Definition of Credit

Credit is the provision of resources by one party to another party where that second party
does not reimburse the first party immediately (thereby generating a debt), but instead
arranges either to repay or return those resources (or other materials of equal value) at a
later date. The resources provided may be financial (e.g. granting a loan), or they may
consist of goods or services (e.g. consumer credit). Credit encompasses any form of
deferred payment.[1] Credit is extended by a creditor, also known as a lender, to a debtor,
also known as a borrower.
Credit does not necessarily require money. The credit concept can be applied in barter
economies as well, based on the direct exchange of goods and services (Ingham 2004
p.12-19). However, in modern societies credit is usually denominated by a unit of
account. Unlike money, credit itself cannot act as a unit of account.
Movements of financial capital are normally dependent on either credit or equity
transfers. Credit is in turn dependent on the reputation or creditworthiness of the entity
which takes responsibility for the funds. Credit is also traded in financial markets. The
purest form is the credit default swap market, which is essentially a traded market in
credit insurance. A credit default swap represents the price at which two parties exchange
this risk – the protection "seller" takes the risk of default of the credit in return for a
payment, commonly denoted in basis points (one basis point is 1/100 of a percent) of the
notional amount to be referenced, while the protection "buyer" pays this premium and in
the case of default of the underlying (a loan, bond or other receivable), delivers this
receivable to the protection seller and receives from the seller the par amount (that is, is
made whole).

Credit history

Credit history or credit report is, in many countries, a record of an individual's or

company's past borrowing and repaying, including information about late payments and
bankruptcy. The term "credit reputation" can either be used synonymous to credit
history or to credit score.

In the U.S., when a customer fills out an application for credit from a bank, store or credit
card company, their information is forwarded to a credit bureau. The credit bureau
matches the name, address and other identifying information on the credit applicant with
information retained by the bureau in its files.That's why it's very important for creditors,
lenders and others to provide accurate data to credit bureaus. [1]

This information is used by lenders such as credit card companies to determine an

individual's credit worthiness; that is, determining an individual's willingness to repay a
debt. The willingness to repay a debt is indicated by how timely past payments have been
made to other lenders. Lenders like to see consumer debt obligations paid on a monthly
basis.
There has been much discussion over the accuracy of the data in consumer reports.
However, the only scientifically researched studies that include sample sizes large
enough to be valid have concluded that by and large the data in credit reports is very
accurate. [2] [3] The credit bureaus point to their own study of 52 million credit reports to
highlight that the data in reports is very accurate. The Consumer Data Industry
Association testified before Congress that less than two percent of those reports that
resulted in a consumer dispute had data deleted because it was in error.[4]

If a consumer disputes some information in a credit report, the credit bureau has 30 days
to verify the data. Over 70 percent of these consumer disputes are resolved within 14
days and then the consumer is notified of the resolution.[4] The Federal Trade
Commission states that one large credit bureau notes 95 percent of those who dispute an
item seem satisfied with the outcome.[5]

The other factor in determining whether a lender will provide a consumer credit or a loan
is dependent on income. The higher the income, all other things being equal, the more
credit the consumer can access. However, lenders make credit granting decisions based
on both ability to repay a debt (income) and willingness (the credit report) as indicated in
the past payment history.

These factors help lenders determine whether to extend credit, and on what terms. With
the adoption of risk-based pricing on almost all lending in the financial services industry,
this report has become even more important since it is usually the sole element used to
choose the annual percentage rate (APR), grace period and other contractual obligations
of the credit card or loan.

Commercial credit report

Commercial credit reporting is the maintenance and reporting of credit histories and
risks for commercial companies.

While most people are familiar with consumer credit reports many are unaware that a
similar reporting system exists to assess risk in extending loans to businesses, insuring
businesses, underwriting insurance risk, purchasing businesses, investing in businesses
and most of all in shipping goods to business on credit terms. Government departments
are also large users of commercial credit for regulating businesses and in collecting taxes.

Every country in the world has commercial (or mercantile) credit reporting agencies, if
for no other reason then to allow foreign exporters to asses the risk in shipping goods to a
wholesaler in that country. They can be large public corporations like U.S.A.
headquartered, Dun & Bradstreet Inc. (traded on the New York Stock Exchange,
established in 1842) with thousands of employees and offices and correspondents around
the world.[1] A recent development in commercial credit reporting is Cortera – which
combines data reporting comparable to Dun & Bradstreet , but which also runs an online
community in which businesses put up online ratings on if/how/when they get paid by
their own customers and suppliers (ratings visible to other community members.[2]They
can also be small one man operations serving a limited number of local and foreign
clients in a small country.

Before telephones and the internet, the only way to gather risk information on a business
was to visit the business owner at their place of business. Credit reporters would ask the
owner for the names of the companies that supplied them on credit terms, what banks
they dealt with and detailed questions about number of employees, what was sold, etc.
They would then contact these suppliers and banks for reference information. It took
days, even weeks, to fulfill a request for a commercial credit report.

Electronic communication and computers changed the gathering of commercial risk

information. Credit reports can now be compiled in seconds without human intervention
and without a business owners knowledge. Suppliers are now requested to supply
frequent aged trial balance down loads on all their accounts receivable to commercial
credit reporting agencies. These trade payment experiences are linked together to give a
profile of how a business is paying numerous suppliers. Collection agencies supply the
credit reporting agencies with information on commercial collection claims they receive
which are matched to the trade payment experiences.

Public record information such as, bankruptcy filings, legal suits, lease registrations and
judgments are also gathered and added to the files on a particular business. As this flood
of information accumulates over many years trends are identified and it becomes like a
pulse tracking cash flow within a business. Companies unable to come up with sufficient
cash to pay suppliers are quickly identified. Computerized monitoring systems tell
suppliers when to restrict credit to unhealthy businesses. These very comprehensive,
detailed reports can with mathematical equations be reduced down to two digit scores
that now allow for automated credit approvals and rejections.

Commercial credit is more volatile than consumer credit. Few businesses survive five
years in the same form that they were first founded. All businesses are in constant
competition with other businesses for clients and markets. The granting of credit by
businesses is very much a market driven. Retailers hope that they will have sold the
goods they bought at a profit before they are required to pay for these goods that they
bought on credit. Retailers who can not get credit from suppliers are at a serious
competitive disadvantage if they are required to pay for their inventories in cash on
delivery.

Strict laws governing consumer credit reporting agencies rarely include commercial
credit reporting agencies. Any complaints about the accuracy or incompleteness of
information in a commercial credit report can potentially do harm to the agencies
reputation, so they do take complaints seriously. However, unlike consumers most
businesses are oblivious to the risk reports being compiled on them. They may never be
aware of why they were unable to obtain credit from a supplier. Suppliers are not
required to provide credit to customers. Since only about 20% of businesses subscribe to
commercial credit reports it most likely a business that was turned down by one supplier
will be able to find an alternative source of supply.

Trade credit
The word credit is used in commercial trade in the term "trade credit" to refer to the
approval for delayed payments for purchased goods. Credit is sometimes not granted to a
person who has financial instability or difficulty. Companies frequently offer credit to
their customers as part of the terms of a purchase agreement. Organizations that offer
credit to their customers frequently employ a credit manager.

Consumer credit

Consumer debt can be defined as ‘money, goods or services provided to an individual in

lieu of payment.’ Common forms of consumer credit include credit cards, store cards,
motor (auto) finance, personal loans (installment loans), retail loans (retail installment
loans) and mortgages. This is a broad definition of consumer credit and corresponds with
the Bank of England's definition of "Lending to individuals". Given the size and nature of
the mortgage market, many observers classify mortgage lending as a separate category of
personal borrowing, and consequently residential mortgages are excluded from some
definitions of consumer credit - such as the one adopted by the Federal Reserve in the
US.

The cost of credit is the additional amount, over and above the amount borrowed, that the
borrower has to pay. It includes interest, arrangement fees and any other charges. Some
costs are mandatory, required by the lender as an integral part of the credit agreement.
Other costs, such as those for credit insurance, may be optional. The borrower chooses
whether or not they are included as part of the agreement.

Interest and other charges are presented in a variety of different ways, but under many
legislative regimes lenders are required to quote all mandatory charges in the form of an
annual percentage rate (APR). The goal of the APR calculation is to promote ‘truth in
lending’, to give potential borrowers a clear measure of the true cost of borrowing and to
allow a comparison to be made between competing products. The APR is derived from
the pattern of advances and repayments made during the agreement. Optional charges are
not included in the APR calculation. So if there is a tick box on an application form
asking if the consumer would like to take out payment insurance, then insurance costs
will not be included in the APR calculation (Finlay 2009).

Consumer Credit Scheme in Banking Sector of Bangladesh: A Comparative

Analysis between Local and Foreign Commercial Banks
The study is about the “Consumer credit scheme in banking sector of Bangladesh: a
comparative analysis between local and foreign Commercial banks” on four private
banks, two local and two foreign over a period of 1999 to 2003. Both the primary and
secondary data were used in the study. The study revealed that consumer credit scheme
has been popularizing among the customers of low-income and medium income levels. It
is exhibited that the foreign sample banks are providing better services as compare to
local sample banks as regards consumer credit facilities, terms and conditions, fees, target
market and specific products. It is observed that foreign commercial banks are more
dynamic than the local commercial banks. Moreover, foreign banks are more technical
than the local banks to design the consumer credit program. In respect of execution
process of the scheme, it is seen that the foreign banks used to follow principles of sound
lending and standard execution process.
However, the local banks are not in a position to follow the principles of sound lending
and standard execution process. It is also observed that the foreign banks are able to
render better consumer credit services. Moreover, the banking environment is more
congenial in the foreign banks as compared to local banks. As regards the delinquency
position of the consumer credit, the study revealed that the delinquency rate is in a
tolerable limit in the case of foreign banks. But, this is not so in case of local banks.
Therefore, the banks personnel are always conscious regarding the ratio of recovery and
failed installment of a consumer credit loan. It is further exhibited that the perceptions of
the customers found to be clear as regards the various aspects of consumer credit scheme.
Moreover, the bank personnel have also clear perceptions as regards the various aspects
of consumer credit scheme. Finally, the study highlights the major problems involved in
consumer credit scheme from the view points of both the customers and the bankers. The
study provides valuable recommendations as to remove those problems. Therefore, the
proper concern government and bank authority should follow the recommendations of
this study in order to make the scheme attractive to the prospective customers.

Reaching SMEs
To extend the availability of credit information to smaller credits --say down to Taka
100,000 requires a major expansion [factor of ten] in the data to be managed.
Furthermore, permission to initiate requests for information may be extended to sources
of trade credit. This is one of the most important sources of credit for small enterprises
and increasing this kind of credit requires improved, transparent methods for assessment
of reliability of the borrowing organization. The current methods used by CIB will not
reach the trade credit issues and would burden the Bureau with about ten times more
work in maintaining data bases and increase the number of information requests to more
than 1,000 per day. The administrative processes of the central bank will probably not
work to support such an expansion. A new approach is needed to provide credit
information for SMEs requiring Taka 100,000 – 1,000,000. To increase the coverage to
facilities of Taka 100,000 and above will increase the volume of information by a factor
of 5.10 To deal with such an increase there are significant implications for the CIB’s
computer systems. If we focus on the number of companies potentially covered then the
increase is a factor of 10. This is a major change in the data management environment.
Micro credit:
The member-based Microfinance Institutions (MFIs) constitute a rapidly growing
segment of the Rural Financial Market (RFM) in Bangladesh. Micro credit programs
(MCP) in Bangladesh are implemented by various formal financial institutions
(nationalized commercial banks and specialized banks), specialized government
organizations and Non-Government Organizations (NGOs). The growth in the MFI
sector, in terms of the number of MFI as well as total membership, was phenomenal
during the 1990s and continues till today. Over the period of June 2003 to June 2006 the
growth rate was over 70% in terms of horizontal expansion of Micro credit borrower. The
total coverage of MCP in Bangladesh is approximately 30.09 million borrowers without
considering overlapping figures. It is estimated that after considering the overlapping
problem, which is expected to be over 40%, the effective coverage would be around
18.05 million borrowers. Out of 18.05 million borrowers covered by Micro credit
program, about 62% are below poverty line and so over 11.19 million poor borrowers are
covered by Micro credit program by 2006.
Micro credit programs of NGOs (known as NGO-Microfinance Institutions or NGO-
MFIs) and Grameen Bank play dominant role in this financial market, NGO-MFIs serve
more than 61 percent and Grameen Bank alone serves 24 percent of the total borrowers.
Among NGO-MFIs more than 80 percent of the outstanding loan disbursed by the top 20
NGOs, three of them are very large and have coverage all over the country. Service
charge on credit varies from 10% to 20% at flat method of collection, all partners of Palli
Karma-Sahayak Foundation (PKSF) charge 12.5%. Average interest offered by NGO-
MFIs on savings to the members is 5%. Near about 90% of the clients of this sector are
female. Loan recovery rate is generally very high compare to the banking sector, which is
over 90%. Average loan size of NGO-MFIs was found around Taka 4,000.

Industrial Structure
Much of the Bangladesh modern industrial sector is concentrated in 20-25 business
groups. Indeed this is the common position in Asia. These groups are led by a small
family group (the core) which invests over time in a number of companies, each of which
effectively operates independent but under the direction of the core.
The financing of industry is largely through bank borrowing, and using the earnings from
one company to start another company, although capital markets have emerged to finance
equity participation. Individual groups expand dependent on bank credit for leverage. In
the high interest rate environment of Bangladesh and the considerable business risks this
can be a dangerous approach. However, in a period of sustained rapid growth it is the
most effective way to build industrial capacity.

Bank Lending
Bank lending is structured on providing collateral for loans. The concept of asset based,
rather than activity based, lending has dominated commercial banking in Bangladesh. For
a limited company it is the practice to demand as collateral guarantees or real estate from
directors in addition to the assets of the borrowing company. The belief is that this is
additional security in the event of default on the loan; the assets of the defaulting
company may be insufficient. The banks are extra cautious and distrust the borrowers
since the legal system provides little support to the lender. Ironically, collateral has no
impact in the real world of Bangladesh as few foreclosures have been made and where
these have been achieved the collected collateral value was 10% of the loan balance.9 Of
course by the time of default loan balances may be two or three times the original loan
due to accumulating interest.
Therefore we might in practice expect collateral to cover 20-30% of the principal.
Banking lending is generally only completed when there is collateral present, even
through such collateral has little real value and there is no central bank requirement for
such.
Nevertheless, company directors are basically forced to provide collateral in addition to
the limited companies assets if they wish to obtain loans. Once this is achieved the
corporate veil is torn away. The Directors, always a partial owner, find that all of their
assets are exposed for collection. Limited liability as a concept is lost.

Credit Risk In Banks

Credit risk is arguably the most significant form of risk capital market participant’s face.
It is often unmanaged, or at best poorly managed, and not well understood. It tends to be
situation-specific, and it does not easily fit to the concept of modern portfolio theory. And
yet, it is an important consideration in most business and financial transactions.
Managing credit risk exposure more effectively is crucial to improving capital market
liquidity and efficiency.
Credit derivatives have emerged in the 1990s as a useful risk management tool. They
allow market participants to separate credit risk from the other types of risk and to
manage their credit risk exposure by selectively transfer-ring unwanted credit risk to
others. This distinguishing of credit risk from other types of risk creates new
opportunities for both hedging and investing.

Loan Portfolio Management

Lending is the principal business activity for most commercial banks. The loan portfolio
is typically the largest asset and the predominate source of revenue. As such, it is one of
the greatest sources of risk to a bank’s safety and soundness. Whether due to lax credit
standards, poor portfolio risk management, or weakness in the economy, loan portfolio
problems have historically been the major cause of bank losses and failures.

Effective management of the loan portfolio and the credit function is fundamental to a
bank’s safety and soundness. Loan portfolio management (LPM) is the process by which
risks that are inherent in the credit process are managed and controlled. Because review
of the Loan portfolio management (LPM) process is so important, it is a primary
supervisory activity. Assessing Loan portfolio management involves evaluating the steps
bank management takes to identify.
Credit Information Bureau
The CIB has been in operation for several years. The need for such an organization had
been discussed for several years and the Government included this in the Financial Sector
Reform Project. The central bank established a separate unit headed by a General
Manager5 tasked to develop the CIB. The FSRP worked with the Duff and Philps Credit
Rating Co. USA, Rating Agency Malaysia Berhad, Malaysia, and DCR-VCR Credit
Rating Company Ltd., Pakistan.
Investment Corporation of Bangladesh, Prime Commercial Bank of Pakistan.
The CIB went into operation in 1992.
Mr. Nur Karim was assigned this responsibility. The successful development of the CIB
is largely due to the perseverance and drive of Nur Karim.
CIB to develop the reporting formats, computer programs, and hardware to support CIB’s
operations. The CIB is operated by the central bank, as a regular part of the bank. No
separate organization was established and so the CIB does not have a separate corporate
identify. It is staffed with regular employees of the central bank who work in the CIB on
rotation of their assignments. There are currently over 40 persons working of the CIB.
These are drawn from the statistics, computer and general cadres.
The CIB collects information from banks on the condition of credit facilities to borrowers
whenever the total exposure exceeds Taka 1,000,000 [10 lakh]. The facilities total is
determined by the sum of all facilities available to the company on the reporting date.
This includes both funded [advances, lines of credit, loans etc. and non-funded facilities
[guarantees, L/Cs]. The reports are submitted by all the scheduled banks and the non-
banking financial institutions quarterly for all facilities from Taka 1-10 million and
monthly for all facilities Taka 10 million and above. At present there is no coverage for
the large number of small enterprises borrowing less than Taka one million.
All financial institutions submit reports to the CIB on every borrower with a total
exposure of more than one million Taka. This report provides the balance on each facility
as of the reporting data and information on the classification of the loan or facility if any.
Originally these forms were completed in paper versions by the banks and forwarded to
the CIB. This required a major data entry effort. Recently CIB has required the banks to
provide the data on diskettes, which greatly eases the time that it takes to enter
information in the database. [See Annex 3 for the forms used; these indicate the type of
information available to the CIB] There is currently no on-line connection between banks
and the central bank.
Moreover the classification condition of a loan changes only when the administrative
process of classification is executed within the commercial bank. Otherwise, while total
exposures may change, the criteria for bad debt only changes with the administrative
process of classification.
Two databases are maintained by CIB: First the borrower database that lists all
companies that have credit facilities. This enables the CIB to review the total exposure of
the company with all banks. The second data base is called the owners database; it links
the owners i.e. listed owners or directors as reported by the lending bank, to the
businesses which they own. Consequently the credit exposures associated with a
particular individual can be determined. Building up the database for the businesses was
straightforward, as identification of a company is generally simple. The owner's database
is more difficult as there are differences in spelling and some room for mistakes in the
matching process of Mr. X with Mr. Y. CIB has now successfully built up this database
and generally it works well. There is also difficulty from submitted lists of directors and
owners, as there is not always an exact correspondence with CIB’s records. However,
there is great experience built up in resolving these problems although sometimes it takes
time to do so. The data collection process is now well organized and the banks are
experienced in the collection and submission of data on borrowers.
At present the CIB database has approximately 25,000 borrowers listed and about 35,000
borrowers; the difference are businesses not now borrowing from the banking system.
This is consistent with the number of loans at the end of 1997 as reported by the
Scheduled Banks of 44,500 with balances of more than 1 million Taka. [Schedule Bank
Statistics, December 1997]. As CIB operates on total exposure, there are multiple loans to
enterprises, and some non-banking financial institutions are included in CIB’s database
but not included in the Schedule Bank Statistics. We consider these numbers broadly
consistent.
OBJECTIVES
Two objectives are recommended:
- To broaden the availability of credit information to include trade credit and small
businesses.
- To shift the collection, processing, and provision of credit information from the central
bank to the private sector.

CIB’s Operations
In this section CIB’s operations are briefly reviewed. We estimate the cost of the CIB
operations to be quite low. If all costs are included the central bank spends approximately
Taka 150 on each application.8 The private sector would charge for the capital
investment and additional analyses is required for a credit rating system. About Taka 250
report is a reasonable estimate.
This is a very small part of the loan that is being studied which averages Taka 5 million.
As coverage increases then the size of the loan decreases. On the other hand the systems
become more complex. This is discussed under the section on expansion to SMEs.
How does CIB work? A financial institution considering a loan asks for information from
the CIB. The CIB checks the loan record of the company being considered for a loan, call
it AAA and also the record of other companies which have a director of AAA on their
boards. Thus is Mr. XYZ is a director of AAA the CIB will search for other companies
where XYZ is a director and report the record of those other companies. This reporting
procedure is focused on the idea that the owners and mangers of a company should be
evaluated on the basis of their other operations.
The CIB currently reports the funded and unfunded facilities outstanding and, within the
funded facilities, (i.e. loans and advances) the total outstanding and the amounts
classified substandard, doubtful, and bad/loss for each type of loan. The lending banks
are not identified. This information provides a picture of the current total exposure of the
company to the banking sector and the quality of the loans. This information is extended
to cover other business establishments in which directors of the company applying for
credit also serve as directors. The use of this information is up to the individual
commercial bank. The exception is large loans or bank director loans requiring
Bangladesh Bank approved 8 Based on 45 employees Average monthly compensation
Taka 8,000 100% overhead 250 reports/day for 20 days/month. The development and
capital costs are probably Taka 1 crore; earning 24% per year (including depreciation)
would add another Taka 40 per report. where the existence of an adverse report on the
company or a Director of the company blocks the credit.
In addition to the reports to banks making loans the CIB information is used to prepare
special reports used in bank inspection, eligibility for election, and special reports on loan
recovery.

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.