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Private Bank Credit Risk Management

Policy With Bangladesh Bank - Dhaka


Bank Limited
INTRODUCTION

1.1 Origin of the Report

Masters of Business Administration (MBA) Course requires a three months attachment with
an organization followed by a report assigned by the supervisor in the organization and
endorsed by the faculty advisor. As I am already working for Dhaka Bank Limited (DBL), I
took the opportunity to do my internship in my own organization. My organizational
supervisor Mr. Syed Abdul Quader, Senior Assistant Vice President and Manager of Islampur
Branch asked me to conduct a study on Comparative Analysis between Bangladesh Bank’s
Best practices guidelines and Dhaka Bank Limited existing credit policy. My faculty
supervisor Mr. Shama-e-zaheer, lecturer of Institute of Business Administration, University
of Dhaka, also approved the topic and authorized me to prepare this report as part of the
fulfillment of internship requirement.

1.2 Background of the Report

Last year 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 produce 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 follows-

a) Credit Risks;
b) Asset and Liability/Balance Sheet Risks;
c) Foreign Exchange Risks;
d) Internal Control and 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 risk management system by December, 2003 based
on the guidelines sent to them.

I am working in the Credit Department of Dhaka Bank Limited, Islampur Branch. In this
report, I will try to make a comparative analysis between Bangladesh Bank’s suggested best
practices guideline for managing credit risk and Dhaka Bank Limited existing credit policy .

1.3 Objective of the Report


The study has been undertaken with the following objectives:
To analysis the pros and cons of the conventional ideas about credit operation of a Bank.¬
To¬ have better orientation on credit management activities specially credit policy and
practices, credit appraisal, credit-processing steps, credit management, financing in various
sector and recovery, loan classification method and practices of DHAKA Bank Limited
(DBL).
To¬ compare the existing credit policy of Dhaka bank limited with that of best practices
guideline given by Bangladesh Bank, the central bank of Bangladesh.
To identify and suggest scopes of improvement in credit management of DBL.¬
To get an overall idea about the performance of DHAKA Bank Ltd.¬
To fulfill the requirement of the internship program under MBA program¬

1.4 Scope of the Report

The study would focus on the following areas of DHAKA Bank Limited.
Credit appraisal system of DHAKA Bank Limited.¬
Procedure for different credit facilities.¬
Portfolio (of Loan or advances) management of DHAKA Bank Limited.¬
Organization structures and responsibilities of management.¬
Each of the above areas would be critically analyzed in order to determine the efficiency of
DBL’s Credit appraisal and Management system.

1.5 Sources of Information

Information collected to furnish this report is both from primary and secondary in nature. The
secondary information was collected from the different publication, and books. For collecting
books and periodicals I have used the following library:

IBA Library
BIBM Library
Bangladesh Bank Library

1.6 Methodology of the Report

The following methodology will be followed for the study:


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 Dhaka Bank 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 was and practical case observation
were done.

1.7 Limitation of the Report

This report will only consider credit risks of Dhaka Bank limited. It will not cover

Asset and liability/ balance sheet risk.¬


Foreign Exchange Risk¬
Internal control And compliance risk¬
Money laundering Risk.¬

1.8 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 Dhaka Bank Limited. In section iii, Credit management
policy and practice of DBL is critically analysed followed by Bangladesh Bank’s Best
practice guideline for credit management in section iv. Section v deals with findings and
recommendations.

THE ORGANIZATION – 1

2.0 AN OVERVIEW OF DHAKA BANL LIMITED (DBL)

Dhaka Bank Limited is the leading private sector bank in Bangladesh offering full range of
Personal, Corporate, International Trade, Foreign Exchange, Lease Finance and Capital
Market Services. Dhaka Bank 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.

2.1 Background of Dhaka Bank Limited

Dhaka Bank Limited is a scheduled bank that was incorporated under the Companies Act
1994, started its operation on July 1995 with a target to play the vital role on the socio-
economic development of the country. Aiming at offering commercial banking service to the
customers’ door around the country, the Dhaka Bank limited established 20 branches up-to
this year. This organization achieved customers’ confidence immediately after its
establishment.

Within this short time the bank has been successful in positioning itself as progressive and
dynamic financial institution in the country. This is now widely acclaimed by the business
community, from small entrepreneur to big merchant and conglomerates, including top rated
corporate and foreign investors, for modern and innovative ideas and financial solution.

2.2 Capital Base

Authorized Capital: BDT 1000.00 million.


Paid up Capital : BDT 531.07 million (as on 31.12.2003)

2.3 Mission Statement

To be the premier financial institution in the country providing high quality products and
services backed by latest technology and a team of highly motivated personnel to deliver
Excellence in Banking.

2.4 Slogan
Excellence in Banking

2.5 Motto

The Bank will be a confluence of the following three interests:


Of the Bank : Profit Maximization and Sustained Growth.
Of the Customer : Maximum Benefit and Satisfaction.
Of the Society : Maximization of Welfare.

2.6 Objectives

Be one of the best banks of Bangladesh.¬


Achieve excellence in customer service next to none and superior to all competitors.¬
Cater to all differentiated segments of Retail and Wholesale Customers.¬
Be a high quality distributor of product and services.¬
Use state-of the art technology in all spheres of banking.¬

2.7 Values

• Customer focus
• Integrity
• Team Work
• Respect for individual
• Quality
• Responsible citizenship

2.8 Workforce

Total number of employees stood at 568 as on December 31, 2003.

2.9 Branches

Dhaka Bank limited has 19 conventional Branches and 2 Islamic Banking Branches. Among
total of 21 Branches, 13 branches are located in Dhaka City, 4 branches are located in
Chittagong. The other 4 branches are located in Sylhet, Narsingdi, Narayangonj, Sirajgonj
each. The registered office (Head Office) of Dhaka Bank Limited is at Biman Bhavan, 100
Motijheel C/A, Dhaka-1000.

2.10 Management Information System

Since its journey as commercial Bank in 1995 Dhaka Bank Limited has been laying great
emphasis on the use of improved technology. It has gone to online operation system since
2003. And the new Banking Software Flexcube is under process of installation. As a result
the bank will able to give the services of international standards.

2.11 Correspondent Relationship

The Bank established correspondent relationships with a number of foreign banks, namely
American Express Bank, Bank of Tokyo, Standard Chartered bank, Mashreq Bank, Hong
Kong Shanghai Banking Corporation, CITI Bank NA-New York and AB Bank Ltd. The
Bank is maintaining foreign exchange accounts in New York, Tokyo, Calcutta, and London.
The bank has set up letter of credit on behalf of its valued customers using its correspondents
as advising and reimbursing Banks. The Bank maintains a need based correspondent
relationship policy, which is gradually expanding. The number of Foreign Correspondents is
406.

2.12 Organization Structure

2.13 Departments of DBL

If the jobs are not organized considering their interrelationship and are not allocated in a
particular department it would be very difficult to control the system effectively. If the
departmentation are not fitted for the particular works there would be haphazard situation and
the performance of a particular department would not be measured. Dhaka Bank Limited has
does this work very well. Different departments of DBL are as follows:

Human Resources Division♣


Personal banking Division ♣
Treasury Division♣
Operations Division♣
Computer and Information Technology Division♣
Credit Division♣
Finance♣ & Accounts Division
Financial Institution Division♣
Audit♣ & Risk Management Division

2.14 Human Resources Management of DBL

Dhaka Bank Limited recognizes that a productive and motivated work force is a prerequisite
to leadership with it’s customers, it’s shareholders and in the market it serves. Dhaka bank
treat every employee with dignity and respect in a supportive environment of trust and
openness where people of different backgrounds can reach their full potential.

The bank’s human resources policy emphasize on providing job satisfaction, growth
opportunities, and due recognition of superior performance. A good working environment
reflects and promotes a high level of loyalty and commitment from the employees. Realizing
this Dhaka Bank limited has placed the utmost importance on continuous development of its
human resources, identify the strength and weakness of the employee to assess the individual
training needs, they are sent for training for self-development. To orient, enhance the banking
knowledge of the employees Dhaka Bank Training Institute (DBTI) organizes both in-house
and external training.

2003 2002

Human 803 602


Resources
Training Tk.19,08,894/ Tk.15,79,443/
Expenses

The remuneration is very competitive in comparison with industry average.


Beside these the recruitment procedure is comprehensive.

2.15 Product and Services

The product and services that are currently available are given below:

2.15.1 Depository Product

Dhaka Bank Limited is now offering different types product for mobilizing the savings of the
general people.

Deposit Product
Current Deposit
Saving deposit Account
STD Account
Fixed Deposit
Excel Account
Foreign Currency Deposit Account
NFCD Non Resident Foreign Currency Account

2.15.2 Interest Rate paid to different Deposit liabilities:

Seri Application Up-to Tk. 50 Lac


a 50 Lac
& above
l
1 FDR for 1 months 5.50% 5.50%

2 FDR for 3 months 8.25% 8.50%

3 FDR for 6 months 8.50% 8.75%

4 FDR above 1 year 8.75% 9.00%

5 STD Account 4.50% 4.50%

6 Savings Account 6.00% 6.00%

2.15.3 Loan Product

The Dhaka bank 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:
Personal Loan Scheme
Lease Finance
Term Loan
Small & Medium Enterprise loan
Working Capital Financing
Import Financing
Export Financing
Syndicate Loan
Industrial Financing

2.15.4 Personal Banking Products

• ATM Card Service


• Credit Card Services
• Excel Account for Executives

2.16 Financial Performance of DBL

The Dhaka Bank Limited is one of the most successful private sector commercial bank in our
country, though it started its operation only nine years back. It has achieved the trust of the
general people and made reasonable contribution to the economy of the country by helping
the people investing allowing credit facility.

2.16.1 Profit

Dhaka Bank Limited registered a operating profit of Tk. 509.60 million as of 31 December,
2003.Provision for tax for the year amounted to Tk. 240.61 million with a net profit of Tk.
269.01 million compared to

2.16.2 Capital

Dhaka Bank Limited commenced its operation with an authorized capital of Tk. 1,000.00
million with paid up capital of Tk. 100.00 million.
The paid up capital of the bank amounted to 531.07 million as on December 31, 2003. The
total equity (capital & reserve) of the bank as on December Stood at Tk. 1209.97 million. The
Capital Adequacy Ratio is 10.88% as on December 31, 2003which exceed the stipulated
requirements for banks in Bangladesh.

2.16.3 Deposits

As of December 2003 Total deposits of the bank stood at Tk. 16850.83 million excluding call
as against Tk. 14964.01 million excluding call of the previous year.

Table 2: Deposit of DBL Tk in million

Year Deposit

2002 14960

2003 16850
2.16.4 Loan and Advances

The Bank recorded a 14.94% growth in advances with a total loans and advances portfolio of
Tk. 12886.68 million at the end of December 2003 compared to Tk. 11.211.39 million in
2002.

Dhaka Bank is making loan and advances in different areas. The bank continues to explore
and diversify its loan distribution with the objective of efficient use of resources and take
utmost precaution to safeguard it. DBL also participated in a syndicated loan.

Table 4: Loans & Advances of DBL Tk in million

Year Loans & Advances

2002 11210

2003 12880

2.16.5 International Trade

International Trade is an important constituent of the business portfolio of the bank. The
import value stood at Tk. 19079.40 million in 2003 with a growth of 2.05% over the volume
of 18696.70 million in 2002. On the other hand, export increased by 12.90% in the year 2003.
Total export volume of the bank amounted to 6900.60 million in 2003 compared to Tk.
6110.20 million in the previous year.

2.16.6 Investment Banking:

Lease finance, Hire purchase and Capital Market Operation besides investment in Treasury
Bills and Prize Bonds constitute the investment basket of DBL. The investment portfolio
made up of Government Securities and Shares and Debentures of different listed companies
stood at Tk. 2046.10 million in 2003 indexing a 4.91% increase over Tk. 1950.28 million in
the previous year.

DHAKA BANK AT A GLANCE: 1999-2003

Financial Highlights. ( Figures in


million Taka )

1999 2000 2001 2002 2003


Authorised Capital 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00
Paid up Capital 275.88 275.88 303.47 379.34 531.07
Reserve Funds & Other 62.42 170.73 357.67 516.11 678.90
Reserve
Shareholders' Equity 338.30 446.61 661.14 895.45 1,209.97
(Capital & Reserve)
Deposits (Base & Bank) 7,503.26 10,749.41 17,705.85 16,854.01 18,365.83
Advances 3,843.35 5,414.86 10,245.65 11,211.39 12,886.69
Investments 557.95 813.73 1,274.46 1950.28 2,046.10
Import Business 9,075.80 13,827.90 17,649.10 18,696.70 19,079.40
Export Business 3,299.30 6,494.00 6,182.50 6,110.20 6,900.60
Guarantee 530.09 887.80 2,123.09 1,579.09 1,515.90
Total Income 859.36 1,203.30 1,925.55 2,384.81 2,283.37
Total Expenditure 691.51 947.64 1,472.31 1,955.03 1,773.75
Operating Profit 230.15 330.75 561.69 628.21 632.55
Profit before Tax 167.85 255.66 453.24 429.78 509.62
Profit after Tax 94.64 173.17 290.39 234.31 269.01
Fixed Assets 6.01 21.85 32.84 105.67 87.45
Total Assets (excl. contra) 9,606.79 11,646.44 19,125.19

3.1 Overview

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.
The objective of the credit management is to maximize the performing asset and the
minimization of the non-performing asset as well as ensuring the optimal point of loan and
advance and their efficient management. Credit management is a dynamic field where a
certain standard of long-range planning is needed to allocate the fund in diverse field and to
minimize the risk and maximizing the return on the invested fund. Continuous supervision,
monitoring and follow-up are highly required for ensuring the timely repayment and
minimizing the default. Actually the credit portfolio is not only constitute the banks asset
structure but also a vital factor of the bank’s success. The overall success in credit
management depends on the banks credit policy, portfolio of credit, monitoring, supervision
and follow-up of the loan and advance. Therefore, while analyzing the credit management of
DBL, it is required to analyze its credit policy, credit procedure and quality of credit
portfolio.

3.2 Credit Policy of DBL

One of the most important ways, a bank can make sure that its loan meet organizational and
regulatory standards and they are profitable is to establish a loan policy. Such a policy gives
loan management a specific guideline in making individual loans decisions and in shaping the
bank’s overall loan portfolio. In Dhaka Bank Limited there is perhaps a credit policy but
there is no credit written policy.

3.3 Credit Principles

In the feature, credit principles includes the general guidelines of providing credit by branch
manager or credit officer. In DHAKA Bank Limited they follow the following guideline
while giving loan and advance to the client.
Credit advancement shall focus on the development and enhancement of customer
relationship.¬

All¬ credit extension must comply with the requirements of Bank’s Memorandum and
Article of Association, Banking Company’s Act, Bangladesh Bank’s instructions, other rules
and regulation as amended from time to time.

Loans¬ and advances shall normally be financed from customer’s deposit and not out of
temporary funds or borrowing from other banks.

The bank shall provide suitable credit services for the markets in which it operates.¬

It should be provided to those customers who can make best use of them.¬

The¬ conduct and administration of the loan portfolio should contribute with in defined risk
limitation for achievement of profitable growth and superior return on bank capital.

Interest rate of various lending categories will depend on the level of risk and types of
security offered.¬

3.4 Global Credit Portfolio limit of DBL

The features which deals with how much total deposits would be used as lending the
proportion of long term lending, customer exposure, country exposure, proportion of
unsecured facility etc. the most notable ones are:

The aggregate of all cash facility will not be more than the 80% of the customers deposit¬

Long term loan must not exceed 20% of the total loan portfolio.¬

Facilities are not allowed for a period of more than 5 (Five) years.¬

Credit facilities to any one customer group shall not normally exceed 15% of the capital fund
or TK. 100 crores¬

3.5 Types of Credit

Credit may be classified with reference to elements of time, nature of financing and
provision base.

3.5.1 Classification on the basis of time:

On the basis of elements of time, bank credit may be classified into three heads, viz.

Continuous loans:

These are the advances having no fixed repayment schedule but have an 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 "Later 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", "Lease finance"," 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.

3.5.2 Classification on characteristics of financing:

Funded Non-funded

Overdraft * Letter of Credit¬


Loan * Bank Guarantee ¬
Consumer Credit¬
LTR¬
PAD¬
Cash Credit (Pledge¬ & Hypo)
Staff Loan¬
Term Loan¬
Packing Credit¬

The varieties used by DBL are briefly described below with the common terms and
condition. Banks generally offer different kinds of credit facilities to the customers.

The credit facilities of DBL may be broadly classified into five categories. They are as
follows:

Loansθ
Cash Creditθ
Overdraftθ
Bills purchased and discountedθ
Consumer Credit/ personal loanθ

They are discussed below accordingly.


3.5.2.1 Loan

In case of loan the banker advances a lump sum for a certain period at an agreed rate of
interest. The entire amount is paid on an occasion either in cash or by crediting in his current
account, which he can draw at any time. The interest is charged for the full amount
sanctioned whether he withdraws the money from his account or not. The loan may be repaid
in installments or at expiry of a certain period. Loan may be demand loan or a term loan.

Eligibility: loans are normally allowed to those parties who have either fixed source of
income or who desire to pay it in lum sum.
Interest Rate: 12%-15% per annum (Quarterly paid).

3.5.2.2 Cash Credit

In Cash credit, banker specifies a limit called the cash credit limit, for each customer, up to
which the customer is permitted to borrow against the security of tangible assets or
guarantees. Cash credit is given through the cash credit account. The purpose of cash credit
is to meet working capital need of traders, farmers and industrialists.
Cash credit in true sense is against pledge of goods. Cash credit is also allowed against
hypothecation of goods. In case of hypothecation the ownership and possession of the goods
remain with the borrower. By virtue of the hypothecation agreement bank can take possession
of the goods hypothecated, if the borrower defaults.

Rate of Interest: 12%-14%.


Renew System: it is renewed in periodic basis (yearly).

3.5.2.3 Overdraft

Overdraft are those drawings which are allowed by the banker in excess of the balance in the
current account up to a specified amount for definite period as arranged for. These advances
are secured The loan holder can freely draw money from this account up to the limit and can
deposit money in the account off course, this loan has an expiry date after which renewal or
enhancement is necessary for enjoying such facility. Any deposit in the OD account is
treated as repayment of loan. Interest is charged as balance outstanding on quarterly basis.
Overdraft facilities are generally granted to businessmen for expansion of their business,
against the securities of stock-in-trade, shares, debenture, Government promissory notes,
fixed deposit, life insurance policies etc.

3.5.2.4 Bills purchased and discounted

Banks grant advances to their customers by discounting bill of exchange or pro-note.

3.5.2.5 Personal Loan (Consumer Credit Scheme)

Objectives :

The objectives of this loan are to provide essential household durable to the fixed income
group (Service Holders) and other eligible borrowers. Car loan, loan for house renovation,
vacation loan, marriage loan and loan for household equipment well as entertainment
products are governed by personal loan program. The Total amount of loans along with the
duration in which these loans taken, need to be repaid is given below:

Type of Product Loan Amount (Tk) Lac Tenure


1. Vehicle Up to 7.00 4 to 5 years
2. Household items 1.00 2 years
for Businessman
3.Household items Up to 3.00 2 to 3 years
for Service holders
4. Others Special Considerations Special Considerations

Personal loan is given under personal guarantee of the borrower and another third parson
known to the borrower. As this loan is collateral free the rate of interest is little bit high such
as 15% to 18%. There is also a processing fee of 1.5% taken at the time of disbursement of
the loan.

3.6 Credit Ratification Authority of DBL:

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 DBL
is comprised of Managing Director and other top-level executives, that is, DMDs 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. In DBL broad meeting occurs once in every week.

3.7 Credit Evaluation Principles

Some principles or standards of lending are maintained in approving loans in order to keep
credit risk to a minimum level as well as for successful banking business. The main principles
of lending are given below:

3.7.1 Liquidity:

Liquidity means the availability of bank funds on short notice. The liquidity of an advance
means it repayment on demand on due date or after a short notice. Therefore, the banks must
have to maintain sufficient liquidity to repay its depositors and trade off between the liquidity
and profitability is must.

3.7.2 Safety:

Safety means the assurance of repayment of distributed loans. Bank is in business to make
money but safety should never be sacrificed for profitability, To ensure the safety of loan.
The borrower should be chosen carefully. He should be a person of good character &
capacity as well as bank must have to maintain eligible number of security from borrower.
3.7.3 Profitability:

Banking is a business aiming at earning a good profit. The difference between the interest
received on advances and the interest paid on deposit constitutes a major portion of the bank
income, Besides, foreign exchange business is also highly remunerative. The bank will not
enter into a transaction unless a fair return from it is assured.

3.7.3 Intent:

Banks sanction loans for productive purpose. No advances will be made by bank for
unproductive purposes though the borrower may be free from all risks.

3.7.4 Security:

The security offered for an advance is an insurance to fall bank upon incases of need.
Security serves as a safety value for an unexpected emergency. Since risk factors are
involved, security coverage has to be taken before a lending.

3.7.5 National interest:

Banking industry has significant roll to play in the economic development of a country. The
bank would lend if the purpose of the advances can contribute more to the overall economic
development of the country.

3.8 Pre-disbursement Compliance

When the credit proposal are approved the credit officer must have to be ensured that the
disbursement of the credit facilities must comply with the directions written in the credit
policy and circular made by time to time along with checking all the following terms and
conditions.

The officer of Loan Administration must collect¬ the acceptance of the customer’s of the
terms and conditions on the duplicate copy of the sanctioned advice.

They will thoroughly¬ examine and ensure that the subject credit facility does not contradict
to any law, rules and regulation of the country, Bangladesh Bank and

Deed of the Mortgage and power of the Attorney to be drafted and executed under the
Supervision of the Bank’s Legal Advisor.¬

Lawyers¬ certificate to the effect that all the legal formalities (Equitable/ Registered
Mortgaged) has been properly created on the land and building in favor of the bank & bank
has acquired the effective title of the property.

Registered power of attorney has been¬ collected form the borrower (contractor) assigning
the work order favoring the DBL and the power of attorney has been registered with the work
order given agency and they have agreed that they will issue all the cheques favoring DBL.
The legal documents of the vehicle have been obtained.¬

Collection of the satisfaction certificate in respect of all the documents both legal and
banking from the lawyer.¬

Entry has been made in the Safe -in and Safe-out register and the documents are preserved.¬

After being satisfied all the above terms and conditions the credit in-charge will disburse the
loan amount to the client.

3.9 Documentation of the Loan:

Documentation is obtaining such agreement where all the terms and condition and securities
are written and signed by the borrower. It specifies rights and liabilities of both the banker
and the borrower. In documentation each type of advances requires a different set of
documents. It also differs with the nature of securities. The documents should be stamped
according to the stamp Act. There are no hard and fast rules of documentation and it varies
from bank to bank. Generally, the documents are taken in the case of a secured advance by
DBL:

i. Demand promissory note: Here the borrower promises to pay the loan as and when demand
by bank to repay the loan.

ii. Letter of arrangement.

iii. Letter of continuity.

iv. Letter of hypothecation of goods and capital machinery.

v. Stock report: This report is used for OD and CC. In this report, information about the
quality and quantity of goods hypothecated is furnished.

vi. Memorandum of deposit of title deed of property duly signed by the owners of the
property with resolution of Board of Directors of the company owning the landed.

vii. Personal guarantee of the owners of the property.

viii. Guarantee of all the directors of the company.

ix. Resolution of the board of directors to borrow fund to execute documents and completes
other formalities

x. Form no. XVII/XIX for filling charges with the register of joint stock companies under
relevant section.

xi. Letter of Revival

xii. Letter of lien for advance against FDR.


3.10 Security against Advances:

The different types of securities that may be offered to a banker are as follows:

(a) Immovable property


(b) Movable property

i. Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, wage earner
development bond.

ii. Fixed Deposit Receipt

iii. Shares quoted in the Dhaka Stock Exchange and Chittagong Stock Exchange.

iv. Pledge of goods

v. Hypothecation of goods, produce and machinery

vi. Fixed assets of manufacturing unit.

vii. Shipping documents.

3.10.1 Relation between Advance with the Security

Types of advance Securities

Loans Lien or various kinds of Sanchaya patras, Govt. Securities, FDR,


Collateral of immovable property, shares quoted in stock exchange
Overdraft Pledge or hypothecation of machinery, land and building on which
machinery are installed, stock in trade, goods products and
merchandise.
Bills purchased Bills itself

3.10.2 Modes of Charging Security:

A wide range of securities is offered to banks as coverage for loan. In order to make the
securities available to banker, in case of default of customer, a charge should be created on
the security. Creating charge means making it available as a cover for advance. The following
modes of charging securities are applied in the Dhaka Bank Limited.

3.10.2.1 Lien

A lien is right of banker to hold the debtor’s property until the debt is discharged. Bank
generally retains the assets in his own custody but sometimes these goods are in the hands of
third party with lien marked. When it is in the hand of third party, the third party cannot
discharge it without the permission of bank. Lien gives banker the right to retain the property
not the right to sell. Permission from the appropriate court is necessary. Lien can be made on
moveable goods only such as raw materials, finished goods, shares debentures etc.

3.10.2.2 Pledge
Pledge is also like lien but here bank enjoys more right. Bank can sell the property without
the intervention of any court, incase of default on loan, But for such selling proper notice
must be given to the debtor. To create pledge, physical transfer of goods to the bank is must.

3.10.2.3 Hypothecation

In this charge creation method physically the goods remained in the hand of debtor. But
documents of title to goods are handed over to the banker. This method is also called
equitable charge. Since the goods are in the hand of the borrower, bank inspects the goods
regularly to judge it s quality and quantity for the maximum safety of loan.

7.10.2.4 Mortgage:

Mortgage is transfer of interest in specific immovable property. Mortgage is created on the


immovable property like land, building, plant etc. Most common type of mortgage is legal
mortgage in which ownership is transferred to the bank by registration of the mortgage deed.
Another method called equitable mortgage is also used in bank for creation of charge. Here
mere deposit of title to goods is sufficient for creation of charge. Registration is not required.
In both the cases, the mortgage property is retained in the hank of borrower.

3.10.2.5 Trust Receipt

Generally goods imported or bought by bank's financial assistance are held by bank as
security. Bank may release this lien / pledge these goods against trust receipt. This means that
the borrower holds goods in trust of the bank, trust receipt arrangement is needed when the
borrower is going to sell this goods or process it further but borrower has no sufficient fund
to pay off the bank loan. Here proceeds from any part of these goods are deposited to this
bank.

3.10.2.6 Advance against Work-Order

Advances can be made to a client to perform work order. The following points are to be taken
into consideration.
The client’s management capability, equity strength, nature of scheduled work and feasibility
study should be judiciously made to arrive at logical decision. If there is a provision for
running bills for the work, appropriate amount to be deducted from each bill to ensure
complete adjustment of the liability within the payment period of the final bill besides
assigning bills receivable, additional collateral security may be insisted upon. Disbursement
should be made only after completion of documentation formalities and fulfillment of
arrangements by the client to undertake the contract. The progress of work under contract is
reviewed periodically.

3.10.2.7 Advance against Approved Shares:

Credit facilities to extend against shares will be called “Investment Scheme against Shares”.
Advance may be allowed against shares of companies listed with the Stock Exchange Ltd.
Subject to margin or may other restrictions imposed by Bangladesh Bank/Head Office of the
bank from time to time. Value of shares & margin should be worked out as per guidelines
issued from time to time by Bangladesh Bank / Head Office of the bank.
3.10.2.8 Advance against Fixed Deposit Receipts:

Advance against Fixed Deposit Receipt will be subject to credit Restrictions imposed from
time to time by Head Office / Bangladesh Bank. Scrutinize the Fixed Deposit Receipts with
regard to the following points.

a) The Fixed Deposit Receipt is not in the name of minor.

b) It is discharged by the depositor on revenue stamp of adequate value & his signature is
verified.

c) Creation of liability on Fixed Deposit issued in joint names by any one of the depositors is
regular.

d) If the Deposit Receipt is offered as a security for allowing advances, a letter of lien shall
be obtained from the depositors, on the appropriate form.

e) If the Deposit Receipt has been issued by the branch-allowing advance, lien against that
specific Deposit Receipt to be marked in the fixed Deposit Register of the branch.

f) The discharged receipt, the letter of lien duly verified by the issuing branch & the letter
confirming registration of the lien on the deposit receipts shall be kept along with other
documents under safe custody of the bank.

3.11 Credit Monitoring and Review:

It is the last step in credit policy and procedure framework of DBL. Credit monitoring and
review is very important, because it ensures proper utilities and repayment of bank fund.
Credit monitoring and review feature of DBL is concerned was assessing the quality of
different type of loan.

Periodic review and follow up should, inter-alia aims at ensuring:

That conduct (Turnover, regularity of repayment etc) of the¬ borrowing accounts during the
period under review has been satisfactory or as expected.

The account is not having excess over limit¬

The terms and condition of the sanctioned letter are strictly followed.¬

The value of the collateral security is adequate.¬

There¬ is not any unfavorable situation in market, economy and political conditions, which
may endanger the reliability of the borrower account.

The analysis of the borrowers business performance and comparison of the projected and
actual to find any deviations.¬

Apparent profitability from the loans¬


3.12 Classification of the 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:

Table 1 Classification on the basis of security

Security 2003 2002


Debts considered good in respect of Tk.9,164,399,974 Tk. 8,905,717,569
which the bank is fully secured
Debts considered good for which bank Tk.1,912,967,379 Tk.1,422,195,631
holds no other security than the
debtors personal security
Debts considered good and secured by Tk, 1302,949,636 Tk824,412,906
the personal security of one or more
parties in addition to the personal
security of the debtor.

3.13 Objective Basis of Classification

In classifying the loan and advance there are four classes in the loan review practiced in
Dhaka Bank Limited. They are as follows:

3.13.1Unclassified:

The loan account is performing satisfactorily in the terms of its installments and no overdue
is occurred. This type of loan and advances are fall into this class.

3.13.2 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.

Category of Credit Time overdue (irregularities)


S-T Agri & Micro Credit 3 months & above but less than 6 months.
Continuous loan Substandard
Demand Loan 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.
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.

3.13.3 Doubtful:

This classification contains where doubt exists on the full recovery of the loan and advance
along with a loss is anticipated but can not be quantifiable at this stage. Moreover if the state
of the loan accounts fall under the following criterion can be declared as doubtful loan and
advance.

Category of Credit Time overdue (irregularities)


S-T Agri & Micro Credit 6 months & above but less than 12 months.
Continuous loan Doubtful
Demand Loan Un-recovered for 6 months & above but less
than 12 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 12 months.
Repayable more than 5years: If the
overdue installment equals or exceeds the
amount repayable within 18 months.

3.13.4 Bad and Loss:

A particular loan and advance fall in this class when it seems that this loan and advance is not
collectable or worthless even after all the security has been exhausted. In the following table
the criteria to be fulfilled to fall in this category are summarized:

Category of Credit Time overdue (irregularities)


S-T Agri & Micro Credit Not recovered within more than 12 months.
Continuous loan Bad
Demand Loan Un-recovered more than 12 months from
the date of the loan is claimed. and
Repayable within 5years: If the overdue Loss
installment equals or exceeds the amount
Fixed Term loan repayable within 18 months.
Repayable more than 5years: If the
overdue installment equals or exceeds the
amount repayable within 24 months.

3.14 Qualitative Judgment Basis of Classification

Beside the above-mentioned objective criteria, Dhaka Bank 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. Whether any continuous credit, demand loan,
fixed term loan are classified or not on the basis of the above mentioned objective criterion
but if there is any doubt or uncertainty as regarding their recovery then the loan can be
classified on the basis of the Qualitative Judgment. The qualitative factors that are considered
in Dhaka Bank 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 Dhaka Bank Limited were like this

Table: Classification position last three years. Tk in million

Year Unclassified Substandard Doubtful Bad


2002 10940 12 5 250
2003 12470 200 20 200

3.15 Management of Delinquent Client

When a problem loan is detected the responsible branch manager takes the corrective action
and tries to minimize the loan losses allowing different facilities to the client. The steps
practice in Dhaka Bank Limited to manage the delinquent loan are:

Persuasion: This is the first step practiced in the DBL to mange the problem loan.¬

Negotiation: If the persuasion failed, the loan officer negotiates¬ a plan of action with the
borrower to try to extract both the bank and the borrower from possible loss. This calls for
certain sacrifices on the part of the bank and borrower in their mutual interest.

Litigation: If after rescheduling the loan and or failed to¬ negotiate with the delinquent
client, DBL go for taking legal action against the delinquent client to recover the loan.

3.16 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

Dhaka Bank Limited in the time of loan provisioning to get the real picture of the income
mainly follow the Bangladesh Bank guideline. The rate of provisioning used in DBL is
summarized in the following table.

Table 4: Rate of provisioning

Class Short Term AgricultureAll other credit


credit.
Rate of Provisions
Unclassified (UC) 5% 1%
Substandard (SS) 5% 20%
Doubtful 5% 50%
Bad or Loss 100% 100%

3.17 Credit Appraisal System

The function of commercial banks to collect deposit from the common people and to invest
deposited money in different sectors for overall development of the economy of the country.
So the banks have to be very much careful in credit appraisal. The person who is primarily
held responsible for appraising a loan proposal in Dhaka Bank limited is called the credit
officer.

The most important measure of appraising a loan proposal is safety of the project. Safety is
measured by the borrower and repaying capacity of him. The attitude of the borrower is also
an important consideration, liquidity means the inflow of cash into the project in course of its
operation. The profit is the blood for any commercial institution. Before approval of any loan
project the bank authority has to be sure that the proposed project will be a profitable venture.
Profitability is assessed from the projected profit and loss statement. The security is the only
tangible remains with the banker. Securing or collateral it is accepting must be easy to sell
and sufficient to cover the loan amount. But bank cannot sanction loan by only depending on
collateral. The sources of repayment of the project should be a feasible one. During
sanctioning any loan bank has to be attentive about diversification of risk. All money must
not be disbursed amongst a small number of people. In addition any project must be
established for the national interest and growth.

Commercial banks and financial institutions intermediate between lenders and borrowers.
These financial intermediaries collect deposit and disburse it as loan and advance to the
individual people, business, commercial, industrial entity. The loan and advance should be
given to them who has the certain and predicted cash flow to repay the credit. If the
relationship manager fail to analyze the clients viability of repaying the loan and the projects
cash flow possibility of default may arise due to the fact. So the importance of APPRAISAL,
in sanctioning the loan, is the key to identify the borrowers ability, expertise, efficiency,
industry analysis, business performance to ensure the recovery of the credit along with the
good supervision, monitoring and the relationship. In a word it can be said that the purpose of
appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for
acceptable purpose covered by adequate security. At the time of credit proposal the bank has
to come to an acceptable compromise between over caution and under caution.
3.18 Guiding Principle of Credit appraisal of DBL for Credit Officer:

To determine the worth of a client, the following conceptual exercises should be


undertaken. There are no fixed and set methods to perform credit marketing,
and scope for application of individual judgment/ perception always plays over
set rules in such work. For example, drop in revenue of a contractor may indicate
the client’s failure to get work, or it may be due to adaptation of policy to do
higher margin quality jobs.

3.18.1 Industry Information:

Gather and evaluate industry information, where the client is, which may be
done in the following aspects:
Records of prices can reveal trend, fluctuations
3.18.1.1
through various lengths of
Determine
the price
Time in short run/ long run. From the records it
behavior Of
the should be determined whether
product/
service of The Product/ Service has short term jump in demand
the client. and hence in price in the increase / decrease. The
effect of such Short Term Increase /Decrease of
demand on Sales Volume and Profitability Short Term
has to be understood and measured, viz., fluctuation
range, fluctuation cycle duration, vis-a-vis clients
cost/ revenue, etc. Examples of such products would
be

Winter clothing, non-essential items like ice cream,


fast food, cars, and other luxury items.

If the Product is easily substitutable, then price rise


3.18.1.2Substitut
in Dhaka will influence customers to the other, often
ability of
the market tolerance for short run fluctuation ' for such
product. product is very low. Example of this situation may be
Paper for Plastic, tea for coffee, etc.

If there are very few sources of procurement, price


3.18.1.3 Diversity
fluctuations are often
of source of
procureme
Wider. Example of this is seen in steel sheet trading.
nt.

It often happens to specialized trade centers, to


3.18.1.4 Market
either protect against unhealthy competition, or
pact to set
price drive out competition, in which case pricing may be
in stress. Existence of monopolist/ oligopolist as
client's competitors may

Signal prDBLem.
Such industry is susceptible quick change in taste,
3.18.1.5 Item for
sharp competition, large investment. Examples could
which taste
changes be toy industry, office furniture, fashion design
very fast.
Of clothing, etc.
In poorer countries/ or in countries with unstable
.18.1.6 The class political environment, Pricing of procurement / sale is
of the more sensitive to political turmoil, natural disasters
country is (flood / storm / earth quake) in the short run for cars,
important non-essential foods like baby food (branded baby
to note, serial), etc.
when there
is Basic food and clothing demand may not be dented
dependenc much.
e on
Forei country's dependence of Aid /Grant /
foreign
Investment may influence certain industry such
countries
as building materials like cement rod, therefore
for import/
scrap vessel, etc.
export.
Major construction like bridge over river,
establishment of large scale production industry of
items like fertilizer, car, etc. may influence purchase
capacity of consumers, govt. etc.

Some points to carefully watch in case of


dependency on foreign market may be:

(a) Currency fluctuation,

(b) Festival Depression/ Boost in market


demand,

(c) Development of other country competition,

(d) Government intervention in stock market,


etc.

High dependency Examples could be computers/ electronics, unfamiliar


on technology, brands (popular brand in Dhaka country may not be
which may change as popular in another country), in which case large
suddenly. pile up of inventory may result in pricing stress at
technology, the least.
which may
in Dhaka
country may not
be as popular in
another country),
in which case
Some industries are associated with risk of hazard,
3.18.1.7 Possible such as mining, asbestos plant, industrial boiler,
hazard pressurized gas filling, nuclear plant, isotope for
medical industry, building construction, etc. Such
industry may require lot of safety inspections,
certifications, insurance etc., shortage of which may
result in serious consequence-, or heavy cost at the
least.

Quality of a relationship account may deteriorate due


3.18.1.8 Long to long run replacement of technology, in computer
Term Look industry, printing industry, medicine plant, etc. Deep
stage of business cycle, world depression, etc. may
cause raise in expenditure. Demography, change in
population of consumer group may influence
business, examples may be education, cars,
insurance, baby food, travel, medicare, etc. Client in
industry facing sun-set, may eventually become ill
quality.

3.18.2 Management Capabilities:

There is no set rules to quantify/ confirm management's intentions/ capabilities.


Nevertheless, different aspects of the management of the client have to be
mentally perceived and recorded on best judgment/ effort basis. Management
information can be gathered and evaluated in the following angles:
Survey of relationship gone ill reveals that for many
3.18.2.1 cases, the management was evaluated liberally.
Significanc Lenders should take management profile of a
e of company very seriously. After all, it is the
manageme management who moves the business whether in
nt profile the right or in the wrong direction. If, as lender, we
evaluation. do not like the

Management now, we certainly will not like it when


we will ask them to repay.

This is the prime important criterion. There are no


3.18.2.2 Integrity set rules for testing this, however, information/
comments from competitors, creditors, business
associations/ clubs, etc. are indicative of the client's
integrity.

One man show,


3.18.2.3 Single
trouble Autocratic attitude,
manageme
Lack of delegation,
nt

Inappropriate positioning of people in different


responsibilities,

Lack of personnel to act as second line of defense, or


succession.

Much
entrepreneurial attitude, (willing to do several start
up projects at a time, constant interest in new
projects), etc.

It is important that the owner, the key men have


3.18.2.4 thorough knowledge of the works of the sub-
Experience ordinates. Lack of experience always results in over
of owner. dependence on subordinates, and inadequate
guidance/ management ability.
External:
3.18.2.5
Informatio Existence of a well established net work of market
n System. information is essential for any business, other wise
a company loses its touch with the ground Sales
team can be a good source of information for market
dynamics for retail/ whole sale business.

Relationship with competitors/ customers is another


source.

Use of published information is also very useful.

Internal:

Current and on going information system on


inventory/ receivable control, financial figures, etc.
should be established and correctly interpreted, lack
of skill to interpret-data may result in under
utilization/ misinformation all together.

3.18.3 Financial Strength:

(C) Accounts /Financial information should be evaluated in the following


directions:
It should be marked as change of policy may effect
3.18.3.1 on the profitability/ leverage, etc.
Accounting
Policy.
Often qualifications are not clearly expressed which
3.18.3.2 Auditor’s may have much impact on the financials.
qualificatio
n.
This should be determined and ensured that client
3.18.3.3 Other made full disclosure.
bank’s
limits/ Existence of other financing facilities is to be netted
outstandin out from total finance requirements of the client,
gs. otherwise over financing, hence over-trading
becomes a serious risk.

This has to be matched. Care should be exercised to


3.18.3.4 Modus distinguish between current and term requirements,
operandi of permanent working capital requirement is often
the errDhakaously financed by short term
business/
deal, vis-à- Loan, often client's intuition is taken for determining
vis finance requirements, temporary / seasonal raise in
facilities to requirement is often mistaken for regular
be requirement, or not at all accommodation.
provided.
Such mistakes lead to financial mismanagement on
the client's part as well as on the part of the
financier.
3.18.4 Documentation and Execution of facilities:

Improper documentation can be really frustrating in


3.18.4.1 Credit / times of trouble with the client.
Lending is
incomplete
without
proper documentation.
Sanction Letter and Acceptance by client,
3.18.4.2 Examples Correspondence with Credit Administrator/ Lawyer,
of
documents Security documents -(Lien ,hypothecation, etc.).
to take
Undertakings by client,
particularly
Legal documents (loan agreements,
take care
indemnification's, application for facilities,
of.
partnership deed, Memo & Article of Associations,
registrations with ministry, licenses, specialized
authorizations, etc.),

Amendments to any documents,

Ensure safe custody of the documents, etc.

Any terms and conditions should not left as just


acceptance of sanction letter, it should be put down
in noting through

Undertakings, explanation letters, etc.


Follow-up of clients facilities movements are integral
3.18.4.3 Follow part of relationship management. Examples of
through. points to follow may be as under:

STRL:

Swings of total outstanding.

Look out for larger than usual debits / credits.

Look out for cheque returns.

Reason for such should be obtained and


documented.

Fixed Loans:

Relationship officer should maintain his/ her own


schedule of dates when payment is due.

Look out for any deferrals, reasons should be


documented, proper approval should be obtained
and filed. .

Should determine need /justification and obtain


proper approval mfor any change in installment
amounts if approached by client.

Bills, L/Cs:

Check for unusual items. Short profit making


tendency in experimental trade beside regular line
of business often put the operational cycle of clients
in jeopardy.

Larger L/Cs than usual should be looked at carefully,


often it may result in stock pileup.

Change in frequently in extension and retirement of


TR may be indicative.

Cancellation of L/Cs may indicate prDBLem in


procurement on the exporter's part/ or fund
shortage of funds on the client's part.

Usage of LBD should be monitored


3.18.5 Review/ Renewal:

Relationship client is to be reviewed as an on going


3.18.5.1 On going. process.

Client should be contacted on need as well as on


routine basis.

Dhaka a year (or interi


3.18.5.2 Annual
review. Performance of the client must be thoroughly
reviewed to justify continuation of relationship.

Up to date financial statements, fresh credit reports


from other banks, statistics of utilization of facilities
with own and other banks should be reviewed,
facilities requirement should also be reviewed and
like wise renewed/ (canceled if necessary)

3.18.6 Socio-economic:

A very important job of the relationship officer is to follow up and maintain


information on the client, the business/ industry environment, politico-economic
developments within the country of operations as well as globally to look out for
early signals of emergence of problems. The following may be some guidance for
such follow up:
1. Financial: Adverse tern in sales and/ or profit,

Deviation from planned/ forecasted results, Interim losses,


Decline/ appreciation in returns,

Lowering of liquidity,

Unusual / Lager
overdrafts, larger swings,

Other cash income


(amount and timing),

Deviation from
usual borrowing circle,

Qualified Auditors'
comments,

Diversion of
fund,

Delay in
submission of financial information.

Breaches in terms and conditions of finance, etc.

2. Business Unplanned divestiture of funds,

Over-trading,

Cash drain to
subsidiaries,

Fall in market
share,

Involvement in
litigation by client,

Unplanned failure
to invest in capital expenditure or R&D,

Over reliance on
single product, or customer, etc.
3. Key management departure,
Management
Key man's long
sickness, accidents,

High personnel
attrition (particularly in management),

Too high
optimism, excessive life style, usually such attitudes are

Displayed in
deep crisis.,

Inefficient staff
remain un-removed, etc.

4. Industry Excess capacity/ supply,

Deregulation
(causing rise in competition),

Change in
market norms/ trading patterns,

Fast change in
technology,

Week existence
within the industry (in such situation clients tend to cover
against weaknesses by making large funds available to the
company),

Market rumors
(though must not be taken as facts, deserve due attention
as quite often these are early indications of trouble)

5. External Observation of stock market up-down,

Changing finance
market (rise and fall in base rate of central bank, treasury
bond issue by govt. or major financing company, etc.
within country of operations or abroad)

Trade inquiry
feed back on client,

Change in lender
group,

Devaluation of
company stocks,

Dependency on
stronger currency import,

Adverse
regulatory, political, economic changes.

3.18.7 Overall Portfolio Management:

The term means managing total exposure on different clients, in different


industries of product or service, enjoying different types of facilities. The
management may take into consideration the following
Relationship personnel should have fair idea of
3.18.7.1 Market the market sizes in the country of operations at
shares of least. He/ she should follow the strategy of the
different senior management to maintain total exposure
clients within on each industry within limit defined by such
Dhaka strategy.
industry, sizes
of different
industries
Exposure on individual client should also be
within country
planed.
of operation.

Quality of portfolio should also be determined


by classification policy and should try to
improve it.

Cross financing clients within the portfolio may


result in higher control.

Change in strategy /policy of portfolio should be


executed by increase or decrease of exposure in
specified fields.

Steps Involved in Credit Processing

3.19.1 Application for loan:

Applicant applies for the loan in the prescribed form of bank. The purpose of this forms is to
eliminate the unwanted borrowers at the first sight and select those who have the potential to
utilize the credit and pay it back in due time.

3.19.2 Getting Credit information:


Then the bank collects credit information about the borrower from the following sources:

1. Personal Investigation

2. Confidential report from other bank/ Head office/Branch/Chamber of commerce

3. CIB report from central bank

3.19.3 Scrutinizing and Investigation:

Bank then starts examination that whether the loan applied for is complying with its lending
policy. If comply, than it examines the documents submitted and the credit worthiness. Credit
worthiness analysis, ie. analysis of financial conditions of the loan applicant are very
important. Then bank goes for Lending Risk Analysis (LRA) and spreadsheet analysis, which
are recently introduced by Bangladesh Bank. According to Bangladesh Bank rule, LRA and
SA is must for the loan exceeding Dhaka core.

If these two analyses reflect favorable condition and documents submitted for the loan
appears to be satisfactory then, bank goes for further action.

3.19.4 Existing process of handling loans:

The process of sanctioning loans is as follows:

3.19.5 The C’s of Good & Bad Loan:

The Branch manager of DBL try to judge the possible client based on some criteria. These
criteria are called the C’s of good and bad loans. These C’s are described below:

3.19.5.1 Character

The outcome of analyzing the character is to have overall idea about the integrity, experience,
and business sense of the borrower. Two variables; Interaction/interview, and Market
Research are used to analyze the character of the borrower.

1. Interaction/interview: the indicators are


a) Prompt and consistent information supply, information given has not been found false
(Willingness to give information).
b) CIB also reveals business character.
c) Willingness to give owns stake/equity & collateral to cover.
d) Tax payer.

2. Market Research:
a) Information on business is verified.
b) Dealing with supplier and or customer as supplier is also a kind of lender; the payment
character can also be verified.
3.19.5.2 Capital
For identifying the capital invested in the business can be disclosed using the following
indicators.

a) Financial Statements
b) Receivable, Payable, statements to practically assess the business positions. Net worth
through financial statements or from declaration of Assets & Liabilities.

3.19.5.3 Capacity (Competence)

Capability of the borrower in running the business is 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 efficiently, effectively and profitably. The indicators help to
identify the capacity of the borrower.

a) Entrepreneurship skills i.e. risk taking attitude shown by equity mobilization.


b) Management competencies both marketing and products detail, ability to take decision.
c) Resilience or shock absorption: Connection, Back up (if first time falls second lines come
to help.)

3.19.5.4 Collateral

Make sure that there is a “second way out “ of a credit, but do not allow that to drive the
credit decision.

3.19.5.5 Cash Follow:

Cash flow is the vital factor that is used to identify whether the borrower will have enough
cash to repay the loan or advance. Cash keeps the liquidity to ensure repayment. The
relationship manager try to identify the annual cash flow from the submitted statements.

3.19.5.6 Conditions:

Understanding the business and economic conditions can and will change after the loan is
made.

3.19.5.7 Complacency:

Do not rely on past history to continue. Stay alert to what can go wrong in any loan.

3.19.5.8 Carelessness:

Remember that documentation, follow-up and consistent monitoring are essential to high
quality loan portfolios.

3.19.5.9 Communication:

Share credit objectives and credit decision making both vertically and laterally within the
bank.

3.19.5.10 Contingencies:
Make sure that you understand the risks, particularly the downside possibilities and that you
structure and price the loan consistently with that understanding.

3.19.5.11 Competition:

Do not get swept away by what others are doing.

3.20 Credit Query:

The loans and advance department gets a form filled up by the party seeking a lot of
information. The typical credit query form is attached in the appendix iii.

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
Security risk.

A detail interpretation of these risk and the procedure for evaluating the credit as follows

3.21.1 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.

3.21.2 Industry risk.

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

3.21.3 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.

3.21.4 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.

3.21.5 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.

3.21.6 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.

3.21.7 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).

3.21.8 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.

3.21.9 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.

3.21.10 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.

3.21.11 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.

3.21.12 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.

3.21.13 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.

3.21.14 Security cover risk:

This refers to the risk that the realized value of security is less than exposure. Security cover
risk depends on speed of realization and liquidation value. For analyzing security cover risk,
the official requires assessing the power of the customer to prolong the legal process and to
analyze the market demand for the security For assessment of security control risk, the
officials times the time that would require to liquidate the security and assess the risk and
estimates the security value at liquidation and assess the risk.

Before completing the LRA form, the relationship manager collects data specially industry
specific from published sources and company specific data that not usually published., by
personally visiting the company. After collecting the necessary data he/ she prepares financial
spreadsheet. This spreadsheet provides a quick method of assessing business trend &
efficiency and helps to assess the borrower ability to pay the loan Obligation. Financial
spreadsheet includes balance sheet, income statement, cash flow statement and ratios for the
purpose of financial statement analysis. Through analyzing data and collected information,
the concerned official completes the LRA form and all scores are transferred to the scoring
matrix to find the overall risk of lending. The overall matrix provides four kinds of lending
risk for decision making viz. (I) Good (ii) Acceptable (iii) Marginal and (iv) Poor. The bank
does not provide any credit request having an over all risk as “ marginal" and " Poor" without
justification. All credit application rated "Poor" shall require the approval of the Board of
Directors regardless of purpose tenor or amount. Therefore bank can minimize the dangers
regarding the bad loan and advances through using the LRA.

CREDIT RISK MANAGEMENT GUIDELINES BY BANGLADESH BANK


4.0 INDUSTRY BEST PRACTICES AS SUGGESTD BY BBK
4.1 POLICY GUIDELINES

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.

4.1.1 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 Faciliti ♣


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.
Appendix-3.4.3 provides brief description of financing under syndicated arrangement.

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.

4.1.2 Credit Assessment & Risk Grading

4.1.2.1 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 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 summaries 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 intergroup 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, cheques, 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. Rather, credit proposals and the
granting of loans should be based on sound fundamentals, supported by a thorough financial
and risk analysis.

Appendix iv contains a template for credit application.

Risk Grading

4.1.2.2 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. 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. All security
documentation should be in place. Aggregate Score of 95 or greater based on the Risk Grade
Scorecard.

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). Borrowers should have adequate liquidity, cash
flow and earnings. An Aggregate Score of 75-94 based on the Risk Grade Scorecard.

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. Facilities should be downgraded to 4 if the borrower incurs a
loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors
are present. 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. Facilities should be downgraded to
5 if sustained deterioration in financial condition is noted (consecutive losses, negative net
worth, excessive leverage), if loan payments remain past due for 30-60 days, or if a
significant petition or claim is lodged against 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.

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, if the customer intends to
create a lender group for debt restructuring purposes, the operation has ceased trading or any
indication suggesting the winding up or closure of the borrower is discovered. Not yet
considered non-performing as the correction of the deficiencies may result in an improved
condition, and interest can still be taken into profits. An Aggregate Score of 45-54 based on
the Risk Grade Scorecard.

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. Assets should be downgraded to 7 if loan payments remain
past due in excess of 90 days, and interest income should be taken into suspense (non-
accrual). Loan loss provisions must be raised against the estimated unrealizable amount of all
facilities. The adequacy of provisions must be reviewed at least quarterly on all non-
performing loans, and the bank should pursue legal options to enforce security to obtain
repayment or negotiate an appropriate loan rescheduling. In all cases, the requirements of
Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. An
Aggregate Score of 35-44 based on the Risk Grade Scorecard

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. The prospect of recovery is poor and legal options have been pursued. The
proceeds expected from the liquidation or realization of security may be awaited. The
continuance of the loan as a bankable asset is not warranted, and the anticipated loss should
have been provided for. This classification reflects that it is not practical or desirable to defer
writing off this basically worthless asset even though partial recovery may be effected in the
future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An
Aggregate Score of 35 or less based on the Risk Grade Scorecard

At least top twenty-five clients/obligors of the Bank may preferably be rated by an outside
credit rating agency.

The Early Alert Process should be completed in a timely manner by the RM and forwarded to
CRM for approval to affect any downgrade. After approval, the report should be forwarded to
Credit Administration, who is responsible to ensure the correct facility/borrower Risk Grades
are updated on the system. The downgrading of an account should be done immediately when
adverse information is noted, and should not be postponed until the annual review process.

Approval Authority, Segregation of Duties & Internal Audit


4.1.3 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.

All ♣ credit risks must be authorized by executives within the authority limit delegated to
them by the MD/CEO. The “pooling” or combining of authority limits should not be
permitted.

Credit approval ♣ should be centralised within the CRM function. Regional credit centres
may be established, however, all large loans must be approved by the Head of Credit and
Risk Management or Managing Director/CEO/Board or delegated Head Office credit
executive.

The aggregate exposure to any borrower or borrowing group must be used to determine the
approval authority required. ♣

Any ♣ credit proposal that does not comply with Lending Guidelines, regardless of amount,
should be referred to Head Office for Approval

MD/Head of Credit Risk Management must approve and monitor any cross border exposure
risk. ♣

Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control,
and Head of CRM. ♣

It ♣ is essential that executives charged with approving loans have the relevant training and
experience to carry out their responsibilities effectively. As a minimum, approving executives
should have:

- At least 5 years experience working in corporate/commercial banking as a relationship


manager or account executive.
- Training and experience in financial statement, cash flow and risk analysis.
- A thorough working knowledge of Accounting.
- A good understanding of the local industry/market dynamics.
- Successfully completed an assessment test demonstrating adequate knowledge of the
following areas:

o Introduction of accrual accounting.


o Industry / Business Risk Analysis
o Borrowing Causes
o Financial reporting and full disclosure
o Financial Statement Analysis
o The Asset Conversion/Trade Cycle
o Cash Flow Analysis
o Projections
o Loan Structure and Documentation
o Loan Management.

A • monthly summary of all new facilities approved, renewed, enhanced, and a list of
proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.

4.1.4 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.

4.1.5 Internal Audit

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.

PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES

The appropriate organizational structure must be in place to support the adoption of the
policies detailed in Section 1 of these guidelines. The key feature is the segregation of the
Marketing/Relationship Management function from Approval / Risk Management /
Administration functions. Credit approval should be centralized within the CRM function.
Regional credit centers may be established, however, all applications must be approved by
the Head of Credit and Risk Management or Managing Director /CEO /Board or delegated
Head Office credit executive.
4.2.1 Preferred Organizational Structure

The following chart represents the preferred management structure:

4.2.2 Key Responsibilities

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. ♣

Credit Administration:

To ensure that all security documentation complies with the terms of approval and is
enforceable. ♣

To ♣ monitor insurance coverage to ensure appropriate coverage is in place over assets


pledged as collateral, and is properly assigned to the bank.

To ♣ control loan disbursements only after all terms and conditions of approval have been
met, and all security documentation is in place.

To maintain control over all security documentation ♣

To ♣ monitor borrower’s compliance with covenants and agreed terms and conditions, and
general monitoring of account conduct/performance.

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.

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.

4.3.1 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 centres 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

Zonal Credit Officer (ZCO)


Head of Credit &
Head of Corporate Banking (HOBC)

Managing Director

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.

4.3.2 Credit Administration

The Credit Administration function is critical in ensuring that proper documentation and
approvals are in place prior to the disbursement of loan facilities. For this reason, it is
essential that the functions of Credit Administration be strictly segregated from Relationship
Management/Marketing in order to avoid the possibility of controls being compromised or
issues not being highlighted at the appropriate level. Credit Administration procedures should
be in place to ensure the following:
4.3.2.1 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.

4.3.2.2 Custodial Duties:

Loan disbursements and the preparation and storage of ♣ security documents should be
centralized in the regional credit centers.

Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets


pledged as collateral. ♣

Security documentation is held under strict control, preferably in locked fireproof storage. ♣

4.3.2.3 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.

Credit Monitoring, Credit Recovery Process of Dhaka Bank Limited


4.3.3 Credit Monitoring

To minimise 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.

Computer systems must be able to produce the above information for central/head office as
well as local review. Where automated systems are not available, a manual process should
have the capability to produce accurate exception reports. Exceptions should be followed up
on and corrective action taken in a timely manner before the account deteriorates further.
Refer to the Early Alert Process (section4.3.3.1).

4.3.3.1 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. An Early Alert report should be completed by the RM and sent to the
approving authority in CRM for any account that is showing signs of deterioration within
seven days from the identification of weaknesses. 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.

Despite a prudent credit approval process, loans may still become troubled. Therefore, it is
essential that early identification and prompt reporting of deteriorating credit signs be done to
ensure swift action to protect the Bank’s interest. The symptoms of early alert are by no
means exhaustive and hence, if there are other concerns, such as a breach of loan covenants
or adverse market rumors that warrant additional caution, an Early Alert report should be
raised.

Moreover, regular contact with customers will enhance the likelihood of developing
strategies mutually acceptable to both the customer and the Bank. Representation from the
Bank in such discussions should include the local legal adviser when appropriate.

An account may be reclassified as a Regular Account from Early Alert Account status when
the symptom, or symptoms, causing the Early Alert classification have been regularized or no
longer exist. The concurrence of the CRM approval authority is required for conversion from
Early Alert Account status to Regular Account status .

4.3.4 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.

NPL Account Management, Account Transfer, Loan Monitoring & Incentive


Program
4.3.4.1 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. Whilst some
assistance from Corporate Banking/Relationship Management may be sought, it is essential
that the autonomy of the RU be maintained to ensure appropriate recovery strategies are
implemented.

4.3.4.2 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. ♣

4.3.4.3 Non Performing Loan (NPL) Monitoring

On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account
Manager to update the status of the action/recovery plan, review and assess the adequacy of
provisions, and modify the bank’s strategy as appropriate. The Head of Credit sho uld
approve the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval needed
for NPLs in excess of 15%. The CLR’s for NPLs above 25% of capital should be approved
by the MD/CEO, with a copy received by the Board.

4.3.4.4 NPL provisioning and Write Off

The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off
of bad and doubtful debts, and suspension of interest should be followed in all cases. These
requirements are the minimum, and Banks are encouraged to adopt more stringent
provisioning/write off policies. Regardless of the length of time a loan is past due, provisions
should be raised against the actual and expected losses at the time they are estimated. The
approval to take provisions, write offs, or release of provisions/upgrade of an account should
be restricted to the Head of Credit or MD/CEO based on recommendation from the Recovery
Unit. The Request for Action (RFA) or CLR reporting format should be used to recommend
provisions, write-offs or release/upgrades.

The RU Account Manager should determine the Force Sale Value (FSV) for accounts grade 6
or worse. Force Sale Value is generally the amount that is expected to be realized through the
liquidation of collateral held as security or through the available operating cash flows of the
business, net of any realization costs. Any shortfall of the Force Sale Value compared to total
loan outstandings should be fully provided for once an account is downgraded to grade 7.
Where the customer in not cooperative, no value should be assigned to the operating cash
flow in determining Force Sale Value. Force Sale Value and provisioning levels should be
updated as and when new information is obtained, but as a minimum, on a quarterly basis in
the CLR.

Following formula is to be applied in determining the required amount of provision:

1. Gross Outstanding XXX


2. Less: (i) Cash margin held or Fixed
Deposits /SP under lien. ( XXX )
(ii) Interest in Suspense Account ( XXX )
3. Loan Value
(For which provision is to be created before considering
estimated realizable value of other security/collateral held) XXX
4. Less: Estimated salvage value of security/collateral held ( XXX )
(See Note below)
Net Loan Value XXX

Note: The amount of required provision may, in some circumstances, be reduced by an


estimated realizable forced sale value of (i.e. Salvage Value) of' any tangible collateral held
(viz: mortgage of property, pledged goods / or hypothecated goods repossessed by the bank,
pledged readily marketable securities etc). Hence, in these situations, it will be advisable to
evaluate such collateral, estimate the most realistic sale value under duress and net-off the
value against the outstanding before determining the Net Loan value for provision purposes.
Conservative approach should be taken to arrive at provision requirement and Bangladesh
Bank guideline to be properly followed.

4.3.4.5 Incentive Program:

Banks may wish to introduce incentive programs to encourage Recovery Unit Account
Managers to bring down the Non Performing Loans (NPLs). The table below shows an
indicative incentive plan for RU account managers:

Recovery as a % of Recommended Incentive as %


Principal plus of
interest
net recovery amount

If CG 7-8 if written off

76% to 100% 1.00% 2.00%

51% t0 75% 0.50% 1.00%

20% to 50% 0.25% 0.50%

COMPLIANCE OF BANGLADESH BANK GUIDELINES BY Dhaka Bank Limited (DBL)


5.0 COMPLIANCE OF BBK GUIDELINES BY DHAKA BANK LIMITED

In the previous sections of this report we have critically analysed Dhaka Bank’s existing
credit risk management system as well as Bangladesh Bank’s best practices guidelines for
managing credit risk. Comparing Dhaka Bank’s current credit risk management system with
the BBK best practices guideline we see that Dhaka Bank lacks some of the best practices in
banking industry which can be generated in the following way-

5.1Credit Policies/ Lending Guideline: In the above analysis we have seen that Dhaka Bank
limited has no written credit policy though it follows some policy. As there is no written
credit policy, branch managers sometimes get confused whether to go with a project or not.

Thus Dhaka Bank limited should have a lending guideline available in every branches so that
credit officers can take quick decision whether to accept or reject a project. The lending
guideline should include the following-

• 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

5.2 Credit Assessment & Risk Grading: Though credit is properly assessed in DBL, but
there is no risk grading system applied here. It should adopt a credit risk grading system to
ensure account management, structure and pricing are commensurate with the risk involved.

5.3 Approval Authority: In Bangladesh Bank’s guideline it is written that “Approval


authority should be delegated to individual executives and not to committees to ensure
accountability in approval process”. But in Dhaka Bank limited we see 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.

5.4 Segregation of Duties: According to Bangladesh Bank Guideline Banks should aim to
segregate the following lending functions to improve the knowledge levels and expertise in
each department:

- Credit Approval/ Risk Management


- Relationship Management/ Marketing
- Credit Administration

But in Dhaka Bank limited there is no such depertmentation or segregation of duties. In small
branches of DBL only single loan officer do all the jobs like loan marketing, risk assessing
and credit administration.

5.5 Internal Audit: Dhaka Bank limited has a segregated internal audit/ control department
charged with conducting audit of all departments as suggested by Bangladesh bank guideline.

5.6 Preferred Organizational Structure: Currently Dhaka Bank does not follow the
preferred management structure as suggested by BBk guideline. The key feature in the
preferred management structure is the segregation of Marketing/ Relationship function from
approval/Risk management/ Administration function.

5.7 Approval process: According to BBk best practice 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 Dhaka Bank we see that every credit proposal goes to Executive committee i.e. board.

5.8 Credit Administration: The BBk 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 Dhaka Bank credit officers under supervision of Branch Credit In-charge or Manager also
carry out all the three functions of credit administration. But Credit Marketing and
administration is yet to be segregated.

5.9 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 Dhaka Bank credit monitoring is also done by credit In charge or branch managers. As a
result Early Alert Accounts do not get that much attention as needed.

5.10 Credit Recovery: According to BBk guideline 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 Dhaka Bank the non-performing loan is very low (below 3%) and the recovery unit is yet
to be formed. But for personal loan program, Personal Banking Division has a recovery unit.

5.11 Incentive Program: The BBk guideline also encourages Banks to introduce incentive
programs for the Recovery Unit Account Managers to bring down the NON Performing
Loans (NPLs)
Dhaka Bank Limited currently has no incentive program as it does not have any Recovery
Unit.

CONCLUSION AND RECOMMENDATION

06 CONCLUSION AND RECOMMENDATION

A banker can not sleep well with bad debts in his portfolio. The failure of commercial banks
occurs mainly due to bad loans, which occurs due to inefficient management of the loans and
advances portfolio. Therefore any banks must be extremely cautious about its lending
portfolio and credit policy. So far Dhaka Bank Limited has been able to manage its credit
portfolio skillfully and kept the classified loan at a very lower rate ---thanks goes to the
standard and stringent credit appraisal policy and practices of the bank.
But all things around us are changing at an accelerating rate. Today is not like yesterday and
tomorrow will be different from today. Given the fast changing, dynamic global economy
and the increasing pressure of globalization, liberalization, consolidation and
disintermediation, it is essential that Dhaka bank limited has a robust credit risk management
policies and procedures that are sensitive to these changes. To improve the risk management
culture further, Dhaka bank limited should adopt some of the industry best practices that are
not practiced currently. These are

Dhaka Ban should have a clear written lending guideline. The¬ lending guideline should
include Industry and Business Segment Focus, Types of loan facilities, Single Borrower and
group limit, Lending caps, Discouraged Business Types, Loan Facility Parameters and Cross
boarder Risk.

It should adopt a credit grading system All¬ facilities should be assigned a risk grade. And
the borrowers risk grades should be clearly stated on credit application.

Approval¬ authority should be delegated to individual executives rather than Executive


Committee/ Board to ensure accountability. This system will not only ensure accountability
of individual executives but also expedite the approval process.

All lending functions should be segregated in the following way¬

* Credit Approval / Risk Management


* Relationship Management / Marketing
* Credit Administration

The segregation of duties will improve the knowledge levels and expertise in each
department.

The¬ organization structure should have to be changed to put in place the segregation of the
Marketing/ Relationship Management function from Approval / Risk Management /
Administration function.

The responsibilities of the key persons of the above function must also be clearly specified.¬

An¬ Early Alert Account system should be introduced to have adequate monitoring,
supervision or close attention by management.( An early Alert Account is one that has risk
and potential weaknesses of a material nature)

There should be a Recovery Unit to manage¬ directly accounts with sustained deterioration.
To encourage Recovery Unit incentive program may also introduced.