Credit Risk Grading Aziz.pdf
Transcript of Credit Risk Grading Aziz.pdf
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A Term Paper
On
Submitted To
Mr. MA Taleb
Professor
Department of Banking and Insurance
University of Dhaka
Submitted By
M.M. Azizur Rahman
Roll No: 164
MBA (Banking) 16th
Batch
Department Of Banking and Insurance
University of Dhaka
Date of Submission: December 23, 2014
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Prepared By
M.M. Azizur Rahman
Id No: 16-037
MBA (Banking) 16th
Batch
Department Of Banking and Insurance
University of Dhaka
Dhaka, Bangladesh
Date of Submission: December 23, 2014
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Acknowledgement
Its a great pleasure for me to work with the report based on a topic Credit Risk Grading & its
Compliance in the Banking Sector which is very much significant for the banking companies. I hope
working on this topic will help me to gather various exposures to practical field. So, at the very
beginning, I would like to express my gratitude to almighty Allah for whose kindness I am sound
mentally and physically enough to prepare this report.
I would like to thank my faculty supervisor, Mr. MA Taleb, Professor, Department of Banking and
Insurance, University of Dhaka for his valuable direction and guidelines for which I have been able to go
through the in depth of the topic.
Finally, I would like offer a special thank to Mrs. Dipti Rani Hazra, Joint Director, Bangladesh Bank,
Head Office and Mr. Fazlul Karim, Assistant Director, Head Office, Bangladesh Bank.
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December 23, 2014.
Mr. MA Taleb
Professor,
Department of Banking and Insurance,
University of Dhaka.
Subject: Submission of Term Paper.
Dear Sir,
Here is the term paper on Credit Risk Grading & its Compliance in the Banking Sector that You
asked to submit on 23rd
December, 2014.
This report reveals the credit risk grading manual issued by the Bangladesh Bank, the controller of all the
scheduled and non-scheduled banking and financial institution and makes a practical example on the
Janata bank limited. In the preparing the practical example, I found some significant shortcomings of the
credit risk grading. But, still I conclude that Janata Bank Limited has less credit risk compare to the
banking industry in Bangladesh.
I have tried my best within my limitations to make this report presentable, information worthy. I really
enjoyed working on this topic, and I hope that you will consider all of my faults generously. If any
question arises regarding this report, I will be available for clarification.
Yours Sincerely
M.M. Azizur Rahman
Roll No: 164
MBA (Banking) 16th Batch
Department of Banking and Insurance
University of Dhaka.
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Table of Contents
Topics Page No.
Chapter One : Introduction 01-05
1.1. Preface 02
1.2. Origin of the Report 03
1.3. Rational of the Report 03
1.4.Purpose of the Report
1 .4. (a). General Purpose
1.4. (b). Specific Purpose
03
03
04
1.5.Corporate Profile of JBL 05
Chapter Two: Literature Review 06-10
Chapter Three: Methodology 11-14
3.1. Data Sources
3.1.(a).Primary Sources
3.1.(b).Secondary Sources
3.2.Analytical Tool
3.3. Limitation of the Study
12
12
12
12
12
Chapter Four: Analysis and Discussion 15-35
4.Credit Management Performance 15
4.1.Sector Wise Break-up of Loans of JBL 15
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INTRODUCTION
Credit Risk Grading is an important tool for credit risk management as it helps a Bank to understand
various dimensions of risk involved in different credit transactions. The credit risk grading system is vital
to take decisions both at the pre-sanction stage as well as post-sanction stage.
At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not
to lend, what should be the pricing for a particular exposure, what the extent should be of Exposure, what
should be the appropriate credit facility and the various risk mitigation tools. At the post-sanction stage,
the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the
grading, and other precautions to be taken. Having considered the significance and necessity of credit risk
grading for a Bank, it becomes imperative to develop a credit risk grading model which meets the
objective outlined above.
DEFINITION OF CREDIT RISK GRADING (CRG)
The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects
the underlying credit-risk for a given exposure.
A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks
associated with a credit exposure.
Credit Risk Grading is the basic module for developing a Credit Risk Management system.
FUNCTIONS OF CREDIT RISK GRADING
Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed
decision-making. Grading systems measure credit risk and differentiate individual credits and groups of
credits by the risk they pose. This allows bank management and examiners to monitor changes and trends
in risk levels. The process also allows bank management to manage risk to optimize returns.
USE OF CREDIT RISK GRADING
The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a
common standardized approach to assess the quality of an individual obligor and the credit
portfolio as a whole.
As evident, the CRG outputs would be relevant for credit selection, wherein either a borrower or
a particular exposure/facility is rated. The other decisions would be related to pricing (credit
spread) and specific features of the credit facility.
Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing
the aggregate risk profile. It is also relevant for portfolio level analysis.
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NUMBER AND SHORT NAME OF GRADES USED IN THE CRG
The proposed CRG scale for the banks consists of 8 categories with Short names and numbers
are provided as follows:
CREDIT RISK GRADING DEFINITION CRITERIA
1. Strength of the bank.
2. Condition of the bank.
3. Condition of franchise value.
4. Condition of operating environment.
5. Capability for timely repayment for any commitment.
6. Possibility of being adversely affected by seen or unseen events.
7. Credit facilities fully secured/partly secured/unsecured.
8. Credit facilities fully covered by government guarantee.
9. Credit facilities fully covered by top tier international/local bank
CREDIT RISK GRADING DEFINITIONS
A clear definition of the different categories of Credit Risk Grading is given as follows:
Risk Rating Grade
Definition
Superior Low Risk 1 Facilities are fully secured by cash deposits Government bonds or a counter guarantee from a top
tier international bank.
All security documentation should be in place.
Good Satisfactory Risk 2 The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low
leverage.
The company should demonstrate consistently strong
earnings and cash flow.
All security documentation should be in place.
Aggregate Score of 95 or greater based on the Risk
Grade Scorecard.
Grading Short Name Number
Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/watch list MG/WL 4
Special Mention SM 5
Substandard SS 6
Doubtful DF 7
Bad Loss BL 8
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Acceptable Fair Risk 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
earnings, cash flow and have a good track record
An Aggregate Score of 75-94 based on the Risk Grade
Scorecard.
Marginal Watch list 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.
Aggregate Score of 65-74 based on the Risk Grade
Scorecard.
Special Mention 5 Grade 5 assets have potential weaknesses that deserve
managements close attention. If left uncorrected, these weaknesses may result in a
deterioration of the repayment prospects of the
borrower
An Aggregate Score of 55-64 based on the Risk Grade
Scorecard.
Substandard 6 Financial condition is weak and capacity or inclination
to repay is in doubt
Loans should be downgraded to 6 if loan payments
remain past due for 60-90 days
Not yet considered non-performing as the correction of
the deficiencies may result in an improved condition,
and interest can still be taken into profits.
An Aggregate Score of 45-54 based on the Risk Grade
Scorecard.
Doubtful
(non-performing)
7 Full repayment of principal and interest is unlikely and
the possibility of loss is extremely high.
However, due to specifically identifiable pending
factors, such as litigation, liquidation procedures or
capital injection, the asset is not yet classified as Loss.
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 & Loss
(non-performing)
8 Assets graded 8 are long outstanding with no progress
in obtaining repayment (in excess of 180 days past
due) or in the late stages of wind up/liquidation.
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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
An Aggregate Score of 35 or less based on the Risk
Grade Scorecard
HOW TO COMPUTE CREDIT RISK GRADING OF A BANK
Step I: Identify all the Principal Risk Components (Quantitative & Qualitative)
Credit risk for counterparty may be broadly categories under Quantitative and Qualitative factors
which arise from an aggregation of the following:
QUANTITATIVE FACTOR:
Capital Adequacy
Asset Quality
Earnings Quality
Liquidity and Capacity of External Fund Mobilization
Size of the Bank & Market Presence
QUALITATIVE FACTOR:
Management status
Regulatory Environment & Compliance
Risk Management
Sensitivity to Market Risk
Ownership (Share holding pattern) & Corporate Governance
Accounting Quality
Franchise Value
Step II: Allocate weightages to Principal Risk Components
According to the importance of risk profile, the following weights are proposed for corresponding
principal risks components (Quantitative and Qualitative factors).
Principal Risk Components: Weights
QUANTITATIVE FACTOR: 60%
Capital Adequacy 15%
Asset Quality 15%
Earnings Quality 15%
Liquidity and Capacity of External Fund Mobilization 10%
Size of the Bank & Market Presence 5%
QUALITATIVE FACTOR: 40%
Management 10%
Regulatory Environment & Compliance 10%
Risk Management 5%
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Sensitivity to Market Risk 5%
Ownership (Share holding pattern) & Corporate Governance 5%
Accounting Quality 3%
Franchise Value 2%
Step III: Establish the Key Parameters
Once weightages are allocated to the Principal Risk Components (Quantitative and Qualitative Factors)
the next task is to arrive at key parameters corresponding to the Principal Risk Components.
Key Parameters for Capital Adequacy
Banks plan to raise equity to support its growth (Internal Capital Generation)
Minimum Capital Adequacy Requirement (CAR) set by Bangladesh Bank
Leverage ratio of the bank is satisfactory
Dividend policy of the Bank
Key Parameters for Asset Quality
Risk Management includes exhaustive pre-approval and post approval activities
Portfolio Management System
Level of nonperforming loans
Sector from where the gross NPL are coming from
Nature of security/collateral and the frequency of valuation
Key Parameters for Earnings Quality
Level of earnings
Diversity of earnings
Return on Assets (ROA)
Return on Equity (ROE)
Average cost of fund,
Net Interest Income Margin (NIIM) trend is satisfactory
Key Parameters for Liquidity and Capacity of External Fund Mobilization
Statutory Liquidity Reserve, Cash Reserve Requirement and Loan Deposit Ratio compliance
Asset liability maturity structure
Core asset funded by core liabilities
Impact on interest rate volatility on deposit and its trend
Ability to raise fund through stable sources in cost effective manner
Key Parameters for Size of the Bank & Market Presence:
Number of branch network and employees
Level of automation
Products and services offered are regularly reviewed
Key Parameters for Management:
Quality of Management (details of Senior Management, background of MD and other top
executives)
Experience and educational background of the senior, mid level and junior management
Management Philosophy (Vision & Mission)
Human resource development plans
Quality of training being offered
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Staff turnover
Emphasis to Information Technology and staff knowledge in this area
Key Parameters for Regulatory Environment & Compliance:
Policy on loan classification and provisioning
Policy on large loans
Disclosure requirement for banks
Delegation of power at operating level
Internal Control and Compliance mechanism
Status on Basel II compliance
Key Parameters for Risk Management:
Implementation of risk management in the areas of Credit Risk,
Implementation of risk management in the areas of Operational Risk
Implementation of risk management in the areas of and Market Risk
Key Parameters for Sensitivity to Market Risk
Degree to which changes in interest rates can adversely affect companys earnings
Degree to which changes in foreign exchange rates can adversely affect companys earnings
Degree to which changes in commodity prices can adversely affect companys business
Key Parameters for Ownership (Share holding Pattern) & Corporate Governance:
Ownership pattern & composition of Board (current shareholding with names of promoters)
Conflict of interest issues in the operational management
Personal policy and employee satisfaction
Application of information technology in the system
Key Parameters for Accounting Quality:
Policies for income recognition
Provisioning and valuation of investment are examined
Quality of Auditors
Key Parameters for Franchise Value:
Joint venture partner or Strategic Alliance
Management contract or Technical collaboration
Alliance/arrangement with World Bank/ADB/IFC/SEDF or awards/certification/recognition
Step IV: Assign weightages to each of the key parameters
Once the above mentioned key risk parameters are evaluated, analyzed and reviewed properly the next
step will be to further assign weightages against each key parameter depending on its strength and
merits.
Step V: Input data to arrive at the score on the key parameters
After the risk identification & weightages assignment process (as mentioned above), the next steps
will be to input actual score obtained by the Bank (under review process) against the key parameters in
the score sheet to arrive at the total scores obtained.
Step VI: Arrive at the Credit Risk Grading based on total score obtained
The following is the proposed Credit Risk Grade matrix based on the total score obtained by an
obligor (i.e. a Bank).
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Risk Grading Short Name Score Grade
Superior SUP i. 85 100
ii. Credit facilities fully cash
covered (100%) or near cash.
iii. Government guarantee
iv. International Bank guarantee
1
Good GD 75 84 2
Acceptable ACCPT 65 74 3
Marginal/watch list MG/WL 55 64 4
Special Mention SM 45 54 5
Substandard SS 35 44 6
Doubtful DF 25 34 7
Bad & Loss BL < 25 8
Credit Risk Grading: A Practical Example on Janata Bank Limited
Qualitative Factor
KEY PARAMETERS Points Parameter Actual Score
Obtained
1.Capital Adequacy 15.00 11.50
Banks plan to raise equity to support its growth is acceptable
(Internal Capital Generation)
4.00
Excellent
Strong
Good
Moderate
4
3
2
1
Strong
3
Bank has maintained the
Minimum CAR set by BB
5.00
3% or more above RR
1% to 2% above RR
Required minimum ratio
1% to 2% below RR
More than 2% below RR
5
4
3
2
1
1.85 %
4
Leverage Ratio of the Bank is
acceptable
4.00
9 % or More
7 % to less than 9%
5% to less than 7%
2% to less than 5%
Less than 2%
4
3
2
1
Fair
3
Is the dividend policy of the Bank
satisfactory keeping in line with
capital adequacy requirement
2.00 Satisfactory
Acceptable
Unsatisfactory
2
1.5
1
Acceptable
1.5
2. ASSET QUALITY: 15 Points 15.00 10.00
CRM includes exhaustive pre-
approval and post -approval
process
2.00 Always
Sometimes
Never
2
1
0
Always 2
Portfolio Management System
2.00 Satisfactory
Moderate
2
1
Satisfactory
2
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Unsatisfactory 0
Is level of non -performing loans
acceptable
3.00 Less than 3%
3% to5%
5% to 10%
10% to 15%
More than 15%
3
2.5
2
1.5
1
5% to 10%
2
Sector wise gross NPL 1.00 Satisfactory Moderate
Unsatisfactory
1
.5
0
Moderate .5
Sector from where the gross NPL
are coming from are periodically
reviewed
1.00 Regularly
Sometimes
Hardly
1
.5
0
Regularly
1
Are classified loans being
followed regularly with clear
action plan for recovery?
2.00 Yes
No
2
0
Regularly
Have Credit Risk Grading of
clients are in place and effective?
1.00 Always
Sometimes
Hardly
1
.5
0
Sometimes
.50
Portfolio Diversities are being
ensured by the management
1.00 Regularly
Irregularly
Not at all
1
.5
0
Irregularly .5
Nature of security/collateral are
clearly analyzed and the
frequency of valuation seems
justified
1.00 Justified
Poor
Unjustified
1
.5
0
Poor
1
Quality of non-industrial
lending are analyzed properly
and exposures are satisfactory
1.00 Satisfactory
Unsatisfactory
1
.5
Unsatisfact
ory
.5
3. EARNINGS QUALITY: 15
Points
15.00 12.00
Bank is maintaining satisfactory
growth in level of earnings
2.00 Yes
No
2
1
Yes 2
Diversity of earnings is regularly
pursued
1.00 Yes
No
1
.5
N0 .5
Growth in Return on Assets
(ROA)
2.00 Satisfactory
Moderate
Lower
2
1.5
1
Satisfactory
2
Growth in Return on Equity
(ROE)
2.00 Satisfactory
Moderate
Lower
2
1.5
1
Satisfactory
1.5
Interest Rate Management,
Interest rate policy are impacting
margin and profitability
2.00 Highly
Moderate
Low
2
1.5
1
Moderate 1.5
Non funded business prospects
and its contribution towards
earnings are regularly reviewed
for income growth
1.00 Yes
No
1
.5
Yes 1
Average cost of fund is well
under bank's established
1.00 Regularly
Sometimes
1
.5
Regularly 1
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parameter and are being
monitored
Hardly .25
Average lending rates are well
under bank's established
parameter and are being
monitored
1.00 Regularly
Sometimes
Hardly
1
.5
.25
Regularly 1
Net Interest Income Margin
(NIIM) trend is satisfactory
1.00 Yes
No
1
.5
Yes 1
Yield per taka staff cost is well
under bank's control
1.00 Strong
Weak
1
.5
Weak .5
4. LIQUIDITY AND
CAPACITY OF EXTERNAL
FUND MOBILIZATION: 10
Points
10.00 9.00
Bank is complying to SLR
(Statutory Liquidity Reserve),
CRR (Cash Reserve Requirement)
and Loan Deposit Ratio
2.00 Satisfactory
Moderate
Hardly
2
1.5
1
Satisfactory 2
Asset liability maturity structure
is in place and is reviewed in
ALCO meeting.
2.00 Yes
No
2
1
Yes 2
Bank liquidity ratio is satisfactory 2.00
Yes
No
2.00
1.00
Satisfactory 2
Core asset funded by core
liabilities are been identified and
proper matching is ensured
1.00 Yes
No
1.00
.50
No .50
Bank regularly reviews the impact
on interest rate volatility on
deposit and its trend
1.00 Regularly
Irregularly
1.00
.50
Irregularly .50
Bank has the ability to raise fund
through stable sources
1.00
Capable
Failure
1.00
.50
Capable
1
Bank has the credibility of
funding sources in distress
situation
1.00
Yes
No
Yes
1.00 1
5. SIZE OF THE BANK &
MARKET PRESENCE: 5
Points
5.00 4.50
Number of branch network and
employees
2.00 Large
Medium
Small
2.00
1.50
1.00
Large 2.00
Level of automation 2.00 High
Medium
Low
2.00
1.50
1.00
Medium
1.50
Products and services offered 1.00 Regularly
Irregularly
1.00
0.50
Regularly 1.00
TOTAL QUANTITATIVE FACTOR 60.00 46.50
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QUALITATIVE FACTOR
6. MANAGEMENT : 10 POINTS 10.00 7.00
Bank is viewed as a human resource based
institutions
1.00 Yes
No
1
.5
No .5
Quality of Management (details of Senior
Management, background of MD and other
top executives) is satisfactory
1.00 Satisfactory
Moderate
Unsatisfactory
1
.5
.25
Satisfactory 1.00
Experience and educational background of
the senior, mid level and junior management
is acceptable
1.00 Sufficient
Moderate
Good
1
.5
.25
Moderate .5
Management Philosophy is crystallized
through a well laid down Vision and
Mission
1.00 Yes
No
1
.5
No .5
Bank's human resource development plans
are properly documented and being properly
implemented
1.00 Always
Regular
Sometimes
1
.5
.25
Regular .5
Quality of training being offered by the bank
is acceptable
1.00 Satisfactory
Unsatisfactory
1
.5
Unsatisfactory .5
Management operating efficiency are being
calculated on the basis of earning and are
properly recognized
1.00 Yes
No
1
.5
Yes 1.00
More emphasis are placed on system &
process based banking
1.00 Yes
No
1
.5
No .5
Staff turnover rate is acceptable 1.00 Yes
No
1
.5
Yes 1
Management places emphasis on IT and
continuous enrichment of staff knowledge in
this area
1.00 Very Good
Fair
Poor
1
.5
.25
Fair .5
7. REGULATORY ENVIRONMENT &
COMPLIANCE : 10 Points
10.00 7.50
Policy on loan classification and provisioning
are in line with Bangladesh Bank
guidelines/circulars
2.00 Highly
Moderate
Low
2.00
1.50
1.00
Moderate 1.5
Policy on large loans are properly monitored
and followed per Bangladesh Bank
requirements
1.00 Yes
No
1.00
00
Yes .50
Loan against Shares, Debentures etc. are
properly approved and monitored as per
Bangladesh Bank guidelines
0.50 Yes
No
.50
00
Yes .50
Disclosure requirement for banks are handled
properly
1.00 Yes
No
1.00
.50
Yes 1.00
Delegation of power at operating level are
well defined and properly allocated
1.00 Sufficient
Negligible
1.00
.50
Sufficient .50
Instructions for compliance of provisions of
Money Laundering Prevention Act, 2002 are
properly handled at required level
2.00 Satisfactory
Moderate
Unsatisfactory
2
1.5
1
Moderate 1.5
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Company has been operating satisfactorily in
complying to the regulations of BSEC and
related bodies
1.00 Excellent
Moderate
Low
1.00
.50
00
Moderate .50
Internal Control & Compliance mechanism
as per Bangladesh Bank guidelines are fully
implemented and is operative in all respect
1.00 Fully
Partially
Poorly
1.00
.50
00
Fully 1.00
Bank's effort in moving towards achieving
the way for Basel II compliance is
satisfactory
0.50 Satisfactory
Negligible
.50
00
Satisfactory .50
8. RISK MANAGEMENT: 5 Points 5.00 3.50
Is Credit Policy & Process Manual fully
implemented
2.00 Highly
Moderately
Partially
2
1.5
1
High 1.5
Implementation of risk management in the
areas of Operational Risk Management
2.00 Completely
Moderately
Partially
2
1.5
1
Moderately 1.5
Implementation of risk management in the
areas of Market Risk Management
1.00 Completely
Moderately
Partially
1
.5
.25
Moderately .5
9. SENSITIVITY TO MARKET RISK: 5
Points
5.00 3.50
Changes in interest rates substantially affect
companys earnings 2.00 Highly
Moderate
2.00
1.00
High 2
Changes in foreign exchange rate materially
affect companys earnings 2.00 Highly
Moderate
2.00
1.00
Moderate 1
Changes in commodity prices may affect
bank's business
1.00 Heavily
Lower
1.00
.50
Lower .5
10. OWNERSHIP & CORPORATE
GOVERNANCE
5.00 3.50
Ownership pattern & composition of Board 2.00 Joint
Single
2
1
Joint 2
Conflict of interest issues in the operational
management are fully analyzed
1.00 Always
Sometimes
1
.5
Sometimes .5
Personal policy and employee satisfaction 1.00 Satisfied
Unsatisfied
1
.5
unsatisfied .5
Application of information technology in the
system
1.00 Strong
Weak
1
.5
Weak .5
11. ACCOUNTING QUALITY: 3.00
Points
3.00 2.50
Policies for income recognition is
documented and properly accounted
1.00 Yes
No
1.00
0.50
Yes 1
Provisioning and valuation of investment are
properly examined
1.00 Yes
No
1.00
.50
No .5
Bank's Books of Accounts are being audited
by quality Audit Firm
1.00 Yes
No
1.00
.50
Yes 1
12. FRANCHISE VALUE: 2 Points 2.00 2.00
Joint Venture Partner/Strategic alliance
(foreign or local partners adding to the
synergy)
1.00 Joined
Single
1.00
.50
Joined
1.00
-
Management Contract/Technical
collaboration (foreign or local partners
adding to the synergy)
0.50 Joined
Single
Join
ed
.50
.25
.50
Alliance/arrangement with World
Bank/ADB/IFC/SEDF or any
awards/certification or any other recognition
granted to the Bank
0.50 Joined
Single
Join
ed
.50
.25
.50
TOTAL QULIITATIVE FACTOR 40.00 29.50
GRAND TOTAL 100.00 76.00
CREDIT RISK GRADING GOOD (GD)-2
Interpretation of the Findings: GOOD (GD)-2
Strong Bank Very good Financials Healthy and productive franchises Excellent operating environment Strong capability for timely payment of financial commitments Very low probability to be adversely affected by foreseeable events Excellent liquidity and low leverage. Well established cliental base and strong market share. Very good management skill & expertise. Credit facilities fully covered by the guarantee of a top tier local Bank. Aggregate Score of 75-84 based on the Risk Grade Score Sheet
EXCEPTIONS TO CREDIT RISK GRADING
Head of Credit Risk Management may also downgrade/classify an account in the normal
course of inspection of a Branch or during the periodic portfolio review. In such event, the
Credit Risk Grading Form will then be filled up by Credit Risk Management Department and
will be referred to Corporate Banking/Line of Business/Credit Administration
Department/Recovery Unit for updating their MIS/records.
Recommendation for upgrading of an account has to be well justified by the recommending
officers. Essentially complete removal of the reasons for downgrade should be the basis of any
upgrading.
In case an account is rated marginal, special mention or unacceptable credit risk as per the risk
grading score sheet, this may be substantiated and credit risk may be accepted if the exposure
is additionally collateralized through cash collateral, good tangible collaterals and strong
guarantees. These are exceptions and should be exceptionally approved by the appropriate
approving authority.
Whenever required an independent assessment of the credit risk grading of an individual
account may be conducted by the Head of Credit Risk Management or by the Internal Auditor
documenting as to why the credit deteriorated and also pointing out the lapses.
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If a Bank has its own well established risk grading system equivalent to the proposed credit
risk grading or stricter, then they will have the option to continue with their own risk grading
system.
Limitations of CRG Credit Risk Grading is a good cushion for the banks. Hence it has some limitation. The most common
limitations are given below:
The weightage given are not proportionate equally.
The weights are fixed always rather than flexible.
Various categories of bank exist in the industry but the weightage are not of various
categories.
It is very complicated to identify the principle risk components.
Problems are found in case of setting key parameters.
It is very easier said than done to find consistency in the theory and practice.
No formal revision of the manual is made since its inaugural.
Its a very lengthy process to calculate the aggregate score
Complexity is observed in interpreting score obtained through the process.
Conclusion
An appropriate, precise and flexible Credit Risk Grading system is mandatory for creating and
adopting a risk management culture in the organization for developing a sustainable credit risk
management environment in the banking sector of Bangladesh. Credit risk generates not only from
counter party but also from improper policies, procedures and systems within the organization. This
paper focuses on the weakness of the existing risk evaluation system that entails assessing risk through
counter party or single obligor wise risk analysis. The new proposed Credit Risk Grading and
Evaluation system describes a new lending system that specifically addresses the flaws, thus helping
all parties to the process. Based on the proposed evaluation system, it is expected that the credit risk
analysis policies should: always follow the detailed and formalized credit evaluation or appraisal
process, provide risk identification, measurement, monitoring and control, define target markets, risk
acceptance criteria, credit approval authority, credit maintenance procedures and guidelines for
portfolio management, be communicated to branches or controlling offices and clearly spell out roles
and responsibilities of units involved in origination and evaluation system of credit risk for any
industrial project.
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References
I. Lehaj-Ul-Hasan, Principles, Policies and Guidelines for Sustainable Credit Risk
Management in Bangladesh, A thesis work submitted to the Department of Industrial and Production
Engineering, Bangladesh University of Science and Technology (BUET), December, 2007.
II. Commercial Bank Financial Management, In the Financial Services Industry, Sixth Edition-
JOSEPH F. Sinkey, JR.
III.CRG Guidelines of Bangladesh Bank (www.bangladesh-bank.org)
IV.www.fe-bd.com
V.www.investopedia.com
VI.www.wikipedia.com