Credit Risk Grading(CRG) in Southest Bank Limited (Part-3)

Type Of Credit Risk Grading

The main objectives of calculating the Credit Risk Grading to minimize risk. In our country all banks and financial institutes maintain and calculate The CRG in two ways

  1. First to calculate CRG for manufacturing, Trading, Sole proprietorship, Real Estate and Individual.
  2. Second to calculate CRG for NBFI (Non-Banking Financial Organization).

Top Ten Clients

¡       Bashundhara Import & Export Limited.

¡       Islam Trading Consortium Limited.

¡       Rangs Industries Limited.

¡       Deshbandhu Sugar Mills Limited.

¡       Amber Cotton Mills Limited.

¡       Metro Spinning.

¡       Yeasmin Spinning.

¡       S. Alam Cold Rolled Steels Limited.

¡       Thai Poly Shawn BD Limited.

¡       Guamati Filling Station & Service.

Southeast Bank limited, Principal Branch: Dhaka

 CRG Position on 15.07.2008

Capture

Case-1 ( S.Alam Cold Rolled Steels Limited)

Analysis from Financial Statement:

S. ALAM COLD ROLLED STEELS LIMITED

Balance Sheet as on 30.09.2007 (as submitted by the client)

   

Particulars

Details Amount in BDT

Total amount in BDT

Current Assets calculation 

 

Stock                 2,465,526,662.00

 

Book Debt                    879,296,451.00

 

Advance, deposit and Pre-payments                    142,239,277.00

 

Cash and Bank Balances                      21,451,930.00

 

Total Current Assets                 3,508,514,320.00
   
Fixed Assets Calculation 

 

Tangible Fixed Assets                 1,437,114,119.00

 

Preliminary Fixed Assets                           298,040.00

 

Share Issue Expense                        6,341,498.00

 

Total Fixed Assets 

                1,443,753,657.00

  

 

Current Liability Calculation  
Creditors and Accruals                    684,666,844.00 
Advance against sales                      37,778,901.00 
Short term Bank loan                 2,390,974,361.00 
Provision for workers profit participation fund                        6,144,665.00 
Unclaimed Divident                        3,973,500.00 
Current portion of term loan                    107,248,800.00 
Lease finance due within 01 year                      11,829,052.00 
Propsoed Divident                      80,017,200.00 
Deffered Income Tax                      70,004,579.00 
Total Current Liability                 3,392,637,902.00
   
Loag term liability calculation  
Term Loan (secured)                    788,289,421.00 
Lease Finance (secured)                                         – 
Loan from Associated Companies (unsecured)                    216,640,519.00 
Long term Loan                 1,004,929,940.00
   
Total Loan LiabilityCurrent & fixed liability                4,397,567,842.00
   
Share Holders Equity calculation  
share Capital                    533,448,000.00 
Ratained Earnings                      21,252,135.00 
Total shareholders equity                    554,700,135.00
   
TOTAL ASSETS                 4,952,267,977.00
   
TOTAL LIABILITIES AND OWNERS EQUITY                4,952,267,977.00
   

Profit & Loss Account

Net Sales                  1,339,096,004.00
Less: Cost of goods sold                    984,819,715.00
Gross Profit                    354,276,289.00
Less: Operating expenses                      34,226,135.00
Less: Financial Expenses                    197,156,847.00
Less: WPPWF                        6,144,665.00
Less : Amortization of preliminary Expanses                           149,020.00
Less: Amortization of Share Issue Expanses                        2,113,833.00
Net profit before tax                    114,485,789.00
Less: Provision for income tax                      42,916,841.00
Profit after Tax                      71,568,948.00
   
Calculation of EBITDA  
Profit after tax                      71,568,948.00
Add: provision for tax                      42,916,841.00
Add: Financial Expenses                    197,156,847.00
Add: Amortization                        2,262,853.00
Add: Depreciation                      59,547,892.00
EBITDA                    373,453,381.00
   
Summery for Financial Risk Measurement as a part of CRG: 
1. Total Liabilities                 4,397,567,842.00
2. Shareholders Equity                    554,700,135.00
3. Current Assets                 3,508,514,320.00
4. Current Liabilities                 3,392,637,902.00
5. EBITAD                    373,453,381.00
6. Interest on debt                    197,156,847.00
7. Sales                 1,339,096,004.00
   
Debt-Equity Ratio 

7.93

Current Ratio 

1.03

Operating Profit Margin 

27.89%

Interest Service Coverage Ratio 

1.89

  • Year of Establishment in 1996. (To get from proposal)
  • Business outlook is Favorable. His or her market condition is very well because sales, profit, productivity has remarkable growth.
  • He/she can’t enter/exit easily
  • To count the each Director experience
  • The scenario of private Ltd. Co. is good but may be opposite its public Ltd.
  • Security risk depends on Collateral coverage. And guarantee
  • S Alam Cold Rolled Steels Ltd. obtains the CRG number total 69. and we finance this organization because their sales, profit, product quality, payment of installment and overall company image is well.

CREDIT RISK GRADING SCORE SHEET

 

 

 

 

 

Reference No.:

 

Date:

16-Jul-08

Borrower S Alam Cold Rolled Steels Ltd.
Group Name (if any)N/a Aggregate Score:

69

Branch:Principal Branch   
Industry/SectorManufacturing Risk Grading:     

Marginal/Watch List

Date of Financials

30/09/2007 (Audited)

Completed byEmran Ahmed, EO   
Approved byMr. Giash Uddin Ahmed, SEVP & HoB   

Number

Grading

Short

Score

1

Superior

SUP

Fully cash secured, secured by government guarantee/international bank guarantee

2

Good

GD

85+

3

Acceptable

ACCPT

75-84

4

Marginal/Watchlist

MG/WL

65-74

5

Special Mention

SM

55-64

6

Substandard

SS

45-54

7

Doubtful

DF

35-44

8

Bad/Loss

BL

<35

     

Criteria                        Weight

Parameter

Score

Actual Parameter

Score Obtained

A. Financial Risk                  50% 

1. Leverage: (15%)Less than 0.25×

15

7.93

0

Debt Equity Ratio (×) – Times0.26× to 0.35 x

14

 

Total Liabilities to Tangible Net worth0.36× to 0.50 x

13

 

 0.51× to 0.75 x

12

 

All calculations should be based on0.76× to 1.25 x

11

 

annual financial statements of the1.26× to 2.00 x

10

 

borrower (audited preferred)2.01× to 2.50 x

8

 

 2.51× to 2.75 x

7

 

 More than  2.75×

0

 

2. Liquidity: (15%)Greater  than 2.74×

15

1.03

10

Current Ratio (×) -Times2.50× to 2.74 x

14

 

Current Assets to Current Liabilities2.00× to 2.49 x

13

 

 1.50× to 1.99 x

12

 

 1.10× to 1.49 x

11

 

 0.90× to 1.09 x

10

 

 0.80× to 0.89 x

8

 

 0.70× to 0.79 x

7

 

 Less than  0.70×

0

 

3. Profitability: (15%)Greater  than 25%

15

27.89

15

Operating Profit Margin (%)20% to 24%

14

 

  

 

(Operating Profit/Sales) X 10015% to 19%

13

 

 10% to 14%

12

 

 7% to 9%

10

 

 4% to 6%

9

 

 1% to 3%

7

 

 Less than 1%

0

 

4.  Coverage: (5%) 

 

Interest Coverage Ratio (×) – Times 

 

Earning before interest & tax (EBIT)

More than 2.00×

5

1.89

4

Interest on debt

More than 1.51× Less than 2.00×

4

 

More than 1.25× Less than 1.50×

3

 

 More than 1.00× Less than 1.24×

2

 

Less than 1.00×

0

 

Total Score- Financial Risk 

50

 

29

  

 

 

 

B. Business/ Industry Risk  18% 

 

1. Size of Business (in BDT crore)> 60.00

5

133.90

5

 30.00 – 59.99

4

 

The size of the borrower’s business10.00 – 29.99

3

 

measured by the most recent year’s5.00 – 9.99

2

 

total sales. Preferably audited numbers.2.50 – 4.99

1

 

 < 2.50

0

 

2. Age of Business> 10 Years

3

12

3

 > 5 – 10 Years

2

 

The number of years the borrower2 – 5 Years

1

 

engaged in the primary line of business< 2 Years

0

 

3. Business OutlookFavorable

3

Favorable

3

Critical assessment of medium termStable

2

 

prospects of industry, market shareSlightly Uncertain

1

 

and economic factors.Cause for Concern

0

 

4. Industry GrowthStrong (10%+)

3

Strong (10%+)

3

 Good (>5% – 10%)

2

 

 Moderate (1%-5%)

1

 

 No Growth (<1%)

0

 

5. Market Competition Dominant Player

2

Dominant Player

2

 Moderately Competitive

1

 

 Highly Competitive

0

 

6. Entry/Exit BarriersDifficult

2

Difficult

2

 Average

1

 

 Easy

0

 

Total Score- Business/Industry Risk 

18

 

18

  

 

 

 

C. Management Risk            12% 

 

1. Experience More than 10 years in the related line of business

5

More than 10 years in the related line of business

5

Quality of management based on total5–10 years in the related line of business

3

 

# of years of experience of the senior1–5 years in the related line of business

2

 

management in the Industry.No experience

0

 

2. Second Line/ Succession Ready Succession

4

Ready Succession

4

 Succession within 1-2 years

3

 

 Succession within 2-3 years

2

 

 Succession in question

0

 

3. Team WorkVery Good

3

Very Good

3

 Moderate

2

 

 Poor

1

 

 Regular Conflict

0

 

Total Score- Management Risk 

12

 

12

  

 

 

 

D. Security Risk                   10% 

 

1. Security Coverage (Primary)Fully Pledged facilities/substantially cash covered / Reg. Mortg. for HBL

4

Registered Hypothecation (1st Charge/1st Pari passu Charge)

3

 Registered Hypothecation (1st Charge/1st Pari passu Charge)

3

 

 2nd charge/Inferior charge

2

 

 Simple hypothecation/Negative lien on assets

1

 

 No security

0

 

2. Collateral Coverage (Property Location) Registered Mortgage on Municipal corporation/Prime Area property

4

No collateral

0

 Registered Mortgage on Pourashava/Semi-Urban area property

3

 

 Equitable Mortgage or No property but Plant and Machinery as collateral

2

 

 Negative lien on collateral

1

 

 No collateral

0

 

3. Support (Guarantee)Personal Guarantee with high net worth or Strong Corporate Guarantee

2

Personal Guarantee with high net worth or Strong Corporate Guarantee

2

 Personal Guarantees or Corporate Guarantee with average financial strength

1

 

 No support/guarantee

0

 

Total Score- Security Risk 

10

 

5

E. Relationship Risk              10% 

 

1. Account ConductMore than 3 years Accounts with faultless record

5

Accounts having satisfactory dealings with some late payments.

2

 Less than 3 years Accounts with faultless record

4

 

 Accounts having satisfactory dealings with some late payments.

2

 

 Frequent Past dues & Irregular dealings in account

0

 

2. Utilization of Limit More than 60%

2

100.00%

2

(actual/projection)40% – 60%

1

 

 Less than 40%

0

 

3. Compliance of Covenants /Full Compliance

2

Some Non-Compliance

1

ConditionsSome Non-Compliance

1

 

 No Compliance

0

 

4. Personal DepositsPersonal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits

1

No depository relationship

0

 No depository relationship

0

 

Total Score- Relationship Risk 

10

 

5

Grand Total – All Risk 

100

 

69

 

  • S Alam Cold Rolled Steels Ltd. obtains the CRG number total 69. and we finance this organization because their sales, profit, product quality, payment of installment and overall company image is well.

Case-2 (Furnitec Industries Lt d.)

Furnitec Industries Limited

Analysis from Financial Statement

4.FURNITEC INDUSTRIES LIMITED,DHAKA

FINANCIAL RISK

2007

 
1.Leverage  
Liability  
Long Term Loan  
SEBL/PB

31,796,730

 
Current Liability  
Bank Overdraft

34,817,332

 
Provision for Tax

2,249,130

 
Sundry Creditors

135,468

 
Outstanding Loan  
Wages

375,200

 
Staff Salary & Allowance

82,950

 
Showroom & Office Rent

152,500

 
Electricity Bill

6,915

 
Telephone & Fax Bill

16,232

 
Audit Fee

5,000

 
Leagal Fee

10,000

 
 

37,850,727

 
                                         Total Liability

69,647,457

 
Equity  
Paid up Capital

10,000,000

 
Share Money Deposit

17,000,000

 
Profit & Loss A/C

7,966,634

 
                                          Total Equity

34,966,634

 
   
Total Liability/Total Equity

1.991826179

 
   
2.Liquidity  
Current Assets  
Priliminary Expenses

20,500

 
Advance Deposit & Pre-Payment

7,105,000

 
Unallocated Revenue Expenditure

1,209,865

 
Closing Stock

47,364,075

 
Raw materials

30,962,868

 
Finish Goods

16,401,207

 
Bills Receivable

4,499,302

 
Cash & Bank Balance

498,465

 
Total Current Assets

60,697,207

 
Current Liability  
Bank Overdraft

34,817,332

 
Provision for Tax

2,249,130

 
Sundry Creditors

135,468

 
Outstanding Loan  
Wages

375,200

 
Staff Salary & Allowance

82,950

 
Showroom & Office Rent

152,500

 
Electricity Bill

6,915

 
Telephone & Fax Bill

16,232

 
Audit Fee

5,000

 
Leagal Fee

10,000

 
 

37,850,727

 
   
CA/CL

1.603594219

 
   
3.Profitability  
Net Profit

5,622,825

 
Add:Bank Interest & Charge

4,185,383

 
Add:Depreciation (Admin)

27,708

 
Add:Depreciation (Factory)

4,900,083

 
EBITAD

14,735,999

 
Sales

48,875,325

 
   
(EBITAD/Sales)*100

30%

 
   
4.Coverage  
EBITAD

14,735,999

 
Interest/Financial Charge

4,185,383

 
   
EBITAD/Interest

3.520824498

 

CREDIT RISK GRADING SCORE SHEET

 

 

 

 

 

Reference No.:

 

Date:

24-Jul-08

Borrower Furnitec Industries Ltd
Group Name (if any)N/a Aggregate Score:

75

Branch:Principal Branch   
Industry/SectorManufacturing,Trading Risk Grading:     

Acceptable

Date of Financials

30-Jun-07

Completed bySayeed Sikder, Internee   
Approved byHabibur Rahman Molla, SPO   

Number

Grading

Short

Score

1

Superior

SUP

Fully cash secured, secured by government guarantee/international bank guarantee

2

Good

GD

85+

3

Acceptable

ACCPT

75-84

4

Marginal/Watch list

MG/WL

65-74

5

Special Mention

SM

55-64

6

Substandard

SS

45-54

7

Doubtful

DF

35-44

8

Bad/Loss

BL

<35

Criteria  WeightParameter

Score

Actual Parameter

Score Obtained

A. Financial Risk                  50% 

1. Leverage: (15%)Less than 0.25×

15

1.99

10

Debt Equity Ratio (×) – Times0.26× to 0.35 x

14

 

Total Liabilities to Tangible Net worth0.36× to 0.50 x

13

 

 0.51× to 0.75 x

12

 

All calculations should be based on0.76× to 1.25 x

11

 

annual financial statements of the1.26× to 2.00 x

10

 

borrower (audited preferred)2.01× to 2.50 x

8

 

 2.51× to 2.75 x

7

 

 More than  2.75×

0

 

2. Liquidity: (15%)Greater  than 2.74×

15

1.60

12

Current Ratio (×) -Times2.50× to 2.74 x

14

 

Current Assets to Current Liabilities2.00× to 2.49 x

13

 

 1.50× to 1.99 x

12

 

 1.10× to 1.49 x

11

 

 0.90× to 1.09 x

10

 

 0.80× to 0.89 x

8

 

 0.70× to 0.79 x

7

 

 Less than  0.70×

0

 

3. Profitability: (15%)Greater  than 25%

15

30%

15

Operating Profit Margin (%)20% to 24%

14

 

(Operating Profit/Sales) X 10015% to 19%

13

 

 10% to 14%

12

 

 7% to 9%

10

 

 4% to 6%

9

 

 1% to 3%

7

 

 Less than 1%

0

 

4.  Coverage: (5%) 

 

Interest Coverage Ratio (×) – Times 

 

Earning before interest & tax (EBIT)

More than 2.00×

5

3.50

5

Interest on debt

More than 1.51× Less than 2.00×

4

 

More than 1.25× Less than 1.50×

3

 

 More than 1.00× Less than 1.24×

2

 

Less than 1.00×

0

 

Total Score- Financial Risk 

50

 

42

  

 

 

 

B. Business/ Industry Risk  18% 

 

1. Size of Business (in BDT crore)> 60.00

5

4.88

2

 30.00 – 59.99

4

 

The size of the borrower’s business10.00 – 29.99

3

 

measured by the most recent year’s5.00 – 9.99

2

 

total sales. Preferably audited numbers.2.50 – 4.99

1

 

 < 2.50

0

 

2. Age of Business> 10 Years

3

4

1

 > 5 – 10 Years

2

 

The number of years the borrower2 – 5 Years

1

 

engaged in the primary line of business< 2 Years

0

 

3. Business OutlookFavorable

3

Stable

2

Critical assesment of medium termStable

2

 

prospects of industry, market shareSlightly Uncertain

1

 

and economic factors.Cause for Concern

0

 

4. Industry GrowthStrong (10%+)

3

Good (>5% – 10%)

2

 Good (>5% – 10%)

2

 

 Moderate (1%-5%)

1

 

 No Growth (<1%)

0

 

5. Market Competition Dominant Player

2

Moderately Competitive

1

 Moderately Competitive

1

 

 Highly Competitive

0

 

6. Entry/Exit BarriersDifficult

2

Difficult

2

 Average

1

 

 Easy

0

 

Total Score- Business/Industry Risk 

18

 

10

  

 

 

 

C. Management Risk            12% 

 

1. Experience More than 10 years in the related line of business

5

1–5 years in the related line of business

2

Quality of management based on total5–10 years in the related line of business

3

 

# of years of experience of the senior1–5 years in the related line of business

2

 

management in the Industry.No experience

0

 

2. Second Line/ Succession Ready Succession

4

Ready Succession

4

 Succession within 1-2 years

3

 

 Succession within 2-3 years

2

 

 Succession in question

0

 

3. Team WorkVery Good

3

Very Good

3

 Moderate

2

 

 Poor

1

 

 Regular Conflict

0

 

Total Score- Management Risk 

12

 

9

  

 

 

 

D. Security Risk                   10% 

 

1. Security Coverage (Primary)Fully Pledged facilities/substantially cash covered / Reg. Mortg. for HBL

4

Registered Hypothecation (1st Charge/1st Pari passu Charge)

3

 Registered Hypothecation (1st Charge/1st Pari passu Charge)

3

 

 2nd charge/Inferior charge

2

 

 Simple hypothecation/Negative lien on assets

1

 

 No security

0

 

2. Collateral Coverage (Property Location) Registered Mortgage on Municipal corporation/Prime Area property

4

Registered Mortgage on Pourashava/Semi-Urban area property

3

 Registered Mortgage on Pourashava/Semi-Urban area property

3

 

 Equitable Mortgage or No property but Plant and Machinery as collateral

2

 

 Negative lien on collateral

1

 

 No collateral

0

 

3. Support (Guarantee)Personal Guarantee with high net worth or Strong Corporate Guarantee

2

Personal Guarantee with high net worth or Strong Corporate Guarantee

2

 Personal Guarantees or Corporate Guarantee with average financial strength

1

 

 No support/guarantee

0

 

Total Score- Security Risk 

10

 

8

E. Relationship Risk              10% 

 

1. Account ConductMore than 3 years Accounts with faultless record

5

Accounts having satisfactory dealings with some late payments.

2

 Less than 3 years Accounts with faultless record

4

 

 Accounts having satisfactory dealings with some late payments.

2

 

 Frequent Past dues & Irregular dealings in account

0

 

2. Utilization of Limit More than 60%

2

80.00%

2

(actual/projection)40% – 60%

1

 

 Less than 40%

0

 

3. Compliance of Covenants /Full Compliance

2

Full Compliance

2

ConditionsSome Non-Compliance

1

 

 No Compliance

0

 

4. Personal DepositsPersonal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits

1

No depository relationship

0

 No depository relationship

0

 

Total Score- Relationship Risk 

10

 

6

Grand Total – All Risk 

100

 

75

Furnitec Industries is a manufacturing and Trading Company. Their need minimum paid up Capital Tk.1 corer and Sales minimum Tk. 50-70 lac. But we consider about their Business.

Case-3 ( Thai Poly Shawn)

THAI POLY SHAWN

 

2007

2006

A.FINANCIAL RISK  
1.Leverage  
Liability  
IPDC Loan

6,606,812

9,394,486

South Bank Ltd (Term Loan)

2,498,656

7,527,884

South Bank Ltd (Other)

49,456,284

53,052,999

 

58,561,752

69,975,369

Current Liability

 
Creditors for Expenses

2,877,112

2,535,871

Sundry Creditors

3,004,300

1,165,850

Bank Overdraft (SEBL)

4,981,699

5,175,977

 

10,863,111

8,877,698

                                         Total Liability

69,424,863

78,853,067

Equity

 
Paid up Capital

5,600,000

5,600,000

Share money Deposit

18,252,264

18,252,264

Profit And Loss A/C

1,486,755

975,398

Tax Holyday Reserve

998,635

657,731

 

26,337,654

25,485,393

 

 
Total Liability/ Total Equity

2.63595471

3.094049482

 

 
2.Liquidity

 
Currene Asset

 
Cash in Hand

52,226

48,334

Cash in Bank

5,196,757

6,777,948

L/C Advance

593,907

290,311

Security Deposit

354,640

354,640

Stock and Stores

46,385,202

51,127,541

Bank Guarantee

124,150

61,365

Salary Advance

180,998

125,164

Total Current Assets

52,887,880

58,785,303

Current Liability

 
Creditors for Expenses

2,877,112

2,535,871

Sundry Creditors

3,004,300

1,165,850

Bank Overdraft (SEBL)

4,981,699

5,175,977

 

10,863,111

8,877,698

 

 
CA/CL

4.86857586

6.621683121

 

 
3.Profitability

 
Operation profit

 
Net Profit

852,261

470,815

Add: Depreciation

96,936

100,114

Add: Financial Charge

5,824,949

7,840,655

          Interest on Term Loan (SEBL)

430,773

1,673,173

          Interest on Loan (IPDC)

926,558

1,816,729

          Interest on Short Term Loan(SEBL)

3,476,290

3,046,037

          Interest on SEBL C/C A/C

349,379

629,659

          Bank Charge & Commission

641,949

675,057

EBITAD

6,774,146

8,411,584

Sales

229,681,344

348,441,361

 

 
(EBITAD/Sales)*100

3.00%

2.41%

 

 
4.Coverage

 
EBITD

6,774,146

8,411,584

Interest/Financial Charge

5,824,949

7,840,655

 

 
EBITD/ Interest

1.1629537

1.072816493

CREDIT RISK GRADING SCORE SHEET

 

 

 

 

 

Reference No.:

 

Date:

23-Sep-07

Borrower Thai Poly Shawn (BD) Ltd.
Group Name (if any)  Aggregate Score:

76

Branch:Principal   
Industry/SectorManufacturer of plastic based packages wrapping`

Acceptable

Date of Financials

31.08.2007

Completed byMd. Habibur Rahman Mollah   
Approved by    

Number

Grading

Short

Score

1

Superior

SUP

Fully cash secured, secured by government guarantee/international bank guarantee

2

Good

GD

85+

3

Acceptable

ACCPT

75-84

4

Marginal/Watchlist

MG/WL

65-74

5

Special Mention

SM

55-64

6

Substandard

SS

45-54

7

Doubtful

DF

35-44

8

Bad/Loss

BL

<35

     

Criteria                        Weight

Parameter

Score

Actual Parameter

Score Obtained

A. Financial Risk                  50% 

1. Leverage: (15%)Less than 0.25×

15

2.46

8

Debt Equity Ratio (×) – Times0.26× to 0.35 x

14

 

Total Liabilities to Tangible Net worth0.36× to 0.50 x

13

 

 0.51× to 0.75 x

12

 

All calculations should be based on0.76× to 1.25 x

11

 

annula financial statements of the1.26× to 2.00 x

10

 

borrower (audited preferred)2.01× to 2.50 x

8

 

 2.51× to 2.75 x

7

 

 More than  2.75×

0

 

2. Liquidity: (15%)Greater  than 2.74×

15

4.87

15

Current Ratio (×) -Times2.50× to 2.74 x

14

 

Current Assets to Current Liabilities2.00× to 2.49 x

13

 

 1.50× to 1.99 x

12

 

 1.10× to 1.49 x

11

 

 0.90× to 1.09 x

10

 

 0.80× to 0.89 x

8

 

 0.70× to 0.79 x

7

 

 Less than  0.70×

0

 

3. Profitability: (15%)Greater  than 25%

15

3.00%

7

Operating Profit Margin (%)20% to 24%

14

 

(Operating Profit/Sales) X 10015% to 19%

13

 

 10% to 14%

12

 

 7% to 9%

10

 

 4% to 6%

9

 

 1% to 3%

7

 

 Less than 1%

0

 

4.  Coverage: (5%) 

 

Interest Coverage Ratio (×) – Times 

 

Earning before interest & tax (EBIT)

More than 2.00×

5

1.16

2

Interest on debt

More than 1.51× Less than 2.00×

4

 

More than 1.25× Less than 1.50×

3

 

 More than 1.00× Less than 1.24×

2

 

Less than 1.00×

0

 

Total Score- Financial Risk 

50

 

32

  

 

 

 

B. Business/ Industry Risk  18% 

 

1. Size of Business (in BDT crore)> 60.00

5

35.00

4

 30.00 – 59.99

4

 

The size of the borrower’s business10.00 – 29.99

3

Sales position as per  financial statement as of 31.08.07 is Tk.22.96 crore. We assume that sales position at the end of this year  will be more than Tk.35.00 crore. Their last years sales was Tk.34.84 crore.

 

measured by the most recent year’s5.00 – 9.99

2

 

total sales. Preferably audited numbers.2.50 – 4.99

1

 

 < 2.50

0

 

2. Age of Business> 10 Years

3

10

3

 > 5 – 10 Years

2

 

The number of years the borrower2 – 5 Years

1

 

engaged in the primary line of business< 2 Years

0

 

3. Business OutlookFavorable

3

Favorable

3

Critical assesment of medium termStable

2

 

prospects of industry, market shareSlightly Uncertain

1

 

and economic factors.Cause for Concern

0

 

4. Industry GrowthStrong (10%+)

3

Strong (10%+)

3

 Good (>5% – 10%)

2

 

 Moderate (1%-5%)

1

 

 No Growth (<1%)

0

 

5. Market Competition Dominant Player

2

Dominant Player

2

 Moderately Competitive

1

 

 Highly Competitive

0

 

6. Entry/Exit BarriersDifficult

2

Difficult

2

 Average

1

 

 Easy

0

 

Total Score- Business/Industry Risk 

18

 

17

  

 

 

 

C. Management Risk            12% 

 

1. Experience More than 10 years in the related line of business

5

More than 10 years in the related line of business

5

Quality of management based on total5–10 years in the related line of business

3

 

# of years of experience of the senior1–5 years in the related line of business

2

 

management in the Industry.No experience

0

 

2. Second Line/ Succession Ready Succession

4

Ready Succession

4

 Succession within 1-2 years

3

 

 Succession within 2-3 years

2

 

 Succession in question

0

 

3. Team WorkVery Good

3

Very Good

3

 Moderate

2

 

 Poor

1

 

 Regular Conflict

0

 

Total Score- Management Risk 

12

 

12

  

 

 

 

D. Security Risk                   10% 

 

1. Security Coverage (Primary)Fully Pledged facilities/substantially cash covered / Reg. Mortg. for HBL

4

Registered Hypothecation (1st Charge/1st Pari passu Charge)

3

 Registered Hypothecation (1st Charge/1st Pari passu Charge)

3

 

 2nd charge/Inferior charge

2

 

 Simple hypothecation/Negative lien on assets

1

 

 No security

0

 

2. Collateral Coverage (Property Location) Registered Mortgage on Municipal corporation/Prime Area property

4

No collateral

0

 Registered Mortgage on Pourashava/Semi-Urban area property

3

 

 Equitable Mortgage or No property but Plant and Machinery as collateral

2

 

 Negative lien on collateral

1

 

 No collateral

0

 

3. Support (Guarantee)Personal Guarantee with high net worth or Strong Corporate Guarantee

2

Personal Guarantee with high net worth or Strong Corporate Guarantee

2

 Personal Guarantees or Corporate Guarantee with average financial strength

1

 

 No support/guarantee

0

 

Total Score- Security Risk 

10

 

5

E. Relationship Risk              10% 

 

1. Account ConductMore than 3 years Accounts with faultless record

5

More than 3 years Accounts with faultless record

5

 Less than 3 years Accounts with faultless record

4

 

 Accounts having satisfactory dealings with some late payments.

2

 

 Frequent Past dues & Irregular dealings in account

0

 

2. Utilization of Limit More than 60%

2

>60%

2

(actual/projection)40% – 60%

1

 

 Less than 40%

0

 

3. Compliance of Covenants /Full Compliance

2

Full Compliance

2

ConditionsSome Non-Compliance

1

 

 No Compliance

0

 

4. Personal DepositsPersonal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits

1

Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits

1

 No depository relationship

0

 

Total Score- Relationship Risk 

10

 

10

Grand Total – All Risk 

100

 

76

Thus way I had calculated various types of clients CRG with financial statements and to gather practical experience.

Findings

There were some problems while I conducting the orientation program.

Lacking Of The Report

Proprietorship, Private (Home) Limited companies are not interested to maintain their Balance Sheet and they have no accounts department or not healthy because they have no accountability.

Audit firm prepare their Balance sheet basis on favor them. Such as,

Profitable organization———– Show the Banks or Financial Institute, when                       needs funded.

Loosing organization————- Show the NBR (National Board Revenue), when they provide Tax.

Actual or real B/S—————– Prepares internally for own satisfaction

In particular area can not find out actual Business growth. Because, there have no institute to maintain or collect up to date data.

Small and Medium Entrepreneurs has minimum pain-up capital Tk.1 corer and sales or turnover 50 to 70 lac in a year but CRG manual show, sales must be increased which maximum Tk.60 corer and minimum Tk.2.50 corer. So, they can’t obtain good number.

Most of the time Private (Home) Limited company has no ready succession. This is uncertainty for the Banks.

Most of the banker marking the qualitative judgments depend on own opinion.

A particular business economic situation affected by the Political and natural situation.

As a result, the main objectives of the CRG to minimized the risk, it will be quite destroy

Improvement Of The CRG

Any Banks or financial institute can change or improve The CRG manual depends on their strategy. I am also discuss with the officer about the improve CRG manual and I think,

Proprietorship, Private (Home) Limited companies must be provided Tax return certificate to banks or financial institutes for funded.

NBR (National Board Revenue) should collect information about financial statement of the client from the Banks.

To established an institute by state for collecting latest information.

Strict regulations should be made to ensure transparency and accountability of activities the audit firms.

Conclusion

I have focused and analyzed on Credit Risk Grading system of Southeast Bank Ltd. The Banking sector in any country plays an important role in economic activities. Bangladesh is no exception of that. As because it’s financial development and economic development are closely related. That is why the private commercial banks are playing significant role in this regard.

The Credit Risk Grading minimize this problem because include this methods provide a specific guideline about lending criteria. Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels.

Bangladesh Bank expects all commercial banks to have a well defined credit risk management system which delivers accurate and timely risk grading. This manual describes the elements of an effective internal process for grading credit risk. It also provides a comprehensive, but generic discussion of the objectives and general characteristics of effective credit risk grading system. In practice, a bank’s credit risk grading system should reflect the complexity of its lending activities and the overall level of risk involved.

 

Some More Parts-

Credit Risk Grading(CRG) In Southest Bank Limited (Part-1)

Credit Risk Grading(CRG) In Southest Bank Limited (Part-2)