Significant resources and sophisticated programs are used to analyze and manage risk. Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advice on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like Standard & Poor’s, Moody’s, Fitch Ratings, and Dun and Bradstreet provide such information for a fee. Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property.
Basic Principles of Loans and Advances
Basic principles of loans and advances are as follows‑
- Within the aggregate limit of loans and advances as mentioned, 50% of lending will be made to small industrial sector in accordance with prescribed norms of the Government and the Central Bank in terms of the Bank’s objectives with 50% to the commercial sector.
- All lending will be adequately secured with acceptable security and margin requirements as laid down by the Head Office Credit Committee.
- The Bank shall not incur any uncovered foreign exchange risk (currency exposure) in the lending of funds.
- The Bank shall not incur any risk of exposure in respect of unmatched rate of interest on funding of loans and advances beyond 15% of outstanding loans and advances.
- End-use of working capital facilities will be closely monitored to ensure lending user for the purpose for which they were advanced.
- Loans and advances shall be normally funded from customer’s deposits of a permanent nature, and not out of short term temporary funds of borrowings from other banks or through short term money market operations.
- Spreads over cost of funds on loans and advances and commissions and fees on other transactions should be commensurate with the rating of the borrower, quality of risk and the prevailing market conditions.
- Loans and advances shall not exceed ten times the Bank’s net worth or 65% of customers deposit whichever is lower.
- Credit evaluation will include:
a) Prevalent credit practices in the market place.
b) Credit worthiness, background and track record of the borrower.
c) Financial standing of the borrower supported by financial statements and other documents evidence.
d) Legal jurisdiction and implications of applicable laws.
e) Purpose and Tenure of the loan/facility
f) Viability of the business proposition.
g) Quality and adequacy of security, if available.
Some Important Factors in Consideration
Though, off balance sheet activities play a vital role in a banks earning, still income earned out of lending accounts for major portion of it. This lending, in other word advance, may raise the standard of success of a bank to the highest possible level and the same time premature death of a bank may occur depending on how the portfolio is handled. So, the following factors should be given great emphasis.
Who shall get Credit?
It is easier to find out a depositor than finding out a good borrower. Public money in the hands of bad borrower is never safe and secured. Then, whom to lend? The answer is to a proper entrepreneur. It is widely accepted that a good entrepreneur is a good borrower.
How much to Lend?
The Bank should lend matching to the asset of the borrower as well as his/her capability to properly handle the business. Bank credit must not be extended for speculative purpose. Moreover, contingent liability must be taken into consideration very wisely in sanctioning new loan and enhancing old limit as contingent liability turning into actual liability, may upset the liquidity position of a bank.
There must be a depth study on the following points:
- When the loan is to be given?
- How the loan is to be given?
- What may happen after disbursement of the loan?
- Generally what happens (from past experience) after disbursement of the loan?
- In which sector, private or public, trading or industrial, the loan will be given?
- The loan will be short term or long term?
- A manager will do the possible efforts to minimize the risk of the Bank?
Credit Management Fundamentals of AB Bank
a) As maximizing profit is the basic aim of the bank, every profit opportunity should be explored and negotiated skill fully.
b) Growth of the size of customer base through constant alertness towards profitable business opportunity.
c) To avoid unnecessary wastage of time and energy, clear, concise and summary type communications should be used.
d) To be thoroughly familiar with the banks policies and functions.
e) To put every effort in reducing and containing the size of classified advance portfolio.
f) To keep the exposure burden of credit operations to the barest minimum and endeavor to improve the cost efficiency of credit operations.
g) To apply strong commonsense in all credit matters by putting questions—”Does this make sense? Is there a better way? How to improve this?”
h) To place a high priority on the quality of credit exposure, new proposals must meet the bank’s credit criteria and existing portfolio should be under constant review for improving risk positions.
SOUND Credit Principles of AB Bank
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 dispersion is basic to sound credit principles and policies. Recognize impact of fee income through Letter of Credit, Letter of Guarantee, Foreign Exchange business in enhancing return on assets.
e) Normally not to entertain or encourage long-term credit proposals.
Lending Policies of AB Bank
A loan policy gives loan officers, relationship managers, and the Bank’s management specific guidelines in making individual loan decisions and in shaping the Bank’s overall loan portfolio. One of the most important ways a bank can make sure that its loans meet regulatory standard and are profitable is to establish a written loan policy.
AB Bank Limited also has a good loan policy and the most important elements of the policy are stated below:
A goal statement for the Bank’s loan portfolio (in terms of types, maturities, sizes, and quality of loans).
- Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve.)
- Lines of responsibility in making assignments and reporting information within the loan department.
- Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications.
- The required documentation that is to accompany each loan application and what must be kept in the Bank’s credit files (required financial statements, security agreements etc.)
- Lines of authority within the bank regarding who is responsible for maintaining and reviewing the bank’s credit files.
- Guidelines for taking, evaluating and perfecting loan collateral.
- A presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loans.
- A statement of quality standards applicable to all loans.
- A statement of the preferred upper limit for total loans outstanding (i.e. the maximum ratio to total loans to total assets allowed.)
- A description of the principal trade area, from which most loans should come.
- A discussion of the preferred procedures for detecting, analyzing and working out problem loan situations.
Types of Loan Facilities
The Bank’s lending operations will be in the form of:
- Working capital finance
- Trade finance (local and import)
- Project finance (on selective basis)
- SME finance
The following types of credit facilities shall be allowed:
Funded like as Overdraft, Time Loan, Term Loan, Trust Receipt, IBP,FBP
Non Funded like as Letter of Credit, Letter of Guarantee
Single Borrower/Group Limits/Syndication
The Bank’s exposure on a single borrower shall be governed by Bangladesh Banks guidelines formulated through BRPD Circular(s). As per the latest guidelines Banks maximum permissible exposure for one obligor is 35% of the total capital of the bank, subject to funded facilities being up to 15% of the total capital. In case of export sector financing, the one obligor exposure limit is 50% but the funded exposure will remain the same, i.e. 15%.
Discouraged Business Types
Unless reconsidered, considering various aspects the Bank shall discourage lending in the following sector:
- Tanneries and leather goods
- Commercial public Transport
- Gold trading
- Arms / weapons dealing
- Highly Leveraged Transactions
- Finance of Speculative Investments
- Lending to companies listed on CIB black list or known defaulters
- Counterparties in countries subject to UN sanctions
- Share Lending
- Taking an Equity Stake in Borrowers
- Lending to Holding Companies
- Bridge Loans relying on equity/debt issuance as a source of repayment.
Loan Facility Parameters
While sanctioning a credit facility different parameters like maximum size, maximum tenor, and covenant and security requirements to be clearly determined and spelt out. Such as
– Bank should not grant facilities where the bank’s security position is inferior to that of any other financial institution.
– Assets pledged as security should be properly insured.
– Valuations of property taken as security should be performed by a recognized professional valuation firm appointed to conduct valuations. (for credit facilities exceeding a certain amount as determined from time to time)
– 3rd party mortgage should be avoided unless direct relationship can be established acceptable to bank.
Cross Border Risk
Risk associated with cross border transactions. International trade with parties of a particular country may be of comparatively higher risk. Political and sovereign risk, third world debt crisis, war risk, trade and economic sanctions risk, security risk etc to be considered while processing import and export finance proposals involving with particular countries. For example, export documents negotiated for and import from countries like Nigeria, Iraq, and Israel to be avoided.
A thorough credit and risk assessment shall be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment shall be presented in a Credit Memorandum that originates from the Branch and is approved by Head of Credit Risk Management, Credit Committee or the Board of Directors as the case may be. The Branch Manager will be the owner of the customer relationship, and will be held responsible to ensure the accuracy of the entire credit memorandum submitted for approval. The Branch Manager and Credit Officers must be familiar with the bank’s Lending Guidelines and shall conduct due diligence on new borrowers, principals, and guarantors.
It is essential that the Branch knows 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. Bank has established Know Your Customer (KYC) and Money Laundering guidelines which shall have to be adhered to at all times.
Credit Memorandum shall summarize the results of the risk assessment and include, as a minimum, the following details:
– Amount and type of loan(s) proposed.
– Purpose of loans.
– Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
– Security Arrangements
In addition, the following risk areas shall be addressed:BORROWER ANALYSIS
The majority shareholders, management team and group or affiliate companies shall be assessed. The academic qualifications, business experience and managerial ability of the directors / owners shall be taken into account. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall have to be addressed, and risks mitigated.
The key risk factors of the borrower’s industry shall have to be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces shall have to be addressed and the strengths and weaknesses of the borrower relative to its competition to be identified.
Any customer or supplier concentration shall have to be addressed, as these could have a significant impact on the future viability of the borrower.
HISTORICAL FINANCIAL ANALYSISAn analysis of a minimum of 3 years historical financial statements of the borrower shall be presented. This may, however, be relaxed in case of smaller enterprises. Where reliance is placed on a corporate guarantor, guarantor’s financial statements / net worth statements shall also have to be analyzed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. PROJECTED FINANCIAL PERFORMANCE
Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance shall have to 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.
ADHERENCE TO LENDING GUIDELINES
Credit Memoranda must clearly state whether or not the proposed recommendation is in compliance with the bank’s Lending Guidelines. The Bank’s Head of CRM or Credit Committee shall approve Credit Applications that do not adhere to the bank’s Lending Guidelines.
Mitigating factors for risks identified in the credit assessment shall have to be identified. Possible risks include, but are not limited to: 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.
A current valuation of collateral shall have to be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage shall be assessed.
Lending Procedure of AB Bank Limited
The lending procedure starts with building up relationship with customer through account opening. The stages of credit approval are done both at the branches and at the corporate office level. The various stages of credit approval are described sequentially:
A loan procedure starts with a loan application from a client who must have an account with the Bank. At first it starts from the branch level. Branch receives application from client for a loan facility. In the application client mention what type of credit facility he/she wants from the bank including his/her personal information and business information. Branch Relationship Manager or the Relationship Credit Officer of the credit department conducts the initial interview with the customer.
After receiving the loan application from the client, the bank sends a letter to Credit Information Bureau of Bangladesh Bank for obtaining a credit inquiry report of the customer from there. This report is called CIB (Credit Information Bureau) report. This report is usually collected if the loan amount exceeds fifty thousand taka. The purpose of this report is to be informed that whether or not the borrower has taken loans and advances from any other banks and if so, what is the status of those loans and advances i.e. whether those loans are classified or not.
If Bangladesh Bank sends positive CIB report on that particular borrower and if the Bank thinks that the prospective borrower will be a good one, then the bank will scrutinize the documents. Required documents are:
- In case of corporate client, financial documents of the company for the last three to five years. If the company is a new one, projected financial data for the same duration is required.
- Personal net worth of the borrower(s).
- In this stage, the bank will require whether the documents are properly filled up and duly signed. Credit in charge of the relevant branch is responsible enquire about the ins and outs of the customer’s business through discussing with him/them.
Bank officials of the credit department will inspect the project for which the loan is applied. Project existence, its distance from the bank originating the loan, monitoring cost and possibilities are examined.
Any loan proposal needs to be evaluated on the basis of financial information provided by the loan applicant. Financial spread sheet analysis which consists of a series of quantitative techniques is employed to analyze the risks associated with a particular loan and to judge the financial soundness and worthiness of the borrower. Besides lending risk analysis is also undertaken by the bank to measure the borrower’s ability to pay considering various risks associated with the loan. These quantitative techniques supported with qualitative judgment are the most important and integral part of the credit approval process used by AB Bank Limited. This is the credit analysis phase.
Obtain legal opinion on the collateral provided by the applicant, whether those are properly submitted- regular and up to date or else those documents will be asked to regularize by the applicant.
The branch starts processing the loan at this stage. Based on the analyses (credit analysis) done by the branch, the branch prepares a loan proposal. The proposal contains following important and relevant information:
Name of the borrower (s), Nature of credit, Purpose of the credit, Extent of the credit, Collateral, Margin, Rate of interest, Repayment Schedule Validity.
If the proposal meets AB Bank’s lending criteria and is within the manager’s discretionary power, the credit line is approved. The manager and the sponsoring officer sign the credit line proposal and issue a sanction letter to the client.
If the value of the credit line is above the branch manager’s limit then it is sent to head office or zonal office for final approval with detailed information regarding the client (s), credit analysis and security papers.
Head office processes the credit proposal and afterwards puts forward an office notice if the loan is within the discretionary power of the head office credit committee or board memorandum if the loan requires approval from the board of directors.
If the zonal office, credit committee of the head office or the board as the case may be approves the credit line, an approval letter is sent to the branch. The branch then issues a sanction letter to the borrower with a duplicate copy. The duplicate copy duly signed by the borrower is returned to the branch of the bank. This duplicate copy returned by the applicant proves that the borrower agrees with the terms and conditions of the credit line offered by the bank.
After issuing the sanction advice, the bank will collect necessary charge documents. Charge documents vary on the basis of types of facility, types of collateral.
Finally loan is disbursed by the branch through a loan account in the name of the borrower and monitoring of the loan starts formally.
Interest Rate W.E.F
|2) Large and medium scale industries|
|3) Small Industries (Term Loan)|
|4) Working Capital|
|a) Large and medium scale industries|
|b) Small Industries|
|6) Commercial Lending|
|7) Housing Loans|
|8) Consumer Credit|
|9) Credit Card|
2.00% per month
2.00% per month
|10) Finance to NBFI’s|
|i) Cash Collateral – ABBL FDR|
|ii) Cash Collateral – Other Banks FDR or WDB|
|iii) Women Enterpreneur (Awparajita upto Tk 50.00 lac)|
|iv) Special Scheme Loans – SME|
First information sheet (FIS)
First information sheet (FIS) is the prescribed from provided by the respective branch that contains basic information of the borrower. It contains following particulars.
- i. Name of the concern with its factory location, office address and Tel no.
- ii. Name of the main sponsors with their educational qualification.
- iii. Business experience of the sponsors, details of past and present business, its achievement and failures, name of all the concerns wherein the sponsors have involvement.
- iv. Income tax registration no. With the amount of tax paid for the last three years.
- v. Details of unencumbered assets (movable & immovable) personally owned by the sponsors.
- vi. Details of liabilities with other banks and financial institutions including securities held there against.
- vii. Purpose of loan sought from AB Bank.
- viii. Estimated cost of the project & means of finance.
Application for credit line
After receiving the first information sheet from the borrower bank official verifies all the information carefully. He/she also checks the account maintains by the borrower with the bank. If the official become satisfied then he/she gives application to the bank prescribe format supplied by the bank called Credit for request limit (CRFL).
Borrowers Credit Worthiness Analysis by AB Bank Limited following 6 “C”s:
The question that must be dealt with whether or not the customer can service the loan-that is pay out the loan when due with a comfortable margin of error. This usually involves a detailed study of six aspects of the loan application: character, capacity, cash, collateral, conditions and control. All must be satisfied for the loan to be a good one from the lender’s (AB Bank Limited) point of view.
- Character: The loan officer must be convinced that the customer has a well defined purpose for requesting credit and a serious intention to pay. Responsibility, truthfulness, clean past record, true purpose and honest intention to repay the loan make up what a loan officer calls character.
- Capacity: The customer requesting credit must have the authority to request such and the legal standing to sign a binding loan agreement.
- Cash: The borrower should have the ability to generate enough cash flow to repay the loan. This cash flow can be generated from sales or income from the sales or income, from the sale of liquidation of assets or funds raised through Collateral: The borrower must possess adequate net worth or enough quality assets to provide adequate support for the loan. The value of the collateral security must cover the loan exposure.
- Conditions: The recent trend of borrower’s line of work or industry must be taken into considerations by the lender.
- Control: The lender should be careful about whether changes in law and regulations could adversely affect the borrower and whether loan request meets the Bank’s and regulatory authorities’ standards for loan quality.
Collecting CIB Report from Bangladesh Bank
After receiving the application for credit line, Bank sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. Basically branch seeks this report from the head office for all kinds of loans. The purpose of this report is to being informed that whether the borrower the borrower has taken loan from any other bank; if ‘yes’, then whether the party has any overdue amount or not.
Making Credit proposal (CP)
Branch then has to find the right borrower by considering the following 6 C’s. These are character, capital, capacity, cash, collateral, condition (economic). If the branch thanks that the project is feasible then he will prepare a Proposal. Bank prepares the proposal in a specific from called credit proposal. Significance the proposal branch sends it to head office for approval.
Head Office Approval
The respective officer of Head Office appraises the project by preparing a summary named “Top Sheet” or “Executive Summary”. Then he/she sends it to the Head Office Credit Committee (HOCC) for the approval of the loan. The Head Office Credit Committee (HOCC) considers the proposal and takes decision whether to approve the loan or not. If the loan is approved by the HOCC, the HO sends the approval to the concerned branch with some conditions. These are like.
- Drawing will not exceed the amount of bill receivables.
- The tern over in the account during the tenure of the limit should not be less than four times of the credit limit.
- All other terms and conditions, as per policy and practice of the bank for such advance to safeguard the banker’s interest shall also be applicable for this sanction also.
- Branch shall not exceed the sanctioned limit. Required charge documents with duly stamped should be obtained.
Head Office Approval Authority
Drawing shall be allowed only after completion of mortgage formalities and other security arrangement.
The approval process reinforces the segregation of Relationship Management/Marketing from the Approving Authority. All credit proposals shall be initiated at the Branch level and be forwarded to Head Office Credit Risk Management Division or Head Office Business Banking Division as per following process flow:
- Branch Manager solicits business from customers.
- Branch Manager and Credit Officer prepare Credit Memorandum (CM).
- a. If the CM value i.e. proposed credit facility is within the discretion of Head Office Credit Committee, the CM is submitted to Head of Credit Risk Management (HOCRM) at Head Office.
b. If the CM value is within the discretion of the Board of Directors, the CM is submitted to the Head of Business Banking (HOBB) at Head Office.
- a) HOBB submits the CM, received from the Branch Manager, with their recommendation / comments to HOCRM
b) HOCRM submits CM to H.O. Credit Committee or Board of Directors, as the case may be.
Credit Committee / Board approves (or declines) the Credit Memorandum
5. HOCRM advises decline of proposal or initiates queries with the Branch Manager, if the CM is not approved or further information has been solicited by the approving authority.
6. On approval, HOCRM advises the approval, along with all approval terms, to (i) Branch Manager, (ii) Head Office Risk Asset Management, (iii) Branch Credit Administration and (iv) HOBS (if appropriate)
Post- Approval process:
- Branch Manager advises the customer regarding the approved credit lines and the terms and conditions attached thereto.
- Branch Manager forwards customer’s Acceptance of approval letter to Branch Credit Administration. [In case of ‘qualified’ acceptance given by the customer, Branch Manager addresses the same through the Credit approval chain.]
- Branch Credit Administration obtains legal vetting arranges security / collateral valuation and collects all necessary charge documents, duly executed by the customer, through the Branch Manager.
- Branch Credit Administration
Documentation of loans and advances:
In spite of the fact that banker lends credit to a borrower after inquiring about the character, capacity and capital of the borrower, he must obtain proper documents executed from the borrower to protect him against willful defaults. Moreover, when money is lent against some security of some assets, the document must be executed in order to give the banker a legal and binding charge against those assets. Documents contain the precise terms of granting loans and they serve as important evidence in the
Law courts if the circumstances so desire. That is why all approval procedure and proper documentation shall be completed before the disbursement of the facilities. The documents for loans and advances can be classified into two categories, namely Charge documents & Security documents.
After verifying all the documents the branch disburses the loan to the borrower. A loan repayment schedule is also prepared by the bank and given to the borrower.
After the disbursement of the loan bank officials time to time monitor the loan by physical observation of the activities of the party. It is done in the following manner.
- Constant supervision
- Working capital assessment
- Stock report analysis.
Monitoring is a process of taking case of loan cases starts from the selection of the borrower and remains live throughout the life of a loan.
To minimize credit losses, monitoring procedures and systems should be in places that provide an early indication of the deteriorating financial health of a borrower. At a minimum, systems should be in place to report the following exceptions to relevant executives in CRM and RM team:
- Past due 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 exceptions are referred to CRM and the RM team for timely follow-up.
- Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit.
All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually. Two possible solutions to minimize the credit loss:
1. Early Alert Process
Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Bank’s interest.
2. Incentive Program
Banks may wish to introduce incentive programs to encourage Recovery Unit Account Managers to bring down the Non Performing Loans (NPLs).
Commercial Banks sanction loan to different categories of borrowers for various purposes. Before sanctioning of loans and advances (short term loan, long term loan) bank appraises a loan proposal and analyze information relating to the borrower and purpose of the loan to determine viability of the loan proposal. If the proposal is found viable and safe for lending, loan is sanctioned and disbursed.
At the time of sanctioning loan, along with all other terms and conditions repayment period and installment is fixed. Recovery of loan starts just after the maturity of grace period. But more exhaustive appraisal of the loan proposal in the pre-sanction stage is not the guarantee to recover the loan money with interest unless a built in system of supervision & follow up is applied and proper treatment is given as and when problem arises.
- 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 9 or worse accounts.
The loan classification procedure for all types of loan is governed by the guidelines contained in BRPD Circular no 16 dated 06.12.98 issued by Bangladesh Bank and subsequently revised partially through BRPD Circular no 9 and 10 dated 14.05.2000, According to this circular if any borrower fails to repay his amount or installment within the following time period then it will fall under the following classification status.
Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor 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 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.
It arises mainly from lending, trade finance and treasury businesses. This can be described as potential loss arising from the failure of a counter party to perform as per contractual agreement with the Bank. The failure may result from unwillingness of the counter party or decline in his / her financial condition. The Bank has segregated duties of the officers / executives involved in credit related activities. A separate Corporate Division has been formed at Head Office which is entrusted with the duties of maintaining effective relationship with the customers, marketing of credit products, exploring new business opportunities, etc. Moreover, credit approval, administration, monitoring and recovery functions have been segregated. For this purpose, two separate units have been formed within the credit division.
Operational risk address the risk associated with fraud, forgery, unauthorized activities, error, omission, system failure and external events among others. Bank is managing these risks through written procedures, regular training and awareness programs. Departmental Control Function Checklist (DCFCL), Quarterly Operations Report, Loan Documentation Checklist etc. are in place covering all probable risks associated with bank’s business and operations. Surprise Inspections are also made on a regular basis to make sure that all control tools are functioning properly.
The exposure of market risk of the bank is restricted to foreign exchange risk, interest rate risk and equity position risk.
i) Foreign exchange risk
Foreign exchange risk is defined as the potential change in earnings due to change in market prices. The foreign exchange risk of the bank is minimal as all the transactions are carried out on behalf of the customers against underlying L/C commitments and other remittance requirements.
Financial Institution and Treasury (FIT) division independently conducted the FX transactions and the Mid Office and the Back Office of treasury is responsible for verification of the deals and passing of their entries in the books of account. All foreign exchange transactions are revalued at Market rate as determined by Bangladesh Bank at the month – end.
ii) Interest rate risk
Interest rate risk may arise from trading portfolio and non- trading portfolio. The trading portfolio of the bank consists of government treasury bills, bond. The short term movement in interest rate is negligible or nil. Interest rate risk of non trading business arises from mismatches between the future yield of an asset and its funding cost. Asset Liability Committee (ALCO) monitors the interest rate movement on a regular basis.
iii) Equity position risk
Equity risk arises from movement in market value of equities held. The risks are monitored by the Investment Banking Division under a well designated policy framework. The market value of equities held was however higher than the cost price at the balance sheet date.
The object of liquidity risk management is to ensure that all foreseeable funding commitments and deposit withdrawals can be met when due. To this end, the Bank is maintaining a diversified and stable funding base comprising of core retail and corporate deposits and institutional balance. Management of liquidity and funding is carried out by Financial Institution & Treasury (FIT) department under approved policy guidelines. FIT front office is supported by a very structured Mid Office and Back Office. The liquidity management is monitored by Asset Liability Committee (ALCO) on a regular basis. A written contingency plan is in place to manage extreme situation.
Risk arising from money laundering
AB Bank Limited considers prevention of money laundering risk not only as a compliance requirement imposed by the law of the country but also as one of its core business values. The Board of Directors and Senior Management are firmly committed to combat money laundering. Every year, a message from the President and Managing Director’s office goes to all employees of the Bank reiterating the importance of the issue. There is a high profile Central Compliance Unit (CCU) in place to oversee the anti money laundering activities. The President and Managing Director himself supervise the function of CCU’s. Operation has separate and dedicated headcount for surveillance of the anti money laundering functions across the Bank.
Credit Risk & Credit Analysis
The analysis of financial statements of the prospective borrower(s) carried on for the purpose determining the past financial health of the borrowing unit and judging whether any future loan commitment to the unit is secured or not is known as credit analysis. The basic financial statements required for credit analysis are:
- Balance Sheet
- Income statement (Profit and Loss Account)
- Cash Flow Statement.
A thorough credit and risk assessment shall have to be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the Relationship Manager/Relationship Officer, and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. Risk management (RM) must be familiar with the bank’s Lending Guidelines and shall conduct due diligence on new borrowers, principals, and guarantors.
It is essential that Risk Managers (RMs) 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. Bank has established Know Your Customer (KYC) and Money Laundering guidelines which shall have to be adhered to at all times.
The system defines the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities shall be assigned with a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications.
The following Risk Grade Matrix is provided as an example. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results. Monitoring standards and account management must be appropriate given the assigned Risk Grade.
Each of the borrowing account will be assessed in terms of 9 matrix namely:
- Age of Business
- Account Behavior
- Personal Banking
- Management Experience
- Management Stability
- Business Outlook
Each of the matrixes will carry different weight age and aggregate score will be arrived at after accumulation of allotted points. The aggregate score depicts following credit grade:
Credit Quality Management
Whatever the sector may be the loans are not repaid in proper manner it worth nothing by the banks. Default loans have always been a big problem for our banking sector. The solvency risk of a financial institution often originates from the quality of its assets portfolio. An indicator of asset quality is the ratio of non-performing loans or the classified loans to total loans (gross).The loan classification and loss provisioning criteria and their enforcement continue to be less stringent in Bangladesh than international standers.
Credit Rating Status of Private Bank
|SI NO||Name||Name Of ECAI||Long-Term Rating||Short-Term Rating||Date of Expiry|
|1||Mercantile Bank Limited||CRISL||AA-||ST-2||May 11, 2011|
|2||AB Bank Limited||CRAB||AA3||ST-1||June 30, 2011|
|3||One Bank Limited||CRAB||A1||ST-2||June 30, 2011|
|4||Eastern Bank Ltd||CRISL||AA||ST-2||June 1, 2011|
|5||Standard Bank Limited||CRAB||A1||ST-2||June 30, 2011|
|6||Uttara Bank Limited||CRAB||A2||ST-2||June 30, 2011|
|7||Dutch-Bangla Bank Ltd||CRAB||AA3||ST-1||June 30, 2011|
|8||Pubali Bank Limited||CRAB||AA3||ST-1||June 30, 2011|
|9||Dhaka Bank Limited||CRAB||A1||ST-2||March 7, 2011|
|10||Jamuna Bank Limited||CRAB||A2||ST-2||June 30, 2011|
|11||The City Bank Limited||CRAB||A1||ST-2||June 30, 2011|
|12||United Commercial Bank Ltd||CRISL||A+||ST-2||June 30, 2011|
Credit Rating Agency of Bangladesh Limited (CRAB) has assigned “A1”(Pronounced as Single A One) rating in the Long Term and “ST-2” in the Short Term to AB Bank Limited.
In 2008, Credit Rating Information and Service Limited (CRISL) awarded A1” (Pronounced as Single A One) in the Long Term and ST-2 in the Short Term to AB Bank Limited. Commercial Bank rated ‘A1’in the Long term are adjusted to be strong bank, characterizes by good financials, healthy and sustainable franchises, and a first rate-operating environment. This level of rating indicates strong capacity for timely payment of financial commitment, with low likeliness of being adversely affected by foreseeable events.
Commercial Bank rated ‘ST-2’ in the Short Term are considered to have strong capacity for timely repayment .Banks rated in this category are characterized with commendable position in terms of liquidity , internal fund generation , and access to alternative sources of Funds in outstanding .
In 2009, Credit Rating Information and Service Limited (CRISL) awarded AA3” in the Long Term and ST-1 in the Short Term to AB Bank Limited.
Commercial Bank rated AA3 in the long term belong to “Very strong Capacity & Very high quality” cohort. Bank has very strong capacity to meet their financial commitments. Bank is judged to be of high quality and is subject to low credit risk.
Commercial Bank rated ST-1 in the short term is considered to have highest capacity for timely payment of obligations. Bank is characterized with excellent position in terms liquidity, internal fund generation, and access to alternative sources of funds.
A SWOT Analysis to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture shall be done, particularly in the case of Large Loans.
- Second highest number of branches in the private bank market.
- Investing lots of money in the social for developing. Arranging with the world famous Western Union to deliver quick and safe remittance to the customer.
- Energetic, intelligence officer in the branch level, so they can work a long time without any extra compensation.
- The employee is more flexible. The customer has not any major complain to them.
- Delivering some attractive product to the customer; e.g. ABBL power card.
- Worse Management.
- Human Resource Department is not effective.
- The job satisfaction level of the employee is lower level in the branches.
- Their IT system is worse.
- Web site design is poor.
- Training system is not well.
- The bank management is totally dependable on the branch manager. There is no direct communication with the employee.
- Motivation power is less.
- Providing some good products to the customer.
- Providing some good compensation package to the employee.
- Making online banking.
- Providing standard salary to the employee.
- More competitors in the market.
- The competitors are growing day by day than IT sector, compensation system, and promotion for the employee.
- The other banks arc providing better compensation to the employee.
- The Competitor’s bank has better and well-timed training strategy.
AB Bank limited provides the loans and advances to the borrower though their different branches in all over the country. Though every branch is not best is not best in all respective area of the program but in a particular area a bank can be best. The major point that I have indentified in credit policy in procedure of giving loan &advances of AB Bank Limited is given below:
- Lending is one of the main functions of a back. But lending is a risky procedure, in order to make it less risky AB Bank have different variations such as credit grading and risk grading system.
- Practical procedure is different from the policy that is prescribed by head office.
- Sometimes situation is a big factor at the time of giving SME loan. Such as-if there is a occurrence in the branch then head office will restricted the % of giving loan. At that time Branch will not sanction more loans.
- The full process of loan sanction is done by the branch official, but the final decision is taken by the head office.
- The procedure of giving loan is very complex. That sometimes discourages client from taking loan.
- ABBL’s loans and advances are dominated by financing on short-term credit programmers mainly to the trade commerce & processing units rather in any manufacturing unit.
It is very difficult to recommend about this topic because of research restrictions and unavailability of data. Despite these problems there are some things that the credit management systems/policy of AB Bank Limited, Dhanmondi office should look at:
- AB Bank should increase the amount of loan and advance in micro credit sector as the loan recovery rate from micro credit sector is much higher.
- Implement continuous monitoring system in the loans recovery process
- Improve the Credit risk management department for avoid possible defaulter.
- Improve the criteria for receiving SME loan.
- Ro ensure that the borrowers can utilize the loan on the right purpose
- There are many competitors in banking sector. ATM, online banking, credit card service etc are common in banking sector. They should develop their system.
- AB Bank should examine its borrower’s Cash Flow Statement, Audited Balance Sheet, and Income Statement and other financial statement to make sure that its borrower has the ability to repay the loan.
- More training facility should be conducted for the bankers to improve their analytical ability & professional standard regarding the use of CRG and other tools & techniques in selecting the borrowers and analyzing the loan.
Modern Commercial Banking is exacting business. The reward are modest, the penalties for bad looking are enormous. And Commercial banks are great monetary institutions, important to the general welfare of the economy more than any other financial institution. It has a vastly sobering and exacting responsibility. Banking industry in Bangladesh is now on the right track. The banks are contributing much than the previous years for the growth and development of the country. Banking industry is much organized because of strong vigilance and supervision of Bangladesh Bank. In the industry, AB Bank is one of the pioneers in many criteria. AB Bank is committed towards the excellence in the service with efficiency, accuracy and proficiency.
Like of most of the commercial banks, Credit & foreign exchange department is one of the most important departments of AB Bank. Despite problems and weaknesses, it is driving the bank from the front. With an easy to understand operating guidelines, transparent operating procedure and a team of highly knowledgeable and proficient personnel, this department is expanding and excelling itself day by day.
During the three month internship program at ABBL at Dhanmondi Branch, almost all the desks have been observed more or less. This internship program, in first, has been arranged for gaining knowledge of practical banking as to compare this practical knowledge with theoretical knowledge. During the internship, it is found that the branch provides all the conventional banking services as well as some specialized financing activities to the economy. I have seen that AB Bank Ltd. is not much different from other commercial bank of Bangladesh. It follows the same practice & procedure which is followed by it’s industry members. but one thing should be mentioned new loan reformation have slightly changed the appraisal procedure. This Credit Risk Grading manual makes the procedure rather following their own procedure. If the bank follows the standard appraisal hopefully the changes of failure will be minimized in future.