In Banks and Financial Institutions, Credit Risk is considered as an essential factors that needs to be managed . Credit Risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with the agreed terms. Credit Risk, therefore, arises from the Bank’s dealings with or lending to corporate, individuals and other Banks or Financial Institutions.
Credit Risk Management needs to be a robust process that enables Banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. A comprehensive IT System is essential which should have the ability to capture all key customer data, risk management and transaction information including Trade and Forex.
The Bank prepared Credit Policy in May 2000 and circulated the same to the Branches / concerned Executives for Compliance which was revised in August 2003.
In order to cope with the fast changing scenario of dynamic global economy, liberalization and globalization and in the light of the directives / suggestions of the Focus group of Bangladesh Bank, the Credit Policy has been revised in October, 2005.
All Executives / Officers of the Branch as well as Head Office especially those are entrusted with the responsibility of Credit marketing, approval processing, credit monitoring, recovery and compliance, must keep themselves thoroughly conversant with the contents of the Credit Policy for meticulous compliance. It will be the responsibility of the Head of Branches to ensure that the Policy Guidelines laid down herein are well conversant by the Credit Officers / Relationship Managers and are strictly followed at their end.
The Credit Policy, is however, subject to additions, alternations and modifications as may be warranted by the change of circumstances due to passage of time, to suit the requirement of the Bank.
The contents and instructions laid down in the Credit Policy are strictly PRIVATE and CONFIDENTIAL and meant for “Internal Use” only.
Mercantile Bank Ltd. is committed to provide high quality services to its constituents through different financial products and profitable utilization of fund and contribute to the growth of GDP of the country by financing trade and commerce, helping industrialization, boosting export, creating employment opportunities for the educated youth and encouraging micro-credit leading to poverty alleviation and improving the quality of life of the people and thereby contributing to the overall socio-economic development of the country.
With a view to achieving the aforesaid objectives of the bank, Credit operation is of paramount importance as the greatest share of the total revenue of the bank is generated from it. The success of a bank, therefore, depends on how efficiently and judiciously it makes use of its available resources. In other words, prudent and efficient management of its credit portfolio is very essential for the success of a bank.
The Credit Policy of any banking institution is a combination of certain accepted, time tested standards and other dynamic factors dictated by the realities of changing situations in different market places.
The accepted standards relate to safety, liquidity and profitability of the advance whereas the dynamic factors relates to aspects such as the nature and extent of risk, interest or margin, credit spread and credit dispersal. In all business dealings, officers and employees must be guided by the principles of honesty, integrity and safe-guard the interest of the depositors and shareholders of the bank. They should strictly adhere to the Banking Laws, Rules and Regulations of the Govt. of Bangladesh / the instructions and guidelines issued by the Bangladesh Bank / Head Office from time to time which affect the business practices of the Bank. However, the key to safe, liquid, healthy and profitable credit operations lies in the quality of judgment used by the Executive’s / Officers making lending decisions and their knowledge of the borrower and the market place.
In formulating a credit judgment and making QUALITY Credit Decision, the lending officer must be equipped with all information needed to evaluate a borrower’s character, management competence, capacity, ability to provide collaterals and external conditions which may affect his ability in meeting financial obligations.
The Credit Policy has been divided into the following chapters:
01. Policy Guidelines.
02. Organizational Structure and Responsibilities.
03. Procedural Guidelines.
1. POLICY GUIDELINES:
The Credit Policy guidelines of the Bank describes details fundamental credit risk management policies, outlines general principles that are designed to govern the implementation of more detailed lending procedures and credit risk analysis/risk grading system.
1.1 LENDING GUIDELINES:
The basic principles of lending are described in this section. It must be clearly understood at the outset that these principles are not inflexible and are given as guidelines for protecting the Loans and Advances.
The following are the general principle to be considered for lending funds to customers on a basis consistent with the global operational objectives and business strategies of the bank:
a) The bank shall provide suitable credit services and products for the markets in which it operates.
b) Loans and advances shall normally be financed from customers deposit and not out of temporary funds or borrowing from other Banks.
c) Credit facility will be allowed in a manner which will in no way compromise with Banks standards of excellence.
d) All Credit extension must comply with the requirements of Bank’s Memorandum and Articles of Association, Banking Companies Act 1991 as amended from time to time / Bangladesh Bank’s instructions and other applicable rules and regulations.
e) A prudent banker should always adhere to the following principles of lending funds to his customer: e.g. (1) Background, character and capability of the borrowers, (2) Purpose of the facility, (3) Term of facility, (4) Safety, (5) Security, (6) Profitability, (7) Source of repayment, (8) Diversity
It should be remembered that selection of the appropriate borrowers, proper follow-up and end-use supervision through constant follow-up and monitoring are the cornerstone for timely recovery. These guidelines will be updated annually.
Before selecting a customer / client and subsequent recommendation for financing, the Credit Officer / Relationship Manager must observe the following basics of lending:
1.1.1 Industry and Business Segment Focus:
As a general practice Mercantile Bank Limited will definitely concentrate its business in Trade Finance / Export – Import business and all types of Commercial Loan, Industrial / Project Finance / Syndication and structured Finance / SME Financing and other specialized programs except otherwise restricted by the Government or indicated as unethical and banned items.
The Bank will give emphasis to diversify its business portfolio commensurate with economic and business trend, life cycle of the products, demand supply gap, social and national obligation etc. The Bank’s policies for financing in different major sectors are summarized as follows:
SL Sectors Policies
1) Textile / Spinning/ Sweater/ Knitting/ Denims & Garments To expand
2) Cement To maintain
3) Construction / Real estate / House building To expand
4) Telecommunication To expand
5) Communication Selective basis
6) Information Technology (IT) Project To expand
7) Aro-based Industry To expand
8) Hospital / Clinic / School / College / University Selective basis
9) Healthcare / Pharmaceuticals / Medicine Selective basis
10) Electrical / Electronic appliance To expand
11) Finance to NBFI Selective basis
12) Special Program : Consumer Credit Scheme, SME Financing Scheme, Doctor’s Credit Scheme, Woman Entrepreneurs Development Project, Personal Loan Scheme, Small Loan Scheme, Lease Finance Scheme, Earnest Money Financing Scheme, Car Loan, HBL (General ) / Mortgage Loan, Employees House Building Scheme, ATM, VISA Credit Card, EEF, etc. To expand
13) Plastic / Packaging Selective basis
14) Leather Selective basis
15) Steel and Engineering To expand
16) Edible oil To expand
17) Scrap Vessel Restricted way
18) Paper / Pulp / Partex To expand
19) Chemicals Restricted way
20) Others Based on merit
The Bank’s policy is to handle the specialized business sectors / segments by setting up separate units in Head Office Credit Division. In view of this, Bank has already set up the following units in Head office Credit Division:
• Syndication and Structured Finance
• Project Finance
• Garments Sector
• Specialized Schemes such as Consumer Credit Scheme, Doctor’s Credit Scheme, Woman Entrepreneurs Development Project, Personal Loan Scheme, Small Loan Scheme, Lease Finance Scheme, Earnest Money Financing Scheme, Employees House Building Scheme, Car Loan, HBL (General ) / Mortgage Loan, ATM, VISA Credit Card, EEF, etc.
The Policies for the above specialized segments / sectors have been / to be circulated to all concerns from time to time.
1.1.2 Types of Credit Facilities:
The Bank’s Policy is to introduce diversified / new types of Products / Product derivatives alongwith usual Banking Products. At present the Bank offers the following facilities:
1. Trade Finance:
a) Non-Funded: L/C, Acceptance, Bank Guarantee, etc.
b) Funded: LTR, PAD, IBP, FDBP, IDBP, Time Loan, Loan (General), etc.
2. Project Finance: (Large and Medium Industries / Small Industries including Agro-based Industries):
a) Non Funded: L/C for import of Machinery, Acceptance, Bank Guarantee, etc.
b) Funded: Time loan, Term loan for retirement of documents of imported machinery / Local machinery / other project fixed costs, Hire Purchase, Lease Finance, Loan (General), HBL (Commercial).
3.i) Working Capital (For Industrial Finance):
a) Non Funded: L/C for import of Raw Materials, Acceptance, Bank Guarantee, etc.
b) Funded: Overdraft Cash Credit (Hypo), Cash Credit (Pledge), PAD, LTR, Time Loan, IBP, etc.
3.ii) Working Capital (For Work Order):
a) Non Funded: Letter of Credit, Bank Guarantee, etc.
b) Funded: SOD (work order), SOD (General), etc.
4. Commercial Lending :
a) Non Funded: L/C for import of goods, Acceptance, Bank Guarantee, etc.
b) Funded: Cash Credit (Hypo), Cash Credit (Pledge), OD, PAD, LTR, Time Loan, IBP, etc.
5. Finance to NBFI:
a) Non Funded: L/C for import of machinery’s / equipment for their clients, Bank Guarantee, etc.
b) Funded: OD, Time Loan, Term Loan (Credit line), Call Loan, Zero Coupon Bond Purchase.
6. Specialized Scheme:
Consumer Credit Scheme, SME Financing Scheme, Doctor’s Credit Scheme, Woman Entrepreneurs Development Project, Personal Loan Scheme, Small Loan Scheme, Lease Finance Scheme, Earnest Money Financing Scheme, Employees House Building Scheme, Car Loan, HBL (General ) / Mortgage Loan, ATM, VISA Credit Card, EEF, etc.
7. Export Oriented Business:
a) Non Funded: Back to Back L/C, Acceptance, Bank Guarantee, Letter of Credit, etc.
b) Funded: Packing Credit, Overdraft, Hire purchase, Lease Finance, FDBP, IDBP etc.
8. Advance against Financial Obligation:
Funded: SOD (FO), SOD(SS), SOD(FDR), SOD(General)
9. Products under Islamic Banking System:
The Bank has a plan to establish an Islamic Banking wing at Head Office aiming to open Islami Banking Branches subject to permission from Bangladesh. Our Islamic Banking branches shall meticulously follow the operational modes and methodologies as permissible under Islamic Shariah. The major lending products of the Bank under Islamic Banking System will be as follows:
Investment / Deployment of Funds:
Bai-Al-Murabaha (Deferred Lump Sum/ Installment Sale)
Bai-Muajjal (Deferred Installment / Lump Sum Sale)
Al-Musharaka (Joint-Venture Profit-Sharing)
Al-Mudaraba (Trustee Profit-Sharing)
Bai-Salam (Advance Sale and Purchase)
Post Import Finance
Purchase and Negotiation of Export Bills
Inland Bills Purchased
Murabaha Import Bills
Bai-Muajjal Import Bills
Pre Shipment Finance
Al-Quard-ul-Hasan (Benevolent Loan)
Letter of Guarantee (Al-Kafalah Contract):
Guarantee for Sub-Contracts
Advance Payment guarantee
Guarantee in lieu of Security Deposits
Guarantee for exemption of Customs Duties
Letter of Credit (L/C) / Al-Wakalah, Al-Musharakah, Al-Murabahah:
Al-Wakalah (Ancillary Service)
Al-Musharakah (Joint Venture Profit Sharing)
Al-Murabahah (Profit Sharing and Loss Bearing)
1.1.3 Single Borrower / Group Limits / Syndication:
The Bank may extend the maximum credit facilities (funded / non-funded) to a single client / enterprise / group as per guidelines of Bangladesh Bank BRPD circulars issued / to be issued from time to time on the following criteria:
a) Clients who falls under Grade 1 category as per Bank’s Risk Grading System.
b) Covered by adequate collateral security or Guarantee.
c) Established long term business / Banking relationship.
d) The total outstanding financing facilities by the Bank to any single client or enterprise or organization / group shall not at any point of time exceed 35% of the Bank’s total capital subject to the condition that the maximum outstanding against fund based financing facilities (funded facilities) do not exceed 15% of the total capital. Non-Funded Credit facilities e.g. letter of credit, guarantee, etc. can be provided to a single large borrower but under no circumstances, the total amount of the funded and non-funded facilities shall exceed 35% of the Bank’s Capital.
e) In case of export sector, single borrower exposure limit would be 50% of the Bank’s total capital. But funded facilities in case of export credit shall not exceed 15% of the total capital.
f) Loan sanctioned to any individual or enterprise or group amounting to 10% or more of the Bank’s capital shall be considered as large loan.
g) Total large loan portfolio of the Bank will not exceed the limit fixed by Bangladesh bank vide their BRPD circular # 05 dated April 09, 2005 or as advised by Bangladesh Bank from time to time.
In line with basic principles of lending, the Bank always discourage to lend its maximum ceiling to a single client / group to minimize the risk. The Bank will prefer as a policy guideline to arrange syndicated loan / participate in the syndicated finance / consortium loan arrangement or in a club finance.
One obligor / Group Concept:
Group Relationship would be established as per Bangladesh Bank guidelines provided / to be provided from time to time.
1.1.4 Lending Caps:
a) The Bank Management will establish a specific industry sector exposure cap to avoid over concentration in any one-industry sector. Sector-wise allocation of Credit shall be made annually with the approval of the Executive Committee of the Board of Directors / Board of Directors as per appendix-1.1.
b) Diversification of Credit Portfolio will be encouraged so as to reduce the risk of dependence on a particular sector for balanced socio-economic development of the country.
c) Branches shall submit a report outlining trend and outstanding to the Head of Credit Administration Division on quarterly basis for onward submission to the Executive Committee of the Board of Directors / Board of Directors for information/ perusal/ guidance.
1.1.5 Discouraged business types:
The Bank will discourage lending to following areas of business:
• Military Equipment/Weapons Finance
• Tobacco sector
• Companies listed on CIB black list or known defaulters
• Highly Leveraged Transactions.
• Finance of Speculative Investments
• Logging, Mineral Extraction/Mining or other activity that is Ethically or Environmentally Sensitive
• Counterparties in countries subject to UN sanctions.
• Share Lending (Not more than 60% of share value of last 6 (six) months market average or maximum 35 lac whichever is lower or as per guidelines of Bangladesh Bank)
• Taking an Equity Stake in Borrowers (except under Islamic Banking Operation)
• Bridge Loans relying on equity/debt issuance as a source of repayment.
• Lending to Holding Companies.
1.1.6 Loan Facility Parameters:
The Loan facility parameters for the Bank have been set as under:
a) The Bank in general will approve / renew trade finance facility for the period of 01 (one) year from the date of approval / last expiry date.
b) The Bank will extend medium term loan for 3(three) years period.
c) The Bank will extend long term loan for maximum period of 7 (seven) year including grace period of 6(six) months to 18(eighteen) months (depending on the nature of Project) for project finance but in case of need, in syndication or club financing, the Bank may extend the period of loan upto 8(eight) years or as per consensus of the syndicated members.
However, in case of House Building Loan (General), the repayment period will be maximum of 15(fifteen) years.
d) House Building Loan to Bank’s employee shall be governed as per policy guidelines of “Employees House Building Loan” scheme.
e) Besides above, the Bank will extend credit facilities under special program like Consumer Credit Scheme, Small Loan Scheme, SME Financing, Doctor’s Credit Scheme, Women Entrepreneurship Development Project, Personal Loan, Car Loan, House Building Loan (General) / Mortgage Loan, NBFI’s as per policy set / to be set by the Bank under the policy guidelines of the specific scheme.
f) The rate of Interest / Commission / Charges / Fees etc. would be as per the approved schedule of charges with variation permissible as per Bangladesh Bank guidelines and with the approval of competent authority.
g) The interest rate to be charged and to be paid out on quarterly basis except the especial schemes and unless otherwise specified in the approved terms.
h) Repayment of term loan would be fixed preferably on monthly/quarterly basis.
i) In general, the cash margin for L/C would be 10% of the L/C amount or on the basis of Banker – Customer relationship subject to the minimum requirement of Bangladesh Bank whichever is higher.
j) For the import of Capital machinery, the cash margin for L/C would be 25% – 30% or on the basis of Banker – Customer relationship subject to the minimum requirement of Bangladesh Bank whichever is higher.
k) Any exception, as mentioned above, would be specifically approved by the competent authority of the Bank.
l) Security accepted against credit facilities shall be properly valued and shall be effected in accordance with Laws of the country in which the security is held. An appropriate margin of security will be taken to reflect such factor as the disposal costs or potential price movements of the underlying assets.
Accepted Securities are: Cash/Cash equivalent, Land and Building (in the form of registered mortgage with registered IGPA), hypothecation / ownership of Plant and Machinery, stock of goods, assignment of bills / receivables, book debts, pledge of shares, guarantee / Corporate Guarantee, etc.
m) Valuation of the lended property / Building / Machinery / Stock of Raw materials / Finished products shall be done by the Bank’s enlisted professional surveyors duly checked by the Bank officials.
n) Mortgage formalities including execution of registered irrevocable power of attorney must be completed as per legal vetting of the Bank’s approved/enlisted Lawyer.
o) The value of the mortgage property shall be preferably be double of the facility to be extended depending upon other security coverage.
The security condition may be relaxed depending upon the Credit worthiness of the customer / Banker-Customer relationship / potentiality of the business of the client.
Any exception of the parameters mentioned above are subject to be approved by the competent authority as per delegated power approved by the Board of Directors
1.1.7 Cross Border Risk / Political and Sovereign Risk:
Risk associated with cross border lending. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligation, distinguished from ordinary credit risk because the difficulty arises from a political event, such as suspension of external payments
– Synonymous with political and sovereign risk
– Third world debt crisis
For example, export documents negotiated for countries like Nigeria.
1.1.8 Pricing Policy:
Interest rates / pricing of Loans, charges, commissions, etc. on various lending categories will depend on the level of risk, period of loan and type of security offered. The higher the risk, the higher will be the interest rate. However, exceptions shall be made in case of lending in national priority sectors.
The Bank from time to time circulate the interest rate / pricing of loans / charges / commissions, etc. to its branches with the approval of competent authority and as per guidelines of Bangladesh Bank. As on date the Bank fixes a mid rate for lending based on the Average Cost of Fund. All pricing of loans shall, however, have relevance to the market condition and be approved by the appropriate authority of the Bank.
1.1.9 Credit and Marketing Fundamentals:
a) To place a high priority on the quality of credit exposure, new proposals must meet Bank’s credit criteria review for improving risk positions.
b) Maximization of profit is the basic aim of the bank, as such every profit opportunity should be explored and professional skills be employed in this direction.
c) To avoid unnecessary wastage of time, energy and ambiguity a clear, concise and summary type communications shall be used.
d) To be thoroughly familiar with the Bank’s policies and functions.
e) To keep the expense burden of credit operations to the barest minimum and endeavor to improve the cost efficiency of credit operations.
f) To contribute one’s best in all matters where his approval, concurrence or other action is involved.
g) To apply strong commonsense in all credit matters by raising questions- does this make sense? Is there a better way? How to improve on this?
h) To avoid all temptations which may jeopardize or compromise the Bank’s risk assets.
1.2 CREDIT ASSESSMENT AND RISK GRADING:
All financial activities involve a certain degree of risk and particularly, the financial institutions of the modern era are engaged in various complex financial activities requiring them to put proper attention to every detail.
1.2.1 Credit Assessment:
A thorough Credit and Risk assessment shall be conducted for all types of credit proposals. The results of this assessment to be presented in the approved Credit Appraisal Form that originates from the Credit Officer / Relationship Manager (RM) and is to be approved by the Credit Committee / Executive Committee of the Board of Directors / Board of Directors. The Credit Officers / RM is the owner of the customer relationship and must be held responsible to ensure the accuracy of the entire credit application / proposal submitted for approval. The Credit Officer / RMs must be familiar with Bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals and guarantors in line with policy guidelines.
Credit Appraisal should summarize the results of Credit Officers / RMs risks assessment and includes, as a minimum, the following details:
• Amount and type of loan(s) proposed
• Purpose of Loan(s)
• Results of Financial analysis
• Loan structure (Tenor, Covenants, Repayment schedule, Interest)
• Security Arrangements
* KYC Concept:
The Credit Officers / RM must know their customers and conduct due diligence on new borrowers, principals and guarantors to ensure such parties are in fact who they represent themselves to be i.e., Know Your Customer (KYC).
The Banker – Customer relationship would be established first through opening of CD/ STD / SB accounts. Proper introduction, photographs of the account holders / signatories, passport, Trade License, Memorandum and Articles of the Company, certificate of incorporation, certificate of commencement of business, List of Directors, resolution, etc. i.e. all the required papers as per Bank’s policy and regulatory requirements are to be obtained at the time of opening of the account. A declaration regarding approximate transaction to the account is to be obtained during opening of account. Information regarding business pattern, nature of business, volume of business, etc. to be ascertained. Any suspicious transaction must be timely addressed and brought down to the notice of Head Office / Bangladesh Bank as required and also appropriate corrective measures to be taken as per the direction of Bank Management / Bangladesh Bank.
1.2.2 Risk Management / Credit Risk Evaluation / Assessment – Lending Decision :
A comprehensive and accurate appraisal of the risk in every credit proposal of the Bank is mandatory. No proposal can be put on place before approving authority unless there has been a complete analysis. In order to safeguard Bank’s interest over the entire period of the advance, a comprehensive view of the capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all regulatory /legal formalities, condition of all documentation and finally a continuos and constant supervision on the account are called for. It is absolute responsibility of the Credit Officer / RM to ensure that all the necessary documents are collected before the proposal is placed for approval. Where Loans/Advances/Credit facilities are granted against the guarantee of the third party, that guarantor must be subject to the same credit assessment as made for the principal borrower.
While making lending decisions, particular attention shall be given to the analysis of credit proposals received from heavily leveraged companies and those dealing in non-essential consumer goods, taking special care about their debt servicing abilities.
Emphasis shall be given on the following several credit principles:
a) Present and future business potentiality for optimum deployment of Bank’s fund to increase return on assets
b) Preference for self liquidating QUALITY business
c) Avoiding marginal performers.
d) Risk depression is basic to sound credit principles and policies. Bank shall be careful about large and undue concentration of credit to industry, one obligor and common product line etc.
e) Managing the amount, size, nature and soundness of one-obligor exposures relative to the size of the borrower and Bank’s position among his other lenders.
f) Personal guarantee of the principal partners or the Directors of the Company shall be obtained
1.2.3 Basics of Credit Risk :
The following risk areas shall be considered for analyzing a credit proposal.
• Borrower Analysis (Management/Ownership/Corporate Structure Risk):
The majority shareholders, management teams and group or affiliate companies shall be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall be addressed, and risks to be mitigated. The following questions may be asked to assess the Management Risk:
Who is the borrower? Does any particular/special characteristic of borrower need particular attention? For example, if the borrower is a Trust, this calls for examination of Trust Deed.
Are there adequate abilities and experience in senior management?
Is there adequate depth and succession planning?
Is there any conflict amongst owners/senior managers that could have serious implications?
Is the Manager/Credit Officer satisfied about the character, ability, integrity and experience of the borrower?
• Industry Analysis (Business and Industry Risk):
The key risk factors of the borrower’s industry shall be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces (demand supply gap) shall be addressed and the strengths and weaknesses (SWOT Analysis) of the borrower relative to its competition to be identified. For the above purpose the Credit Officers/RM may obtain / collect data from the statistical year book / economic trends of Bangladesh Bank / public report / newspaper/ journals etc. The following questions may be asked to assess the Business and Industry Risk:
Are there any significant concentrations of sales (by customer, industry, country, region)?
How does the borrower rate with its competitors in terms of market share?
Can increased direct production costs be easily passed on to customers?
Does the borrower deal in any specific product that may be subject to obsolescence?
Is the purpose of borrowing consistent with the objectives of the Company?
Is the purpose legal? Does it contravene any rules and laws of the country and any instruction issued by the Bangladesh Bank/Head Office?
• Supplier/Buyer Analysis/Market Risk:
Any customer or supplier concentration shall be addressed, as these could have a significant impact on the future viability of the borrower.
• Market Risk:
The sufficient market data is to be obtained to identify clients/borrowers’ market share in the industry/demand-supply gap in the market.
• Technological Risk :
The product that is manufactured must be technologically viable i.e. whether the technology applied is updated. The product’s stage in its life cycle must be understood. Technical Aspects of the products must be addressed. The Credit Officer / RM must be satisfied with the mitigating factors of technical and technological risk, associated with the products.
• Financial Analysis (Historical / Projected):
An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor’s Financial statement should also be analyzed. The analysis should address the duality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. In this regard the Credit Officer / RM must look into the status of chartered accountant audit firm.
Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans shall not be granted if projected cash flow is insufficient to repay debts. In this regard the possibilities of cost overrun and sensibility analysis shall be done. The following questions may be asked to assess the Financial Risk:
Does the borrower produce financial statements on time?
Is working Capital Adequate?
Has the customer actual title to stock?
Have financial covenants been met?
Has there been any major sale of shares by directors?
Any significant change in asset conversion cycle? (Account Receivables/ payables Inventory etc.)
• Account Conduct:
For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc.) shall be assessed. In this regard the Credit Officer / RM may look into the account turnover like debt summation / credit summation / highest debit balance/ highest credit balance (or lowest debit balance), no. of debit entries/ no. of credit entries for last three years (yearwise).
• Adherence to Lending Guidelines :
The Credit Applications/ Appraisals must be prepared in line with Bank’s lending guidelines. It must be clearly stated whether or not the application/proposal is in compliance with Bank’s Credit Policy lending guidelines. Related questions to be addressed are :
Is proposed application in compliance with Bank’s guidelines?
Does the lending to clients also compliant with Central Bank’s guideline?
What are the Niche Products?
• Interest Rate Risk :
The interest rate must be fixed based on different risk factors associated with the type of business such as liquidity risk, commodity risk, equity risk, and loan period risk. Interest rate also arises from the movements of interest rate in the market. In assessing the pricing and profitability, the Credit Officer/RM must consider the income from ancillary business like foreign exchange business, group business, volume of business etc. Related questions to be addressed are:
What is the rate of interest charged?
Is the rate fixed in consideration to the risk factors?
Will the rate charged be profitable to the Bank?
• Foreign Exchange Risk :
The foreign exchange transaction is associated with foreign currency fluctuation risk. Therefore the Credit Officer/RM must take care of for the Forex risk. The questions to be addressed are:
Does the business involve foreign currency dealings?
What are trends of foreign currency fluctuation?
• Cost overrun Risk :
This type of risk is generally involved in taking project finance decision. A high degree of cost overrun may cause the failure of the project. Therefore the credit officer must consider the cost components of the project and their chance of devaluation. The questions to be addressed are-
Whether the construction cost may increase?
Whether the imported machinery cost may increase for the fluctuation of the foreign currency.
Are all types of cost components addressed during preparation of feasibility report?
Does sensitivity analysis prove sufficient shock absorbing capability of the project?
• Mitigating Factors :
The Credit Officer/RM must address to different risks associated with the proposal. The possible risk include but not limited to market risk, financial risk, foreign exchange risk, risk of cost overrun, margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues, rapid growth, acquisition or expansion, new business line/product expansion: management changes or succession issues, customer or supplier concentrations, and lack of transparency or industry issues. Mitigating factors for risks identified in the credit assessment shall have to be described and understood.
The Bank must assess the critical risks of facilities given / to be given and ways / factors of mitigation of those risks. Some of the critical factors are:
• Loan Structure :
The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increase the risk of fund diversion and may adversely impact the borrower’s repayment ability. Related questions to be addressed are:
Are facilities justified by the borrower’s business?
Are any capital / long term expenditure being financed by short time borrowing (either OD or TR)?
What is the amount required? Is it sufficient or excess for the purpose mentioned?
• Security :
A current valuation of collateral must be made by Bank’s approved enlisted surveyors and the quality and priority of security being proposed shall be assessed properly.
Loan shall not be granted solely on security consideration. Adequacy and the extent of the insurance coverage shall be assessed. The Credit Officer/RM must look into the client’s interest / dependability on the collateral offered as security.
Is security offered acceptable and adequate?
Has all the security been perfected in accordance with the loan application?
Have any valuation and inspection been undertaken since the last application?
If you hold a guarantee, do you consider it has value?
Has the credit rating of the Borrower deteriorated and have you considered the requirement for additional security?
Can a valid charge be obtained on the security?
• Name lending (Relationship Assessment) :
Credit proposals shall not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations shall be discouraged and treated with great caution. Rather, credit proposals and the granting of loans will be based on sound fundamentals supported by a thorough financial and risk analysis. Related questions to be addressed are:
Has the borrower complied with the terms and conditions of the facility?
Adverse feature include: any past dues / excesses / delays / cheque returns and or default in covenants and / or failure to meet interest when due.
Does the account fluctuate with the seasonality of the business?
Has the relationship strategy and earnings for the last twelve months been met?
1.2.4 Risk Grading :
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.
Presently the Bank is following/conducting the Lending Risk Analysis to assess the risk grade. The concerned Credit Officer / RM must clearly indicate the risk grade (as per the finding) in the specific column of credit appraisal form so that the authority can take decision on the matter. A standard Risk Grading Matrix is depicted as under based on the Risk Grade Scorecard attached as an Appendix-1.2.
Risk Rating Grade Definition
1 Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier International Banks / Local Banks. All security documentation’s are in place and in order.
2 The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company must demonstrate consistently strong earning and cash flow and have an unblemished track record. All security documents are in place. Aggregate Score of 95 or greater based on the Risk Grade Scorecard.
3 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 earning, 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.
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.
5 Grade 5 assets potential weaknesses that deserves 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 90 days or more, 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.
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 180 days or more but less than 270 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.
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 assets are not yet classified as Loss. Assets should be downgraded to 7 if loan payments remain past due for 270 days or more but less than 360 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.
Bad and Loss
8 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 360 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.
1.3 APPROVAL AUTHORITY :
i) All powers of the Bank are vested in the Board. They are the source of all powers, and any person or body can exercise only the powers delegated by the Board in ways and manners specified by them.
ii) Mercantile Bank Ltd. believes in decentralization of powers. With a view to ensuring prompt and efficient services to its multitude of clients spread far and wide, the Bank envisages delegation of optimum powers to its Executives and Officials at different levels of operations. But, while delegating powers, the Board is also aware of the following principles and factors:
(a) The Board can delegate the authority, not its responsibility.
(b) The evil of dual sub-ordination may creep in the chain of command if authority is not well defined and properly implemented.
(c) Exercise of the delegated authority must commensurate with the shouldering of the responsibility.
iii) In order to implement the system of delegation of powers effectively, and to derive the desired benefit for the Bank as well as the Executives concerned, the Bank must develop a system to ensure that the delegated authority exercised by the Executives can be evaluated realistically and qualitatively. For that purpose, the Bank will have to develop a Management Information System (MIS) so that the Board gets prompt and systematic feed back as to how effectively and efficiently the delegated authority is being exercised by the Executives. For the purpose of investment of Bank’s Fund, the cardinal principle is ‘Safety first, Business next’. Delegation of power shall test the ability of the Executives to take decisions judiciously with honesty and integrity to achieve the objectives of the Bank.
iv) The Board of Directors of the Bank in its 11th meeting held on May 02, 2000 approved delegation of a) Business Power (Loans and Advances), b) Business Power (Foreign Exchange) to individual executives of the Bank, which was later on revised and approved by the Board of Directors in its 42nd meeting held on April 29, 2003.
v) The Bank intends to make it crystal clear to all concerned that the powers are delegated to serve the greater interest of the institution. So, to achieve this objective, the General Guidelines as described in section 3.3 of chapter 3 and the ceiling as mentioned in Annexure-A: Business Power- General Credit / Investment (revised-October 2005) and Annexure-B: Business Power- Foreign Exchange (revised-October 2005) shall be followed meticulously.
vi) The credit approval function has been separated from the marketing/relationship management function.
vii) Unless personally authorized by a separate letter, mere mention of delegation in this guidelines shall not entitle an official falling under the category to exercise the powers.
viii) Delegated approval authorities shall be reviewed annually by Managing Director & CEO/ Executive Committee of Directors / Board of Directors
ix) All credit risks must be authorized by executives within the authority limit delegated to them by the Managing Director & CEO/ Executive Committee of Directors / Board of Directors. The “pooling” or combining of authority limits is not permitted.
x) The aggregate exposure to any borrower or borrowing group is used to determine the approval authority required.
xi) Any credit proposal that does not comply with Lending Guidelines, regardless of amount, has to be referred to Head Office for Approval.
xii) Managing Director & CEO/Head of Credit Risk Management / Board as per the delegated power shall approve and monitor any cross border exposure risk / exceptional case.
xiii) Any breaches of lending authority to be reported to Managing Director & CEO, Head of Internal Control and Head of CRM.
1.3.1 Training and Experience :
It is essential that Executives/member of the Committee authorized to exercise delegation of business power must have relevant training and experience to carry out their responsibility effectively and a minimum they should have:
• At least 5 years experience working in Corporate / Commercial banking as a Relationship Manager/Head of Branch/ Head of Credit, etc.
• Training and experience in financial statement, cash flow and risk analysis
• A thorough working knowledge of Accounting
• A good understanding of the local industry/market dynamics
• Adequate knowledge of the following areas:
Introduction of accrual accounting.
Industry / Business Risk Analysis.
Financial reporting and full disclosure.
Financial Statement Analysis.
The Asset Conversion/Trade Cycle.
Cash Flow Analysis.
Loan Structure and Documentation.
1.3.2 Reporting Of Approved New Facilities And Declined Proposals :
A monthly summary of all new facilities approved, renewed, enhanced and a list of proposals declined stating reasons thereof to be reported by CRM to the Managing Director and CEO as per format enclosed at Appendix-1.3.
1.3.3 Time Requirement for Approval of Credit Proposals :
• At Branch level : Branch Authority as per their business delegation must take decision within maximum of 3 – 7 days
• At Head Office level : The Head Office Credit Committee(HOCC)/ Executive Committee of the Board of Directors/Board of Directors shall take decision within maximum of :
5 – 7 days for simple type of facility
15 – 30 days for Project Loan
30 – 60 days for Loans under Syndication / Club Finance etc.
• Sanction letter to be issued within 1 – 2 days time from the date of approval.
• In case of Large Loan, it must be reported to Bangladesh Bank.
• In case of the specific loans like Director’s loan, prior approval from Bangladesh Bank to be obtained as per requirements / guidelines of Bangladesh Bank.
1.3.4 Segregation of Duties :
The following lending functions have been segregated:
• Credit Approval / Risk Management
• Relationship Management / Marketing
• Credit Administration
• Monitoring, Recovery and Compliance
The purpose of the segregation is to improve the knowledge levels and expertise in each department, to decrease the probability of compromise, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgement of credit proposals. The job responsibilities of different units are as follows:
Name of Unit Job responsibility
Relationship Management / Credit Marketing The persons in the department will be responsible for Relationship Management.
1. To act as the primary contact person with the borrower regarding marketing of credit products.
2. To maintain thorough knowledge / up to date position of borrower’s business and industry. The concerned officer must apply his intelligence/common sense to ascertain whether the proposals carry value or contribute to Bank’s profitability.
3. To cater to customer needs and summarize the facilities, rate of interest / commission / charges / security arrangement etc. and place it to the higher authority for further process.
4. To make periodic visit / inspection in borrower’s shop / factory / warehouse etc. and submit the report to the Head of Credit Marketing.
5. To provide required information to the Credit appraisal team for approval / concurrence or other action and Credit Administration Team in case of need.
6. To monitor the financial performance and account conduct of the borrower and intimate the updated position to the Credit Approval Authority / branches.
7. To prepare a Call report for all customer contact / visit and place it to the reporting authority.
Credit Appraisal / Approval 1. To prepare credit proposals (memo) and place it to the approval authority for decision.
2. To obtain necessary approval from appropriate approval authority
3. Issuance of Sanction Letter / declining decision to the branches
4. All sorts of correspondence to the branches / Marketing Division for preparation of memo.
5. Conducting due diligence in line with Bank’s CRM Policy guidelines and Bangladesh Bank / Govt. rules and regulations.
Credit Administration 1. To ensure completion of documentation formalities in compliance with terms of approval.
2. To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged.
3. To control loan disbursement only after all terms and conditions of approval have been met and all security documentation are in place.
4. To maintain control over all security documentation.
5. To monitor borrower’s compliance with covenants & agreed terms and monitor account performance.
6. To produce required statements related to credit division including statement of new facilities, renewed facilities, declined facilities and submit before the Managing Directors & CEO / EC / Board for review and guidance.
Name of Unit Job responsibility
Monitoring, Recovery and Compliance 1. To manage all Special Mention, Substandard, Doubtful and Bad and Loss accounts in order to standardize/regularize/maximize recovery and ensure that appropriate and timely loan loss provisions have been made.
2. To provide early signals / warning to the Branches / Marketing Division / Account Relationship Managers / Officers.
3. To determine Account Action Plan / Recovery Strategy.
4. To deal with all legal matters.
5. To process branch proposals regarding rescheduling of classified accounts.
6. To collect CIB report from Bangladesh Bank and be responsible for sending CIB, Bangladesh Bank return including CL and statement to other regulatory authorities on time.
7. To ensure that Bangladesh Bank circulars/regulations are maintained centrally and advised to all relevant divisions to ensure compliance.
8. To enlist surveyors, lawyers, insurers with approval of the Bank Management and to monitor and review their performance periodically.
1.3.5 Internal Audit/Control:
The Bank has a separate and independent Audit and Inspection Division responsible for conducting audits and inspection of all Branches and Departments of Head Office. Audits and Inspection are carried out on periodic interval (at least once in a year) to ensure compliance with regulatory guidelines, internal procedures and Lending Guidelines as per Bangladesh Bank requirement. Surprise inspection / special inspections are also conducted as and when required. The Head of Audit & Inspection Division directly reports to the Managing Director and CEO.
1.3.6 Establishment of Control Mechanism:
At present 13 (thirteen) Branches of the Bank are interconnected with ONLINE SYSTEM. Rest of the branches will be ONLINE within 2-3 months. Therefore, it will be possible to monitor any function / any transaction of the branches by the controlling authority at Head Office after establishment of ONLINE SYSTEM with other branches. Authority may be given to the Managing Director and CEO, Additional Managing Director, Deputy Managing Director, Head of Credit, Head of Credit Administration Department, Head of Board Audit, Head of Internal Audit & Inspection, and Head of Compliance to go through any transaction of the Branches as and when required.
1.3.7 Credit Training :
In order to discharge the duties efficiently and conduct the due diligence properly, it is necessary to arrange sufficient training for executives / officers of different areas particularly the credit officers. Considering the requirements the Bank has established its Training Institute in Head Office in 2002 where different types of banking related courses are offered to Officers of different level. It is expected that all Credit Officers and Relationship Managers will be trained gradually in specific fields of Credit Risk Management.
2. ORGANIZATIONAL STRUCTURE AND RESPONSIBILITIES:
The appropriate organizational structure must be in place to support the adoption of policies described in Chapter-I of these guidelines. The key feature is the segregation of the Marketing / Relationship Management function from Approval / Risk Management / Administrative Functions.
Credit approval shall be centralized within the CRM function. Credit application shall be approved by the Managing Director and CEO / Additional Managing Director / Deputy Managing Director / Head of Credit at Head Office / Head of Branches as per their delegation of business powers approved by the Board of Directors and beyond their authority, the proposals are to be placed before the Executive Committee of the Board of Directors / Board of Directors for approval.
2.1 ORGANIZATIONAL STRUCTURE :
The following chart represents the management structure:
DETAILED ORGANOGRAM IS ATTACHED IN APPENDIX 2.1
2.2 Key Responsibilities :
The key responsibilities of the above functions are as follows. Please also refer to Appendices 2.2 (A-E) for sample job descriptions.
A) Head of Corporate / Commercial Banking :
The responsibility of the Head of Corporate / Commercial Banking includes planning, developing and managing the Bank’s corporate, commercial and institutional business to ensure high profitability and sustained growth in line with the Bank’s strategic plan, credit policies and business objectives in order to provide overall coordination of marketing efforts for the Bank’s non-personal business including the formulation of strategy, establishment of performance tracking systems and joint campaign with other Divisions of the Bank. He will serve on the Bank’s Asset and Liability Management Committee.
The other key responsibilities of the Head of Corporate / Commercial Banking are as follows:
1. Oversee the marketing and business development activities of the bank’s non-personal business.
2. Maximize Bank’s profitability through promotion of all loan products and appropriate loan pricing.
3. Ensure that credit quality is maintained and reviewed at all times.
4. Ensure a prudent level of portfolio diversification.
5. Ensure compliance with Bank Credit Policies and Central Bank regulations.
6. Contribute to the development of relationship management skills of staff in Corporate Banking.
7. Provide input/advice to the MD and CEO/Board of Directors regarding the formulation of strategic operating plans.
8. Maintain an in depth knowledge of the local market.
B) Relationship Manager :
The responsibility of Relationship Managers (RMs) is to serve as the primary relationship contact person with the Bank’s corporate and commercial customers, to maximize relationship profitably through cross selling and to minimize credit losses through risk assessment and timely identification of deteriorating Credit Risk of Customers.
The other key responsibilities of the RMs are as follows:
1. Maintain thorough knowledge of borrower’s business and industry through regular contact, factory/warehouse inspections, etc. RMs should proactively monitor the financial performance and account conduct of borrowers.
2. Timely and accurate submission of Credit Applications for new proposals and annual reviews, taking into account the credit assessment requirements outlined in clause 1.2.1 of Chapter-I of the Bank’s Credit Policy.
3. Highlight any deterioration in borrower’s financial standing and amend the borrower’s Risk Grade in a timely manner. Changes in Risk Grades should be advised to and be approved by concerned approval authority.
4. Seek assistance/advice at the earliest from CRM regarding the structuring of facilities, potential deterioration in accounts or for any credit related issues.
5. Provide good customer service while ensuring that the Bank’s interest is protected
6. Grow the customer base through marketing and business development efforts, including cross selling to existing customer base
7. Ensure that credit quality is maintained and customer reviews are completed in timely manner.
8. Follow up with customers to ensure the timely receipt of financial statements, loan payments and all documentary requirements of the Bank.
9. Ensure compliance with internal policies and procedures and external regulatory requirements and that all internal and external audit recommendations are implemented.
C) Head of Credit Risk Management :
The Key responsibilities of the Head of Credit Risk Management are as follows:
1. Oversight of the Bank’s credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking and treasury operations.
2. Oversight of the Bank’s asset quality.
3. Directly manage all Special Mentioned, Substandard, Doubtful and Bad & Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made.
4. Approve or decline, within the delegated business authority, the Credit Applications recommended by RM. Where aggregate borrower exposure will be in excess of the delegated authority, he will provide recommendation to Managing Director & CEO for approval.
5. Provide advice/assistance regarding all Credit matters to line management / RMs
6. Ensure that the lending executives have adequate experience and / or training in order to carry out job duties effectively.
D) Head of Credit :
The responsibility of the Head of Credit is to ensure sound asset quality and create a conservative credit culture through lending activities / credit approval process is responsive to customer needs and credit losses are minimized. He will serve on the Bank’s Asset and Liability Management Committee.
The other key responsibilities of the Head of Credit are as follows:
1. Promote strong asset quality.
2. Updating the Bank’s lending guidelines/credit policies as and when required but at least annually.
3. Ensure credit recommendations/approvals are taken in a timely manner.
4. Ensure a prudent level of portfolio diversification.
5. Maximize recovery of problem loans and minimize credit losses.
6. Ensure compliance with internal policies and procedures and external regulatory requirements.
7. Contribute to the development of credit risk management skills of staff in Credit Administration and Corporate Banking departments.
8. Provide input/advice to the MD & CEO/Board of Directors regarding the formulation of strategic operating plans.
E) Head of Credit Administration Division (CAD) :
The responsibility of the Head of Credit Administration Division (CAD) includes planing, organizing, directing, controlling and reviewing the operational and administrative functions of Credit Administration Division to ensure efficient and effective support to the concerned Divisions in line with regulatory and Bank requirements while exercising appropriate control and independent judgement.
The other key responsibilities of the Credit Administration Division are as follows:
1. Ensure loan documentation and securities are duly completed and in place prior to disbursement of loans.
2. Ensure that CIB report reflects/includes the name of all the lenders with facility, limit and outstanding.
3. Ensure compliance with all formalities regarding large loans and loans to Directors as per Directives of Bangladesh Bank Circulars & rules and regulations of Banking Companies Act.
4. Ensure that adequate insurance is in place on all pledged assets, all approval conditions have been met and exceptions, if any, are approved prior to disbursement of loans.
5. Maintain control over all security documentation.
6. Monitor borrower’s compliance with covenant, agreed terms & conditions and also monitor account performance.
7. Produce required statements related to credit division including statement of newly approved facilities, renewed facilities, declined proposals and submit a report before the Managing Director and CEO / EC / Board for their review and guidance.
F) Head of Monitoring, Recovery and Compliance Division:
The key responsibilities of the Head of Monitoring, Recovery and Compliance Division are as follows:
1. Directly manage all Special Mentioned, Substandard, Doubtful and Bad and Loss accounts in order to standardize/regularize/maximize recovery and ensure that appropriate and timely loan loss provisions have been made.
2. Provide early signals/warning to the Branches/Marketing Division/Account Relationship Managers/Officers.
3. Determine Account Action Plan/Recovery Strategy.
4. Pursue all options to maximize recovery.
5. Deal with all legal matters.
6. Process branch proposals regarding rescheduling of classified accounts.
7. Collect CIB report from Bangladesh Bank and be responsible for sending CIB, CL returns to Bangladesh Bank on time.
8. Ensure all required Bangladesh Bank returns and statements to other regulatory authorities are submitted with accurate statistics in the correct format in a timely manner.
9. Ensure that Bangladesh Bank circulars/regulations are maintained centrally and advised to all relevant divisions to ensure compliance.
10. Enlist surveyors, lawyers, insurers with approval of the Bank Management and to monitor and review their performance periodically.
3. PROCEDURAL GUIDELINES:
This chapter outlines the main procedures that are needed to ensure compliance with the policies contained in chapter 1 of these guidelines.
3.1 Approval Process :
In approval process the Bank segregates its Relationship Management / Marketing from the Approving Authority. The existing approval authorities are Head of Branch, Zonal Head, Head Office Credit Committee, Executive Committee of the Board of Directors and Board of Directors as per their delegation of business powers defined in later section. The recommending or approving executives shall take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits shall be as per policy guidelines that all proposals where facilities are upto 15% of the bank’s capital shall be approved at the CRM level, facilities upto 25% of the capital shall be approved by Managing Director & CEO subject to the limit approved by the Board of Directors. At present the Bank has business delegation powers approved by the Board of Directors in its 42nd meeting held on 25th April 2003. Credit proposals in excess of 25% of the Bank’s Capital to be approved by the Executive Committee of the Board of Directors or Board of Directors after recommendation of CRM, Corporate Banking and Managing Director & CEO.
The Branch Marketing Team comprising of Executives and Officers shall market the clients and then prepare credit appraisal memo as per the prescribed format and within the purview of the set rule/policy guideline of the Bank. In case it is within the delegated business power of the Head of Branch, the concerned Executive / Officer will place it to the Head of Branch who will make judgement (qualitative and quantitative judgement) and if found viable then he/she will approve the Loan otherwise he/she may reject it or forward it to the Zonal Head / Head of Corporate / Commercial Banking at Head Office.
The concerned Executive / Officer at Zonal Office on receipt of the proposal will prepare a credit appraisal memo as per the prescribed format and within the purview of the set rule / policy guidelines and then place it to Zonal Head who will make Judgment (qualitative and quantitative) and if found viable then he will approve the facility, if it is within his business delegated power otherwise he may reject it or forward it to the Head of Corporate / Commercial Banking at Head Office along with his recommendations. The Proposal on receipt by the Head of Corporate / Commercial Banking will forward it to the Head of Credit who in turn distribute it to the respective Credit Officer at the Head Office for scrutiny, analysis and prepare a Office Note / Memo with due diligence along with their observations / results of analysis and to place it before the Head Office Credit Committee. In Head Office Credit Division, separate Credit Officers are designated for looking after the proposal of separate Branches. There also exist separate units for handling Garments related proposal / Export Finance, Project Loan, Syndication and Structured Finance. The Head Office Credit Committee depending upon the delegated business power shall either approve it (or reject it if not found viable) or place it to the Executive Committee of Directors / Board of Directors.
3.2 Appeal Process :
Any declined credit proposal may be represented to the next higher authority for reassessment / approval. However, there shall be no appeal process beyond the Managing Director & CEO.
3.3 Delegation of Power:
Delegation of approval of Credit facilities shall be as per policy guidelines that all proposals where credit facility/facilities are upto 15% of the Bank’s Capital shall be approved by CRM level, facilities upto 25% of the Capital shall be approved by the Managing Director and CEO subject to the limit approved by the Board of Directors. Credit facilities in excess of 25% of the Bank’s Capital shall be approved by the Executive Committee of the Board of Director or Board of Directors on recommendation of CRM, Corporate Banking and Managing Director & CEO.
At present the Bank has business delegation powers (revised – April 2003) approved by the Board of Directors in its meeting held on 29th April 2003 which may further be revised from time to time considering the volume of the portfolio and other related factors.
While exercising the business delegation powers, the following general guidelines shall be followed meticulously:
1. The Managing Director can exercise all the powers vested in other Executives/Officers of the Bank.
2. Other than the Managing Director, the Delegation of Powers shall be exercised by the Additional Managing Director / Deputy Managing Director / Executives/Officers only to whom such schedule of powers is issued by a separate letter by or under the order of the Managing Director as approved by the Board/Committee. In such cases, the Executive or Officer may also exercise Delegation of Powers vested in other Executives/Officers lower in rank/grade and working in his Deptt./Branch. VPs, FVPs, AVPs and officers shall be authorized to exercise delegated powers only when posted as In-charge of Branches.
3. Unless personally authorized by a separate letter, mere mention of delegation in the schedule of business power at Annexure-A(revised-October 2005) and Annexure-B (revised-October 2005) shall not entitle an official falling under the category to exercise the powers.
4. The Managing Director may suspend exercise of delegated Powers of any Executive/Officer or any category of Executive/Officer through specific or general order with the prior approval of the Board/Committee. In case of emergency, he may also suspend exercise of delegated Powers of any Executive/Officer or any category of Executive/Officer subject to obtaining post-facto approval from the Board within one month from the date of such suspension.
5. Delegated Powers may be reduced, suspended or withdrawn at the discretion of the Board of Directors /Committee.
6. These rules containing schedule of powers shall be treated as strictly confidential and shall always be in the custody of the Executive/Officer to whom it has been issued.
7. The sanctioning authority shall exercise their prudence and judgement in using these powers.
3.3.1 NORMS FOR EXERCISING BUSINESS DISCRETIONARY POWER (LOANS AND ADVANCES)
A.1. DISCRETIONARY POWERS:
1. Delegated powers shall be exercised by the authorized officials judiciously keeping in view the interest of the Bank. In exercising the powers so delegated, authorized officials shall abide by credit restrictions, CIB clearance, margin restrictions, stipulation regarding period of repayment in force from time to time, etc. Advances requiring prior approval of Bangladesh Bank can be sanctioned only after such approval is obtained. Delegation of powers do not vest on the sanctioning official any authority to relax or waive any credit restrictions/stipulation in force from time to time.
2. The first and fore most criterion for allowing credit will be the proper and correct selection of borrower.
The borrower should be selected on the following basis :
a) The borrower must be a man of integrity and must enjoy good reputation in the market.
b) The borrower must have the capacity and capability for utilizing credit properly and profitably.
c) The enterprise of the borrower must be viable and profitable. That is, the proposal of the borrower must be evaluated properly and carefully so as to ascertain its profitability. The enterprise must be able to generate sufficient fund for debt servicing.
3. A party to whom credit to be allowed should be as far as possible within the command area i. e. area of operation of the branch. For example, Nayabazar Branch, Dhaka should not normally accommodate a party of Mohakhali area, Dhaka. Deviations, if any, are to be explicitly explained in the proposal.
4. No sanctioning officer can sanction any credit to any of his near relations and to any firm/company where his relations have financial interest. Such cases should be sent to Head Office for consideration.
5. There shall be no power to sanction clean advance. Clean advance or advances may be allowed only with the approval of the Board/Committee.
6. No loan or advances shall be sanctioned to any Director of our Bank or any firm or company where they have interest as Proprietor/Partner/Director or to their family Members as defined in the Banking Companies Act, 1991.
A. 2 DETERMINATION OF SANCTIONING POWERS:
1. The schedule of business powers as per Annexure-A (revised-October 2005) lays down the maximum power per party.
2. While determining sanctioning power per party (Individual/Firm/ Company, etc.) against different type/nature of advances, loans, guarantee, L/C etc. existing sanctioned limit (unexpired), together with proposed amount of limit taken together, should not exceed the delegated power of sanctioning authority against specific type/nature of limit.
3. A party should not be allowed credit facilities in different names or from different Branches without the authority of Head Office. A party will mean any one person/firm/company/ concern and will include his/its sister concerns.
4. No discretionary power shall be applied to accommodate parties to whom Head Office has already sanctioned limit or proposals of which have already been rejected by Head Office.
5. Before issuance of any Bid Bond, it must be ascertained whether or not the party will require Performance Bond or any other credit facility.
6. Authority beyond delegated powers shall be exercised by the Board/ Committee.
A. 3. RULES ON MARGIN :
1. Interest/margin on various loans and advances will be in accordance with instructions issued from time to time by Head Office, Board of Directors of the Bank and Bangladesh Bank. In case where minimum margin is specified, the percentage may be increased according to market conditions, saleability/durability/ bulk/storage position and inspection facility of the goods. Norms given below shall be followed strictly:
i. Hypothecation with collateral : Minimum 50%.
ii. Hypothecation without collateral : Minimum 60%.
iii. Pledge of F. D. R duly discharged: Minimum 5%.
iv. Sanchaya Patra, Unit certificate: Minimum 10%.
v. Documentary Bill: Minimum 10%.
vi. Life Insurance Policy: Minimum 50% of surrender value.
vii. Immovable property: Minimum 50%.
viii. Govt. Authorized Debenture: Minimum 25% of face value.
ix. Company Shares & Debentures approved by the Bank’s Board of Directors: Minimum 40% of market value or face value whichever is lower.
x. For Industrial Working Capital margin on raw material/ finished goods = Minimum 20%.
2. Sanction of advance/limit should be advised to the borrowers detailing properly the terms and conditions and written confirmation of acceptance of the same to be obtained from the party.
3. All formalities connected with the investigation into the credit worthiness of the parties, processing the proposals, compilation of credit reports and obtaining necessary documents should be observed meticulously.
4. Disbursement of loans presupposes observance of all norms and procedures as per rules and guidelines in this Delegation of Powers, Manuals and also conveyed through different circulars of Head Office and Bangladesh Bank from time to time. The disbursing officer shall ensure that all documentation of credit have been duly completed before disbursement of credit.
5. The Branch In-charge shall remain responsible for constant supervision and follow-up of the advances allowed under the discretionary powers and keep Head Office apprised of the disproportionate variations.
6. Recommending and supervisory officials shall remain accountable for their respective roles.
7. Sanctioning officer will be accountable for non-recovery due to his injudicious decision.
7. All members of the Credit Committee (Management) shall also be accountable collectively and individually for their injudicious decision.
A. 4 SANCTIONING AUTHORITY:
The business powers can be exercised by the following when posted as under:
The Managing Director & CEO shall exercise delegated powers on the recommendation of the Credit Committee.
Additional Managing Director/Deputy Managing Director shall exercise business power delegated to them. Senior Executive Vice President / Executive Vice President / Senior Vice President whenever posted as In-charge of Credit Division shall exercise business power delegated to them.
The Managing Director is however, authorized/delegated to allow composite credit facilities within the delegation as per delegation allowed for individual nature of loan. But Composite limit (funded and non-funded) so allowed shall not exceed Tk 10 crore, out of which under no circumstances funded facility shall exceed Tk. 5 crore.
There shall be a Credit Committee at Head Office. However in case of any disagreement between the committee and the concerned Executive, the matter may be referred to the Managing Director for disposal in the greater interest of the Bank.
VPs, FVPs and AVPs shall exercise delegation only when posted as In-charge of Branches.
A. 5 RULES OF SANCTIONING LOANS :
1. Sanction orders will be communicated by Head Office to the Branches and by the Branches to the parties under Double signature as follows :
a. For the limits sanctioned at Head Office level : By Executives not below the rank of Asstt. Vice President.
b. For the limits sanctioned at Branch level : By Executives/ Branch-In-Charge.
2. Prescribed limit of business powers shall not exceed under any circumstances.
3. Valuation of goods/produces/hypothecated to the Bank to secure any advance shall in no case exceed:
4. Goods and produces against which advances are made should be readily marketable.
5. Loans & Advances allowed against FDRs/Cash Collateral’s, PSPs etc. shall be adjusted immediately before the face value of the instruments and outstanding advance amount becomes equal or upon maturity, whichever is earlier.
6. In case of advance against mortgage of property, original Title Deed and chain of documents i.e. C.S Parcha, R.S. Khatian, Mutation Certificate, Non-encumbrance Certificate, Municipal Tax Receipt, Approved plan, Rent Receipt (upto date) etc. should be checked by a paneled lawyer or by the Bank’s Law Officer who must certify about correctness of ownership and suitability as security against the advance.
7. Money suit/court cases against any defaulting borrower is to be filed by the branches after obtaining prior approval from Head Office.
8. Branches shall maintain Bank’s printed “Confidential Limits, Register” which will record serially all the limits sanctioned.
3.3.2 NORMS FOR EXERCISING BUSINESS DISCRETIONARY POWERS (FOREIGN EXCHANGE)
B.1. INTRODUCTION :
Discretionary Powers with regard to the Foreign Exchange transaction shall be exercised by the authorized officials judiciously keeping in view the interest of the Bank. In exercising such powers, officials shall take note of any changes of Exchange Control Regulations of Bangladesh Bank and the Import and Export regulations issued by the CCI & E. It may be noted that such regulations are changed and amended regularly.
B.2. BASIS FOR DETERMINATION OF SANCTIONING:
1. The schedule for Business Powers as per Annexure-B (revised-October 2005) lays down the maximum power per party.
2. One party can be accommodated for one item only. If accommodation for more than one item is proposed, the proposal can be approved by Official who is authorized to sanction the total amount i.e., the combined amount of two or more items together.
3. For all practical purposes, one party will mean one person/firm/ company/concern including his/its sister concerns.
4. Before sanctioning of any financial accommodation to a party, their existing liabilities in various accounts (including those in the name of their sister concerns) shall be taken together along with the proposed accommodation to determine the sanctioning authority.
5. The existing liabilities of a party shall be calculated by the following formula :
a. All outstanding or unexpired sanctioned limit (whichever is higher) in the form of LIM, LTR, PC, ECC, LOANs, Cash Credits, SOD (General) etc.
b. 100% of the Contingent Liabilities after deducting Cash Margin received there – against.
6. In case of opening Letters of Credit where post-import finance shall be required as per arrangement, care should be taken that L/C amount together with other duties and taxes constituting the total landed cost should not exceed delegated authority prescribed for post-import finance.
7. All delegated powers may be exercised subject to any restriction imposed by Bangladesh Bank, CCI & E or Head Office from time to time.
8. Before establishing L/C, genuineness of the importers and the suppliers must be ascertained. The importers must have permanent business establishment with good reputation.
9. Arrangement of pre-shipment inspection of the goods by an internationally reputed surveyor at the loading point indicating the name of carrying vessel with its voyage number may be made as far as practicable at the cost of the opener/beneficiary of the L/C.
10. Outstation importers should not ordinarily be entertained. But, incase of well known and reputed outstation importers, the authorized officer in his own responsibility can open L/C after having been fully satisfied with the importer’s genuineness/integrity and reputation.
11. It is the policy of the Bank that all types of regular importers, including Garment Factories, shall be allowed suitable limit for opening of general and BTB L/C as well as post-import finance. This will avoid any delay in handling such business. So, Branch-In-charges shall obtain necessary limits for such parties at their earliest.
12. Sanctioning authority must report details of accommodation to Head Office on regular basis.
13. Foreign Guarantees shall be processed subject to the approval of Bangladesh Bank, where necessary. Outward Foreign Guarantees shall be issued only after obtaining Counter Guarantee from the applicant of the guarantees. This shall be in addition to other collateral securities, wherever applicable.
14. The Branch In-charge will remain responsible for constant supervision and follow-up of the advances allowed under his discretionary powers and also the advances approved by Head Office on his recommendation. Branch shall keep Head Office apprised of the disproportionate variation, if any.
15. Sanctioning official shall be accountable for non-recovery due to his injudicious decision.
B.3 SANTIONING AUTHORITY:
The Business Powers can be exercised by the following officials when posted as under :
a. Managing Director, Additional Managing Director, Deputy Managing Director and other Executives (SVP & above) of the Credit/International Division on the recommendation of the Credit Committee, if any.
b. Branch In-charge/Managers on the recommendation of the Credit Committee, if any.
B.4. OPEING OF BACK TO BACK L/Cs:
1. In case of Back to Back L/Cs and pre-shipment finance on account of export oriented garments & textile industries etc., the following norms shall be followed :
i. While opening Back to Back L/Cs for import/procurement of raw materials on account of clients, their present outstanding amount of Back to Back L/Cs, Back to Back Bills will be taken together into account within the sanctioned limit.
ii. Back to Back L/Cs for new clients or existing clients having overdue Bills liabilities will be opened only after obtaining prior approval from Head Office.
iii. Before opening of Back to Back L/Cs the authorized officers must see that the importer is in possession of :
a. A valid customs Bonded Warehouse License.
b. Freely negotiable export L/C (Master L/C) with shipment validity sufficient to cover the transitional period of import of raw material and manufacturing the garments and export thereof.
c. Quota Allocation letter of Export Promotion Bureau in case of quota item, to be deposited with the branch before opening of L/C.
iv. While sanctioning pre-shipment finance for manufacturing the garments, the authorized officers must see that the entire fabrics and accessories have arrived at the factory premises and are under process of manufacture. He must be satisfied that there will be no difficulty in execution of the export order up to 100% well in time i. e. within the present validity of the export L/C. He will also ensure that the amount of pre-shipment Credit and the amount of Back to Back liability together will, under no circumstances, exceed 90% of FOB value of the export to be made.
2. All imports & exports are subject to Import & Export Trade Control Regulations and Exchange Control Regulations. The authorized Officers while opening L/Cs and negotiating export documents will meticulously follow these regulations.
3. OTHER RULES :
1. Back to Back L/Cs shall be allowed on account of the party on the basis of party’s installed capacity & past performance etc. against proper limits sanctioned by Head Office.
2. Back to Back L/C may be opened depending on the production capacity within the sanctioned limit.
3. Additional Back to Back L/C facilities beyond capacity can be opened with the approval of competent authority as a special case.
4. No Back to Back L/C bill shall be kept overdue beyond its due date of payment as per acceptance communicated by the Bank.
5. All over draft (Export) Loan to be allowed to pay out any overdue bill under Back to Back L/C must have prior or post-facto approval of Head Office.
6. Board shall be regularly apprised on the position of SOD (Export) Loan and overdue bills.
6. Existing facilities, if exceed the sanctioned limit, shall be brought to normal limit or additional security shall be obtained to regularize the facility.
7. PC allowed against any L/C shall be adjusted upon negotiation of the same L/C.
3.4 CREDIT ADMINISTRATION & DISBURSEMENT AUTHORITY:
The Disbursement Authority has been separated from Approval authority. The Disbursement Authority is vested upon the Credit Administration Division (CAD). The flow chart for disbursement process is given below:
The Credit Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities. The functions of Credit Administration are strictly segregated from Relationship Management/Marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level.
Credit Administration procedures are in place to ensure the functions as mentioned in flowchart attached as Appendix-3.1
Security documents are to be prepared in accordance with approval terms and to be legally enforceable. Standard loan facility documentation’s are to be drafted / prepared by the legal counsel. At present the function of preparation of documents (other than syndication) are performed by the Branch and exceptions are referred to legal counsel for advice.
Disbursements under loan facilities are made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit and outstanding. All formalities regarding large loans and loans to Directors are guided by Bangladesh Bank circulars and related section of Banking Companies Act. All Credit Approval terms must be met. The check list certificate is to be signed by Credit In-charge and Head of Branch. In order to cope with the revised policy, the disbursement authority will be vested to the Head of Credit Administration Division upto Tk. 5.00 Crore above which will be vested to the Deputy Managing Director. In the absence of the Deputy Managing Director, the power may be exercised by the Senior Executive Vice President.
3.4.2 Custodial Duties:
The documents may either be prepared at Branch level or by Head Office (for Syndication and Large Loan) with the Vetting of legal counsel/adviser of the Bank.
Loan disbursements and storage of security is to be done at Bank’s respective Branch.
Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets pledged as collateral.
Security documentation is held under strict control, preferably in locked fireproof storage and with dual control.
3.4.3 Compliance Requirements:
All required Bangladesh Bank returns are submitted in the correct format in a timely manner.
Bangladesh Bank circulars/regulations are maintained centrally and advised to all relevant Divisions to ensure compliance.
All third party service providers (surveyors/valuers, lawyers, insurers, CPAs etc.) are approved and performance reviewed on an annual basis.
3.5 SPECIFIC GUIDELINES:
Annual Credit Program and Refinancing/Rediscounting Policy of Bangladesh Bank are comprehensive and restrictive. While adhering to such a policy in general, the following guidelines must be observed:
Unsecured loans and advances to individuals:
As a matter of policy, these loans and advances are discouraged and are subject to following restrictions, if the collateral offered consists of assets that are not readily marketable. These loan requests must:
Be supported by financial statements showing all direct and contingent liabilities
Clearly identify the purpose of the loan / advance and sources(s) of repayment
The overdrafts must be in the form of approved lines. Overdrafts may not be created to meet other obligations of borrower e.g. payment of interest or repayment of a past due loan. Every effort must be made to ensure recovery within the agreed tenor.
Receivable financing: Outstanding must be adequately covered by eligible receivables, Maximum life of eligible receivables must not exceed 12 months.
Trade finance of supplier’s credit: The basic rule is that the tenor of the facility should not exceed the expected economic life of the items imported.
3.5.1 Facilities subject to guarantees (Personal or Corporate):
It should be made clear to the guarantors that the Bank will call upon them to meet their obligation in the event of the borrower’s default. Guarantors must be informed of all changes in their terms and conditions of the facility and where these involve weakening of the credit e.g. release of collateral, the extension of maturities or an increase in the pricing of the facility, the guarantor’s agreement should be obtained in writing. In the event of default, the guarantor should be advised immediately in writing to meet his obligations under the guarantee. In case of his failure, appropriate action should be initiated.
3.5.2 Changes in Terms and Conditions:
Prior approval of Head Office is required to accomplish any material change in a credit / banking arrangement. This applies specifically to change in rate, maturity, collateral, covenant, waiver of default, amendment and release of guarantee(s) and any other change which would materially alter the credit arrangement from that initially or previously authorized.
3.6 CREDIT MONITORING:
To minimize credit losses, monitoring procedures and systems should be in place, which will provide an early indication of the deteriorating financial health of a borrower. The credit monitoring process in Bank is vested on Monitoring, Recovery and Compliance Division. Head of Monitoring, Recovery and Compliance Division will report the exceptional list of assets on daily basis on the following categories:
Past due (which are not paid or renewed at maturity – Grade 5) principal or interest payments, past due trade bills, account excesses and breach of loan covenants;
Loan terms and conditions are monitored, financial statements are received on a regular basis and any covenant breaches or exception are to be referred to the CRM and the RM team for timely follow-up.
Timely corrective action is to be taken to address findings of any internal, external or regulatory inspection/audit.
All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually.
Monitoring, Recovery and Compliance Division will keep regularly follow up and corrective action to be taken in a timely manner before the account deteriorates further.
3.6.1 Early Alert Process:
An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision or close attention by the management.
If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date with a likely prospect of being downgraded to 5 Category or worse (Impaired status), within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Credit Officers / RM and must be undertaken on a continuous basis. An Early Alert report (Appendix-3.3.2) shall be completed by the Credit Officer / RM and to be sent to the approving authority for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade shall be updated as soon as possible and no delay to be made in referring problem accounts to the Monitoring, Recovery and Compliance Division for assistance in recovery.
Despite a prudent credit approval process, loans may still become troubled. Therefore, the Credit Officers/RMs must ensure the early identification and prompt reporting of deteriorating credit signs for swift action to protect the Bank’s interest. The symptoms of important early alert shown in Appendix-3.3.3 are by no means exhaustive and hence, if there are other concerns, such as a breach of loan covenants or adverse market rumors that warrant additional caution, an Early Alert report shall be raised.
Moreover, regular contact with customers is to be maintained to enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions shall include the local legal adviser when appropriate.
An account may be reclassified as a Regular Account from Early Alert Account status when the symptom or symptoms, causing the Early Alert classification have been regularized or no longer exist. The concurrence of the approval authority is required for conversion from Early Alert Account status to Regular Account status.
3.6.2 Classification of Loans:
A classified Loan or Commitment is one, which is classified as Substandard, Doubtful or Loss as per policy of Loan classification set by Bangladesh Bank.
Position of Classified Loans and Advances and other assets shall be placed before the Board of Directors of the Bank and quarterly submitted to Bangladesh Bank.
The classification status must be reflected in the CIB reports on regular basis (monthly for Tk. 1.00 crore and above and quarterly for all the facilities outstanding of Tk. 50,000.00 to below Tk. 1.00 crore. Besides, statement for Tk. 10,000.00 to below Tk. 25,000.00 and Tk. 25,000.00 to below Tk. 50,000.00 has also to be reported.
3.6.3 Rescheduling and declassification:
Resceduling and declassification of loans, advances and other assets require prior approval of Head Office of the Bank and in some specific cases from Bangladesh Bank. During rescheduling / declassification of the Loan, the Bangladesh Bank’s sets rules must be followed meticulously.
3.7 RECOVERY AND FOLLOW UP OF NON PERFORMING LOANS AND ADVANCES:
Loans and advances in whatever form granted by the Bank to its clients are repayable either on demand or at the expiry of fixed period or as per repayment schedule agreed upon while granting the facilities. If loan is repayable on installment basis, default may be purely an oversight on the part of borrower but in other cases, it may be much more serious, giving the Bank the first tangible evidence that the borrower is in financial difficulty. At this point the procedure for dealing with potential loan losses comes into operation. The Head of Branch should, therefore, keep a close and constant watch on all their loans and advances to ensure that timely action is initiated in each case for adjustment of the account or its renewal, if it is decided to continue the facility.
For this purpose, each Branch should maintain a diary/card in prescribed format in which the due date of expiry of credit facility, a notice should be sent to the borrower reminding him of the due date of repayment and making a formal demand for repayment/renewal as the case may be. Vigorous follow up action should thereafter be taken by issuing repeated reminders and putting pressures on the borrower by calling on him personally. In other words, all out efforts should be taken to recover the advance on its expiry. However, if in spite of vigorous persuasion the borrower fails to adjust the liability within the date of expiry of the facility, the liability should be downgraded to Special Mention (Grade-5) to facilitate monitoring and further follow up. The branches should however, still make constant efforts to recover the advance if necessary, through legal process. Before filing of the suit, Head Office approval should be obtained.
3.7.1 Recovery Unit (RU) and its Function:
In Head Office there is a recovery unit under CRM and a recovery unit in Branch under the supervision of Head of Branch (HoB). In order to facilitate follow up and recovery of NPA’s, the branch as well as Head Office recovery unit shall review at the close of each month all the Special Mention Account / Classified loan accounts incorporating their comments regarding the prospects and measures taken for recovery. The Recovery Unit (RU) directly manages accounts with sustained deterioration (a. Risk Rating of Special Mention (5) to Bad / Loss (8)). The Bank’s policy is to transfer EXIT accounts graded 4 – 6 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Credit Officer / Relationship Management to RU, a Handover / Downgrade Checklist (Format has been provided in Appendix-3.4.1) shall be completed.
The RU’s primary functions are:
Determine Account Action Plan/Recovery Strategy
Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate.
Ensure adequate and timely loan loss provisions are made based on actual and expected losses.
Regular review of grade 6 or worse accounts
The management of problem loans (NPLs) is a dynamic process and the associated strategy together with the adequacy of provisions is regularly reviewed. A process shall be established to share the lessons learnt from the experience of credit losses in order to update the lending guidelines.
3.7.2 Incentive Programme:•
A process of incentive programme may be established to encourage Recovery Unit Account Managers to bring down the Non-Performing Loans (NPLs). The following table shows an indicative incentive plan for RU accounts managers:
3.7.3 Account Transfer Procedures:•
Within 7 days of an account being downgraded to substandard (grade 6) a Request for Action (RFA Appendix-3.4.2 A) and a handover/downgrade checklist (Appendix-3.4.1) should be completed by the Credit Officer / RM and forwarded to RU for acknowledgment. The account shall be assigned to an account manager within the RU, who will review all documentation, meet the customer and prepare a Classified Loan Review Report (CLR. Appendix-3.4.2 B) within 15 days of the transfer. The CLR shall be approved by the Head of Credit and a copy to be endorsed to the Head of Corporate Banking and to the Branch where the loan was originally sanctioned. This initial CLR shall highlight any documentation issues, loan structuring weaknesses, proposed workout strategy and shall seek approval for any loan loss provisions that are necessary.
Recovery Units ensures that the following is carried out when an account is classified as Sub Standard or worse:
Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances shall be restricted and only approved after careful scrutiny and approval from appropriate executives within approving authority and/or as per Bangladesh Bank guidelines.
CIB reporting is updated according to Bangladesh Bank guidelines and the borrower’s Risk Grade is changed as appropriate.
Loan loss provisions are taken based on Force Sale Value (FSV) or as per classification criteria as set by Bangladesh Bank.
Loans are only rescheduled in conjunction with the Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows and should be strictly monitored.
Prompt legal action is taken if the borrower is uncooperative.
3.8 NON PERFORMING LOAN MONITORING / MANAGEMENT:
All NPLs are assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account and shall serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Marketing / Relationship Management may be sought, it is essential that the autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented.
On a quarterly basis, a Classified Loan Review Report (CLR) (Appeneix-3.4.2 B) to be prepared by the RU Account Manager to update the status of the action / recovery plan, review and assess the adequacy of provisions and modify the bank’s strategy as appropriate. The Head of Credit will approve CLR for NPLs upto 15% of the Bank’s Capital, Managing Director & CEO will approve CLR for NPLs in excess of 15% of the Bank’s capital. The CLRs for NPLs above 25% of capital shall be approved by Executive Committee of the Board of Directors with a copy to Board. At present all the rescheduling / write off proposals are being approved by the Executive Committee of Board of Directors / Board of Directors.
3.9 NPL PROVISIONING :
The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off of bad and doubtful debt and suspension of interest must be followed in all cases. Regardless of the length of time a loan is past due, provisions are made against the actual and expected losses at the time they are estimated. At present the authority for approval to make provisions, write offs, or release of provisions/upgrade of an account is rests with EC / Board. The Request for Action (RFA) (Appendix-3.4.2A) or CLR(Appendix-3.4.2B) reporting format should be used to recommend provisions, write-off or release/upgrades.
The RU Account Manager shall determine the Force Sale Value (FSV) for accounts grade 6 or worse. Force sale value will be the amount that is expected to be realized through liquidation of collateral held as security or through the available operating cash flows of the business, net of any realization costs. Any shortfall of the Force Sale Value compared to total outstanding shall be fully provided for once an account is downgraded to 7. Where the customer is not cooperative, no value shall be assigned to the operating cash flow in determining Force Sale Value.
The forced sale value/value of the eligible security is guided by the Bangladesh Bank Circulars issued from time to time. The valuation of the landed property/ building / stocks/ plant & machinery etc. are done by Bank’s approved surveyors. The provisions are made as per Bangladesh Bank guidelines.
Following formula is to be applied in determining the required amount of provision:
Gross Outstanding XXX
Less : (i) Cash margin held or Fixed
Deposits/other cash collateral under lien (XXX)
(ii) Interest in Suspense Account (XXX)
(For which provision is to be created before considering
estimated realizable value of other security/collateral held) (XXX)
Less: Estimated salvage value of security/collateral held (XXX)
(See Note below)
Net Loan Value XXX
Note: The amount of required provision may in some circumstances be reduced by an estimated realizable forced sale value (i.e. Salvage Value) of any tangible collateral held (viz: mortgage of property, pledged goods/ or hypothecated goods repossessed by the bank, pledged readily marketable securities etc.). Hence in these situations it will be advisable to evaluate such collateral, estimate the most realistic sale value under duress and net-off the value against the outstanding before determining the Net Loan value for provision purposes. Conservative approach should be taken to arrive at provision requirement and Bangladesh Bank guideline to be properly followed.
3.10 RENEWAL AND STATUS VERIFICATION:
On expiry of a facility, the borrower may come forward with a proposal either for renewal of the facility for a further period or for enhancement of the existing facilities or for both. He may also agree to offer additional stocks/securities or even furnish a guarantor. The Head of Branch (Branch Manager) should examine all such proposals and if he is satisfied, the proposals should be sent to Sanctioning Authority at Zonal Office or Head Office as, as the case may be, if beyond his business delegation power, duly supported by full blown credit analysis including report of verification of Stocks/status of Collateral Securities etc. as is done in case of fresh proposals. The Head Office in turn will process the renewal/enhancement proposal after verifying the following factors:
Justification for renewal / enhancement.
Reasons for non-payment / adjustment of the loan in time.
Security aspect in terms of outstanding loan.
Credit worthiness of the client.
3.11 LEGAL ACTION:
Legal proceeding are lengthy and time consuming as well as having an element of negative publicity and as such effort must made to settle a defaulter’s outstanding out of court. However, if situation compels the Bank to take legal action for recovery of stuck up loans and advances, the same shall be done with prior approval of Head Office. In order to expedite the process, the Government has already enacted the Artha Rin Adalat (Amendment) Act 2003. Therefore the Head of Branch and Monitoring, Recovery and Compliance Division in Head Office must ensure that Legal Action are taken properly and in time. All legal process shall be conducted by the Bank’s Legal Retainer, if necessary in consultation with Bank’s Legal Adviser.
3.12 WRITE OFF OF LOANS / ADVANCES:
In course of recovery / settlement of long outstanding cases, it may be required to write off any loan/advance or portion thereof which is unrecoverable or considered a total or partial loss. In 2003 Bangladesh Bank has issued a circular providing instruction / guidelines for write-off of loan (BRPD circular # 02 dated January 13, 2003 and DOS Circular # 01 dated 29.12.2004). It is, however, the responsibility of the Head Office to decide which loans/advances are to be written-off.
Loans / advances which are recommended for write-off must be accompanied by a memo summarizing the circumstances necessitating the current write-off as well as recovery efforts to date. Under no circumstances should the fact that all or any portion of a loan / advances that has been written-off be revealed to the borrower, nor should the borrower be informed that the loan / advances is on a non-accrual basis. Despite, the loans and advances being written-off, the recovery process will be continued for those loan and advances.
3.13 LOAN SYNDICATION & STRUCTURED FINANCE:
Syndication means joint financing by more than one bank to the same clients against a common security. This is done basically to spread the risk. It also provides a scope for an independent evaluation of risk and focused monitoring by the agent / lead bank.
In Syndication financing banks also enter into an agreement that one of the lenders may act as Lead Bank. In such case, lead bank has to co-ordinate the activities at various stages of handling the proposal i.e. appraisal, sanction, documentation, sharing of security, disbursement, inspection, follow-up, recovery, distribution of installments. / interest etc. It may also call meeting on syndication members, whenever necessary to finalize any decision.
The syndicate may generally be worked in two ways:
Best effort Method.
At present the Best effort method is in practice in our country
Types of Syndicated facilities:
Credit enhanced syndicated loan.
Working Capital Syndication.
Loan for BMRE / New Projects.
Project Finance Loan
Local Currency Loan under Structured Finance etc.
Parties to the Syndication:
Arranger (Single Arranger / Co-Arranger / Arranger Group). Arranger must obtain mandate from the customer / Borrower.
Participants (Banks / Financial Institutions etc.).
The Facility Manager / Agent (Banks / Financial Institutions).
Advantages of Lenders / Banks:
Large Loan requirement within legal lending limit can be managed.
For diversification of risk / sharing of risk.
Scope of diversification across customers and industries.
Opportunity to increase asset base.
Captive transaction business shared by the syndicated members.
Strength of togetherness and joint due diligence.
Advantages of Customers:
May get a large loan by contacting with one Bank / Arranger.
Less time consuming and cost effective.
Answerable to only one Bank.
Before making syndication / raising a loan the arranger must be aware of the following:
Mandate to be obtained from the Borrower.
The debt / Equity ratio – whether the debt % is justifiable.
Market appetite – whether it is saleable to the market / participants.
Are the participant will accept the Arranger? i.e. whether the participants are confident enough of the capability of the Arranger.
Whether the due diligence are properly conducted.
Time Limit for the arrangement / Facility.
Due Diligence checklist
Share issued and Principal Share Holders / Shareholding structure.
Organizational Structure / Management & Directors / Workers / Labours / Technical persons etc.
Legal Aspects – Licensing / Franchising / Equipment suppliers / Regulatory Authorities Permission etc.
Equipment / Properties required.
Products / Markets.
Research and Development.
Patents / Trade Marks.
Sales & Distribution.
Financials : Historical / Projected / Intercompany Borrowing.
Foreign Exchange Risk / (Devaluation).
Financed Documents – Facility Agreement.
Security Documents – Security Sharing Agreement.
• Mortgage formalities.
• Creation of charges etc.
The flowchart of Syndicated Finance is attached in Appendix- 3.5
3.14 PROJECT FINANCE:
A separate unit for Project Finance has been established in the Head Office Credit Division. The functions of the unit are to appraise / analyze the Feasibility of the project, conduct due diligence, address the risk factors and to be placed before the Head Office Credit Committee / Executive Committee / Board of Directors based on the lending authority.
3.15 SME LENDING :
The Bank intends to encourage the small and medium entrepreneurs and hence structured its SME financing activities. The Bank has set the definition of small enterprise in line with Bangladesh Bank guidelines. A special credit scheme under the name and style “Small and Medium Enterprise (SME) Scheme” has been introduced to extend credit facilities to the small and medium entrepreneurs of the country.
The details of Bank’s “Small and Medium Enterprise (SME) Scheme” has been circulated to all concerns by Head Office Credit Division Instruction Circular no. 230/2004 dated May 23, 2004.
3.16 EXPORT FINANCE:
The Bank extended different types of credit facilities to the Export oriented Industries / Exporter from the very inception of the Bank. Recently the Bank has reviewed the position and revised its policy to increase the volume of export business by extending finance to well reputed export oriented industries / corporate clients having a track record. This will bring the Bank a substantial profit as well as foreign currency to meet the obligation against import.
The Bank extends facilities in both pre-shipment stage and port-shipment stage for working capital like procurement and procuring of Raw materials, Packing and Transporting of goods, insurance premiums, freight charges, inspection fees etc. Pre-shipment finance will be allowed either against Irrevocable Letter of Credit of a reputed foreign Bank or against finance contract from reputed foreign buyers acceptable to the Bank.
The Bank should not grant any Packing Credit facility against(i) Restricted L/C and (ii) Revocable L/C
Before negotiation, the dealing officer must check and scrutinize the documents thoroughly to ensure that they have been drawn in exact conformity with the terms and conditions mentioned in the Letter of Credit.
3.17 FINANCE IN GARMENTS SECTOR:
The Bank’s policy is to increase the volume of Export business substantially. In view of this the Bank has established a separate unit under Head Office Credit Division for handling the Garments Business. In order to take necessary precautions during opening of Back to Back L/C for the import of fabrics and accessories, the Bank has strengthen its monitoring / supervisory functions for protecting the Bank’s interest.
3.18 SPECIALIZED LOAN
In order to cope with the changes in the economy and society, the Bank’s policy is to develop and introduce new products for different customers group.
3.18.1 Small Loan Scheme:
With a view to provide financial assistance to the shopkeepers of different shopping center / market situated at various cities of the country, the Bank has launched an especial programme under Small Loan Scheme. The salient feature and terms and conditions has been circulated to all concerns vide Instruction Circular # 09/99 dated September 30, 1999.
3.18.2 Earnest Money Financing Scheme:
With a view to encourage the Contractor financing against Works, an Earnest Money Financing Scheme has been introduced. The modus operandi and terms and conditions under the Scheme has been circulated to all concerns vide Instruction circular # 50 dated August 26, 2000.
3.18.3 Doctors Credit Scheme:
In order to provide modern Medicare facility to the mass people of the country, a Scheme namely “Doctors Credit Scheme” has been introduced for newly passed MBBS Doctors, Specialist Doctors and Owner(s) of Clinic / Hospital / Diagnostic Centre. The detailed guidelines under the scheme has been circulated to all concerns vide Instruction circular # 51 of August 2000.
3.18.4 Personal Loan Scheme:
With a view to cater the Credit needs of Government / Semi Government Officials / Employees of Autonomous Bodies / Banks and financial Institutions / Multinational Companies / reputed private organization and Teachers of Public / private School / Colleges / Universities, a personal loan Scheme has been introduced. The detailed guidelines and terms and conditions has been circulated vide Instruction circular # 240 dated July 7, 2004.
3.18.5 Consumer Credit Scheme:
In order to provide financial assistance for purchasing household consumable items, the Bank has launched an especial credit program under Consumer Credit Scheme to upgrade the living standard of the people who happens to be the main driving force of the economy.
A brief outline on the terms and conditions of the CCS has been circulated to all concerns vide Instruction circular # 05/99 dated September 09, 1999.
3.18.6 Woman Enterprenuership Development Project:
With a view to encourage women to take active role in Socio-economic activities, an especial project in the name of “Women Enterprenureship Development Project” has been introduced for extending credit facility for establishment / Expansion of Small Cottage Industry and also as working capital to the project. The detail guidelines, terms and conditions and modus operandi of the Project has been circulated vide Head Office, Credit Division Instruction Circular # 139/2002 dated September 23, 2002.
3.18.7 Lease Finance Scheme:
With a view to encourage the genuine and capable entrepreneurs for acquiring Capital machinery, medical equipment, Computers and various items, the bank has introduced Lease Finance Scheme. The detailed terms and conditions and modus of operandi of the lease finance has been circulated vide Instruction circular # 12/99 dated November 15, 1999.
3.19 PORTFOLIO MANAGEMENT & MATURITY – GAP ANALYSIS:
Portfolio management may be defined as the allocation of funds amongst investment alternatives to maximize the profit. In this regards the Bank’s policy is to diversify the business and allocate the funds in different sectors in consideration of the following:
a) Minimum risk with maximum return.
b) Prospects of the business.
c) Country’s economical trend.
d) Historical growth pattern and performance of the products and product life cycle stage.
e) Government Policy to boost up the sectors like Agro-based Industry. IT Sectors etc.
f) Maturity-Gap between the Deposits and Loans and Advances.
The Credit Division of the Bank will review the sectoral allocation on regular intervals (on monthly basis) and will place it to the EC / Board of Directors for information and guidance.
3.20 LENDING RISK ANALYSIS:
Lending Risk Analysis (LRA) is one of the managerial and operational tools that used to assess the credit worthiness of the borrower. Lending Risk Analysis involves assessing the likelihood of repayment of loans to the Bank based on analysis of certain risk factors. Bangladesh Bank has already made mandatory for exercising Lending Risk Analysis for granting loans for Tk. 1.00 crore and above. The Credit officers of the Bank must conduct the LRA for granting the loans (Tk. 1.00 crore and above). The Summary of the major areas to be analyzed is shown in a Grid Chart as follows:
The LRA involves both sensitive and objective analysis. The credit Scoring system i.e. Z – Score and Y-Score are to be obtained using the Spread Sheet analysis. Most of the Credit Officers of the Bank have taken special training on LRA.
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