Md. Saiduzzaman SelimMBA (Evening)

Introduction

Performance evaluation of Credit Risk Management : A Case Study on State-owned Commercial banks of Bangladesh

 

Presentation on

The study has been under-taken with the following objectives:

A. General Objectives To fulfill the partial requirements for obtaining MBA degree from the

IBAIS University. To review credit risk management policy and practice in SCBs in line with

the guidelines issued by Bangladesh Bank to find out potential areas of improvement.

B. Specific Objectives To assess the trend and magnitude of non-performing loans. To find the causes of non-performing loans. To analyze the impact of NPL on profitability. To recommend for overcoming NPLs.

Objectives of The Study

FFD

Research Design: The qualitative and quantitative ways of descriptive research method together have been followed to accomplish the Dissertation report. The time preference of the study relates to the years of 1990-2014.

Methodology of the Study

Population and Sample size:Banks Total

populationSample size

Sonali 10 3Agrani 15 3Janata 10 3Rupali 15 3

4 50 12

Data Collection Instruments: Sources of dataA. PrimaryB. Secondary

A Non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days.

According to IMF, definition of NPLs is “A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full”. Loan may also be Non- performing if it is used in a different way than that for which it has been taken. According to the latest notice of the central bank, only 'doubtful' and 'bad' categories are treated as default loans.

Non-performing loans are also called non-performing assets (NPA), which are loans, classified by a bank or a financial institute, at the instruction of the regulatory authority, on which repayments or interest payments are not being made on scheduled time.

Trend and Magnitude of NPLs

The trend of non-performing loans in SCBs of Bangladesh:

We can divide the trend of non-performing loan in three sections are respectively

The trend of non-performing loans before Liberation Period

Growth and Spread of non-performing loans after liberation period

Present status of non-performing loans culture in Bangladesh

Year NPL (%) Year NPL (%) 1990 27.59 1991 26.30 1992 31.86 1993 32.23 1994 32.12 1995 31.00 1996 32.55 1997 36.57 1998 40.38 1999 45.62 2000 38.56 2001 37.02 2002 33.73 2003 29.0 2004 25.3 2005 21.35 2005 21.35 2006 22.94 2007 29.90 2008 25.44 2009 21.38 2010 15.56 2011 11.27 2012 23.87 2013 28.76 2014 31.2 (around)

Magnitude of NPLs

Banks Non-performing Loans In Percentage of Total Loan as Sept-2013: Comparison Between Types of Banks :

State Owned Banks

Specilized banks

Private Banks

Foreign Banks

28.76 29.39 7.3 6.02

Source: BB : Loan Rescheduled for the four State Owned Commercial Banks (2011-2014).

Source: Bangladesh bank publications-2013

Credit risk is a serious threat to the performance of banks; therefore various researchers have examined the impact of credit risk on banks in varying dimensions. Credit risk is the risk or potential of loss that may occur due to failure of borrower/ counterparty to meet the obligation on agreed terms and conditions of financial contract. To strengthen the risk management practices of banks, Bangladesh Bank issued ―Guidelines on Credit Risk Management (CRM) for Banks on the basis of the first version of its kind, the Bank Company Act 1991 (Amended in 2013). Better credit risk management presents an opportunity to greatly improve overall performance and secure a competitive advantage. These guidelines provide broad-based policy on the core principles for identifying, measuring, managing and controlling credit risk in banks.

I have found that poor credit risk management practice by SCBs that has

made NPLs in high percentage where the 63% NPls of total NPLs are from SCBs .

FINDINGS

business are run by adolescents who have lack of business experience. For peoples who want to do business in generally after retirement from

state or private service. Political instability Boards of the Directors. Loans are given to the borrower without consideration of Rescheduling of loans is offered to the defaulters without any down

payment in some causes. Loan scams have been a big cause of non-performing loan in banks in recent

years. They do not follow the Bangladesh Bank guidelines fully and fairly. Lack of power of BB to control SCBs because of the ministry of finance .

Some causes are responsible for increasing NPLs of four state-owned banks:

Anti-corruption Commission (ACC) Act- 2004, The Bank Companies Act-1991and The Companies Act-1994 are the suitable laws to prevent the bank fraudulence but their implementation is very rare.

Lack of Monitoring Lack of human resource policy The practice of the purchase of loans of questionable quality from private

commercial banks (PCBs) under pressure from powerful quarters that makes NPLs in SCBs.

The Internal Control department which ought to be the most critically important department of any bank is weak in the state-owned commercial banks (SCBs).

Some causes are responsible for increasing NPLs of four state-owned banks:

I would like to say again that main causes of problem loans in those banks are:

Allowing customer to intimidate Basing the lending decision on pressure from other parties Inadequate analysis of the borrower Inadequate analysis of financial statements Inadequate analysis of loan purpose, source of repayment, and excess cash flow Improper loan structure—amount, source of repayment, timing of repayment (terms) Improper collateralization Failure to properly identify entity bank is dealing with

So we can say that indirectly the credit risk management of SCBs is producing high percentage of NPls

that indicates the negative impact on performance of the banks :

erosion of the capital. reduces current revenue. resulting high loss of provision. high cost of loan which causes low investment. decrease of economic growth. loan loss reserve to make up bad debt. Finally law profit.

FINDINGS

Capital deficit of SCBs (in BDT Billion)

Source: Bangladesh Bank

Comparison of SCBs ROA with others Bank

The recommendations for banks that may help the authority to take effective remedial actions to overcome the NPLs and CRM problems in at least acceptable level. Sanctioning of loans should be on the basis of prudent banking principles and some other considerations must be stopped.Outright bribesPutting an end to the practice of sanctioning loans under pressure from powerful quarters .Future lucrative employment in the borrower's companyOver valuation of properties and assets of the borrower which are offered as collateralThe boards of directors of state-owned banks must consist of honest personalitiesA high-powered Credit Counseling Committee (CCC) headed by the Credit Management Department should be formed in each of the banks.A team must visit the factory and office of the applicant.Collection of Information about the applicant.

Without meeting the credit risk grading and due diligence no new loan should be sanctioned.

Documentation should be completed in all respects by the legal department before disbursement of the loan.

A perfect and exquisite credit analysis should be made in all respects about the applicant.

Bankers will have to increase their negotiation skills to speed up loan recovery

Bangladesh Bank can impose strict rules of lending on all state-owned banks.

Bank officials must visit the client's office and factory regularly Analyzing the disbursement of loans of past, present and future. Banks should take high collateral. SCBs have to follow each and every guidelines of risk management of BB

to overcome the problem of NPLs within short period of time.

The default loan culture as a regular phenomenon must not be accepted for an indefinite period of time. The concerned authorities already have taken some actions by the amendment of bank company act 1991 in 2013 to come out from this regular problem.

The truth is that suggestions, thinking, recommendations etc. will never work, unless and until all the interested parties come up with a positive approach. Unexpected political influence should be kicked out from the banks.

Conclusions