Chapter 01

Introduction
1.1 Origin of the report 1.2 Scope of the report 1.3 Objective of the study
1.3.1 General Objective 1.3.2 Specific Objective

1.4 Methodology and Sources of Information

1.4.1 Primary sources 1.4.2 Secondary Sources

1.5 Limitation of the study

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1.1 Origin of the report

As a requirement for the fulfillment of our BBA program in the business administration we have to perform three months internship program. As a student of BBA I have gathered enough theoretical knowledge and now want to put my potentiality in the practical field. The main objective of the internship program is to have practical knowledge of the professional life and to relate the four years theoretical learning to practical field.

1.2 Scope of the Report

The report covers two departments during the period in practical orientation and the area of organizational overview, performance of the overview of Credit Risk Management, identification of loans and advances, conclusion & recommendation.

1.3

Objective of the Study

1.3.1 General Objective:

The broad or general objective of the study is to learn and analyze the credit risk management of NBL and the system the followed for credit assessment.

1.3.2 Specific Objective:

To know about the National Bank Limited To learn about credit department of NBL To gather information about credit risk and its management process Analyze the credit assessment process

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1.4 Methodology and Sources of Information

1.4.1 Primary sources:
The information for the Project Credit Risk Management of National Bank Limited will be collected from both primary and secondary sources. Primary data will collected through face to face interview and discussion with the officials of NBL. Secondary data will collected from websites, relevant articles and journals etc.

Primary Sources
Discussion with officials Face to face interview

1.4.2 Secondary Sources

Most of the information of the report is collected from secondary sources like

Relevant books and websites Various manual and Credit Mechanism Published reports and annual reports of the National Bank Limited Previous performance matters booklet Collected data from employee of the Branch and Division.

1.5 Limitation of the study

Numerous constraints have been faced in the preparation of the report. However the main constraints to accomplish this report are the following: The allotted time period was very short to cover everything exclusively. Any research work demands a high degree of involvement regarding collection of information, literature review and organization of information. While doing so, many limitations arose even though researchers always put their best effort to avoid them.
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All types of required data were not available that may be helpful to make this paper more complete.

Chapter 02

Background of the National Bank Limited

2.1 Evolution of NBL 2.2 Corporate Information of NBL 2.3 Vision of NBL 2.4 Mission of NBL 2.5 Objectives of NBL 2.6 Business Goal 2.7 Line of Business of NBL 2.8 Hierarchy of NBL 2.9 Branches of NBL

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2.1 Evolution of National Bank Limited

Bangladesh economy has been experiencing a rapid growth since the 90s. Industrial and agricultural development, international trade, inflow of expatriate Bangladeshi workers' remittance local and foreign investments in construction, communication, power, food processing and service enterprises ushered in an era of economic activities. Urbanization and lifestyle changes concurrent with the economic development created a demand for banking products and services to support the new initiatives as well as to canalize consumer investments in a profitable manner. A group of highly acclaimed businessmen of the country grouped together to responded to this need and established National Bank Limited in the year 1983.

National Bank Limited was established on 23rd March 1983 with authorized capital TK. 100 million and paid up capital of TK. 80 million was subscribed by the sponsors/directors and TK. 4 million was subscribed to the government. Remaining TK. 36 million has been fully subscribed by the public. The management of the Bank is vested in a board of directors consisting of 21 members including the managing director of the Bank. Managing directors is the chief executive of the Bank. The Bank carries of deposits, investment of funds, financing of trades, businessmen, industrialists, importers and exporters etc. The National Bank Limited opened new branches eight during 1983, raising the total number branches 112 in 2009, total number of employees of the Bank was 242 in 1983 and increased to 2239 in 2009, and during the short periods of its operation the Bank has made notable progress in various activities. NBL determined to bring back the long forgotten taste of banking services and flavors. NBL want to serve each one promptly and with a sense of dedication and dignity. The then President of the People's Republic of Bangladesh Justice Ahsanuddin Chowdhury in angulated the bank formally on March 28, 1983 but the first branch at 48, Dilkusha Commercial Area, Dhaka started commercial operation on March 23, 1983. The 2nd Branch was opened on 11th May 1983 at

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Khatungonj, Chittagong. At present; NBL has been carrying on business through its 112 branches spread all over the country. Besides, the Bank has drawing arrangement with 415 correspondents in 75 countries of the world as well as with 32 overseas Exchange Companies. NBL was the first domestic bank to establish agency arrangement with the world famous Western Union in order to facilitate quick and safe remittance of the valuable foreign exchanges earned by the expatriate Bangladeshi nationals. NBL was also the first among domestic banks to introduce international Master Card in Bangladesh. In the meantime, NBL has also introduced the Visa Card and Power Card. The Bank has in its use the latest information technology services of SWIFT and REUTERS.NBL has been continuing its small credit programmed for disbursement of collateral free agricultural loans among the poor farmers of Barindra area in Rajshahi district for improving their lot. Alongside banking activities, NBL is actively involved in sports and games as well as in various SocioCultural activities. The Bank established extensive drawing arrangement network with Banks and Exchange Companies located in important countries of the world. Expatriates Bangladeshi wage earners residing in those countries can now easily remit their hard-earned money to the country with confidence, safety and speed. The number of workforce of NBL stood at 2239, which include 1689 officers and executives and 550 staff. Now NBL is on line to establish trade and communication with the NBL International banking companies of the world. As a result NBL will be able to build a strong root in international banking horizon. Bank has been drawing arrangement with well conversant money transfer service agency "Western Union". It has a full time arrangement for speedy transfer of money all over the world. Transparency and accountability of a financial institution is reflected in its Annual Report containing its Balance Sheet and Profit & Loss Account. In recognition of this, NBL was awarded Crest in 1999 and 2000, and Certificate of Appreciation by the Institute of Chartered Accountants of Bangladesh. With a strong sense in all business areas commercial banking, NBL could foresee tremendous growth in home in homebound remittance form Bangladesh expatriates in USA and UK, Middle East and different countries of the world. Consecutively NBL established a unique money remittance system with Western Union of USA for inbound and outbound remittance. At present

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NBL is the only authorized agent for this unique service in Bangladesh. From the very beginning NBL is playing a vital role in the private sector Banking. National Bank Limited is one of the leading private commercial bank having a spread network of 112 branches across Bangladesh and plans to open few more branches to cover the important commercial areas in Dhaka, Chittagong, Sylhet and other areas in 2009. National Bank Limited has been licensed by the Government of Bangladesh as a Scheduled commercial bank in the private sector in pursuance of the policy of liberalization of banking and financial services and facilities in Bangladesh. In view of the above, the Bank within a period of 25 years of its operation achieved a remarkable success and met up capital adequacy requirement of Bangladesh Bank.

National Bank Ltd is one of the leading banks which introduced first Credit Card in Bangladesh. Our technology has been upgraded to manage the growth of the bank and meet the demands of our customers. ATMs now allow customers to retrieve 24x7 hours cash withdrawals. National Bank Limited is a customer oriented financial institution. It remains dedicated to meet up with the ever growing expectations of the customer because at National Bank, customer is always at the center.

National Bank Limited has its prosperous past, glorious present, prospective future and under processing projects and activities. Established as the first private sector Bank fully owned by Bangladeshi entrepreneurs, NBL has been flourishing as the largest private sector Bank with the passage of time after facing many stress and strain. The member of the board of directors is creative businessman and leading industrialist of the country. To keep pace with time and in harmony with national and international economic activities and for rendering all modern services, NBL, as financial branches with computer network in accordance with the competitive commercial demand of time. Moreover, considering its forth-coming future the institution automated all its infrastructure of the Bank has been rearranging. The expectation of all class businessman, entrepreneurs and general public is much more to NBL. Keeping the target in mind
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NBL has taken preparation to open new branches by the year 2007. The emergence of National Bank Limited in the private sector is an important event in the Banking arena of Bangladesh. When the nation was in the grip of severe recession, Govt. took the farsighted decision to allow in the private sector to revive the economy of the country. Several dynamic entrepreneurs came forward for establishing a bank with a motto to revitalize the economy of the country. National Bank Limited was born as the first hundred percent Bangladeshi owned Bank in the Private sector from the very inception it is the firm determination of National Bank Limited to play a vital role in the national economy.

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2.2 Corporate Information of NBL Corporate Information

Incorporation of the Bank Certificate of commencement of Business Licensed issued by Bangladesh Bank Licensed issued by Bangladesh Bank for opening the First branch, Dilkusha Branch Formal Lunching of the Bank Commencement of Business of Dilkusha Branch Listed with Dhaka Stock Exchange Publication of prospectus Date of first public subscription (IPO) Trading of shares in DSE Association with Gulf exchange Pte Ltd Signing in agreement with Western Union Money Transfer Listed with Chittagong Stock exchange Trading of Shares in CSE Listed with CDBL Inauguration of Balaka Exchange Pte Ltd Registration Certificate as Stock Broker 15.03.1983 20.03.1983 22.02.1983 22.03.1983 23.031983 23.031983 20.12.1984 30.12.1984 14.01.1985 21.04.1985 26.11.1985 16.05.1993 06.11.1995 06.11.1995 29.09.2004 08.07.2007 24.10.2007

(Source: National Bank Limited annual Report, 2008)

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2.3 Vision of National Bank Limited

Ensuring highest standard of clientele services through best application of latest information technology making due contribution to the national economy and establishing ourselves firmly at home and abroad as a front ranking bank of the country are our cherished vision.

2.4 Mission of National Bank Limited

Efforts for expansion of our activities at home and abroad by adding new dimensions to our banking services are being continued unabated. Alongside, we are also putting highest priority in ensuring transparency, account ability, improved clientele service as well as to our commitment to serve the society through which we want to get closer and closer to the people of all strata. Winning an everlasting seat in the hearts of the people as a caring companion in uplifting the national economic standard through continuous up gradation and diversification of our clientele services in line with national and international requirements is the desired goal we want to reach.

2.5 Objectives of National Bank Limited

people. Foreign a cordial, deep-rooted and firm banker-customer relationship by Taking part in the development of the national economy through productive Connecting clients to modern banking practices by the best application of dispensing prompt and improved clientele services. deployment of the Banks resources as well as patronizing different social activities. improved information technology, so that they get encouraged to continue and feel proud of banking with NBL. Bringing modern Banking facilities to the doorstep of general public through

diversification of Banking services, thereby arousing saving propensity among the

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Ensuring highest use of the professional workforce through enhancement of their Responding to the need of the time by participating in syndicated large loan

aptitude and competence. financing with like-minded Banks of the country, thereby expanding the area of investment of the Bank.

2.6 Business Goal

To patronize, sponsor and encourage games and sports, entertainment and other socio-economic activities, alongside providing the best services to the clients.

2.7 Line of Business of NBL

Investment Banking (Capital Market Operation In DSE & CSE) Lease Finance Investment In Government & provide Security International Trade Finance (Import, Export) Foreign Exchange Dealing (Currency Dealing, Remittance) Money Market Operations (Call Money Market) Corporate Finance Syndication SME Banking

Personal Banking (Auto Loan, Vocational Loan, Personal Loan) Housing Finance

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2.8 Hierarchy of NBL

Chairman

Managing Director Deputy Managing Director Senior Executive Vice President Executive Vice President Senior Vice President

Vice President Senior Asst. Vice President

Asst. Vice President Senior Principle Officer Principle Officer Executive Senior Officer Officer Junior Officer Asst. Officer Page 12 of 51 Computer Operator

2.9 Branches of NBL

NBL which was started at Dilkusha Branch on March 23rd, 1983 was the first and major private commercial Bank in Bangladesh operating throughout the country as well as the age of the Bank is only 18 years. During this period it has established total 76 branches over the country and made a smooth network inside the country as well as throughout the world. The number of Branches as territory wise is mentioned in the table:

Area-wise Branches
Division Area Dhaka Area Chittagong Area Rajshahi Area Khulna Area Selhet Area

Number of Branches
44 23 16 09 16

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Chapter 03

Credit Policy Guidelines of NBL

3.1 Different Forms of Credit in NBL 3.2 Purposes of Loans and Advances 3.3 Focus on Various Lending Areas 3.4 Steps in Loan Processing 3.5 Flowchart Approval for process of Loans and Advances 3.6 Lending Caps 3.7 Rate of Interest 3.8 Security and Support against Loans & Advances 3.9 Mode of Disbursement 3.10 Mode of Adjustment 3.11 Validity of Loans & Advances

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03.1 Different Forms of Credit in NBL

Generally we find three types of loan:

Loans

Continuous Loan

Demand Loan

Term Loan

The different types of loans and advances that NBL offers are as follows:

Secured Overdraft (SOD) Loan against Trust Receipt (LTR) Payment Against Document (PAD) House Building Loan House Building Loan (staff) Term Loan.

Loan (general) Bank Guarantee Cash Credit (Pledge) Cash Credit (Hypo) Foreign Documentary Bill Purchase (FDBP) Inland Documentary Bill Purchase (IDBP)

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03.1.1 Continuous loan:

In this mode of loan, within a fixed amount and fixed period of time, one can receive and deposit money several time. NBL provide different types of continuous loan: Secured Over Draft- financial obligation Cash credit- hypothecation Cash credit- pledge Secured Over Draft- General

03.1.2. Term Loan:

Here, the borrower will take the whole amount at a time and has to deposit/ repay loan within specified time. NBL provides different types of term loan: Retail Banking Loan Any Purpose Loan Education Loan SME Loan Housing Loan Lease Financing Scheme Loan

03.3.3 Demand Loan:

The loans that become repayable on demand by the bank will be treated as Demand Loan. If any contingent or other liabilities are turned to forced loan i.e. without any prior approval as regular loan those too will be treated as Demand loan. Such as: LTR, PAD, FBP and FDBP and LDBP etc.
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3.2 Purposes of Loans and Advances

National Bank Limited has been offering wide range of credit facilities as under: NAME Cash Credit ( Hypo & Pledge) SOD (General) SOD (Export) Loan (General)

LCA(Loan against cash Assistance) LC(Local & Foreign) sight & on Deferred payment basis PAD LTR LIM PC LDBP/FDBP BTB L/C Bank Guarantee Local/Foreign

PURPOSE Business capital/ Working capital. Against Financial organization /works/supply orders. Payment of Accepted bills at maturity before receipt of export proceeds. Acquiring capital assets/purchasing construction, finishing, expansion, repair, renovation of House/Flat /Real estate business etc Financing for the period of the L/C obligations against receipt of documents. For import/Local procurement of goods/ services. For making payment of the payment of the L/C obligations against receipt of documents. Retirement of shipping documents Retirement of shipping documents Meeting Financial requirement of the exporter at pre-shipment stage against Exporter L/C. As post shipment finances against local/ foreign export bills. Import of raw/packing materials against Exporter L/C For submission of tendency/to obtain and offer as security against work order, supply order/ For Gas, Electricity connection/against delivery of goods/against release of goods, without or against partial payments by customer etc.

National Bank will also finance any other activity under any credit nature, which will meet the institution basic principles of safety, liquidity and spread, upholding, credit norms and complying with the guidelines/ directives of the Central Bank/ regulatory body.
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3.3 Focus on Various Lending Areas

National Bank main focus on various lending/as will be as under: Industry and Business Segment* i. Trading Business ii. Ready Made Garments iii. Textile (Yarn/Fabrics Manufacturing) iv. Chemicals/Toiletries v. Entertainment vi. Telecommunication/IT vii. Power Generation and Distribution viii. Energy (power/Fuel/Gas) ix. Electric Goods x. Services viz. GSA, Freight Forward, and Airlines.etc. xi. Steel and Re-rolling Mills xii. Engineering and Construction xiii. Small Traders/SME xiv. Agro-based industry/ Dairy products/ Fishery/Tea/crop xv. Export Oriented Industries xvi Pharmaceuticals xvii Consumer loans(personal, auto, credit card) xviii. Food and Allied( edible oil, flour etc) xix. Ship scrapping xx. Real Estate xxi. Paper xxii. Transport xxiii. Cold storage finance xxiv. Financing Cement Industries Focus Grow Grow Grow Grow Grow Grow Grow Grow Grow Grow Grow Grow Encourage Encourage Encourage Encourage Encourage Maintain Maintain Maintain Maintain Discouraged Discouraged Discouraged

*The Industry and Business Segment Focus will be revised from time to time depending on national requirement, market conditions, Cyclic of the economy, appetite for growth for each sector, shift in Government Policy and National Bank, credit planning.

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3.4 Steps in Loan Processing

There are some stages the proposal has to come across. The steps are:

Request for Credit the client

Credit Application from filled up

Scrutinizing the documents

Analyzing the information

Preparing the proposal

Presenting of the proposal

Sanctioning of the credit

Informing the client, Implementation

Figure: Steps of processing Loan

3.5 Flowchart Approval for process of Loans and Advances

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Credit application processed by credit officers and recommendation by Credit In charge of the branch Branch Credit Committee

Branch Manager

Regional office

Regional office Credit Committee

Regional Head

Head Office, Credit Division

Head Office Credit Committee

Deputy Managing Director (Credit)

Managing Director

Executive Committee(EC)

Figure: Approval Process of Loans & Advances

3.6 Lending Caps

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National Bank Limited is very much aware of over concentration of credit in particular area, which may under some situation, create disaster for the bank. Keeping this in consideration and also the overall business, trend, propose/potentials, risks& mitigate, pricing, owners stake in business, business competitors involvement, safety, liquidity, security etc. NBL will be guided by the following Lending caps generally:-

Sectors Caps Trade & Commerce SME Industry-working capital Project Finance Long Term Retail/Consumer (CCS) Agro Credit Work/ Supply order (contractual Finance) Others Total Government Policy and National Banks credit focus.

% 45% 10% 10% 10% 10% 5% 5% 5% 100%

*The Caps will be revised from time to time depending on the market conditions, shift in

3.7 Rate of Interest

Rate of interest will be charged as per declared rate of the bank. Pricing will be basically risk based. Higher price will be considered for riskier borrowers because of their higher risk involved. Similarly lower price will be considered for prime clients on the basis of their low risk ( Low risk
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grade clients means where an obligor obtained higher aggregate score as per CRG score sheet or 100% cash covered or govt./international Top bank Guarantee). In fixing interest rate cost of fund & the prevailing rate in the competing market shall also be considered. Concessional interest rates to the deserving customers will be allowed within the declared interest rates band of the bank. Commission/charges on credit facilities will be realized taking the competing scenario in the banking market into account, involved risks in financing & overall policy of the bank. NBL will be provided loans by the following interest rates generally: Loans & Advances Cash Credit(CC) Secured Over Draft( SOD) SME Loan Housing loan Lease Financing Scheme Loan Retail Banking Interest Rates (%) 18% 16%, normally, Interest rate is 2.5% above from the instrument rate such as FDR,SS etc. 16% 16% 16% 14% (Officers)

20% (Non- officers) Term Loan 16% *The Interest Rates will be revised from time to time depending on the market conditions, shift in Government Policy and National Banks credit focus.

3.8 Security and Support against Loans & Advances

The following types of securities are generally accepted:

Machineries of factory/ industry on hypothecation basis. Values of machineries are checked.

Raw materials, work in process, finished goods, stock in trade on hypothecation and pledge basis. Inventory is held in a warehouse/godown for financing against pledge under Banks control. Value of Inventory is checked.

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Land and building of acceptable type and value, under registered mortgage. Financial obligation after ascertainining its genuineness of issuance, ensuring marking of lien of the lender bank on the instrument and obtaining confirmation from the issuing bank that encashment including even before maturity date will be allowed to the lender bank on request without referring to the instrument holder.

Bills receivable against work order/supply order duly assigned/supported by registered P.A executed by the client favoring the bank, confirmed by the work entrusting authority that the cheques/ bills against the work shall be issued in the name of the bank A/C of the client.

Cars/ buses/water crafts/ vessels under hypothecation and joint registration. Shipping documents as lien against LC. Trust receipt (For LTR) Export documents-under lien (for LDBP/FDBP). Export LC/ Contact under lien (For LDBP/FDBP). Packing credit letter. (For PC) Personal guarantee/corporate guarantee/cross-corporate guarantee. Post dated cheques. 1st/2nd charge/1st ranking pari passu charge on fixed and floating assets of the limited companies financed.

Bank obtains authorization to debit clients account in order to keep policy in force.

Insurance:
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National Bank having insurable interest on a property/ an asset obtain insurance policy as per norms against credit facilities extended in order to protect this banks interest. Insurance policy shall be taken covering all possible risks. Branches shall ensure that insurance policy is current and renewed on a timely basis. Insurance shall be obtained from a reputed company.

General/Special conditions/Covenants:
General/Special conditions/Covenants will be according to the nature of advances, security arrangements, ownership pattern, and mode of acquisition, institutional norms / instructions, guide lines of the central bank / regulatory authority.

3.9 Mode of Disbursement

In disbursing credit the bank ensures drawings for the purpose the loan has been sanctioned. Where required visit of the business/site etc are suggested and all subsequent disbursement are made conditional to full utilization of disbursed money in the preceding phase. In case of disbursement of loan, money for acquisition of assets, payment is suggested after receipt of the asset by the borrower.

3.10 Mode of Adjustment

For the borrower to exhibit capability to periodically adjust the drawings taken and as such to have idea regarding the rationale for the continuation of the facility, adjustment mode is given. In term of lending, where revolving transaction is not allowed, adherence to adjustment stipulation (monthly, quarterly, half yearly or otherwise) is suggested to ensure recovery of the loan disbursed.

3.11 Validity of Loans & Advances

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Validity date for continuous credit is set at a period not exceeding 1 year. Short term loan mostly is allowed for trade/commerce. This expiry date is virtually the date for adjustment/ review of the facility, subject to periodical and satisfactory turnover of the limit. Conduct of the business during the whole of validity period determines the fate of continuation of the facility for the next period. Loans for short/ medium/long term are also sanctioned depending upon the requirement thereof and also on cash flow generation, repayment capacity and over all lending feasibility. Such loans are allowed for adjustment in installment.

Short term Medium term Long term

: Up to 12 months : More than 12 months and up to 60 months : More than 60 months.

Chapter
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04

Credit Risk Management of NBL

4.1 Types of CRM 4.2 Mission and Vision of CRM 4.3 Major objectives of the CRM guidelines 4.4 Risk Management Process 4.5 Credit principles followed by NBL 4.6 Credit Evaluation of NBL
4.7 Credit

Risk assessment

4.8 Credit Information Bureau Report (CIB report) 4.9 Credit Assessment System 4.10 National Banks Risk Grading Framework 4.11 Credit Risk Grade Matrix

4.12 Different categories of Credit Risk Grading Credit 4.13 Risk Grading Review 4.1 Types of CRM

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In perspective of National Bank Limited risk is defined as the possibility of losses, financial or else. Now a days risk management plays a vital role to reduce uncertainty of assets and or else. The major area of risk the bank think is that Credit Risk, Liquidity Risk, Market Risk, Operation Risk and Reputation Risk due to Money Laundering Risk. Market risks include Foreign exchange risk, Interest rate risk and Equity risk.

Figure 01: Types of Risk Management of National Bank Limited

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4.2 Mission and Vision of Credit Risk Management

National Banks mission is to ensure quality services, establish and maintain modern and electronic banking all financial activities with highly motivated and skilled personnel, maintaining transparency, accountability & integrity and thereby ensure stable and sound financial operational system. National Bank Limited will: Extend credit facilities at competitive price with prudence & efficiency. Offer wide range of products. Encourage loans & advances to income generating activities and will thereby create employment opportunity and improve standard of living of the common people. Loans and advances for productive purpose which will alleviate poverty will be stressed upon. Diversify lending activities, avoiding sectored concentration, ensuring geographical dispersal. Design its loan operations keeping social and economic factors in consideration. Attach importance to consumer credit, Loans to small businessmen, Festival loan, Small Loans for finishing and expansion of house, Personal loan for salaried persons and any purpose loan.

Prefer lending which will be adequately secured with acceptable security. Borrowers stake in any activity will be ensured.

Encourage syndicated financing in prospective/ profitable ventures. Not incur any uncovered foreign exchange risk in lending fund. Invest at reasonable lending rates. Monitor End use of loans/ advances.

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Generally prefer short term lending promoting through lending small and medium enterprises.

Constantly explore prospective and profitable investment areas in order to achieve institutional and country objectives.

Extend of credit which should contribute within defined risk limitation to the banks achievement of profitable growth and superior return on the Banks capital.

4.3 Major objectives of the CRM guidelines

The main objectives of the guidelines are as under:

To provide directional guidelines to all concerned to improve risk management culture & establish minimum standard for managing risks in credit operations.

To adopt an appropriate working method. To keep legal aspects relating to loans and advances vivid. To introduce and adopt uniform practice in working. To make lending correct information based. To identify proper lending correct area. To analyze all aspects related to credit and ascertain viability of lending. To make credit documentation exhaustive. To ensure proper supervision, monitoring & follow up. To ensure safe return of money lent, avoidance of credit loss and strengthen asset quality and to protect banks interest.

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4.4 Risk Management Process

NBL's activities involve analysis, evaluation, acceptance and management of some risk or combination of risks. Risk management is emphasized not only for regulatory purpose but also to improve operational and financial performance of the Bank. The main objective of the risk management is that the Bank takes well calculative business risks while safeguarding the Bank's capital, its financial resources and profitability from various risks.

Risk Origination by Business Units Credit Risk Operational Risk Market Risk Liquidity Risk Reputation Risk

Risk Identification Identify, Understand and Analyze Risks

Risk Assessment & Measurement Quantify and Assess Risk Impact

Risk Control & Migration Recommend Measures to Control & Migrate Risks

Risk Monitoring Monitor and Report on Progress & Compliance

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Balance Risk against Return

Figure: Risk Management Process In order to streamline risk control features in a more effective manner, National Bank Limited has put in places all manuals as suggested in the core risk management guide lines of Bangladesh Bank. To manage the risk, National Bank Limited takes some steps. They actively involve analysis, evaluation, acceptance and management of some risk. Risk management is not only for regular process but also improve financial performance of the Bank.

4.5 Credit Principles Followed by NBL

To achieve their goal for maximizing the stockholders value and protect the interest of the depositors as well as to improve the quality of banks assets as fundamentally sound financial institution, they will abide by but will not be limited to the following Credit Principles, which should guide their behavior in their lending decisions: Assessment of the customers character, integrity and willingness to repay will from basis of lending.

Customer having capacity and ability to repay shall only be lent. Possibility of default will be worked out before lending. Credit will be extended in the areas risks of which can be sufficiently understood and managed.

Independent Credit participation in the credit process shall be ensured. Ethical behavior in all credit activities shall be ensured. Be proactive in identifying, managing and communicating credit risk.

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Be diligent in ensuring that credit exposures and activities including processing function complying with NBL requirements as well requirement of regulatory authority.

Risk and reward to be optimized. Diversified Credit Portfolio to be built and maintained. Credit will normally be financed from customers deposits and not out of short-term temporary funds or borrowing from other banks.

The bank shall provide suitable credit services and products for the market in which it operates.

Credit will be allowed in a manner which will in no way compromise with the Banks standard of excellence and to customers who will not compromise such standards.

All credit extension must comply with the requirement of banking companies Act. 1991 and amendments thereof from time to time.

4.6 Credit Evaluation in NBL

National Bank will follow the following credit evaluation process:

Prevailing credit practices in the market. Credit worthiness, background and track records of the borrower. Financial standing of the borrower supported by financial statement and other documentary evidences.

Legal jurisdiction and implication of applicable laws. Effect of any applicable regulations and laws.

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Purpose of the loan/ facility. Tenure of the loan/facility. Viability of the business concern. Cash flow analysis and also projections thereof. Quality, value and adequacy of security, if available. Risk taking capacity of the borrower. Entrepreneurship and managerial capabilities of the borrower. Reliability of the sources of repayment. Volume of risk in relation to the risk taking capacity of the bank or company concern. Profitability of the proposal to the bank or company concerned. Credit Risk Grading Yield from the facility Market aspect Total global exposure of the borrower CIB status

4.7.1 Credit Risk Assessment

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4.7.1.1 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 considered by the following the risk assessing areas:

4.7.1.2. Borrower Analysis:

Full particulars of the proprietor, partners, Directors, etc to be examined, their management capability to be ascertained. Overall performance and credit status of the allied concerns of the client i.e. group will be assessed.

4.7.1.3. Industry analysis:

Before extending credit in an area, over all business conditions of that area/sector will be critically examined, prospects and problems to be ascertained. Demand and supply of the concerned goods/ services, Demand and supply gap, contribution of the borrower in meeting the gap, strength and weakness of the borrower & their competitors to be accurately assessed.

4.7.1.4. Supplier/Buyer Analysis:

Lending decision will be preceded by an intensive analysis on whether the borrower depends on a single or a very few customer or gets the supply of the raw materials/dealing items from a single suppler. Such sales and supply concentration will be given a very careful consideration.

4.7.1.5. Historical Financial Analysis:

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An analysis of a minimum of 3 years historical financial statements of the borrower shall be presented.

4.7.1.6. Projected Financial Performance:

Where term facilities (tenor more than 1 year) are proposed, borrowers future/ projected financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should be granted if projected cash flow is insufficient to repay debts.

4.7.1.7. Risk and Mitigating Factors

Risk inherent in a credit proposal shall have to be identified and appropriate justifying factors should be applied. These are to be summarized in the Credit Assessment Form. That has to identify properly. If any risk factor is identified by the credit officer but that is actually not mitigating factors. That will be make loss for the organization.

4.7.1.8. Collateral
Collateral offered against a credit facility shall properly be valued and verified by the concerned relationship officer or Relationship Manager and revalued and re-verified annually in the subsequent period(s). In addition to the valuation of the Relationship Officer, 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. Any valuation of the collateral must be supported by the photograph and side map, where applicable.

4. 7.1.9. Insurance Coverage

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Adequacy and extent of insurance coverage must be assessed in the credit Assessment Form. Customer preference for not taking required insurance policy must be obtained from approved insurer of the Bank.

4.7.1.10. Adherence to Policy

It should be clarified whether the customer is agreed to comply with the banks internal policy and external regulatory requirements. Any deviation from the policy and other internal or external requirement must be justified and mentioned as deviation in the Credit Assessment From.

4.7.1.11. Syndicated Loans

Proposal for syndicated loans shall be analyzed with respect to risk and return in the same manner as directly sourced loans. In case of participation in a syndication deal, Bank will independently assess the proposal and will not solely depend on the credit assessment of the lead Arranger. .

4.8 Credit Information Bureau Report (CIB report):

One of the major risk reducing criteria for the bank is Credit Information Bureau Report. Bank can easily know the total information of any customer from Credit Information Bureau. Banks are requested to send the CIB if a customer want to avail more than 50 thousand taka. Every Bank needs to submit their various statements like monthly statement, quarterly statement to Bangladesh Bank. Bangladesh Bank gathers that credit information and make an individual code name for every customer. They provide information about the limit, outstanding, disbursement date, expiry date. If a customer applied for a Credit facility in any bank, the bank request to Bangladesh Bank to sent CIB report to the Bank where bank can know the details of customer. If a customer have loan facility more than 1.00 crore bank need to send monthly statement, if a customer have loan facility less than 1.00 crore bank sent the statement quarterly.

4.9 Credit Assessment System

4.9.1. Credit Assessment System:

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Commercial banks and financial institutions intermediate between lenders and borrowers. These financial intermediaries collect deposit and disburse it as loan and advance to the individual people, business, commercial, industrial entity. The loan and advance should be given to them who has the certain and predicted cash flow to repay the credit. If the credit officer fail to analyze the clients viability of repaying the loan and the projects cash flow possibility of default may arise due to the information. In sanctioning the loan, is the key to identify the borrowers ability, expertise, efficiency, and industry analysis, business performance to ensure the recovery of the credit along with the good supervision, monitoring and the relationship. The purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate security.

4.9.2. Allocation of Authority:

To assure proper and orderly conduct of the banking operation, the board of directors empowered the Managing Directors and executives of the bank to lend up-to certain under certain terms and conditions at their discretion. Important point is that an officer will not be delegated certain power on the basis of his position. In other words, an officer does not automatically get lending authority by virtue of his corporate /functional title. Specified lending authority will be delegated by the Managing Director to various Executives after taking into consideration his proven credit judgment, Knowledge, and experience.

4.9.3. Approving Authority:

In National Bank Limited, the credit proposal goes through certain steps that are ordered in terms of hierarchy. The board of directors is the ultimate authority and it delegates different power to the
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different committees. In National Bank Limited, there are following hierarchies in approving credit facilities:

Figure: Approving Authority Sequence

4.9.3.1

Branch Credit Committee:

The branch credit department is maintained by the branch manager and the other members are second man or manager operation, credit in-charge, and other members are nominated by the branch manager and the credit officer who prepares the proposal calls them relation officer. As the ultimate performance of the branch depends on the loan all of the members are give importance. If the credit amount wanted is not under the sanctioning authority of the branch committee, it is sent to the Head Office Credit Committee for approval.

4.9.3.2

Head Office Credit Department

After receiving the loan proposal from different branches, credit committee (HO) seats after certain interval for analyzing the proposal. The credit officers review the proposal and look for what other
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information is needed to provide with it to present before the executive committee. Here they also appraise the loan proposal in the same way the branch does. The HO credit committee is headed by the Managing Directors of the bank and other members are selected by him. Mainly the HO credit department is responsible for the following activities:

The committee evaluates the quality of the lending staff posted in the branch and take appropriate steps to made them efficient and effective. Ensuring that all the required information and documents are collected and are in order.

4.9.3.3

Executive Department

If the limit of the loan proposal exceeds the authority delegated to the HO credit committee, the loan proposal is forwarded to the executive committee for sanction. Approving the credit facility as delegated by the Board of Directors.

Supervising implementing the directives of the Board of Directors. Reviewing of each extension of the credit approval by the HO credit committee or Managing Director. Communicate the result of all the above function to the Board of Directors.

4.9.3.4

Board of Directors

If the credit demand of the client crosses the delegated power of the executive committee, the proposal is sent to the board of directors for approval. The Board of Directors has, in the NBL; retain the following credit related responsibilities in their hand: Delegating authority to approve and review credit The board of directors will approve the credit for which authority is not delegated to anybody.

4.10. National Banks Risk Grading Framework

4.10.1 Basic Framework: When providing credit facility to the customer, Bank undertakes many risks among which credit risk is considered to be most important one. As such, an in-depth study should be conducted on the
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borrowers creditworthiness which will help the Bank to identify all possible risk underlying in a particular credit transaction. A former evaluation of borrowers financial health and ability to repay debt obligation is call credit rating which helps the bank to grade the customer. As such, it is also called credit risk grading. And risk identified through credit rating/risk grading is quantified for better understanding and takes appropriate technique. Besides, it helps the bank to charge commensurate risk premium on a particular credit facility. Therefore, it is important to accurately measure the risk in a transaction and grate the facility accordingly. As per recommendation of the Financial Sector Reform Project, Bangladesh Bank made it mandatory for the bank to conduct a Lending Risk Analysis in the prescribed format before sanction of a loan which is steel in force. Later, Bangladesh Bank instructed all commercial Banks to develop its own credit risk grading system vide its Guidelines on Credit Risk Management. In the said guideline, Bangladesh Bank provide sample Risk Grading Model and advised Banks to design their own model in line with that one.

4.10.2 NBLs Risk Grading Framework

All credit proposals must be supported by a comprehensive risk analysis. It is the absolute responsibility of the originating officer to conduct comprehensive risk analysis and risk grading score, risk grading etc in the proposal. He/she will also insure that all necessary documents/proposal/ information in support of the proposed risk grading are with the proposal before the facility request is sent to the competent approval authority.

4.11 Credit Risk Grade Matrix

As per instruction of Bangladesh Bank, National Bank has developed Risk Grading Scorecard which will be used to find out rating of all credit facilities and/or customers of the bank except the loans under Retail Credit Division. The score of the risk grading scorecard will be weighted one. There are 10 (ten) rating criteria and separate parameters have been set to measure borrowers
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position against each criterion. After analyzing borrowers financials or other relevant documents, the Relationship Officer will first find out the points the borrower earns against each criterion based on the parameters set and then multiply the points obtained by the relevant risk weight which will produce Weighted Score.

A snapshot of criteria and weight assigned to each criterion is as follows:

Sl. No. 01

Criteria Leverage

Weight (%) 15

Name of the Grade Superior

Short Name SUP

Score 85+

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02 03 04 05 06 07 08 09

Liquidity Profitability Account Control Business Outlook Management/ Key Person Age of Business Size of Business Personal Banking

15 15 5 10 15 05 05

Good Acceptable Marginal/ Special Mention Substandard Doubtful Bad & Loss

GD ACCPT MG/WL SM SS DF BL

75-84 65-74 55-64 45-55 45-54 35-44 <35

05 10 100

10 Total

Relationship Security

Figure: A snapshot of criteria and weight assigned to each criteria

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 borrowers business position, any breach of contract by the borrower or as and when he/she feel it necessary. Customer is to be affixed in the relevant field of the Credit Assessment Sheet.

4.12 Different categories of Credit Risk Grading

1. Superior (SUP) Credit facilities, which are fully secured i.e. fully cash covered. Credit facilities fully covered by government guarantee. Credit facilities fully covered by the guarantee of top tier international bank.

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2. Good (GD)

Strong repayment capacity of the borrower. The borrower has excellent liquidity and low leverage. The company demonstrates consistency strong earnings and cash flow. Borrower has well established, strong market share. Very good management skill and expertise. All security documentations are in place. Credit facilities fully covered by the guarantee of a top tier local bank Aggregate score of 85 or greater based on Risk Grade Score sheet.

3. Acceptable (ACCPT)

These borrowers are not strong as good grade borrowers, demonstrate earnings, cash flow and have a good track record. Borrowers have adequate liquidity, cash flow and earnings. Credit in this grade is secured acceptable collateral (1st charge over

inventory/receivables/equipment/property). Acceptable management. Acceptable parent/sister company guarantee. Aggregate score of 75-84 based on Risk Grade Score sheet.

4. Marginal/Watch list (MG/WL)

This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment.

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 These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/ or inconsistent earnings. Weaker business credit and early warning signals of emerging business credit detected. The borrower incurs a loss. Loan repayment routinely falls past due. Account conduct is poor, or other untoward factors are present. Credit requires attention. Aggregate score of 65-74 based on Risk Grade Score sheet.

5. Special Mentioned (SM)

This grade has potential weakness that deserves managements close attention. If left uncorrected, this weakness may result in a deterioration of the repayment prospects of the borrower.

Severe management problems exist. Facilities are downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage). Bangladesh Bank criteria for Special Mentioned (SM) shall apply. Aggregate score of 55-64 based on Risk Grade Score sheet.

6. Sub Standard (SS)

Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Bangladesh Bank criteria for Sub Standard (SS) shall apply.

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Aggregate score of 45-54 based on Risk Grade Score sheet.

7. Doubtful (DF)
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 yet is not classified as Bad & Loss. Bangladesh Bank criteria for Doubtful Credit shall apply. Aggregate score of 35-44 based on Risk Grade Score sheet

8. Bad and Loss (BL)

Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/ liquidation. Prospects of recovery are poor and legal options have been pursued. 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 valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal procedures/ suit initiated. Bangladesh Bank criteria for bad and loss (BL) shall apply. Aggregate score of less than 35 based on Risk Grade Score sheet.

4.13 Credit Risk Grading Review

Credit Risk Grading for each borrower should be assigned at the inception of lending and should be periodically updated. Consistency and accuracy of the Risk Grade should be examined periodically by the branch and Internal Control & Compliance Division while conducting inception it must also be ensure that CRG has been properly done and periodically updated. Frequencies of the review of the credit risk grading are mentioned below:
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Number 1 2 3 4 5 6 7

Risk Grading Superior Good Acceptable Marginal/ watch list Special Mention Sub- standard Doubtful Bad & Loss

Short SUP GD ACCPT MG/WL SM SS DF BL

Review frequency (at least) Annually Annually Annually Half yearly Quarterly Quarterly Quarterly Quarterly

Chapter 05
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Findings

5.1 Findings of the study

The rate of interest or product cost is set up by the Head Office. Interest rate has to be

within a limit for every bank which is notified by the Bangladesh Bank. Pricing for the credit varies for depending on the risk level of credit facility. Risk level is measure on some criteria like; CIB Report, CRG points, Personal Information. High risky credit facility charged high interest. Price of Credit facility also set up by the Head Office credit committee. Credit allocation is set-up by the Head Office Credit committee. The Head of the Branch can authorize credit up to Tk.20 Lac.

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 Branch credit officer prepare the credit proposal containing details customer information. Some big credit facilities recommended by the Head Office credit Committee which is processed with fast monitoring and screening. Sometimes clients and customers are moving here and there inside the bank premises. So it hampers the smooth functioning and security system of the bank. Quality development may help the bank to hold on the old customers and attract potential customers. The number of Brochure is not sufficient to supply information to the clients for their query.

Chapter 06 Recommendation
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Conclusion

6.1 Recommendation
The process of sanctioning a loan is very time consuming. Management should give more effort to reduce the time of processing a loan.

The main portion of profit comes from the foreign exchange and credit division, but there are not enough employees on these departments to serve the clients. So number of employees should be increased in these departments.

The management must be more careful of sanctioning that loans which are recommend by powerful bodies. Because these loans sometimes become more risky.

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To reduce the credit risk the original documents of the client must be verified thoroughly.

The repayment capacity of loan of the client should be properly investigated to reduce the default risk.

6.2 Conclusion
The National Banks philosophy - "A bank Performance for potential" has been precisely an essence of the legend of success in Bangladesh. The bank has proved to be successful by offering quality services to its customers in time. Most of employees of National Bank are very efficient (with few exceptions); everyone knows their work very well and can perform efficiently to produce the best output. National Bank Limited has consistently remained focused on efficient customer service by providing wide range of products and services. Their products and services are as diverse as the market segment demand. Their customers group range from individuals, big corporate clients,

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NGOs to non residents. Financing to NGOs were done for extending microfinance to cover less privileged people who are struggling to fight poverty. NBL also focus on its delivery platform, its people and its brand to support the growth. Improvement in mix of deposit by developing more retail savings products remained in their policy objectives. National Bank Limiteds core value to remain socially responsible corporate citizen will remain integral part to its strategy and communicating them to all stakeholders is intrinsic to the plan.

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