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Introduction
Introduction:
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1.3 Purpose:
The main purpose of this policy document is to set out yardsticks for and
spell out standard practices for management of credit risk in the Bank. As
such, it specifically addresses the following areas:
a) to set out yardsticks for and spell out standard practices
b) to establishing an appropriate credit risk environment,
c) setting up a sound credit approval process,
d) maintaining
an
appropriate
credit
administration
&
monitoring process
e) To ensuring adequate controls over credit risk.
1.4 Scope:
This policy document will be applicable for issues related to credit risk
with respect to both direct and indirect credit products of traditional and
islamic banking as well. This is also to be read in conjunction with the
Guidelines for Consumer Finance with respect to retail banking products.
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Chapter: Two
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Willingnes
s to repay
Personal
History
Character
(C1)
Capability
(C2)
Credit
Worthiness
Financial
Capacity
Easy
Realizable
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Integrity
Managemen
t Capacity
Institutions
Local
Business
Communit
Communit
y
Certification
(C6)
Own
Capital
Borrowed
CapitalCapital
Collateral
(C5)
Industry
Conditions
Status of
Collateral
Market
Not easily
Social
Conditions
realizable
Conditions
Conditions
(C4)
2.1 Safety
Safety is the most significant element of sound lending. The success of the bank depends
upon the confidence of the depositing public. Confidence could be infused by investing the
money in safe securities. Safety depends upon the security offered by the borrower and the
repaying capacity and willingness of the debtor to repay the loan along with the interest.
Therefore, the banker should ensure that the security offered is adequate and readily
realizable and the borrower is a person of integrity, good character and reputation.
Character of Borrower (C1) represents three factors. Related variables of each factor are as
follows:
Factors
Associated variables
Technical expertise
borrower
Factor 3 (F3): integrity of the borrower
Professional training
Net profit
Bank deposit
Thus,
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C1= F1+F2+F3
Capability (C2) represents four factors. Related variables of each factor are as follows:
Factors
Associated variables
Technical expertise
borrower
Factor 5 (F5): education
Professional training
Net profit
Bank deposit
Retained earnings
fund.
Thus,
C2= F4+F5+F6+F7
Capital (C3) represents two factors . related variables of each are as follows:
Factors
Factor 8 (F8): own capital of borrower.
Factor 9 (f9): borrowed capital by the
borrower.
Associated variables
Own capital
Public issue shares
Loan capital
Credit from suppliers
Thus,
C3= F8+F9
Conditions (C4) represents three factors . related variables of each factor are as follows:
Factors
Associated variables
Ecological factors
Availability of raw material s
Government regulation
Industry success
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Domestic demand
Demand in the international market
Social unrest
Political stability
Thus,
C4= F10+F11+F12
Collateral (C5) represents three factors. Related variables of each factor are as follows:
Factors
Factor 13 (F13): easily realizable property
Associated variables
Land and building
Stock and share
Equipment
Inventory and residential properties
Account receivables
Other real estate inventories
Realizable value
Easily marketable
Free from encumbrances
Possession status
Thus,
C5 = F13+F14+F15
Certifications (C6) represents three factors. Related variables of each factor are as follows:
Factors
Factor 16 (F16): local community of the
borrower
Factor 17 (F17): institutional reference
with which borrower has past relationships
Factor 18 (F18): Business Community
With Whom The Borrower Has Business
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Interactions
Thus,
Associated variables
Community leaders
Local shopkeepers
Neighbors
Employees
Bank/creditors
Employers
customers
Suppliers
Competitors
C6 = F16+F17+F18
2.2 Liquidity
Liquidity refers to the ability of an asset to convert into cash without loss within short time.
As the liabilities of a bank are repayable on demand or at short notice, the bank should keep
its funds in liquid state so that it can meet the demand of the depositors in time. Money
locked up in long term loans such as land, building, plant, machinery etc., can not be received
back in time and so less liquid. Short term loans and loans granted against securities such as
goods can be converted into cash easily and so liquid. Therefore, a bank should confine its
lending to short term against marketable securities.
2.3 Profitability
A banker should employ his funds in such a way that they will bring him adequate return
because like all other commercial institutions banks are run for profit. Banks can earn profit
to pay interest to depositors, declare dividend to shareholders, meet establishment charges
and other expenses, provide for reserve and for bad and doubtful debts, depreciation,
maintenance and improvements of property owned by the bank and sufficient resources to
meet contingent loss. Therefore, profit is an important consideration. The main source of
profit comes from the difference between the interest received on loans and those paid on
deposit. For this, a banker should give importance to profitability.
2.4 Purpose
Bank gives advances for making profit but before sanctioning loans bank should enquire
about the purpose about which it is needed. Loans for undesirable activities such as
speculation and hoarding should be discouraged. It is also equally important on the part of
banks to ensure that a loan is utilized for the purpose for which it is granted so that repayment
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will be prompt.
2.4 Security
Customer may offer different kinds of securities such as land, building, machinery, goods and
raw materials to get advances. The securities of the customers are insurance and banker can
fall back upon them in times of necessity. For the sake of safety, he should ensure that the
securities are adequate, marketable and free from encumbrances. Securities, which could be
marketed easily, quickly and without loss, should be preferred.
2.6 Diversity
Only consciousness of the banker and integrity of the borrower cannot ensure the safety of a
bank. Portfolio management is very is very important in giving loans and advances. That
means diversification is more important. Bank should not deploy all its funds to any single
borrower, to an industry, or to one particular region. An adverse change in the economy of
these may affect the entire business. In such a case, repayment will be highly difficult and the
survival of the bank becomes questionable.
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Qualitative Factors
1
2
3
4
5
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6
7
Quantitative Factors
1
2
3
4
Liquidity
Profit and
profitability
Business solvency
Adequacy of the
collateral
Chapter: Three
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Risk is an associated factor with financial service industry. Banks are exposed to a number of
risks of which Credit Risk, Market Risk (interest risk and foreign exchange risk), Operational
Risk and Reputation risk. In order to manage al these risks properly, an effective risk
management system in banking operation is must which is actually reflected in sound lending
policy. Bangladesh Bank has undertaken a project to review the global best practices and to
examine the possibility of introducing the same in the banking industry of Bangladesh.
Bangladesh Bank vide BRPD circular no. 17 dated 07.10.2003 has sent directional
Guidelines/ Manuals of five core risk areas in banking including Credit Risk Management. In
this circular a) Centralization, b) Policy, c) Risk Grading, d) Customization, e) Segregation of
Duties, and f) Approval Authority has been outlined. Among these Policy has been
recommended to include the following:
a. Industry Analysis, business segment focus and credit environment
b. Banks loan Portfolio size, Capital position, Tenure of Deposit etc.
c. Types of Loan facility and level of risk and profitability of different types of loan,
d. Credit needs of the covered area,
e. Business development priorities
f. Single/Group borrower exposure
g. Borrower type and loan type
h. Lending cap to avoid concentration in any sector
i. Discouraged business type,
j. Credit facility parameter,
k. Existing loans classification status,
l. Security consideration
m. Lending procedure
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Lending is a vital function of a commercial banking. While going for lending, the decision
should be taken considering the lending principles as well as Bangladesh Bank guidelines for
lending. For a sound lending, there must be a sound lending policy covering all the issues
discussed in lending principles, Bangladesh Bank policy guideline, PBLs own mission and
vision as well as business strategies. Encompassing all possible aspects a policy guideline is
webbed in a systematic framework in this section. PBLs sound lending policy will cover the
following major points:
1. Governance framework
2. Business segments and financial products
3. Prudential exposure limits
4. Regulatory restrictions on lending
5. Priority sector advances (PSA)
6. Credit appraisal system
7. Credit pricing
8. Credit approvals and denials
9. Margin and security (collateral) management
10. Credit Documentation
11. Credit administration and monitoring
12. Consortium/ syndicated/ multiple bank lending
13. Income recognition, asset classification and provisioning
14. Non-Performing Assets (NPAS) Management
15. Capital market exposures
16. Credit risk management
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Chapter: Four
43
Governance Framework
Governance Framework
The Bank has structured its Governance framework for ensuring effective credit risk
management. The credit policy framed in this document reckons the Governance framework
and other structures laid down/ to be laid down by the Bank for overall Credit Risk
management.
Level 1:
(i)
Board of Directors:
The Board of Directors of the Bank (Board) will have the overall responsibility for
risk management in the Bank, including Credit Risk management. The Board will
approve the Banks credit policy covering every aspects of this policy.
Level 2:
(ii)
There shall be a Risk Management Committee which will be a Board level subcommittee and will act independently, as per BB Guidance on Core Risk Management
issued in 2005. RMC should ideally comprise the following members of the Board:
Chairman,
MD & CEO/CEO,
Member Independent Director of the Board,
Member Independent Director of the Board,
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Member of Board,
The RMC will primarily discharge the roles/ responsibilities pertaining to:
a.
b.
Updating the Board at periodic intervals with the Banks credit risk exposure
profiles concentration risk (borrower groups/ industries/ location/ sectors),
risk rating of the obligors, along with the necessary remedial measures taken/
recommended.
c.
d.
e.
Delegating the broad credit risk monitoring responsibility to the Credit Risk
Management Department (CRMD), to review the risk analysis reports from
CRMD and approving/ disapproving the decisions of CRMD and documenting
it with observations.
Sanctioning/ approving/ reviewing credit proposals as per the Delegation of
f.
h.
(i)
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This Credit Committee would discuss proposals, which will be approved through
consensus. The minutes of Credit Committee
Meetings would be kept for record and for review, as required, by the RMC,
on behalf of the board.
(ii)
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Chapter: Five
43
Identifying key business/ industry segments for credit extension based on high
growth potential and domain knowledge/expertise of the Bank.
(ii)
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competition.
5.1
Financial products:
The Bank would offer a wide range of products to the target customer segments to satisfy
their financial needs. The products range includes:
(i)
Credit Products:
a. Trade Finance
b. Short-term Working Capital Finance: Cash credit, overdraft, demand loan,
j.
Lease Financing
(ii)
Transactional Products:
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a. Bankers Acceptances
b. Documentary Credit
c. Forfaiting
d. Cash Management
e. Factoring
Loan and advances have primarily been divided into two major groups:
a)
Fixed term loan: These are the loans made by the Bank with fixed repayment
schedules. Fixed tern loans are categorized into three based upon its tenure
which is defined as follows:
Short term
Medium term
Long Term
Upto 12 months
:
b) Continuing Loans: These are the loans having no fixed repayment schedule, but have
an expiry date at which it is renewable on satisfactory performance of the customer.
The product mix offering will vary from one business/ industry segment to another. The Bank
would attempt to customize the product-mix to maximize customer satisfaction using Banks
knowledge and innovativeness for building enduring and sustaining relationship with the
Corporate Banking and SME Banking segment customers and retail segment with value
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Chapter: Six
43
(i)
(ii)
The prudential exposure limits/ guidelines will be set by the Risk Management
Committee (RMC), as per the guidelines of BB, and approved by the Banks
Board of Directors. These limits will be reviewed periodically by RMC in the
light of the changes in the BB guidelines on Exposure Norms and also in the
Banks risk appetite and risk profile of its credit portfolio, and revisions, as
necessary put up to the Banks Board of Directors, for approval.
(iii) For the purposes of this document, the term sanctioning authority would
mean and include the designated levels/individuals/committee as authorized to
approve credit proposals from time to time.
3.1. Individual /group borrowers limits:
Single Customer Exposure Limit: Prime Bank will always comply with the prevailing
banking regulation regarding Single Customer Exposure Limit set by Bangladesh Bank
from time to time. As per prevailing regulation, Bank will take maximum exposure
(outstanding at point of time) on a single customer (Individual, Enterprise, Company,
Corporate, Organization, Group) for the amount not exceeding 35% of Banks total
capital subject to the condition that the maximum outstanding against funded facilities
does not exceed 15% of the total capital. However, for single customer of the export
sector maximum exposure limit shall be 50% of the total capital subject to the condition
total funded facility shall not exceed 15% of the total Capital of the Bank at any point of
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time.
(ii)
modes of acquisition.
c. Commercial Papers
d. Exposure under Securitisation as per BB
(iii)
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by the BB.
Capital Funds means the Banks Tier I plus Tier II capital as at the end of the last
published balance sheet, as defined by BB under Capital Adequacy Standards.
(i)
Starting January 1, every year, in order to diversify & disperse credit risk
across industries/ sectors, the RMC will set appropriate exposure ceiling per
industry/ sector, except Priority/Special Sectors for which BB prescribed
minimum lending targets would apply. The Credit portfolio concentration will
be reviewed at RMC meetings to avoid industry concentration and the
approving authorities shall, before sanctioning, consider the concentration
levels.
(ii)
The RMC may consider prescribing lower exposure limits for specific
industries/ sectors where the Banks exposure needs to be curtailed/
discouraged due the industry/ sector-specific risk factors and the risk profile of
the Banks loans portfolio. This would draw on inputs provided by the
research & analysis wing under the CFO.
(i)
BB has the following exposure norm guideline for unsecured advances and
unsecured guarantees, viz. xxx% of a banks outstanding unsecured guarantees
plus total outstanding unsecured advances do not exceed xxx% of its total
outstanding advances.
(ii)
The RMC will review the unsecured exposures at every RMC meeting and
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(i)
The Bank shall not hold shares in any company as pledgee, mortgagee or
absolute owner of an amount exceeding xxx% of the companys paid up
capital, or xxx% of the Banks own paid up capital and reserves, whichever is
less (Statutory limit in terms of Section xxx of Banking Companies Act).
(ii)
(iii) Within the above regulatory ceiling, sub-limits for advances against
shares/debentures/PUBLIC/GOVT SECTOR bonds are stipulated as follows:
a. Loans to individual borrower : Taka x million (securities held in physical
form)
Taka x million (securities held in demat
form)
Individuals will qualify under capital market exposure only if the end use
of funds is investments.
b. Loans to Stock brokers: Suitable sub- limits may be fixed at the time of
next review of the Credit Policy within the limit of xx% as above for all
stockbrokers and also for each broking entity.
6.5 Maturity-wise exposure limits:
The RMC may consider prescribing maturity-wise exposure limits in consonance with
the Banks Asset-Liability Management policy, e.g. for medium term loans for more
than 3 years and for long term loans for more than 7 and 10 years
6.6 Rating-wise exposure limits:
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As a part of its Risk management policy, the RMC may also consider borrower rating-wise
exposure limits at whole Bank level for borrowers falling in risk rating categories of P1 to P5.
Chapter: Seven
43
(i)
The Bank will not grant loans and advances for the following purposes:
a. To a company for buy-back of its shares/ securities (Sec. xxx of
Companies Act)
b. For financing speculative or any arbitrage related transactions in the
capital markets
(ii)
The Bank will not ordinarily lend to NBFIs for the following activities:
Bills Discounted/Rediscounted by NBFIs, except for rediscounting of
a.
b.
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guidelines as applicable.
c.
d.
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(i)
General principles:
A credit proposal originating from the Relationship Manager (RM) would involve
a rigorous credit appraisal process before it is recommended for sanction of
specific credit facilities by the designated authorities. The RM would follow the
following broad guidelines in appraising a credit proposal, irrespective of the
nature of the credit facility and the business segment involved.
a. Bankability of the Proposal: The first step in the appraisal process in any
credit
Chapter: Eight
is
proposal
to ensure
that there
are
no
regulatory restrictions as regards the borrower, the security offered and the
purpose of the loan and that the proposal conforms to the Banks Prudential
Exposure norms and other credit policy guidelines.
b. Due Diligence: The RM would conduct due diligence and conduct in-depth
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c. Credit Need Assessment: This would involve determining the kind of credit
facilities genuinely needed by the applicant and the limits for each of the
facilities.
for each borrower / credit facility, as per the Banks Credit Rating (Risk
Grading) model to reflect the credit risk involved in and determine the pricing
of credit.
e. Recommendations: The appraisal by the RM would cover both qualitative
Term loans/ Deferred Payment Guarantees (DPGs) and Project Finance will be
appraised on the basis of project reports prepared by the borrower in-house or by
external consultants. The main appraisal parameters would be as follows:
(i)
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of the project in the industries where the Bank has domain knowledge/ expertise
would be examined internally by the Bank. In other cases, assistance of suitable
external consultants may be sought, as found necessary, depending on the size of
the exposure and project complexity, etc. The appraisal report of Lead FIs may
also be relied upon after internal scrutiny.
(ii) Promoters Contribution: Generally, 25% contribution by the principal
promoters in the total equity of the project is considered a benchmark level,
whereas the overall equity itself is expected to offer adequate levels to give debt
gearing of 2:1. Deviations from the norm could be permitted by the sanctioning
authorities, on merits of each case.
(iii) Debt Service coverage: Debt service coverage ratio (DSCR) of 2:1 would be
the general benchmark level and deviations below this norm would be permitted
only in exceptional cases after careful consideration by the sanctioning
authorities.
(iv) Debt/ Equity gearing: Debt/ Equity gearing of 1.5 would be the norm and
gearing higher than 2.0 would be considered only in exceptional cases on
sufficient justification (e.g. capital intensive industry) and subject to protective
covenants.
8.3 Working capital facilities:
adequately for productive use would be applicable in all cases and the
proposed limit would be within the prudential exposure norms set by the
Bank. The working capital requirements would be assessed as per the
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guidelines, by
Turnover Method
Maximum
Permissible
Bank
Finance
(MPBF)
method
b. Under a consortium arrangement, the working capital assessment would
be made by the Lead bank and circulated to the members. After discussions,
the overall working capital limit would be finalized by the Lead bank. For
such credit facilities, the Bank would also independently carry out appraisal
and sanction its share of the agreed limit.
(ii) Delivery System of Bank Credit:
After determining the overall need-based credit limit, the following broad
principles of credit delivery would be implemented for allocation of limit into
cash credit and demand loan, in line with the BB guidelines:
a. In case of borrowers with working capital needs of Taka 100 million or
above from the banking system, the demand loan component would
normally be 80 % and the cash credit component at 20%. However,
depending on the needs of the borrower, PBL may approve a different mix.
This provides for better lending discipline and less volatility in limit
utilization.
b. In case of borrowers with working capital needs below Taka 100 million
from the banking system, PBL would encourage the borrowers to avail the
maximum working capital component in the form of demand loan. PBL may
selectively offer a lower interest rate for the demand loan than for the cash
credit in order to incentivise borrowers to increase the proportion of demand
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d. Credit Rating: Wherever external credit ratings are available, such ratings
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need to be factored in at the time of appraisal and review / renewal. For the
standardized approach
e. Capital Market: Where the applicants shares are listed on stock exchange,
the share price movements of the borrowing company vis--vis those of the
peers would also be examined and reckoned to assess the perceptions of the
investors in the company and its growth prospects etc. These perceptions
would serve as additional information in financial analysis.
f.
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Chapter: Nine
43
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Customers will be allowed a fixed rate within that band. Any deviation from the approved interest rate
band will be mentioned in the Credit Assessment Form with proper justification. The Managing
Director may sanction a credit facility at a rate within the Band. However, other executives will
exercise their delegated authority to sanction credit facility at the highest rate of the approved Band.
9. 4 Revision of Rates:
The Management of the Bank will continuously monitor interest rate situation in the market and
discuss the same in the Asset Liability Management Committee (ALCO) meeting at least once in a
month. As per decision of the Asset Liability Management Committee (ALCO), the Management of
the Bank may approach the Board of Directors to revise rate of interest, commission, charges etc.
9.5 Prevailing Interest Rate:
Since last revision of interest rate of our Bank, a lot of changes have taken place in the banking sector.
Specially, the cost of deposit is increasing day by day due to volatile money market. To match the
increased cost of fund with the yield on advances, the lending rates of the Bank was lastly revised by
the Executive Committee of the Board in its 359 th meeting held on 10.05.2005. The revised lending
rates of our Bank are as follows:
Sl.
Nature of Loan/Sector
No.
1.
2.
3.
4.
5.
Agricultural Credit
Term Loan/Project Loan
Working Capital Loan
Pre-shipment Export Credit
Commercial Lending
Effective rate of
return should be
minimum 13%
-
14.00%
Remarks
In addition to the above sector-wise rates, interest rates have been refixed for the following modes:
Sl.
No.
9.
Nature of Loan/Sector
10.
Remarks
-
respective
12.50%
14.00%
14.00%
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13.00 to 15.00%
13.00 to 15.00%
13.
14.
13.50 to 15.00%
12.00 to 14.00%
14.25%
13.00%
Apart from the above, interest rate for the prime customers (having excellent performance
record, resilience, minimum risk and good earning prospect from their non-funded business)
may be 12.00 to 13.00% p.a but effective rate should be minimum 13% p.a.
Chapter: Ten
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Credit approvals
Credit approvals
Three Initial system for sanction/ approval:
a. The three initial system avoids credit approval based on the judgment of
one functionary alone. It establishes line accountability for credit decisions
and combines credit approval authorities and Discretionary Powers. Any
credit exposure (fund-based and/or non-fund based and/or treasury related
credit limits) would be assessed by the Relationship Manager and
recommended by the Head of Corporate Banking (in the branch or Head
Office) in the business group, who is designated as First Signature
Authority.
b. The proposal would then be sanctioned/approved by at least two
authorized Approvers as per the approval structure, one of whom must
have the Discretionary Powers (DP) equal to or greater than the amount of
the credit exposure recommended for sanction and the other must be a
designated Credit Approver/Analyst or a Senior Credit Approver/Analyst
from the CRMD.
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c. The three initial system would be followed for sanction of fresh credit
limit, additional credit limit, changes in the terms & conditions of the
sanctioned credit limit, renewal/ review of the existing sanctioned credit
limit mentioned in the following paragraphs, and also other matters
requiring sanction or approval of credit limit/ facility. The sanction by the
functionary having Discretionary Powers mentioned in the following
paragraphs refers to the exercise of the Discretionary Powers by one of the
two authorised Approvers.
Chapter: Eleven
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The assets charged to the Bank would be valued in line with prevalent banking
norms/ accounting standards/ practices. The Book Debts statement, submitted by the
borrower, should be certified by a Chartered Accountant on a quarterly basis. The
valuation method would be prescribed in the terms and conditions of the sanctioned
facilities
(ii)
The assets charged to the Bank would be adequately insured against all applicable
risks to protect the Banks securities. The Banks lien would be duly registered with
the insurance companies and recorded in the respective insurance policies. The
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insurance policies would be renewed periodically, until the Banks charge subsists
on the securities.
(ii)
Sanctioning Authority would obtain specific confirmation from the RM, at the time of annual
renewal of working capital advances, and at least once every year in case of term loans /
DPGs, to the effect that measures are in place, at operating levels, to safeguard the Banks
interest in terms of value of the security charged, continued validity of the Banks charge /
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Chapter: Twelve
43
Credit Documentation
Credit Documentation
The objective of credit documentation is to clearly establish the debt obligation of the
borrower to the Bank. The primary responsibility for obtaining credit documents will rest
with the Relationship Manager (RM), who will ensure that appropriate documents are
properly executed in time by the concerned parties (obligors/ guarantors). The RM will
ensure that the following pre-execution, execution and post-execution requirements are fully
complied with.
a.
b.
Execution of documents: The RM will ensure that all documents are completed
with relevant particulars accurately incorporated, and are executed by the
borrowers/ guarantors or their duly authorized representative as the case may be
in their legal capacity.
c.
Post-execution Process: RM will ensure that the required returns are filed,
where applicable, with the Registrar of Companies, within the stipulated time
frame, to register the charge created in favor of the Bank.
Credit Monitoring involves follow-up and supervision of the Banks individual loans as well
as the entire loan portfolio, with a view to maintaining the assets quality at the desirable level,
through proactive and corrective actions, aimed at controlling and mitigating the risks to the
Bank. The following pre-disbursement, disbursement and post-disbursement administration
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The RM would keep on record the detailed terms and conditions of the sanction and
the borrowers acceptance to these terms. Apart from the execution of the required
documents by the borrowers/ guarantors, the status of creation of the stipulated
charges over the specified assets, insurance of the charged assets with the Banks lien
noted thereon, bringing in the margin money/ promoters contribution, and
compliance with other terms and condition of sanction would be verified
meticulously.
b. Disbursement stage:
(i)
(ii)
The FAF would be the basis of entry into the Core Banking Solution (CBS) / Loan
Servicing System (LS) / Post Disbursement Tracking System (PDTS). These
ranges of functions may be available in the CBS or separately.
(i)
Off- Site follow up (without visiting the borrowers factory/ office/ go downs)
includes:
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c. Conduct of the borrowers accounts with the Bank and taking corrective measures
for irregularities, if any, and their prompt reporting for ratification to the specified
authority. It would also be ensured that the drawings do not exceed the sanctioned
limits or prudential norms, without the prior approval of the authorities concerned.
d. Ensuring compliance with covenants, including repayments of agreed sums by the
borrower.
e. Half yearly review of the borrowers accounts.
(ii)
a. Visit to the borrowers factory at stipulated intervals for dialogue with the
borrowers management on issues of mutual interest, checking the assets levels
/accounts books and getting a feel of the activity level and general environment in
the factory.
b. Gathering and documenting market reports on the borrowers credit standing /
product acceptance etc.
c. Attending consortium meetings and dialogues with co- bankers regarding the
borrowers accounts.
(iii) The Bank would follow a closely monitored PDTS, the procedure for which is
outlined in the CAD manual, to track loans, receipt of documents (primary,
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Chapter: Thirteen
43
Consortium/ syndicated/
multiple bank lending
Suggested approach:
(ii)
(iii) To help the bank maintain the desired financial discipline on the borrower,
which may not be possible in multiple lending system in which the borrower
attempts to play one banker against the other.
(iv) To facilitate the Bank in building reciprocal business relationships with other
banks.
13.2
Consortium approach:
The consortium approach, suitable for working capital finance where the primary
security for the advance changes frequently, provides a single window concept for
delivery of credit, execution of documents, submission of data and for recovery etc.
Following norms will be followed in consortium lending:
(i)
The Lead Bank (with the largest share of the advance) will conduct credit
appraisal in consultation with the members of the consortium. The overall
credit facilities/ limits from the banking system would be jointly fixed for the
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borrower, with individual shares of the members, which are later approved by
the respective Boards of the banks.
(ii)
Only one loan document (BBA specimen ?) will be executed by the borrower,
signed by the Lead Bank on its own behalf as also on behalf of all other
members of the consortium. The sharing of the security and rights and
responsibilities of the member banks are usually set out in a separate Inter-se
Agreement.
(iii) The Lead Bank can make disbursement of the required credit to avoid delay
and recovers the pro-rata share of the disbursed amount from other members
(as participation certificate/s or bill of exchange basis).
(iv) The borrowers entire ancillary business (bills, letter of credit, foreign
exchange, deposits etc.) will be shared pro rata between the member banks and
suitable distribution method is evolved with consensus.
(v)
The borrower will submit to all the members quarterly financial statements,
for discussions in quarterly meetings of the members, for common financial
follow up and corrective action.
13.3
(i)
(ii)
43
43
Chapter: Fourteen
43
The Bank will follow the norms for Income Recognition and Asset
Classification (IRAC norms) as per BB guidelines and amended from time to
time.
(ii)
(iii) The Banks loans portfolio would be classified in 4 categories of assets as per
BB guidelines as follows:
a. Standard Assets: These are Performing assets (or Non- NPAs)
b. Non-Performing Assets (NPAs):
c. Sub-standard Assets: i.e. an asset which remains irregular/out of order
/overdue for 90 days and is classified as NPA for a period of 12 months from
the date of such classification.
d. Doubtful Assets: i.e. an NPA that remains Sub-standard Asset for a period of
12 months,
e. Loss Assets: i.e. Such loans whose realizable security drops to less than 50%
of the value assessed by the Bank at the time of the last inspection, or to less
than 10% of the outstanding in the account, would be classified as Loss
Assets without passing through the various stages of assets classification.
(iv) In case of reschedulement, the asset would be reclassified as standard after
satisfactory performance for a period of one year from the date the first payment
43
falls due. If the performance is not satisfactory during such period of one year,
the Bank would classify the account appropriately with reference to prerestructuring payment schedule.
(v)
(vi) The Bank would adopt provisioning norms in respect of loan assets (including
Standard Assets) which are more conservative or stringent than the BB norms
based on asset classification as given below:
Classification
Provisioning requirement
Standard assets
1.
2.
Sub-standard assets
Secured
Un-secured
10%
20%
3.
Doubtful assets
To the extent not covered by realizable value
of security
In respect of secured portion
100%
i.
Up to 1 year
20%
ii.
1 to 3 years
30%
iii.
Beyond 3 years
100%
4.
Loss assets
100%
Leased assets
5.
Sub-standard assets
Secured
Un-secured
43
6.
Doubtful assets
To the extent not covered by realizable value 100%
of security
In respect of secured portion
iv.
Up to 1 year
20%
v.
1 to 3 years
30%
vi.
Beyond 3 years
100%
7.
Loss assets
Provisions under special
100%
circumstances
8.
Government guaranteed
advances
9.
Advances in terms of
rehabilitation package
approved by Term Lending
(TL) institutions
Advances in terms of
rehabilitation package
Additional facilities as per the
package finalized by TL
institutions
Credit facilities to SSI
ECGC(Export Credit
Guarantee Corporation) /
43
applicable)
such corporations
Chapter: Fifteen
43
(ii)
(iii) The overall NPA management policy is based on the following principles:
a. Early recognition, identification and reporting of the borrowal accounts in
appropriate internally defined credit labels, in addition to the BB asset
classification into four categories.
b. Documenting the primary causes (as distinguished from symptoms) of
43
15.2
The Bank will follow the EWS for early identification of problem loans, as it
enables the Bank:
a. To take corrective measures before the position becomes irretrievable,
b. To minimize the risk of loss,
c. To improve the prospects of recovery in the event of possible default.
(ii)
43
However, the primary causes of such decline in the borrowers business and
financial position should be identified and appropriate corrective measures
taken for mitigating the credit risk to the Bank.
(iii) The Relationship Manager (RM) and the Head Corporate Banking/SME
Banking concerned with the particular loan would be responsible for:
a.Identifying and documenting the primary causes for the decline in the
business/ financial position of the borrower,
b. Assessing realistically the borrowers ability to rectify the position within
a time frame,
c.Labeling the borrowers account into one of the four internal categories,
mentioned below, with the approval of the Head of Corporate
Banking/SME Banking Group and CRMD.
15.3
(i)
(ii)
c. Monitoring Category: This category will signal that the account requires
special attention due to specific developments after the sanction due to (a)
Internal issues like incomplete documentation, absence of financial
information, unsatisfactory credit discipline or, (b) External developments
like merger, take-over, qualified auditors report, legal suit/s against the
borrower.
d. Adversely Labeled Category: If the Banks payment is overdue for one
month and normal repayment of the obligation is in doubt and there is high
probability of at least some loss, such accounts will be classified in the
category.
(iii) The accounts under Adversely Labeled category involve highest risk and
would be monitored very closely by the RM concerned, who would submit a
detailed review of the account at monthly frequency to Head Corporate
Banking/SME Banking & CRMD along with regulatory and legal compliance
status and recommendations on remedial strategy. The Watch and
Monitoring Category accounts would also be reviewed by the concerned
RM, who will submit review of the account at quarterly intervals to the Head
Corporate Banking/SME Banking & CRMD along with recommendations.
The RM would arrange for rectification of the deficiencies, if any, in the
documentation and securities, in consultation with the Legal Department and
Head Corporate Banking/SME Banking in all these three categories of
accounts.
(iv) In the above three categories of accounts, additional credit facility or
transaction (within the sanctioned limits) would be allowed, only after
reckoning the risk factors involved, as also in tune with the remedial strategy
decided, in line with the approved authority structure.
43
15.4
(i)
a. Sacrifice from the borrower and other stake holders commensurate with
the Banks sacrifice by way of concessionary package involving interest
waivers, debt reschedulement etc. as per BB guidelines.
b. Strengthening of the security package, including personal guarantees of the
promoters/ Group companies.
c. Appointment of the Banks nominee as Financial Controller and
concurrent auditor to exercise the desired control over the cash flows and
end-use of funds of the Company.
d. Appointment of suitable professionals on the Board of the Company to
strengthen the management.
(ii)
Any re-structuring package should comply with all the applicable regulatory
guidelines. Due to the unusual risks involved in rehabilitation/ re-structuring
of debt, it should also be approved by the RMC, irrespective of the amount of
the exposure involved.
43
(iii) After the Unit is turned-around through the Banks rehabilitation programme
and starts generating profits, the account would be upgraded to Standard
Asset as per BB norm and the borrower would be asked to execute the recompensation clause retrospectively in favour of the Bank.
(iv) RMC shall also be responsible based on specific recommendations by CRMD
and Corporate Banking, for approving settlement/ compromise/ write-off/ upgradation of NPA accounts, within the limits approved by the Board.
15.5
Exit option:
As the bank has to continuously maintain a good quality & liquid portfolio, it is
imperative that the bank has a strategy to exit exposures so that it is not saddled with an
exposure which is not in keeping with its risk appetite:
(i)
Exit option is a sensitive issue and would be exercised with due care and
deliberation by the appropriate sanctioning authority under the three initial
system. If the business/ financial viability of a borrowal unit classified as
Adversely labeled or Watch list continues to be suspect and the account is
likely to turn into a Sub-standard Asset, exit option may be exercised by
following one or more of these methods:
43
(ii)
15.6
Settlement/ compromise:
As a corollary to
Adversely labeled or Watch listed accounts considered fit for exit option and also
old unresolved NPAs may be settled through compromise with the borrowers
(including guarantors). One-time final settlement of dues would normally be
preferred to a deferred settlement spread over an extended period of time.
BB guidelines on such Settlement/compromise, wherever applicable, would be
followed. The amount and period of settlement (one-time/deferral period) would be
negotiated with the borrower/ guarantor and who would normally be linked to the
realizable value of the securities charged (their Net Present Value should be lower
than the NPV of the settlement amount).
15.7
(i)
43
in which their directors are common, would be ineligible for finance from any
bank/ FI as per BB guidelines.
(ii)
15.8
(i)
Write- off:
Write-off of the dues, fully or partially, would be done against the
corresponding provisions for the accounts in order to reduce the NPAs protanto and thereby clean the Banks balance sheet, in
(ii)
accounts where there are no prospects of recovery due to the absence/ lack of
realizable security, nor via legal action.
43
possibilities of recovery.
Chapter: Sixteen
43
16.1
(i)
General principles:
One of the main objectives of the Banks credit policy is to build and maintain
a sound and well-diversified credit portfolio. Credit Risk Management (CRM)
is an important tool for achieving this objective, as it would help the Bank:
b. to take informed credit decisions based on an adequate assessment of the
relevant factors involved in the credit risk,
c. to screen credit proposals and assume only such credit risk that is
acceptable to the Bank as per the Credit Risk Assessment guidelines and
d. to ensure diversification of the credit portfolio, by avoiding concentration
in credit exposures to individual/ group borrowers, industry/ sector etc.
beyond the Banks/ BB prudential exposure norms and taking proactive and
corrective action.
(ii)
As per the BB guidelines on Credit Risk Management, every bank should have
a credit risk policy document approved by the banks Board of Directors. The
Banks policy on credit appraisal, approval, documentation, administration and
monitoring (individual loans and credit portfolio), credit audit, management of
non-performing assets including risk mitigation/ control have already been set
out in the previous chapters of the Credit Policy. The Banks guidelines on
43
chapter. The guidelines on CRA for exposures on banks would be spelt out in
the next chapter.
(iii) While formulating the Banks policy on Credit Risk Assessment for exposures
on direct obligors and banks, the guidelines of BB have been duly considered.
43
Bangladesh Bank provided a sample Risk Grading Model and advised Banks to design
their own model in line with that one.
43
credit facility having overall risk at Marginal or Poor level without proper
justification except for renewal of existing facilities under compelling circumstances.
Criteria
Gearing
Liquidity
Profitability
Account Conduct
Business Outlook
Management/Key Person
Age of Business
Size of Business
Personal Banking Relationship
Security
Weight (%)
15
10
15
10
10
15
5
5
5
10
The Relationship Officer of the Branch will prepare Risk Grading Scorecard in case of
new proposal, renewal and/or enhancement of existing facility, any deterioration in the
borrowers business position, any breach of contract by the borrower or as and when
he/she feel it necessary. In addition, aggregate weighted score of the customer is to be
43
Risk Grading:
Letter
Risk
Grade
Numeri
c Definition
Grade
Grade
Superior AAA
Low Risk
Letter
Risk Grade
Numeri
c Definition
Grade
Grade
Good
AA
Satisfactory
Risk
Aggregate
Scorecard.
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.
43
Grade Scorecard.
Assets graded 8 are long outstanding with no
(non-
performing)
expected
from
the
The
liquidation
or
The
may
be
effected
in
the
future.
The Relationship Officer will insert the risk grade of the customer in the concerned
field alongwith Risk Grading Score and forward the same trough proper channel to the
43
Subjective Grading:
Downgrading:
The Relationship Officer of particular customer shall continuously monitor the
customer and bear the responsibility of rating/grading surveillance. If any
deterioration in risk, whatever may be the reason, is noted or adverse information is
received, the Relationship Officer will propose change(s) in the risk grading of the
customer and prepare Early Alert Report and forward the same to the Credit Risk
Management Unit, Credit Division for approval. Changes in the risk grade will be in
effect only when it is approved by the Credit Risk Management Unit, Credit Division.
Once a credit facility/customer is downgraded to a lower grade, it will not be
postponed until the next annual review process. In case of downgrading, credit facility
to the customer may be immediately changed/restructured, if possible.
Asset Risk Migration:
Risk Grading Model will be used for assessing / measuring risk in the credit exposure
taken on a particular customer. It is the key measurement of Banks asset quality.
Therefore, all facilities will be assigned a risk grade. And, asset portfolio of the Bank
43
will be reviewed quarterly. At each quarter end, Credit Risk Management Unit, Credit
Division will report summarizing the migration of the assets with respect to risk grade
and place before the management for review. The Management will ensure nonconcentration of assets in lower grades.
External Rating:
At least top twenty five clients/obligors of the Bank may preferably be rated by an
outside credit rating agency.
System Review:
Proper application of the Risk Grading Scorecard and Risk Grading Model in Credit
operation shall reviewed at least once in a year. And, if change is required, it will be
done at the year-end. Furthermore, accuracy and consistency of the concerned
officers/executives will be reviewed annually.
While the above approach is the extant framework for Credit Risk Rating, in terms of better
approaches the bank needs to move into a combination of Borrower & Facility rating
mechanism, which can help determine the inherent risk in every exposure and thus serve as a
ready reckoner of the inherent riskiness in every portfolio. Thus:
(iv) The Banks system of Credit Risk Rating would reckon two major categories
of credit risk Borrower Risk and Facility Risk. Borrower Risk covers the
financial risk, industry risk and management risk. Facility Risk covers the
tenor and nature of security for an exposure, the value and type of charge on
the security. The two categories of risks are given suitable weights. Each
category of risk is assessed separately on the specified parameters with
suitable weights. The overall risk rating is arrived at by aggregating the scores.
The single rating of an entity will thus represent all the risk factors, associated
43
(v)
Basel-II guidelines have suggested a minimum of 9-point risk rating scale that
includes at least 3 categories of ratings that are ineligible for exposure by a
bank. The Bank will have 12-point rating scale for direct obligors from P-1
(the highest quality risk category) to P-12 (the lowest quality risk category)
and minimum of 6 rating grades for eligibility for exposure by the Bank and
also for performing loans.
(vi) The following general principles would be followed in the Credit Risk
Assessment system of the Bank:
a. The CRA system will apply to all kinds of credit exposure (both fund
based and non-fund based), as defined in chapter 3.
b. Each borrower in the Banks credit portfolio will have a credit rating
assigned under the CRA system.
c. The credit ratings of all borrowers would be reviewed at least annually.
d. The credit ratings would be assigned to each entity/ borrower at the
origination and approved by the Credit Risk Management Department.
e. The officers of the Bank responsible for the rating process under the CRA
system would be suitably trained for this purpose.
16.9
(i)
(ii)
In pursuance of the BB guidelines, the Board of Directors will have the overall
responsibility for risk management in the Bank, including credit risk. The
Board will approve the CRM policy, credit exposure / concentration limits,
43
(iii) The Risk Management Committee (RMC) will be a Board-level subcommittee that will integrate the various risk exposure management
approaches in the Bank and function independently. Its composition and
responsibilities have been described in chapter 1 of the Credit Policy.
(iv) The Credit Risk Management Department (CRMD) will be delegated specific
responsibilities of managing the credit risk in the Bank by the RMC. Its
composition and responsibilities have been mentioned in chapter 1. It will be
independent of the department that deals with credit administration.(CAD)
Risk identification is the first step in the Credit Risk Assessment (CRA)
system. The credit risk inherent in credit proposal is a function of certain
important risk factors, which are specified below, along with the rating
parameters:
a. Financial Risk: This would include an assessment of the entitys
(applicant/ borrower) overall financial strength based on performance and
financial indicators, as derived from its financial statements -historical and
projected. The key parameters would be:
Current Ratio,
Total Outside Liabilities/ Tangible Net Worth (TOL /
TNW),
PBDIT (Profit Before Depreciation, Interest, Tax) /
Interest,
Profit After Tax (PAT) / Net Sales,
Return on Capital Employed (ROCE), and
43
While assessing the overall financial strength of the unit, the static ratios
and future business & financial prospects of the unit would be
considered. Industry comparisons of the above ratios will also be made.
b. Business Risk: Business risk analysis assesses the business fundamentals
of the unit, the competitive market position in the industry and its
operational efficiency. Key factors would include its geographic reach,
distribution and selling arrangement, capacity utilization, nature of the
technology employed. The business risk associated with the unit would be
reflected in its financial risk ratios and their comparison with the industry
averages, which are covered under financial risk parameters.
c. Industry Risk: This relates to the industry of which the unit is a
constituent. The unit/ firm will be subject to the risk factors to which the
industry is exposed. In assessing the industry risk, the key parameters
would be competition/ entry barriers, cyclicality/industry outlook,
regulatory risk/ government policies and other contemporary issues.
d. Management Risk: It involves evaluation of the management of the
enterprise, their risk philosophy, competence and past track record. The
key parameters are the integrity (corporate governance), managerial
competence and commitment, credibility (ability to meet the sales and
profit projections), payments track record, management system and
structure and length of relationship with the Bank. While some subjectivity
would creep in evaluation of these parameters, it should be minimized.
e. Transaction specific Risk (Facility Risk): The risk parameters would be
tenor of the facility, nature of the security, value of the security and type of
charge over the security.
f. Project related risk: This risk would apply only to project loans, as
43
distinct from corporate loans and working capital facilities. The key
parameters for risk assessment would be technology risk, environment
The Borrower Risk would comprise the financial risk, business risk, industry
risk and management risk and Facility Risk would relate to the transaction
risk. In case of term loans or project loans, the project related risk would be
added to financial risk factors by way of Debt Service Coverage Ratio in lieu
of Current Ratio. The weightage of Borrower rating and Facility rating would
be 50:50 in the overall risk rating.
The credit ratings under the CRS system would help the Bank in achieving the
following objectives:
a. It would differentiate easily, via numeric risk grades, the degree of credit
risk in different credit exposures of the Bank. This is the desired approach
towards Basel II risk differentiation, when the bank moves towards
Internal Rating based models under CRM.
b. It would help in identifying problem credits before they become NonPerforming Assets and thus help in taking proactive/ preventive measures
to maintain the risk quality of the Banks credit portfolio at a desired level.
This is explained further in section 16 which follows.
c. It would help in relating credit pricing to the credit ratings of the
borrowers, as explained in the subsequent section.
Summary
Every Corporate loan account shall be assigned a Customer
Risk Rating(CRR) and a
by a bank
There will be at least 8 risk grades to classify standard assets and 3 for sub standard
assets (in conformity with emerging Basel requirements).Large number of grades on
the rating scale is expensive to operate as the costs of additional information for fine
grading of credit quality increases sharply. The standard asset grades should also
have watch grades intended to capture heightened administrative attention. Further
the rating grades must be described well. (Exhibit A) This is in keeping with Basel II
norms towards finer risk differentiation
Ratings will be worked out on the basis of audited balance sheet figures, operational
track record & experience with the account, assessment of industry prospects at a
macro level and the quality of management in the account
FRR is to be derived for each facility using the CRR as a base and factoring in risks
arising out of exposure tenor, loan security, guarantees and documentation covering
the facilities
Analysis of CRR data and migration will help the top management/Board to control
43
Chapter: Seventeen
43
Risk Assessment
43
Risk Assessment
The primary factor determining the quality of the Banks credit portfolio is the
ability of each borrower to honor, on timely basis, all credit commitments made
to the Bank. This must be accurately determined by the authorized Credit
Officers/ Executives prior to approval. Therefore a thorough credit risk
assessment shall be conducted prior to the sanction of any credit facilities.
While assessing a credit proposal more emphasis shall be given on repayment
potential of loans out of funds generated from borrowers business (cash flow)
instead of realization potential of underlying securities. Credit risk assessment
process in the Bank shall be governed by the following principles:
Assessment Frequency:
A comprehensive Credit Assessment (Due Diligence) shall be conducted before
sanction of any loan. Thereafter, it will be done annually for all types of credit
facilities i.e Demand Loan, Continuous Loan and Term Loan.
Assessment Documentation:
The result of the Credit Assessment shall have to be presented in the Credit
Assessment Form enclosed in Annexure - 2. Initially, it will be originated by the
Relationship Officer of the Branch and reassessed in Corporate Banking
Division and finally in Credit Risk Management Unit of Credit Division. All
evidences of credit assessment have to be filed properly in the respective Credit
43
File.
KYC Policy:
Banks KYC policy applicable for depositors shall also be applicable for
borrowing customers. In addition, before sanctioning any credit facility the
concerned relationship officer must physically visit the business premises of the
customer, talk with important personalities of the locality, collect information on
the borrower from his/her existing banker, if any and summarize all these
information in the Pre-sanction Inspection Report.
Accountability:
The Relationship Manager (presently Head of Branch) shall be the owner of the
customer relationship and be held responsible to ensure the accuracy of the
entire credit application/assessment form submitted for approval. He/she will be
responsible for conducting due diligence on the borrower, principals and
guarantors.
43
Repayment Source:
Collateral:
Collateral offered against a credit facility shall properly be valued and verified
by the concerned Relationship Officer and/or Relationship Manager and
revalued and re-verified annually in the subsequent period(s). In addition to the
valuation of the Relationship Officer/Manager, the same collateral must be
valued and verified by an enlisted surveyor of the Bank if the total credit facility
to the concerned customer exceeds Tk 25.00 lac (Taka Twenty Five Lac). Any
valuation of collateral must be supported by the photograph and site map, where
43
applicable.
Insurance Coverage:
43
Others:
In fine, detailed and complete credit risk assessment for each facility and customer
relationship is of paramount importance. The steps that should be followed in carrying
out such an assessment are set out in the Credit Operational Manual and in Head Office
circulars issued from time to time. No proposal shall be put up for approval unless there
has been a complete written analysis. It is the responsibility of the originating officer to
collect all necessary documents/papers before the facility request is sent to the
competent authority for approval.
ROA,
ROE,
Net Interest Margin,
43
43
requirements.
Chapter: Eighteen
43
Important attributed of an efficient loan policy include the points as given below:
Documentation
Pricing strategies,
Other that these there are two types of attributes to be considered in framing an sound loan
policy. They are1. General attributes
2. Policy-procedure related attributes
The above elements are enumerated below:
43
Loan-mix strategy,
Liquidity strategy,
Collateral strategy,
Business ethics,
Loan classification
Loan insurance,
43
Loan documentation
Loan pricing
Repayment schedule,
Chapter: Nineteen
43
portfolio skillfully and kept the classified loan at a very lower rate ---thanks
go 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 Prime bank limited has a robust credit risk management
policies and procedures that are sensitive to these changes. To improve
the risk management culture further, Prime Bank limited should adopt
some of the industry best practices that are not practiced currently. These
are
43
adequate
monitoring,
management
supervision
or
close
attention
by
43
References
1. http://www.primebank.com.bd
2. Khan, Ataur Rahman, Banking Policy and Management, 2008,
Dhaka.
3. www.bangladesh-bank.org
4. Ullah, Shahed and Islam, Fakhrul, Training Manual on Number 53
Foundation Training Course, 2011, Prime Bank Ltd.
43