i.Credit Policy Guidelines: ii. Procedural Guidelines iii. Factors of portfolio management iv.

Saving function: Wealth Function: Liquidity Function: Credit Function: Payment function: Risk Function: Policy function: Free Rider: Credit: its an ability to buy to repayment in future !his is the confidence of the lender upon the borro"er to repay the loan Assymetric Inf.: # situation in "hich one party in a transaction has more or superior information compared to another !his often happens in transactions "here the seller kno"s more than the buyer$ although the reverse can happen as "ell Potentially$ this could be a harmful situation because one party can take advantage of the other party%s lack of kno"ledge Supervision: means it gives more emphasis on endues verification of the loan Prudent management of this risk is fundamental to the substantiality of a bank Credit risk Credit risk is the possibility that a borro"er or counter party "ill fail to pay interest or repay the principles according to the terms specified in the credit agreement Credit risk means payment may be delayed or ultimately not paid at all$ "hich can in turn cash flo" problem and the banks liquidity Credit risk arises from the banks dealing "ith or the lending to the corporate$ individual or the other bank or financial institutions !o minimi&e loss bank should have compressive credit risk management policies

Credit risk management( key messages) Credit risk management lives at the heart of the survival for the vast ma'ority of the banks !he profile of customer ( "hom has been lent to) must be transparent !he maturity profile of the loan product ( for ho" long the loan has been made) interacts strongly "ith the liquidity risk management Credit risk can be limited by reducing connected party lending and large e*posure to the related parties #sset classifications and subsequent provisioning against possible losses impact not only the value of the loan portfolio but also the true underlying value of the banks capital

============================================================ i. Credit Policy Guidelines: A. ending guidelines: !he Lending +uidelines should be updated at least annually to reflect changes in theeconomic out look and the evolution of the bank,s loan portfolio$ and be distributed tall lending-marketing officers !he Lending +uidelines should be approved by the .anaging /irector-C01 2 3oard of /irectors of the bank based on the endorsement of the bank,s 4ead of Credit Risk .anagement and the 4ead of Corporate-Commercial 3anking !he Lending +uidelines should provide the key foundations for account officers-relationship managers (R.) to formulate their recommendations for approval$ and should include the follo"ing: Industry and !usiness Segment Focus !he Lending +uidelines should clearly identify the business-industry sectors that should constitute the ma'ority of the bank,s loan portfolio For each sector$ a clear indication of the bank,s appetite for gro"th should be indicated "ypes of oan Facilities !he type of loans that are permitted should be clearly indicated$ such as Working Capital$ !rade Finance$ !erm Loan$ etc Single !orro#er$Group imits$Syndication /etails of the bank,s Single 3orro"er-+roup limits should be in cluded as per 3angladesh 3ank guidelines 3anks may "ish to establish more conservative criteria in this regard provides brief description of financing under syndicated arrangement ending Caps 3anks should establish a specific industry sector e*posure cap to avoid

over concentration in any one industry sector %iscouraged !usiness "ypes 3anks should outline industries or lending activities that are discouraged #s a minimum$ the follo"ing should be discouraged: 5 .ilitary 0quipment-Weapons Finance 5 4ighly Leveraged !ransactions 5 Finance of Speculative 6nvestments 5 Logging$ .ineral 0*traction-.ining$ or other activity that is 0thically or 0nvironmentally Sensitive 5 Lending to companies listed on C63 black list or kno"n defaulters 5 Counterparties in countries sub'ect to 78 sanctions 5 Share Lending 5 !aking an 0quity Stake in 3orro"ers 5 Lending to 4olding Companies 5 3ridge Loans relying on equity-debt issuance as a source of repayment 9: oan Facility Parameters Facility parameters (e g $ ma*imum si&e$ ma*imum tenor$ and covenant and security requirements) should be clearly stated #s a minimum$ the follo"ing parameters should be adopted: 5 3anks should not grant facilities "here the bank,s security position is inferior to that of any other financial institution 5 #ssets pledged as security should be properly insured 5 ;aluations of property taken as security should be performed prior to loans being granted # recogni&ed <rd party professional valuation firm should be appointed to conductvaluations 9:Cross !order &isk Risk associated "ith cross border lending 3orro"ers of a particularcountry may be unable or un"illing to fulfill principle and-or interestobligations /istinguished from ordinary credit risk because thedifficulty arises from a political event$ such as suspension of e*ternalpayments 5 Synonymous "ith political 2 sovereign risk 5 !hird "orld debt crisis !. Credit Assessment ' &isk Grading Credit Assessment # thorough credit and risk assessment should be conducted prior to the granting of loans$ and at least annually thereafter for all facilities !he R. should be the o"ner of the customer relationship$ and must be held responsible to ensure the accuracy of the entire credit application submitted for approval Credit #pplications should summaries the results of the R.s risk assessment and include$ as a minimum$ the follo"ing details: 5 #mount and type of loan(s) proposed 5 Purpose of loans 5 Loan Structure (!enor$ Covenants$ Repayment Schedule$ 6nterest) 5 Security #rrangements 6n addition$ the follo"ing risk areas should be addressed: 5 3orro"er #nalysis 5 6ndustry #nalysis 5 Supplier-3uyer #nalysis 5 4istorical Financial #nalysis 5 Pro'ected Financial Performance 5 #ccount Conduct 5 #dherence to Lending +uidelines 5 .itigating Factors 5 Loan Structure 5 Security 5 8ame Lending &isk Grading Risk grading is a key measurement of a 3ank,s asset quality$ and as such$ it is essential that grading is a robust process #ll facilities should be assigned a risk grade Where deterioration in risk is noted$ the Risk +rade assigned to a borro"er and its facilities should be immediately changed Financial risk =>? 3usiness risk @A? .gt risk @B Security risk @> Relationship risk @> C. Approval aut(ority !he authority to sanction-approve loans must be clearly delegated to senior credit e*ecutives by the .anaging /irector-C01 2 3oard based on the e*ecutive,s kno"ledge and e*perience #pproval authority should be delegated to individual e*ecutives and not to committees to ensure accountability in the approval process !he follo"ing guidelines should apply in the approval-sanctioning of loans: @ Credit approval authority must be delegated in "riting from the ./-C01 2 3oard (as appropriate)$ ackno"ledged by recipients$ and records of all delegation retained in CR. B /elegated approval authorities must be revie"ed annually by ./-C01-3oard !he credit approval function should be separate from the marketing-relationship management (R.) function < !he role of Credit Committee may be restricted to only revie" of proposals i e recommendations or revie" of bank,s loan portfolios

C #pprovals must be evidenced in "riting$ or by electronic signature #pproval records must be kept on file "ith the Credit #pplications = #ny credit proposal that does not comply "ith Lending +uidelines$ regardless of amount$ should be referred to 4ead 1ffice for #pproval D ./-4ead of Credit Risk .anagement must approve and monitor any cross border e*posure risk E #ny breaches of lending authority should be reported to ./-C01$ 4ead of 6nternal Control$ and 4ead of CR. %. Segregation of %uties 3anks should aim to segregate the follo"ing lending functions: 5 Credit #pproval-Risk .anagement 5 Relationship .anagement-.arketing 5 Credit #dministration !he purpose of the segregation is to improve the kno"ledge levels and e*pertise in each department$ to impose controls over the disbursement of authorised loan facilities and obtain an ob'ective and independent 'udgment of credit proposals ). Internal Audit 3anks should have a segregated internal audit-control department charged "ith conducting audits of all departments #udits should be carried out annually$ and should ensure compliance "ith regulatory guidelines$ internal procedures$ Lending +uidelines and 3angladesh 3ank requirements ii. Procedural Guidelines @ #pproval process: !he approval process must reinforce the segregation of Relationship .anagement-.arketing from the approving authority !he responsibility for preparing the Credit #pplication should rest "ith the R. "ithin the corporate-commercial banking department Credit #pplications should be recommended for approval by the R. team and for"arded to the approval team "ithin CR. and approved by individual e*ecutives !he responsibility for preparing the Credit #pplication should rest "ith the R. "ithin the corporate-commercial banking department Credit #pplications should be recommended for approval by the R. team and for"arded to the approval team "ithin CR. and approved by individual e*ecutives *. Credit Administration !he Credit #dministration 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 #dministration be strictly segregated from Relationship .anagement-.arketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level Credit #dministration procedures should be in place to ensure the follo"ing @ /isbursement B Custodial duties < Compliance requirements +.Credit ,onitoring: !o minimise credit losses$ monitoring procedures and systems should be in place that provide an early indication of the deteriorating financial health of a borro"er #t a minimum$ systems should be in place to report the follo"ing e*ceptions to relevant e*ecutives in CR. and R. team: @ Past due principal or interest payments$ past due trade bills$ account e*cesses$ and breach of loan covenantsF B Loan terms and conditions are monitored$ financial statements are received on a regular basis$ and any covenant breaches or e*ceptions are referred to CR. and the R. team for timely follo"5up < !imely corrective action is taken to address findings of any internal$ e*ternal or regulator inspection-audit .ore emphasis on liquidity problemn$ profitability problem$ sustainability -. Credit &ecovery !he Recovery 7nit (R7) of CR. should directly manage accounts "ith sustained deterioration Whenever an account is handed over from Relationship .anagement to R7$ a 4andover-/o"ngrade Checklist should be completed !he R7,s primary functions are: @ /etermine #ccount #ction Plan-Recovery Strategy B Pursue all options to ma*imi&e recovery$ including placing customers into receivership or liquidation as appropriate < 0nsure adequate and timely loan loss provisions are made based on actual and e*pected losses C Regular revie" of grade D or "orse accounts iii. Factors of portfolio management .. Capital: !he capital of a bank services as a cushion for the protection of the depositors fund !he si&e of capital in relation to deposits influences the amount of risk that a bank can afford to take 3anks "ith relatively adequate capital can make loans to longer maturities and greater risk !he bank management must decide "hat types of loan "ould be best for the bank *. &isk and profita/ility: Some of the important consideration is making this decision are the risk associated "ith various kinds of loans$ the need for diversification to spread the risk$ the types of customers the bank "ants to serve the capabilities of bank personnel$ and certainly$ the relative profitability of various kinds of loans +. "enure of deposit: !he types and tenure of deposits have an important bearing in the determining of the loan portfolio of a bank 4o" much loanable funds "ill be earmarked for long term lending and ho" much for short term$ "ill depend to a great e*tent on the deposit structure of a bank "herein the tenure of availability if deposits "ill largely influence the decision -. Credit environment: !he prevailing economic conditions and investment environment are$ no doubt$ influential in deciding the loan portfolio of a bank

# stable economy offering a more conductive environment for investment is much desirable to a bank formulating its loan policies than a relatively unstable one 0. Influence on monitor: !he loan creating ability of banks greatly influenced by the monitory and fiscal policies of a country 6f additional reserves are made availability to the commercial banking system$ the lending ability of banks is increased 7nder such conditions$ banks can pursue more liberal loan policies than if the opposite situation e*ists "herein e*pansion of banks reserves is curbed or reduced 1. A/ility and e2pertise to (andle initial loan : Whether there are adequate e*pertise of the lending personnel of a bank is a question often raised at the time of firming up the loan portfolio !he officers of a commercial bank may$ for e*ample$ have considerable ability and e*perience in commercial lending by practically very less e*posure to the term of loans$ particularly in the field of industry 8ecessary e*pertise has$ therefore to be acquired by the loan officers "ith a vie" to managing the loan portfolio in the desired "ay 3. Credit needs its area cover: #n obvious factor influencing a commercial bank,s loan portfolio is the area it serves through the net"ork of branches !he loan portfolio should be balanced in a manner so that the various credit needs of the different communicate and areas more accommodated 4. Govt. priorities: #ll banks should have established credit policies that clearly outline the senor management,s vie" of business development priorities and the terms and condition that should be adhered to in order for loans to be approved Saving function: !he system of financial markets and institutions provides a conduit for the publics saving 3ond$ stock$ and other financial claims sold in the money and capital markets provide a profitable$ relatively lo" risk outlet for the public saving$ "hich flo" through the financial markets into investment so that more goods and services can be produced$ increasing society,s standard of living When saving flo"s decline$ investment and living standards begin to fall 5ealt( Function: Wealth is defined as the sum of the values of all assets For those business and individuals choosing to save$ the financial instruments sold in the money and capital markets provide an e*cellent "ay to store "ealth (i e preserve the value assets) until funds are needed for spending #lthough "e might choose to store our "ealth in things (automobiles)$ such items are sub'ect to depreciation and often carry great risk of loss 4o"ever$ bonds$ stocks and other financial instruments do not "ear out over time and usually generate income: more over their risk of loss often is much less than for other forms of stored "ealth i6uidity Function: For "ealth stored in financial instruments the financial marketplace provides a means of converting those instruments into cash "ith little risk of loss !hus$ the financial markets provide liquidity for savers "ho hold financial instruments but are in need of money 6n modern societies$ money consist mainly of deposits held in banks and is the only financial instrument possessing perfect liquidity 4o"ever$ money generally earns the lo"est rate of return of all assets traded in the financial system and its purchasing po"er is seriously eroded by inflation !hat is "hy$ savers generally minimi&e their holdings of money and hold other financial instruments until they really need spendable funds Credit Function: 6n addition to providing liquidity and facilitating the flo"s of saving into investment to build "ealth$ the financial markets furnish credit to fiancG consumption and investment spending Credit consist of a loan of funds in return for a promise of future payment Consumers need credit to purchase a home$ buy groceries$ repair the family automobile$ and retire outstanding ne" buildings$ meet payrolls and grant dividends to their stockholders State$ local$ and federal governments borro" to construct building and other public facilities and to cover daily e*penses until ta* revenues flo" in Payment function: !he financial system also provides a mechanism for making payments for goods and services Cerain financial assets$ mainly checking accounts and negotiable order of "ithdra"al (81W) accounts$ serve as a medium of e*change in making payments Plastic credit cards issued by banks and credit unions give the customers instant access to short term credit but also "idely accepted as a convenient means of payment Plastic cards and electronic means of payment$ including computer terminals in homes$ offices and stores "ill eventually displace checks and other pieces of paper as the principles means of payment in the future &isk Function: !he financial markets offer business$ consumers and governments$ protection against life$ health$ property and income risks !his is accomplished$ first of all$ by the sale of insurance policies 6n addition to making possible the sale of insurance policies$ the money and capital markets have been used by businesses and consumers to Hself insureI against risk that is$ holdings of "ealth "hich are built up as a precaution against future loss Policy function: !he financial markets have been the principal channel through "hich government has carried out its policy of attempting to stabili&e the economy and avoid inflationF 3y manipulating interest rates and the availability of credit$ government can affect the borro"ing and spending plans of the public$ "hich$ in turn influence the gro"th of 'obs$ production and prices A free rider in economics refers to someone "ho benefits from resources$ goods or services "ithout paying for the cost of benefit !he term free rider first used in economics theory of public goods but similar concept has been applied in other conte*t$ including collective bargaining$ antitrust la"$ psychology and political science Free riding may considered as free rider problem "hen it leads to under provision of goods or services$ or "hen it leads to overuse or degradation of a common property resources #lthough the term originated in the economic theory similar concept have been applied in political science$ social psychology$ and other disciplines Some individual in a term or community may reduce their contribution or performance if they believe that one or more other members of the group may free ride