards the acceptance to CAD. CAD takes necessary
steps for disbursement of the loan amount.

Stage 4: Monitoring and Follow-up of Credit:

After disbursement, RM regularly follows-up the credit. Monitoring unit under CAD alongside
of zonal office monitors credit based on due-date-diary. Identification of early alert account and
reporting the same to CRM are responsibilities of RM. Through close monitoring, the quality of
early alert account may improve but conversion of this account to regular account status is under
the discretion of CRM. As per credit policy, RM is to classify the accounts and maintain required
provisions.

Stage 5: Recovery of Credit

There is a separate Recovery Unit (RU) in each bank as per CRM manual. This unit should
directly manage accounts with continuous deterioration. Its primary responsibilities are to
determine recovery strategy, pursue all options to maximize recovery, ensure adequate and
timely loan loss provisioning, etc. The management of Non-Performing Loan (NPL) is a
challenging job, and the associated strategy together with the adequacy of provisions should be
reviewed regularly.

CECM 4th Intake, Assignment-1

2. How would you explain the importance of working capital requirements to
an entity and working capital financing by a bank?

Importance of working capital requirements to an entity:

Working capital is a daily necessity for businesses, as they require a regular amount of cash to
make routine payments, cover unexpected costs, and purchase basic materials used in the
production of goods.

Efficient working capital management helps maintain smooth operations and can also help to
improve the company's earnings and profitability. Management of working capital includes
inventory management and management of accounts receivables and accounts payables. The
main objectives of working capital management include maintaining the working capital
operating cycle and ensuring its ordered operation, minimizing the cost of capital spent on the
working capital, and maximizing the return on current asset investments.  

Working capital is a prevalent metric for the efficiency, liquidity and overall health of a
company. It is a reflection of the results of various company activities, including revenue
collection, debt management, inventory management and payments to suppliers. This is because
it includes inventory, accounts payable and receivable, cash, portions of debt due within the
period of a year and other short-term accounts.

The needs for working capital vary from industry to industry, and they can even vary among
similar companies. This is due to several factors, including differences in collection and payment
policies, the timing of asset purchases, the likelihood of a company writing off some of its past-
due accounts receivable, and in some instances, capital-raising efforts a company is undertaking.

Working capital financing by a bank:

Banks finance Working capital by various modes such as trade credit, cash credit/bank overdraft,
working capital loan, purchase of bills/discount of bills, bank guarantee, letter of credit,
factoring, commercial paper etc.

The arrangement of working capital financing forms a major part of the day to day activities of a
Relationship Manager. It is a very crucial activity and requires continuous attention because
working capital is the money which keeps the day to day business operations smooth. Without
appropriate and sufficient working capital financing, a firm may get into troubles. Insufficient
working capital may result in nonpayment of certain dues on time. Inappropriate mode of
financing would result in loss of interest which directly hits the profits of the firm.

CECM 4th Intake, Assignment-1

 Types of Working Capital Financing / Loans

o Trade Credit
o Cash Credit / Bank Overdraft
o Working Capital Loans
o  Purchase / Discount of Bills
o Bank Guarantee
o Letter of Credit
o Factoring

CECM 4th Intake, Assignment-1

3. To what extent, ICRRS is better than CRGS?

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.
To establish a common measurement system to analyze the quality of credit Bank has established
Credit Risk Grading (CRG) manual in 2005. Over the year it has been practiced by the Banks &
FIs to analyze their credit pattern. But it became problem to analyze every credit customer in one
single manual, to solve this problem in 2019 Bangladesh bank has published ICRRS (Internal
Credit Risk Rating Systems) manuals for Banks & FIs. Internal Credit Risk Rating System will
be an integral part of credit risk management for the banks.
The key uses of this guideline are as follows:
a) To provide a granular, objective, transparent, consistent framework for the measurement
and assessment of borrowers’ credit risk.
b) To facilitate the portfolio management activities.
c) To assess the quality of individual borrower to help the banks to determine the quality of
the credit portfolio, line of business of the branch or the Bank as a whole.
d) To be used for individual credit selection, credit pricing, and setting credit limit and terms
& conditions.
Core focus area of ICRRS is repayment although CRG only represented customer’s financial &
Management health. ICRRS use 34 risk factors covering 100 marks and analyze the financial
statements both by qualitative and quantities judgements. Through ICCRS Banks and FIS check
latest audited Financial reports of the borrowers with special focus in Cash Flow Statements.
In CRG manual it was easier to do fraud by doing Data manipulation by mis-data representation
but in ICRRS it has stopped the way to data manipulation in general context. Through all the
factors presentation & extent of data analysis it is easier to say that ICRRS is far better than
CRG.

CECM 4th Intake, Assignment-1