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Credit approval policy and practice of BANK ASIA LIMITED 1.2 Significance of the Study Four years back Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four ‘Focus Groups’ were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinators to look into the practices of the best performing banks both at home and abroad. These focus groups identified and selected five core risk areas and produced a document that would be a basic risk management model for each of the five 'core' risk areas of banking. The five core risk areas are as followsa)

Credit Risks;

b)

Asset & Liability / Balance Sheet Risks;

c)

Foreign Exchange Risks;

d)

Internal Control & Compliance Risks; and

e)

Money Laundering Risks.

Bangladesh Bank in one of it’s circular (BRPD Circular no.17) advised the commercial banks of Bangladesh to put in place an effective credit approval and monitoring system by December, 2003 based on the guidelines sent to them. While doing internship in the Credit Department of Bank Asia Limited, Scotia Branch, and for preparing the report will try to make a comparative analysis of Credit Approval & Monitoring process of Bank Asia Limited existing credit policy following Bangladesh Bank’s suggested guidelines.


1.3 Objectives of the Study The study has been undertaken with the following objectives •

To identify the factor affecting credit risk.

To evaluate the techniques for credit risk management used by Bank asia ltd.

To compare the existing credit approval and monitoring process of Bank Asia Limited with that of Bangladesh Bank guidelines.

To identify and suggest scopes of improvement of existing methods of loan approval, maintenance and monitoring in the credit division of Bank Asia Ltd.

1.4 Methodology The following sources have been used for the purpose of gathering and collecting data as required. i) Primary sources

&

ii) Secondary sources.

A. Primary sources: 1) Observation

&

2) Personal interview

B. Secondary sources: 1) Different Reports of Bank Asia Ltd. 2) Head Office Circulars 3) Brochures of Bank Asia Ltd. &

4) Previous Internship report.

Both primary and secondary data sources will be used to generate this report. Primary data sources are scheduled survey, informal discussion with professionals and observation while working in different desks. The secondary data sources are annual reports, manuals, and brochures of Bank Asia Limited and different publications of Bangladesh Bank. To identify the implementation, supervision, monitoring and repayment practice- interview with the employee and extensive study of the existing file and practical case observation were done.


1.5 Limitation of the Report This report will only consider credit risks of Bank Asia Limited. Due to time constrain, it will not cover•

Asset and liability/ balance sheet risk.

Foreign Exchange Risk

Internal control and compliance risk

Money laundering Risk.

Besides I was not able to visit the different branches of Bank Asia and had to rely mostly on the information gathered from the Scotia Branch.

1.6 Report Organization This report is divided in five sections. The following section is the organization part i.e. this section will give an overview of Bank Asia Limited. In section iii, Credit approval policy and practice of BANK ASIA LIMITED is significantly analysed with respect to Bangladesh Bank’s guidelines for credit management in section iv. Section v deals with findings and recommendations. Bank Asia Limited is one of the leading private sector banks in Bangladesh offering full range of Personal, Corporate, International Trade, Foreign Exchange and Capital Market Services. Bank Asia Limited is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments, assuring Excellence in Banking Services. 1.7 Background of Bank Asia Limited Bank Asia started its journey on the 27th of November 1999 with the inauguration of the bank’s Corporate Office at the Rang’s Bhaban. By a great number of public responses has enabled the Bank to keep up the plan of expanding its network. The opening of the Principal Office was the big leap forward and successively the opening of Gulshan and Chittagong Branch expanded the horizon of Bank Asia to bring its services to the valued clients more effectively. Within a very short period, the Bank has opened 2 more branches in Dhaka and 2 branches in Sylhet and Kishorganj. In February 2001 Bank Asia took over the Bangladesh operation of The Bank of


Nova Scotia of Canada, the first acquisition of a foreign bank by a local bank in the history of Bangladesh. Later, Bank Asia took over the Bangladesh operation of Muslim Commercial Bank

Limited (MCB) of Pakistan in January 2002. These courageous moves were possible for some visionary decision-makers and also dedicated team of professionals who are constantly putting all their best efforts to establish the bank as one of the leading concern in the industry Bank Asia has so far been highly successful in keeping its clientele satisfied with its high quality services, while continuing its expansion to reach more people around the whole nation. Bank Asia conducts all types of commercial banking activities. The core business of the bank comprises of import, export, working capital finance and corporate finance. The bank is also rendering Consumer loan, and services related to local and foreign remittances. The “Consumer loan� scheme of the bank, which is designed to help the fixed income group in raising standard of living is competitively priced and has been widely appreciated by the customers. The Bank also has ATM services and very lucrative deposit schemes i.e. DG+, DB+, MB+ which have earned the Bank a name in the market. However, these products are temporarily suspended at present. 1.8 Capital Base Authorized Capital

:

Paid up Capital :

BDT 1395,000,000(as on December 31, 2007)

2.1

BDT 4450,000,000.

SWOT Analysis of Bank Asia Ltd.

Every organization is composed of some strengths and weaknesses, which are its internal factors. The opportunities and threats it encounters are external elements. The following will briefly list some of Bank Asia’s internal strengths and weaknesses, and external opportunities and threats, as I perceive from my experience. 2.1.1 Strengths Quality Bank Asia strives to endow its customers with appreciable quality in every service it provides. Customer satisfaction claims the highest priority, as it should be in any service-oriented organization. Adaptability


Bank Asia draws its strength from the adaptability and dynamism it possesses. It has quickly adapted to world class standard in terms banking services. Bank Asia has also adopted state of the art technology to connect with the world for better communication to integrate facilities.

Financial strength

Bank Asia is a financially sound company backed by the enormous resource base of the mother concern RANGS group. As a result customers feel comfortable and more secure while dealing with the bank. Efficient management All the levels of management are solely directed to maintain a culture for the betterment of the quality of the service and for developing a brand image in the market through the organization’s wide team approach and horizontal communication system. State of the art technology Bank Asia utilizes state-of-the-art technology to ensure consistent quality and operation. The evidence of that can be found in one of its branches, Banani that is equipped with Reuters and SWIFT. All these facilities will be introduced in every branch very shortly. Bank Asia Limited has also started using the Stelar Software since January 01, 2004 Human Resource Expertise One of the key-contributing factors behind the success of Bank Asia is its HR who are highly trained and most competent in their own respective fields. Bank Asia provides its employees with training both in-house and out side job. Logistics Bank Asia is free from dependence from the ever-disruptive power supply. The company generates the required power through generator operating on diesel. Water generation at present is also done by deep tube wells on site and is abundant in quantity. Also support tools, like laser printers, photocopiers, microwave oven etc. that have become essential these days are available at arm’s length much to the convenience of the users.


First-Rate working environment

Bank Asia provides its workforce an excellent place to work in. The total complex has been centrally conditioned. The interior decoration has been done exquisitely with the blend of tasteful colors and artistic yet useful furniture that is comparable to any multinational bank. 2.1.2 Weaknesses Limited workforce Bank Asia has very limited human resources compared to its financial activities. There are not many people to perform most of the tasks. As a result many of the employees are burdened with extra workloads and works late hours without any overtime facilities. This might cause high employee dissatisfaction that will prove to be too costly to avoid. 2.1.3 Opportunities Government support Government of Bangladesh has rendered its full support to the banking sector for a sound financial status of the country, as it is becoming one of the vital sources of employment in the country now. Such government concern will facilitate and support the long-term vision for Bank Asia. Evolution of e-banking Emergence of e-banking will open more scope for Bank Asia to reach the clients not only in Bangladesh but also in the global area. It will also facilitate wide area network in between the buyer and the production unit of Bank Asia to smooth operation to meet the desired need with least deviation. 2.1.4 Threats Mergers and acquisitions


The worldwide trend of mergers and acquisition in financial institutions is causing concentration in power in the industry and competitors are increasing in power in their respective areas.

Political instability Unstable political situations cause great distraction in the otherwise smooth flow of business. Sudden hartals and other political programs sometimes present problems for the employees (esp. female employees) in commuting to and from the office. Political instability also promotes a weak law and order system leading to an increase in crime rate in the society. This might also be considered as a potential external threat for a financial institution. Emergence of competitors

Due to existence of unfulfilled demand in financial sector, it is expected that more financial institutions will be introduced in the industry very shortly. And we have already seen such cases in our country that lots of new banks are coming in the scenario with new services, which signifies the faster rate of growth of competitors. Bank Asia should always be prepared to encounter more competition in the coming years. 2.2 Product and Services The product and services that are currently available are given below: Bank Asia Limited launched several financial products and services since its inception. Among them are Monthly Savings Scheme, Monthly Benefit Scheme, Special Savings Scheme, Consumer Credit Scheme, Small Loan Scheme, Rural Finance Scheme & E-cash ATM. All of these have received wide acceptance among the people.

Monthly Savings Scheme (DG+): The prime objective of this scheme is to encourage people to build up a habit of saving. In this scheme, one can save a fixed amount of money every month and receive substantial lump sum of money after three or five years.

Monthly Benefit Scheme (MB+): MB+ is a five (05) years scheme that lets depositors earn monthly benefit of TK. 1000 or its multiple by minimum initial deposit of TK. 100,000 or its multiple and after maturity depositors will get refund of his/her principle amount.


Special Savings Scheme (DB+): DB+ is a six (06) or ten (10) years scheme. The deposit doubles in 06 years and triples in 10 years.

Bonus Savings Scheme: A savings account with a minimum balance of TK. 50,000 will attract not only the usual savings interest but also a further 10% bonus on interest. Personal Credit: Consumer loan is a relatively new field of collateral-free finance of the bank. People with fixed income can avail of these credit facilities to buy household goods, consumer items, buy car or to renovate/expand existing house, etc. Credit Loan: If anyone is in possession of BSP (Bangladesh Sanchaya Patra), which will mature within the next 05 years, but he/she is in need of funds, the scheme can come to rescue. Rural Development Scheme: Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through financing various income-generating activities. This scheme is operated through the rural branches of the Bank. E-Cash Banking Facility: The E-cash card is an ATM card. It can be used as a combination of debit facility. The E-cash card network offers ball banking requirements without ever setting foot in a bank. It’s more than just an ATM service for quick cash withdrawals or account enquiries. E-cash card provides round the clock banking. 2.2.1 Depository Product Bank Asia Limited is now offering different types product for mobilizing the savings of the general people. Deposit Product Current Deposit Saving Deposit Account Short Time Deposit (STD) Account Fixed Deposit Foreign Currency Deposit Account NFCD Non Resident Foreign Currency Account


2.2.2 Interest paid to different Deposits The revised rate of Bank Asia Ltd. on all types of Deposits viz. Savings, Short Term & Fixed effective from May 01,2004 for new as well as existing deposits from its next maturity are as follows: Tenor 3 months 13.00% P.A.

Tenor 6 months 13.50% P.A.

Tenor 1 year 14.00% P.A.

Short Term Deposit 5.00% P.A.

Savings Deposit 7.00% P.A.

2.2.3 Loan Product The Bank Asia is offering the following loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and have good return to the investment as well as satisfy the client. The loan and advance products are: Name of the Products Consumer loan (PC) Term Loan Small & Medium Enterprise loan Working Capital Financing Import Financing Export Financing Syndicate Loan Industrial Financing 2.2.4 Personal Banking Products •

ATM Card Service

Internet Banking

SMS Service/Mobile Banking

Locker Service

3.1 PREMABLE The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future. For a bank, it is the main source of profit and on the


other hand, the wrong use of credit would bring disaster not only for the bank but also for the economy as a whole. 3.2 Principles of Sound Lending Bank performs different functions. Lending of money to different kinds of borrowers is one the most important functions of commercial bank. Not only this, it is the most profitable business of the commercial bank and the major source of income. But lending is a risky business. The borrower of a bank range from individuals to partnership, companies, institutions, societies, corporations etc. engaged in such activities as business, industry, transport, farming etc. But the fact is this while go on lending; a bank must follow certain principles. The principal of sound lending is which where risk involvement may be kept at minimum. The principal of sound lending involves following things:

a)

Safety: The survival of a banker and for the matter of that safety of bank depends on his/her loans and advances. The ideal position is when all the loans and advances positions are fully secured. The safety of the advances should be the first principle of lending. To ensure safety of lending following factors may be considered:

Five Cs

:

Character/conduct, Capacity/capability, Capital/Credit worthiness,

Five Ps Five Ms Five Rs

: : :

Condition and Collateral Security. Person, Purpose, Product(s), Place and Profit. Man, Management, Money, Materials and Market. Reliability, Responsibility, Resources, Respectability and Returns

b) Purpose: The purpose of loans helps the banker to determine his course of action as regards lending. Banker should avoid making loans for unproductive purpose and speculative activities. c) Liquidity: Liquidity means availability or readiness of banks funds on short notice. The liquidity of advance means its repayment on demand on due date or after a short notice. d) Security: The security offered by a borrower for an advance is an insurance to the banker. It serves as the safety valve for an unforeseen emergency. There are different types of security, which call for particular attention and care on part of bank who has to see it that the title he/she gets on them is not unsafe. The security accepted by a bank to cover a bank advance must be adequate, readily marketable, easy to handle and free from any


encumbrances. Whatever be the security, a bank must realize that it is only a cushion to fall back upon in case of need, and its adequate alone should not form the sole consideration for judging the suitability of a loan. e) Profitability: Banks obtain funds from shareholders and if dividend is to be paid on such shares it can be paid by earning profits. The working funds of a bank are collected mainly from by means of deposits from the public and interest has to be paid on these deposit as well as the bank has to cover establishment charges and other expanses. This is not possible unless funds are employed profitably. 3.3 Modern Concept of Good Lending A. Modern concept of lending presupposes a well-developed loan proposal/loan case/ project. This covers as many as six pertinent aspects like Managerial, Organizational, Technical, Marketing, Financial and Economic/Socio-economic. These are technically known as feasibility or viability study of a proposal/ loan case/ projects. By studying all these six aspects if a banker is satisfied about the viability of a loan proposal/loan case/ project, then the bank can finance i.e. grant for lending or otherwise not. B. Financial Spread Sheet (FSS) and Lending Risk Analysis (LRA) are the new technique of assessing soundness of a loan proposal/project. With the help of FSS bank analyses the financial statements regarding a loan proposal/project. Credit decision is made by the bankers on the basis of FSS and LRA and it is a new and modern technique. In LRA bankers analyze eight risks such as supplies risk and sales risk which are Industry Risk, performance risk, resilience risk, management competence risk, management integrity risk which are under Company Risk and security control risk and security cover risk which are under Security Risk. Modern approach thus is an integrated approach of lending by bank, which covers safety, liquidity, purpose, security, profitability etc. 3.4 Credit Policy of Bank Asia Limited Credit policy is the guideline for the credit division which includes the terms and conditions of extending credit, which is followed by the credit division. It is prepared in accordance with the philosophy of the management. Sectors to be covered, steps to be followed, factors to be considered, limits to be maintained and all other relevant matters with expectations relating to the credit extension are clearly described here, which helps the credit division to perform their activities and also in taking the decisions. • Bank Asia (BA) makes loan only to reputable clients who are involved in legitimate business activities and whose income and wealth are derived from legitimate sources.


• Bank Asia encourages lending to socially desirable, nationally important and financially viable sectors and will not lend to unproductive purpose or socially undesired projects. • At all times a policy of “Know Your Customer (KYC)” must be foremost in the credit applications process. • provide, and the credit approval package must contain, sufficient information on the borrower to approve the extension of credit. Satisfactory security and collateral is required as appropriate. BA’s main thrust is on case flow statement of the business rather than on collateral security. • BA discourages the client with relatively low or no founds of their own and with a relatively high ratio of borrowed to own founds tend to face liquidity problems, with adverse repercussions on their ability to service their obligations. 3.5 Global Credit Portfolio of BAL “Credit Portfolio” means total investments by a bank segregated under the folios of different industries. Bank Asia Limited is operating within its own internal environment under skirt of external macro environment, consisting of elements like economic, political/legal, demographic, technological, social etc. The size of loan portfolio is determined by various priorities for bank’s fund. Besides, the prudent management of Bank Asia Limited has designated its portfolio considering the following factors under two broad categories. External factors: Sector based Attractiveness. Government Regulation Credit need of the area or community. Internal factors: 1.Capital Position 2.Types of Loan 3.Deposit pattern 4.Skills and Expertise of Bank’s personnel 5.Credit policy of the bank.

Strategies of the Bank Asia Limited are as follows:


Invest in those sectors where yield/sector is growing over years.

Hold investment in those sectors where yield/sector is high but not growing.

Divest in those sectors where yield/sector is diminishing over years.

This is a new generation bank. It is committed to provide high quality financial services/products to contribute to the growth of GDP of the country through stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the educated youth, poverty alleviation, raising standard of living of limited income group and overall sustainable socio-economic development of the country. 3.6 Types of Credit Credit may be classified with reference to -elements of time, nature of financing and provision base. 3.6.1 Classification on the basis of time Continuous loans These are the advances having no fixed repayment schedule but have a date at which it is renewable on satisfactory performance of the clients. Continuous loan mainly includes "Cash credit both Hypothecation and Pledge" and "Overdraft". Demand loan In opening letter of credit (L/C), the clients have to provide the full L/C amount in foreign exchange to the bank. To purchase this foreign exchange, bank extends demand loan to the clients at stipulated margin. No specific repayment date is fixed. However, as soon as the L/C documents arrive, the bank requests the clients to adjust their loan and to retire the L/C documents. Demand loans mainly include “Payment Against Documents,” "Loan Against Imported Merchandise (LIM)" and "Letter of Trust Receipt".


Term loans These are the advances made by the bank with a fixed repayment schedule. Terms loans mainly include "Consumer credit scheme", "Hire purchase", and "Staff loan". The term loans are defined as follows: •

Short-term loan: Upto 12 months.

Medium term loan: More than 12 months & up to 36 months

Long-term loan: More than 36 months.

3.6.2 Classification on characteristics of financing

Credit

Funded •

Overdraft

Consumer Credit

LTR

PAD

Term Loan

Packing Credit

Nonfunded * Letter of Credit * Bank Guarantee

The varieties used by BAL are briefly described below with the common terms and condition. Banks generally offer different kinds of credit facilities to the customers. Consumer Credit Scheme: This loan is allowed for acquiring consumer durable to the fixed income group and other eligible borrowers. The subject facility is known as Consumer loan.


Export Finance: An exporter requires financial accommodation at two stages, namely:

Pre-shipment stage

Post-shipment stage.

Overdraft: It is an arrangement between the borrower and the Bank, whereby the borrower may overdraw his account up to an agreed amount, within a specified period of time. Overdrafts represent short-term funds and may be extended to business customers to meet a shortfall in their working capital requirements. Requests for financial capital expenditure should be considered under fixed loans.

Different types of Overdrafts are Secured overdrafts, Overdraft against pledged of

goods/stocks,

Overdraft against Hypothecation of good, stocks, plant and Machinery.

Other Advances: Advanced against import bills: - Bills against L/C are originated from the lodgment of shipping documents received from foreign banks against L/C established by the bank. - Advance against trust receipt - Advance against Export bills purchased/discounted - Advance against work order-advance made to client to perform work order - The credit facilities against cash collateral are FDR/Sanchaya patra/ ICB unit certificates etc. Fixed Loans: They represent an arrangement entered into between the borrower and the bank, whereby the borrower is granted a loan for a specified amount with an agreed period. A separate fixed loan account is opened, to which is debited the amount of the loan; the proceeds of the loan being credited to the borrower’s current or saving account, from which source repayments are debited on an installment


basis under a standing instruction, either monthly, bi-monthly, quarterly, half-yearly, annually, or in one lump sum when the loan matures i.e., a bullet repayment. Project Loans: Fixed term loans are particularly appropriate for business customers who require finance on a long term basis for the development of their factories, for purchases of plant and machinery and other fixed assets as they are able to match the cost of the assets with the profits expected to be generated over the period. Such loans are invariably subject to the fundamental principle that the Bank’s funds go in last: this ensures the borrowers have sufficient resources to complete their project and there is no necessity for further resource to bank borrowings. In Hong Kong, construction loans are typical project financing activities. Syndicated Loans: There are circumstances when a bank’s regal lending limit to a particular borrowing group will be exceeded after taking on an additional project loan. In this instance, the bank will invite its correspondent banks to participate in the loan, with it acting as an arranger. Agent and/or Lender, whereby its relationship with customer could be fostered, and generous fee income (i.e., Arranger Fee, Agency Fee, Front-End Fee) could be earned to improve on its return on assets. 3.7 Credit Approving Authority Credit decisions are heart of all credit works. Generally branch manager and the credit in-charge of a branch are held responsible for appraising of a loan proposal. The customer request for credit limit and the credit officer prepares a credit memo and send it to the head office, credit division. After taking all the relevant information from the branch the head office credit division sent the credit memo to the credit committee. Credit committee of BAL is comprised of Managing Director and other top-level executives, that is, SEVPs and EVPs. If credit committee is convinced about the merit of the proposal then it is sent the broad of directors. The board is final authority to approve or decline a proposal. The whole process takes a month or more.

Branch Credit Section

Head Office Credit Committee

Managing Director

Board of Directors


3.8 Classification of Loan on the Basis of Security For internal use, banks classify the loan and advance on the basis of how much the bank is secured in respective of the loan: •

Debts considered good in respect of which the bank is fully secured.

Debts considered good for which bank holds no other security than the debtors personal security

Debts considered good and secured by the personal security of one or more parties in addition to the personal security of the debtor.

3.9 Objective Basis of Classification In classifying the loan and advance there are four classes in the loan review practiced in Bank Asia Limited. They are as follows: 3.9.1 Unclassified The loan account is performing satisfactorily in the terms of its installments and no overdue is occurred. 3.9.2 Substandard This classification contains where irregularities have been occurred but such irregularities are temporarily in nature. To fall in this class the loan and advance has to fulfill the following factor. Time overdue (irregularities) 3 months & above but less than 6 months. Un-recovered for 3 months & above but less than 6 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment equals or exceeds the amount Fixed Term loan

repayable within 6 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 12 months.

Substandard

Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan


The main criteria for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the bank. These accounts will require close supervision by management to ensure that the situation does not deteriorate further. 3.9.3 Doubtful This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but cannot be quantifiable at this stage. Moreover if the state of the loan accounts falls under the following criterion can be declared as doubtful loan and advance. Time overdue (irregularities) 6 months & above but less than 12 months. Un-recovered for 6 months & above but less than 12 months from the date of the loan is

Doubtful

Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan

claimed. Repayable within 5years: If the overdue installment equals or exceeds the amount Fixed Term loan

repayable within 12 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 18 months.

3.10 Qualitative Judgment Basis of Classification Beside the above-mentioned objective criteria, Bank Asia Limited has other few qualitative judgment for classifying the loan and advance. This judgement totally depends on the Branch Manger and or the Head Office credit division. If there is any doubt or uncertainty regarding the recovery of any continuous credit, demand loan, fixed term loan and classified or not on the basis of the above mentioned objective criterion then the loan can be classified on the basis of the Qualitative Judgment. The qualitative factors that are considered in Bank Asia Limited are as follows: •

Borrower sustains a loss of capital.

Significant decrease in the value of the security.

Weakening of bank’s position as creditor due to any reason whatsoever.


Diversification of the funds to uses other than the facility for which the credit was approved.

Incorrect information supplied by the borrower or bankruptcy of the borrower.

Credit is rescheduled frequently or the rules of rescheduling are violated or a suit is filed for the recovery of the credit.

Last year the classification of the loan and advance of Bank Asia Limited were like this: Table: Classification position last two years. Year 2006 2007

Unclassified 21751 27482

Substandard 50.3 96.6

Tk in million Doubtful .54 .44

Bad 453.4 554.2

3.11 Provisioning Specific Provision Head office credit division prepares a list of credit accounts, which are considered to be totally or partially be unrecoverable & keeps a provision against the outstanding loans. Rate of Provisioning Bank Asia Limited in the time of loan provisioning to get the real picture of the income mainly follows the Bangladesh Bank guideline. The rate of provisioning used in BAL is summarized in the following table. Table: Rate of provisioning Class

Short Term Agriculture

All other credit

Unclassified (UC) Substandard (SS) Doubtful Bad or Loss

credit. Rate of Provisions 5% 5% 5% 100%

1% 20% 50% 100%

3.12 Steps Involved in Credit Processing The credit appraisal process here at Bank Asia limited is a detailed and through one, complying to the central bank’s standards as well as analyzing all feasible sources of risk.


The credit division follows certain procedures to decide whether or not to allow the credit facilities demanded. The credit division maintains the tight control over credit reports and keeps the proper documentation and records in the files. In general following steps are followed for a standard credit procedure: 3.12.1 Application for Loan For any type of credit facility relating to the working capital, trade finance, project finance and contract work, clients/borrower’s must fill an application form with following information: Name of firm/ company/ individual, Business address, Permanent address, Constitution/ Status (Proprietorship/ Partnership/ Public Limited Co./ Private Ltd. Co.), Date of establishment and place of incorporation, Background and business experience, Particulars of assets (Land/Building, Bank Deposit, Stock/Shares), Nature of the business, Statement of liabilities with Bank Asia and other banks, Financial statements for the last 3 years explaining the following terms, Capital Funds/ Net Worth (Paid up capital, Retained earnings, General reserve), Balance Sheet Statistics (Current assets, Fixed assets, Term liabilities, Capital/equity, Total liabilities). For working capital finance clients/ borrowers must provide the following information (Annual production, Annual sales, Sources of raw materials, Cash flow statements). Following factors are to be considered while submitting the loan application form to the bank: Proposed debt/equity ratio For processing and getting approval of the requested credit facility the client must provide the above information and should fully co- operate with the bank for further information as needed. The analyst should verify the information through both primary and secondary sources. While evaluating the project for approval the analyst should have adequate knowledge of the economic environment in which the project is to thrive. Such as information related to money, banking foreign exchange, reserves, production, price, national income, cost of living indices, govt. policies covering wages, taxation, tariff, import control, investment, marketability of product etc.

Projected financial statements For all credit proposals, the borrowers should submit their financial statements including last 3(three) years profit and loss A/C and balance sheet-audited/ statement of affairs. When an individual


borrower or guarantor applies for any credit facility, the submitted financial statements must be signed by competent authority and must contain legend to the signatory, the assets and liabilities and sources of income and items of expenses. Here this discussion is like preliminary screening of the plant. So the credit officers need to be cautious about the facility the client is seeking and the available fund in the bank. More over most of the businesses in our country don’t have any standard form of accounting department and don’t have any audited statement. So the main task of the credit officers is to make a relationship with the client to find out the hidden income sources. 3.12.2 Scrutinizing the documents In this step the bank collects and correlates the information about the client. After receiving the credit application form, the credit officer thoroughly checks the form and all the submitted documents. Here, the point of importance whether the documents are certified and or attested by the respective authority.

General check-whether the required documents are submitted authenticated.

Gross verification for identifying consistency.

3.12.3 Analyzing the information Personal interview with the entrepreneur/management When the client approaches for credit, the credit officer talks to him with a view to identifying whether the client has only need of seeking credit facility or not. The credit officer has to have deep analyzing power to find out the clue. The out come of a personal interview session is to have overall idea about the integrity, experience, and business sense of the borrower. Prompt and consistent information supply, willingness to supply information and other verbal and non-verbal clues can be of value to the credit officer in judging the client. If possible, a visit is made to the proposed/existing plant/factory.

Report from Bank Asia Limited If the customer hold an account or is enjoying credit facility from the Bank Asia Limited, the statements of the accounts are collected for analyzing the performance of the existing facility, transaction summary of the accounts along with the integrity of the client.


Report from other banks The client has to mention whether he has other liability in other bank in the name of the project and or in the name of the sister concern in the time applying for credit. From the given information the credit officer communicates with the respective authority of those banks with which the credit seeker has transaction to collect the information about few things: • Whether the client has taken any loan in the name of the proposed project or any other sister concern. •

The amount outstanding and whether classified or not.

The payment behavior of the client.

All the collected information is kept confidential. Report from Society Sometimes the credit officer collects in formation on a client from other businessmen having relationship with Bank Asia. Informally the credit officer discusses about the project, the sponsor(s) and the prospects of the project with persons he thinks can provide him with information. Moreover, information about the sponsor is also collected from the socially important person like community representative and chamber representative. Contacting the client’s supplier can also be another way to verify the payment character of the client. CIB Report There is possibility that client conceals information about his/her company’s current liability and transaction with other banks. So to get the accurate information about the credibility of the customer the branch office collects CIB report through the head office. The CIB authority provides the relevant information about the client. Management Competence or Capability Appraisal The ability of the management to run the business smoothly and business background of the promoter and the sponsor directors and the management are crucial factors in determining the success or failure of any business operation. Capability of the borrower in running the business in highly emphasized in

the time of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiency, effectively and profitability, proper investigation must be carried out in this regard. With this end in view Bank Asia collects the following information from the client:


Brief description of the director’s educational background & business background.

Brief profile of the management.

Business performance for the last three years as performance of the business implies the capability of the manager’s running the business.

Equity mobilization of the directors as it implies their risk-taking attitude.

Entrepreneurship skills.

Management’s experience in the business/businesses of similar nature.

Resilience or shock absorption.

If it is revealed that the directors are in the business for a long time and have operated the business well are said to have the capability to run the business. Financial strength Analysis Analyzing the financial position of the borrower is one of the most crucial jobs to perform before financing any business. It includes financial base analysis of the borrower/business, liability position analysis in terms of risk and return measures, and lending risk analysis in the specified format of Bangladesh Bank. Liability Position Analysis Facility from Bank Asia & other banks taken by the client must be provided while applying for credit facility. The credit officer looks for-Existing facility enjoying by the Client Company from the Bank Asia Limited and other banks, Existing facilities for the sister concerns (if applicable), Debt to Asset ratio, the amount outstanding are classified or not, Monthly installment payment or fixed charge coverage performance of the client and also look for the nature, limit, outstanding, overdue, CL status, security value of the credit facilities.

Financial Viability Analysis In this part, NPV and IRR of the project are calculated, and breakeven analysis is also performed in terms of sales volume and capacity utilization. Payback period and modified IRR are also calculated if deemed necessary for the completeness of the analysis.


3.12.4 Evaluation/ Approval An accurate appraisal of risk in any credit exposure is highly subjective matter involving quantitative and qualitative judgments, where Quantitative factors refer to the analysis of financial statement ratio and Qualitative factors refer to the assessment of management, industry position, customer/ supplier relations, account performance and reputation. In evaluating any credit proposal, the analyst uses the following distinct and logical steps: •

Evaluating the past performance of the borrowers.

Assessing the risk of failure by identifying factors in the borrowers present condition and past performances, which indicates likelihood of success to repay the loan.

Setting terms and conditions of credit facilities.

Forecasting the probable future condition of the borrower and deciding whether to accept or reject a loan proposal.

3.12.5 Documentation & Disbursement Once credit proposal is approved, a sanction letter is issued to client conveying offer to the clientmentioning terms of sanction-type of facility, facility amount, repayment, security, interest rate & fees, positive and negative covenants, etc. Apparently there are three parts of documentation, namelya) Obtaining instruments/ documents-charge documents, standard documents & other specified documents as specified in terms and conditions in sanction letter. b) Stamping c) Execution

Once documentation is complete, facility is disbursed as per term and conditions in sanctioned advice.


1. Request for Credit from the client to a Branch

2. Credit Application form filled up by the customer & collection of document

3. Scrutinizing the documents

4. Analyzing the information

5. Preparing the proposal

6. The proposal goes to the Authority through other necessary steps

7. Sanctioning of the credit

8. Informing the client, Loan Disbursement, Supervision and Monitoring

Figure: Steps involved in Credit Processing


3.12.5 Relation between Advance with the Security

Types of advance

Securities

Loans

Lien of various kinds of Sanchaya patras, Govt. Securities, FDR, Collateral of immovable property, shares quoted in stock exchange Pledge or hypothecation of machinery, land and building on which machinery are installed, stock in trade, goods products and merchandise. Bills itself

Overdraft Bills purchased

3.13 Lending Risk Analysis (LRA): Modern Technique of Credit Appraisal The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess the credit risk in quantifiable manner and then find out ways & means to cover the risk. However, some commercial banks employ LRA technique as a credit appraisal tool for evaluating credit proposals amounting to Tk. 5 million and above. Broadly LRA package divides the credit risk into two categories, namely --- Business risk and Security risk. A detail interpretation of these risks and the procedure for evaluating the credit as follows: 3.13.1 Business risk It refers to the risk that the business falls to generate sufficient cash flow to repay the loan. Business risk is subdivided into two categories.


3.13.2 Industry risk The risk that the company fails to repay for the external reason. It is subdivide into supplies risk and sales risk.


LENDING RISK

BUSINESS RISK

INDUSRTY RISK

SUPPLY RISK

SALES RISK

COMPANY RISK

MANAGEMENT RISK

MANAGEMENT

MANAGEMENT

SECURITY RISK

COMPANY POSITION

SECURITY CONTROL

PERFORMANCE RISK

SECURITY COVER

RESILIENCE RISK


3.13.3 Supplies risk It indicates that the business suffers from external disruption to the supply of imputes. Components of supplies risk are as raw material, Labor, power, machinery, equipment, factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then assessing the risk of disruption of supplies of each item. 3.13.4 Sales risk This refers to the risk that the business suffers from external disruption of sales. Sales may be disrupted by changes to market size, increasing in competition, change in the regulation or due to the loss of single large customer. Sales risk is determined by analyzing production or marketing system, industry situation, Government policy, and competitor profile and companies strategies. 3.13.5 Company risk This refers to the risk that the company fails for internal reasons. Company risk is subdivided into company position risk and Management risks. 3.13.6 Company position risk Within an industry each and every company holds a position. This position is very competitive. Due to the weakness in the company's position in the industry, a company is the risk for failure. That means, company position risk is the risk of failure due to weakness in the companies position in the industry. It is subdivided into performance risk and resilience risk. 3.13.7 Performance risk This risk refers to the risk that the company’s position is so weak that it will be unable to repay the loan even under Favor able external condition. Performance risk assessed by SWOT (Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, Cash flow forecast analysis and credit report analysis (i.e. CIB repot from Bangladesh Bank).


3.13.8 Resilience risk Resilience means to recover early injury, this refers to risk that the company falls due to resilience to unexpected external conditions. The resilience of a company depends on its leverage, liquidity and strength of connection of its owner or directors. The resilience risk is determined by analyzing different financial ratio, flexibility of production process, shareholders willingness to support the company if need arise and political and private affiliation of owners and key personnel. 3.13.9 Management risk The management risk refers to the risk that the company fails due to management not exploiting effectively the company’s position. Management risk is subdivided into management competence risk and integrity risk. 3.13.10 Management competence risk This refers to the risk that falls because the management is incompetent. The competence of management depends upon their ability to manage the company's business efficiently and effectively. The assessment of management competence depends on management ability and management team work. Management ability is determined by analyzing the ability of owner or board of the members first and then key personnel for finance and operation. Management team work is determined by analyzing management structure and its strength and weakness. 3.13.11 Management integrity risk This refers to the risk that the company fails to repay the loan amount due to lack of management integrity. Management integrity is a combination of honesty and dependability. Management integrity risk is determined by assessing management honesty, which requires evaluating the reliability of information supplied and then management dependability. 3.13.12 Security risk This sort of risk is associated with the realized value of the security, which may not cover the exposure of loan. Exposure means principal plus outstanding interest. The security risk is subdivided into two major heads i.e. security control risk and security cover risk. 3.13.13 Security control risk This risk refers to the risk that the bank falls to realize the security because of bank's control over the security offered by the borrower i.e. incomplete documents. The risk of failure to realize the security depends on the difficulty in obtaining favorable judgement and taking possession of security. For


analyzing the security control risk the credit office is required to verify documentation to ensure security protection, documentation completeness, documentation integrity and proper insurance policy. He/she also conducts site visit to verify security existence. Assessment of security control risk requires analyzing the possibility of obtaining favorable judgement and analyzing the case with which the bank could take the possession and liquidate the securities.


SUMMARY OF CREDIT RISK Prism of Good Governance Bangladesh Bank strictly requires the financial institutions to abide by the prism of good governance, which basically explains how to carry out business activities and meeting the targets by maintaining the socio ethical standards and keeping within the regulatory framework. It suggests creating the environment for institutions building in the financial industry- which requires creating sustainable organization that have embedded risk management system which essentially translates to good governance. 4.1 TEQNIQUES FOR CREDIT RISK MANAGEMENT USED BY BANK ASIA LTD 4.14.1 Credit Assessment: A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit

Business strategy

Targets and Buds

Regulatory framework

Application that originates from the relationship manager/account officer (“RM�), and is approved by

-Asset liability Management -Foreign exchange -Internal control -AML

-HRM -Revenue - ALM standard -Security - InfoTech -Corporate affairs

Policy + People + Process

Socio Ethical Standards


Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.

Supplier/Buyer Analysis Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower. Historical Financial Analysis An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analysed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. Projected Financial Performance Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts. Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc) should be assessed.


Adherence to Lending Guidelines Credit Applications should clearly state whether or not the proposed application is in compliance with the bank’s Lending Guidelines. The Bank’s Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the bank’s Lending Guidelines. 4.14.2 Risk Grading All Banks should adopt a credit risk grading system. The system should define the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgement and the Risk Grade Scorecard results. It is recognized that the banks may have more or less Risk Grades, however, monitoring standards and account management must be appropriate given the assigned Risk Grade:

Risk Rating Grade Definition Superior – Low Risk (Grade 1) Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank. All security documentation should be in place. Good – Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. Acceptable – Fair Risk (Grade3) Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. Marginal - Watch list (Grade 4) Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. Special Mention (Grade 5) Grade 5 assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Substandard (Grade 6) financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 60-90 days


Doubtful and Bad (non-performing) Grade 7 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 Loss Loss (non-performing) Grade 8 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation 4.2 GUIDELINES FOR CREDIT RISK MANAGEMENT BY BANGLADESH BANK This section details fundamental credit risk management policies that are recommended for adoption by all banks in Bangladesh. The guidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks. 4.15.1 Lending Guidelines All banks should have established Credit Policies (“Lending Guidelines”) that clearly outline the senior management’s view of business development priorities and the terms and conditions that should be adhered to in order for loans to be approved. The Lending Guidelines should be updated at least annually to reflect changes in the economic out look and the evolution of the bank’s loan portfolio, and be distributed to all lending/marketing officers. The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the bank based on the endorsement of the bank’s Head of Credit Risk Management and the Head of Corporate/Commercial Banking. (Section 2.1 of these guidelines refers) Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of loans that do not comply with Lending Guidelines should be restricted to the bank’s Head of Credit or Managing Director/CEO & Board of Directors. The Lending Guidelines should provide the key foundations for account officers/relationship managers (RM) to formulate their recommendations for approval, and should include the following

Industry and Business Segment Focus The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the bank’s loan portfolio. For each sector, a clear indication of the bank’s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide necessary direction to the bank’s marketing staff. Types of Loan Facilities


The type of loans that are permitted should be clearly indicated, such as Working Capital, Trade Finance, Term Loan, etc. Single Borrower/Group Limits/Syndication Details of the bank’s Single Borrower/Group limits should be included as per Bangladesh Bank guidelines. Banks may wish to establish more conservative criteria in this regard. Lending Caps Banks should establish a specific industry sector exposure cap to avoid over concentration in any one industry sector. Discouraged Business Types Banks should outline industries or lending activities that are discouraged. As a minimum, the following should be discouraged:

Military Equipment/Weapons Finance

Highly Leveraged Transactions

Finance of Speculative Investments

Logging, Mineral Extraction/Mining, or other activity that is Ethically or Environmentally Sensitive

Lending to companies listed on CIB black list or known defaulters

Counter parties in countries subject to UN sanctions

Share Lending

Taking an Equity Stake in Borrowers

Lending to Holding Companies

Bridge Loans relying on equity/debt issuance as a source of repayment.

 Loan Facility Parameters


Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated. As a minimum, the following parameters should be adopted: •

Banks should not grant facilities where the bank’s security position is inferior to that of any other financial institution.

Assets pledged, as security should be properly insured.

Valuations of property taken as security should be performed prior to loans being granted. A recognized 3rd party professional valuation firm should be appointed to conduct valuations.

Cross Border Risk Risk associated with cross border lending. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligations. Distinguished from ordinary credit risk because the difficulty arises from a political event, such as suspension of external payments •

Synonymous with political & sovereign risk

Third world debt crisis

For example, export documents negotiated for countries like Nigeria.

4.15.2 Credit Assessment A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors. It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summarize the results of the RMs risk assessment and include, as a minimum, the following details: •

Amount and type of loan(s) proposed.

Purpose of loans.


Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)

Security Arrangements

In addition, the following risk areas should be addressed: Borrower Analysis The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter group transactions should be addressed, and risks mitigated. Industry Analysis The key risk factors of the borrower’s industry should be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified.

Supplier/Buyer Analysis Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower. Historical Financial Analysis An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analysed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. Projected Financial Performance Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts. Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc) should be assessed.


Adherence to Lending Guidelines Credit Applications should clearly state whether or not the proposed application is in compliance with the bank’s Lending Guidelines. The Bank’s Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the bank’s Lending Guidelines. Mitigating Factors Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues. Loan Structure The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability. Security A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed.

Name Lending Credit proposals should not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution. 4.15.3 Risk Grading All Banks should adopt a credit risk grading system. The system should define the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications. The following Risk Grade Matrix is provided as an example. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgement and the Risk Grade Scorecard results. It is recognized that the banks may have


more or less Risk Grades, however, monitoring standards and account management must be appropriate given the assigned Risk Grade: Risk Rating Grade Definition Superior – Low Risk (Grade 1) Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank. All security documentation should be in place. Good – Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. Acceptable – Fair Risk (Grade3) Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property).

Marginal - Watch list (Grade 4) Grade 4 assets warrant 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. An Aggregate Score of 65-74 based on the Risk Grade Scorecard. Special Mention (Grade 5) Grade 5 assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Full repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Scorecard. 4.15.4 Approval Authority The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process. The following guidelines should apply in the approval/sanctioning of loans: •

Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation retained in CRM.


Delegated approval authorities must be reviewed annually by MD/CEO/Board.

The credit approval function should be separate from the marketing/relationship management (RM) function.

The role of Credit Committee may be restricted to only review of proposals i.e. recommendations or review of bank’s loan portfolios.

Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications.

4.15.5 Segregation of Duties Banks should aim to segregate the following lending functions: •

Credit Approval/Risk Management

Relationship Management/Marketing

Credit Administration

The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgment of credit proposals.

4.15.6 Internal Audit

Managing Director/ CEO

Banks should have a segregated internal audit/control department charged with conducting audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures, Lending Guidelines and Bangladesh Bank requirements.

Head

of

Credit

Risk

Management

Head of Corporate / Commercial Banking

Other Direct Report Internal Audit, etc

5.1(CRM PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES

Other The appropriate organizational structure must be in place to support the adoptionDirect of the policies Credit Administration

Relationship

(May report separately

Management /

to MD/CEO)

Marketing (RM)

Reports detailed in Section 1 of these guidelines. The key feature is the segregation of the Marketing/Relationship Management function from Approval / Risk Management Administration (Internal Audit,/ etc.) functions. Regional credit centers may be established, however, all applications be approved by Managing must Director /

Business the Head of Credit and Risk Management or Managing Director CEO /CEO /Board or delegated Head Development Office credit executive. Credit Approval Business Development (Includes regional credit

5.16.1 Preferred Organizational Structure

Centers if applicable)

The following chart represents the preferred management structure:

Monitoring / Recovery

(includes regional Monitoring/Recovery recovery (includes centres ifregional applicable) recovery centres if

Other

Direct

Reports (Internal Audit, etc.) Managing Director / CEO Other

Direct


Reports (Internal Audit, etc.) Managing Director / CEO Other

Direct

Reports (Internal Audit, etc.) Managing Director / CEO Other

Direct

Reports (Internal Audit, etc.) Managing Director / CEO Other

Direct

Reports (Internal Audit, etc.) Managing Director / 5.16.2 Key Responsibilities

CEO

The key responsibilities of the above functions are as follows. Credit Risk Management (CRM) •

Oversight of the bank’s credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking, personal banking, & treasury operations.

Oversight of the bank’s asset quality.

Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made.

To approve (or decline), within delegated authority, Credit Applications recommended by RM. Where aggregate borrower exposure is in excess of approval limits, to provide recommendation to MD/CEO for approval.

To provide advice/assistance regarding all credit matters to line management/ RMs.

To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively.


Relationship Management/Marketing (RM) •

To act as the primary bank contact with borrowers.

To maintain thorough knowledge of borrower’s business and industry through regular contact, factory/warehouse inspections, etc. RMs should proactively monitor the financial performance and account conduct of borrowers.

To be responsible for the timely and accurate submission of Credit Applications for new proposals and annual reviews, taking into account the credit assessment requirements outlined in Section 4. 1.2.1 of these guidelines.

To highlight any deterioration in borrower’s financial standing and amend the borrower’s Risk Grade in a timely manner. Changes in Risk Grades should be advised to and approved by CRM.

To seek assistance/advice at the earliest from CRM regarding the structuring of facilities, potential deterioration in accounts or for any credit related issues.

Internal Audit/Control Conducts independent inspections annually to ensure compliance with Lending Guidelines, operating procedures, bank policies and Bangladesh Bank directives. Reports directly to MD/CEO or Audit committee of the Board. 6.1 PROCEDURAL GUIDELINES This section outlines of the main procedures that are needed to ensure compliance with the policies contained in Section 1.0 of these guidelines. 6.17.1 Approval Process The approval process must reinforce the segregation of Relationship Management/ Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial banking department. Credit Applications should be recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. Banks may wish to establish various thresholds, above which, the recommendation of the Head of Corporate/Commercial Banking is required prior to onward


recommendation to CRM for approval. In addition, banks may wish to establish regional credit centers within the approval team to handle routine approvals. Executives in head office CRM should approve all large loans. The recommending or approving executives should take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits should be such that all proposals where the facilities are up to 15% of the bank’s capital should be approved at the CRM level, facilities up to 25% of capital should be approved by CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO.

The following diagram illustrates the preferred approval process:

Credit Application Recommended by RM/ Marketing 1 2

Zonal Credit Officer (ZCO) 3

4

Head of Credit & Head of Corporate Banking (HOBC) 5

6

Managing Director 7 7

Executive Committee/ Board 1. Application forwarded to Zonal Office for approved/decline


2. Advise the decision as per delegated authority (approved /decline) to recommending branches. A monthly summary of ZCO approvals should be sent to HOC and HOCB to report the previous months approvals sanctioned at the Zonal Offices. The HOC should review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank policies. 3. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for endorsement, and Head of Credit (HOC) for approval or onward recommendation. 4. HOC advises the decision as per delegated authority to ZCO 5. HOC & HOCB supports & forwarded to Managing Director 6. Managing Director advises the decision as per delegated authority to HOC & HOCB. 7. Managing Director presents the proposal to EC/Board 8. EC/Board advises the decision to HOC & HOCB ** Regardless of the delegated authority HOC to advise the decision (approval/decline) to marketing department through ZCO Recommended Delegated Approval Authority Levels HOC/CRM Executives

Up to 15% of Capital

Managing Director/CEO

Up to 25% of Capital

EC/Board all exceed

25% of Capital

Appeal Process Any declined credit may be re-presented to the next higher authority for reassessment/approval. However, there should be no appeal process beyond the Managing Director.

6.17.2 •

Disbursement:

Security documents are prepared in accordance with approval terms and are legally enforceable. Standard loan facility documentation that has been reviewed by legal counsel should be used in all cases. Exceptions should be referred to legal counsel for advice based on authorization from an appropriate executive in CRM.

Disbursements under loan facilities are only be made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit & outstanding. All formalities regarding large loans & loans to Directors should be guided by Bangladesh Bank circulars & related section of Banking Companies Act. All Credit Approval terms have been met.

6.17.3 Compliance Requirements:


All required Bangladesh Bank returns are submitted in the correct format in a timely manner.

Bangladesh Bank circulars/regulations are maintained centrally, and advised to all relevant departments to ensure compliance.

All third party service providers (valuers, lawyers, insurers, CPAs etc.) are approved and performance reviewed on an annual basis. Banks are referred to Bangladesh Bank circular outlining approved external audit firms that are acceptable.

6.17.4 Credit Monitoring To minimize credit losses, monitoring procedures and systems should be in place that provide an early indication of the deteriorating financial health of a borrower. At a minimum, systems should be in place to report the following exceptions to relevant executives in CRM and RM team: •

Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants;

Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up.

Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit.

All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually.

6.17.5 Early Alert process: An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date with a likely prospect of being downgraded to CG 5 or worse (Impaired status), within the next twelve months. Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis.. The Risk Grade should be updated as soon as possible and no delay should be taken in referring problem accounts to the CRM department for assistance in recovery.


6.17.6 Credit Recovery The Recovery Unit (RU) of CRM should directly manage accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Relationship Management to RU, a Handover /Downgrade Checklist should be completed. The RU’s primary functions are: • Determine Account Action Plan/Recovery Strategy • Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate. • Ensure adequate and timely loan loss provisions are made based on actual and expected losses. • Regular review of grade 6 or worse accounts. The management of problem loans (NPLs) must be a dynamic process, and the associated strategy together with the adequacy of provisions must be regularly reviewed. A process should be established to share the lessons learned from the experience of credit losses in order to update the lending guidelines. 6.17.7 NPL Account Management All NPLs should be assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard. 6.17.8 Account Transfer Procedures Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action (RFA) and a handover /downgrade checklist should be completed by the RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the customer, and prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR should be approved by the Head of Credit, and copied to the Head of Corporate Banking and to the Branch/office where the loan was originally sanctioned. This initial CLR should Highlight any documentation issues, loan structuring weaknesses, proposed workout strategy, and should seek approval for any loan loss provisions that are necessary.


Recovery Units should ensure that the following is carried out when an account is classified as Sub Standard or worse: •

Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate executives within CRM.

CIB reporting is updated according to Bangladesh Bank guidelines and the borrower’s Risk Grade is changed as appropriate.

Loan loss provisions are taken based on Force Sale Value (FSV).

Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored.

Prompt legal action is taken if the borrower is uncooperative.

GUIDELINES FOR CREDIT RISK MANAGEMENT BY BANK ASIA LTD. 7.1 Lending Guideline: In the above analysis we have seen that Bank Asia Limited possesses a newly introduced written credit policy, which was prepared in accordance with Bangladesh Bank Guidelines. Corporate Office sent CRM manual to every Branch Managers, Zonal Heads and all Departmental Heads with a circular on 8th July 2004. The purpose of this document was to provide guidelines to improve the credit risk management and for the credit officers to take quick decision whether to accept or reject a project. The lending guideline includes•

Industry or business segment focus.

Types of loan facilities

Details of single borrower/ group limit

Lending caps

Discouraged business type

Loan facility parameters


Cross Border risk

As there was no written guideline before therefore Bank Asia has just started implementing the guidelines.

7.2 Approval Authority: In Bangladesh Bank’s guideline it is written, “Approval authority should be delegated to individual executives and not to committees to ensure accountability in approval process”. But we see, in Bank Asia Limited, that every credit goes to the Board via credit committee. As a result, wastage of time occurs and no one is held accountable for a bad loan.

7.3 Internal Audit: Bank Asia Limited has a segregated internal audit/ control department charged with conducting audit of all departments as suggested by Bangladesh Bank guideline.

7.4 Approval process: According to Bangladesh Bank best practices guideline, ‘the recommending or approving executives should take responsibility for and be held accountable for their recommendations and approval’. The recommended delegated approval authority levels are as follows Head of Credit/CRM Executives

up to 15% of capital

Managing Director/ CEO

Up to 25% of capital

EC/ Board

All exceed 25% of capital

But in Bank Asia we see that every credit proposal goes to Executive committee i.e. board. 7.5 Credit Administration: Bangladesh Bank guidelines suggest that Credit administration be strictly segregated from relationship management/ marketing. As a result the possibility of controls being compromised or issues not being highlighted at the appropriate level can be avoided. The credit administration has the following functions-


Disbursement

Custodial duties

Compliance requirement

In Bank Asia credit officers under supervision of Branch Credit In-charge or Branch Manager carry out all the three functions of credit administration. Therefore Credit Marketing and Administration is yet to be segregated. 7.6 Credit Monitoring: To minimize credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower. Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all relationship Managers. An early Alert Account is one that has risks or potential weakness of a material nature requiring monitoring, supervision or close attention by management. In Bank Asia credit monitoring is also done by Credit-In-Charge or branch managers. As they be busy with their day-today activities Early Alert Accounts do not get that much attention as needed.

7.7 Credit Recovery: According to Bangladesh Bank guidelines the recovery unit (RU) of CRM should directly manage accounts with sustained deterioration. On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to update the action/ recovery plan, review and assess the adequacy of provisions, and modify as appropriate. In Bank Asia the non-performing loan is very low (50,43,00,000 till December 31, 2006) and the recovery unit is yet to be formed. Even for personal loan program, Personal Banking Division also lacks a recovery unit. 7.8 CIB Checklist: According to the Bangladesh Bank guideline, bank has to send every borrower’s CIB undertaking after every two months, whoever the borrower is, either a person or an organizational entity.


Bank Asia Ltd. does not have any alarming system that CIB of which customer is expired today or going to be expired within a few days. Employees have to keep a closer look everyday on this matter and have to check regularly these huge numbers of accounts. There is a chance to miss some of this inquiry anytime by human mistake and may forget to take CIB for months. In some cases changes in the company directorship makes clash in taking the regular CIB for that company. Most often the refusal comes from the Bangladesh Bank for not matching the spelling of the name of the borrower person or the directors of the company. If there is an automated system in the Bank Asia connected with the Bangladesh Bank and a proper alarming system, then it would be easier for the employees to be regularly updated.


Credit approval policy and practice of bank asia limited