Credit Risk Management of U C B L & Analysis of the Data

Risk
Risk may be defined in terms of the variability of possible outcomes from a given investment. If
the outcome is certain and there is no variability-hence no risk. Another way we can measure
risk like a measure of uncertainty about the outcome from a given event. The greater the
variability of possible outcomes on both, the high side and the low side, the greater the risk.
Risk management
Risk Management is a discipline at the core of every financial institution and encompasses all the
activities that affect its risk profile. It involves identification, measurement, monitoring and
controlling risks to ensure that
a) The individuals who take or manage risks clearly understand it.
b) The banks risk exposure is within the limits established by Board of Directors.
c) Risk taking decisions are in line with the bank strategy and objectives set by BOD.
d) The expected payoffs compensate for the risks taken.
e) Risk taking decisions are explicit and clear.
f) Sufficient capital as a buffer is available to take risk
Risk Evaluation/Measurement
Until and unless risks are not assessed and measured it will not be possible to control risks.
Further a true assessment of risk gives management a clear view of banks standing and helps in
deciding future action plan. To adequately capture banks risk exposure, risk measurement should
represent aggregate exposure of bank both risk type and business line and encompass short run
as well as long run impact on bank. To the maximum possible extent banks should establish
systems / models that quantify their risk profile, however, in some risk categories such as
operational risk, quantification is quite difficult and complex. Wherever it is not possible to
quantify risks, qualitative measures should be adopted to capture those risks. Whilst quantitative
measurement systems support effective decision-making, better measurement does not obviate
the need for well-informed, qualitative judgment. Consequently the importance of staff having
relevant knowledge and expertise cannot be undermined.
Risk Management Process:
UCBL always try to manage above risk by various steps like risk analysis, evaluation,
acceptance and management of some risk or combination of risks. Risk management is
emphasized not only for regulatory purpose but also to improve operational and financial
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performance of the Bank. The objective of the risk management is that the Bank takes well
calculative business risks while safeguarding the Banks capital, its financial resources and
profitability from various risks.
In order to streamline risk control features in a more effective manner, UCBL has put in places
all manuals as suggested in the core risk management guide lines of Bangladesh Bank. Its
Standard Operating Procedure (SOP) contains all the guidelines and also includes some of the
internationally accepted best practices.
To manage the risk, united commercial Bank Limited takes some steps. They actively involve
analysis, evaluation, acceptance and management of some risk. Risk management is not only for
regular process but also improve financial performance of the Bank.
UCBL manage their banks risk by taking following steps:

Credit

Risk
Operational Risk Market
Risk

Liquidity
Risk

Reputation
Risk

Risk
Risk Identification
Identify, Understand and Analyze Risks
Risk Assessment and Measurement
Quantify and Assess Risk Impact
Risk control and migration
Recommend Measures to Control & Migrate Risks
Risk monitoring
Monitor and Report on Progress & Compliance
Balance Risk against return
The Risk management policy of the Bank operates under some broad principles:

Oversight by the Board /Executive Committee. Board approves policies and processes of
risk management recommended by the management and Executive Committee approves
the credit proposals submitted by the management;
Audit Committee of the Board reviews the internal audit reports of the Bank and risk
management covering credit risk, operational risk including money laundering risk,
market risk and liquidity risk;
Dedicated independent risk management units viz. Credit Risk Management units, Credit
Administration Unit, Credit Monitoring and Recovery Unit, Internal Control and
Compliance Unit are responsible for implementation of the risk policies and monitoring
of compliance with risk policies. They are also responsible for identification of and
measuring risks.
Dedicated committee at management level has been set up to monitor risk viz. credit risk
through Credit Review Committee/and Risk Management Division, Operational Risk
through Management Committee and Internal Control and Compliance Division, Market
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and Liquidity risk through Asset Liability Committee (ALCO); Information risk through
MRS Committee and Reputation risk arising out of money laundering through Chief
Compliance Officer of the Bank and Compliance Officers of the branches;

In order to streamline risk control features in a more effective manner, UCBL has put in
places all manuals as suggested in the core risk management guide lines of Bangladesh
Bank. Its Standard Operating Procedure (SOP) contains all the guide lines and also
includes some of the internationally accepted best practices. Departments including
corporate banking, SME banking, retail banking, credit card, foreign exchange, treasury,
human resources and financial administration. The SOPs include all processes related to
the initiation, maintenance, settlement/closure and recording for the entire range of
products offered by the Bank. SOPs will help the bank maintain control over its
operations, clarify the links with the IT system, act as an effective communication tool
that will reduce training time, improve risk management and work consistency.

Board and senior Management oversight:

UCBLs board of director and senior management must concern following things to reduce risk.
a) To be effective, the concern and tone for risk management must start at the top. While the
overall responsibility of risk management rests with the BOD, it is the duty of senior
management to transform strategic direction set by board in the shape of policies and procedures
and to institute an effective hierarchy to execute and implement those policies. To ensure that the
policies are consistent with the risk tolerances of shareholders the same should be approved from
board.
b) The formulation of policies relating to risk management only would not solve the purpose
unless these are clear and communicated down the line. Senior management has to ensure that
these policies are embedded in the culture of organization. Risk tolerances relating to
quantifiable risks are generally communicated as limits or sub-limits to those who accept risks on
behalf of organization. However not all risks are quantifiable. Qualitative risk measures could be
communicated as guidelines and inferred from management business decisions.
c) To ensure that risk taking remains within limits set by senior management/BOD, any material
exception to the risk management policies and tolerances should be reported to the senior
management/board who in turn must trigger appropriate corrective measures. These exceptions
also serve as an input to judge the appropriateness of systems and procedures relating to risk
management.
d) To keep these policies in line with significant changes in internal and external environment,
BOD is expected to review these policies and make appropriate changes as and when deemed
necessary. While a major change in internal or external factor may require frequent review, in
absence of any uneven circumstances it is expected that BOD re-evaluate these policies every
year.
Management of Core Risks in Bank
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Risks involved in different operational area are under control of the management. UCBL has
taken appropriate measures to enforce and follow all approved risk manuals/ guidelines covering
the following risk area in order to control and minimize the business as well as financial risks at
an acceptable level.
1.
2.
3.
4.
5.

Policy Guidelines on Asset Liability Management

Policy Guidelines on Credit Risk Management
Policy Guidelines on Foreign Exchange Risk Management
Policy Guidelines on Money Laundering Prevention
Policy Guidelines on Internal Control and Compliance.

UCBL has formed a Management Committee to review proper implementation and regular
monitoring of core areas of Risk Management.
Credit risk
Credit risk is one of the major risks faced by the Bank. This can be described as potential loss
arising from the failure of a counter party to perform according to contractual arrangement with
the Bank. The failure may arise due to unwillingness of the counter party or decline in economic
condition etc. The risk of loss of principal or loss of a financial reward stemming from a
borrowers failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises
whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are
compensated for assuming credit risk by way of interest payments from the borrower or issuer of
a debt obligation to repay. The higher the perceived credit risk, the higher the rate of interest that
banks will demand for lending their capital. Credit risks are calculated based on the borrowers
overall ability. This calculation includes the borrowers collateral assets, revenue-generating
ability etc. Credit risk emanates from a banks on and off balance sheet dealings with an
individual, firm, company, corporate entity, bank, financial institution or a sovereign. Credit risk
may take the following forms:

In the case of direct lending: principal and/or interest may not be repaid;
In the case of guarantees or letters of credit: funds may not be forthcoming from the
constituents upon crystallization of the liability;
In the case of treasury operations: the payment or series of payments due from the
counter parties under the respective contracts may not be forthcoming or cease;
In the case of security trading business: funds/securities settlement may not be effected;
In the case of cross border exposure: the availability and free transfer of foreign currency
funds may either cease or restrictions may be imposed by the sovereign.

Principles to Reduce Credit Risk

UCBL follow some principles to reduce their credit risk. These principles set by board of
director and senior management. Every branch follows these principles in a very proper way.
These principles are:
Repayment Capacity
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Credit facilities will be extended to those customers who can make best use of them thus helping
maximize Banks profit as well as economic growth of the country. To ensure achievement of
this objective the Bank bases its lending decision mainly on the borrowers ability to repay.
Compliance
All credit extension must comply with the requirements of Banks Memorandum and Articles of
Association, Banking Companies Act, 1991 as amended from time to time, Bangladesh Banks
instruction circulars, guidelines and other applicable laws, rules and regulations, Banks Credit
Risk Management Policy, Credit Operational Manual and all relevant circulars in force. The
officer originating a credit proposal shall specifically declare that it complies with all above
mentioned rules, regulations, policy etc. Credit officer have to check that all of the information is
properly verified. And mentioned document is in the given to the Bank is correct.
Loan-Deposit Ratio
Loans and advance are financed from customer deposits some time from capital fund of the
Bank. United Commercial Bank Limited financed the loan less then their deposits. Another thing
is that bank does not finance their loan from short term money market or out of temporary fund.
Deviation
Any deviation from the internal policy of the Bank must be justified and well documented.
Specially, all credit assessment form shall invariably include the deviations from the policy, if
any. However, no external regulations shall be compromised.
Return
Credit operation of the Bank should contribute at optimum level within the defined risk
limitation. In other words, credit facilities should be extended in such a manner that each deal
becomes a profitable one so that Bank can achieve growth target and superior return on capital.
Besides, credit extension shall focus on the development and enhancement of customers
relationship and shall be measured on the basis of the total yield for each relationship with a
customer.
Credit Quality
Credit facilities shall be allowed in a manner so that credit expansion goes on ensuring optimum
asset quality i.e. Banks standard of excellence shall not be compromised. Credit facilities will be
extended to customers who will complement such standards.
Diversification
The portfolio shall always be well diversified with respect to sector, industry, geographical
region, maturity, size, economic purpose etc. Concentration of credit shall be carefully avoided
to minimize risk.
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Proper Staffing
Proper credit assessment is complex and requires high level of numerical as well as analytical
ability of the concerned officer. To ensure effective understanding of the concept and thus to
make the overall credit portfolio of the Bank healthy, proper staffing shall be made through
placement of qualified officials having appropriate background, right aptitude, formal training in
credit risk management, familiarization with Banks credit culture and required experience as
well.
Name Lending
No credit facility shall be allowed simply considering the name and fame of the key person or
corporate image of the borrowing company. The Bank shall carefully avoid name lending. Credit
facility shall be allowed absolutely on business consideration after conducting due diligence. In
all cases, viability of business, credit requirement, security offered, cash flow and risk level will
be meticulously analyzed.
Single Customer Exposure Limit
UCBL will always comply with the prevailing banking regulation regarding Single Customer
Exposure Limit set by Bangladesh Bank from time to time. As per prevailing regulation, Bank
will take maximum exposure (outstanding at point of time) on a single customer (Individual,
Enterprise, Company, Corporate, Organization, Group) for the amount not exceeding 35 percent
of Banks total capital subject to condition that the maximum outstanding against funded
facilities does not exceed 15 percent of the total capital. However, for single customer of the
export sector maximum exposure limit shall be 50 percent of the total capital subject to the
condition. Total funded facility shall not exceed 15 percent of the total Capital of the Bank at any
point of time.
Security
Security taken against facilities shall be properly valued and affected in accordance with the laws
of the country. When any loan taker was unable to repay the loan then can recover the loan by
realizing the security.
Large Loan
Credit facility to a single customer (Individual, Enterprise, Company, Corporate, Organization,
and Group) shall be treated as Large Loan if total outstanding amount against the limit at a
particular point of time equals or exceeds 10 percent of the total capital of the Bank. UCBLs
total Large Loan Portfolio exposure shall not exceed 56 percent of the total outstanding loans
and advances at any point of time.
Credit in different sectors:

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UCBL continued its Participation in different credit programmes for financing new industrial
projects, working capital, trade finance, international trade etc. Consequently total credit rose to
Tk. 20211 million in 2005 from Tk. 15385 million of 2004. The credit deposit ratio stood at
0.82:1. Sector wise credits during the year 2005 were as follows:
Sector
Agriculture & fishery
Industry
House building
Transport
Whole sale/retail
Import
Export
Others
Total

Taka in Million
237
21473
4077
658
1866
12611
2264
2101
61692

Above information explain below by graph:

Credit Risk Assessment
Risk assessment or analysis is all about understanding the risk associated with lending money.
Until and unless risks are not assessed and measured it will not be possible to control risks. The
primary factor determining the quality of the Banks credit portfolio is the ability of each
borrower to honor, on timely basis, all credit commitments made to the Bank. This must be
accurately determined by the authorized Credit Officers/ Executives prior to approval. Therefore
a thorough credit risk assessment shall be conducted prior to the sanction of any credit facilities.
While assessing a credit proposal total emphasis shall be given on repayment potential of loans
out of funds generated from borrowers business (cash flow) instead of realization potential of
underlying securities. A thorough credit and risk assessment should 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/account officer (RM), 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. RMs must be familiar with the
banks Lending Guidelines and should conduct due diligence on new borrowers, principals, and
guarantors. It is essential that 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 which should be adhered to at all times. Credit Applications should summaries the
All banks should have established Know Your Customer (KYC) and Money Laundering
guidelines which should be adhered to at all times. Credit Applications should summaries the
results of the RMs risk assessment and include, as a minimum, the following details:

Amount and type of loan(s) proposed

Purpose of Loan(s)
Results of Financial analysis
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Loan structure (Tenor, Covenants, Repayment schedule, Interest)

Security Arrangements

In addition, the following risk areas should be addressed:

Borrower Analysis: The majority shareholders, management team and group or affiliate
companies should be assessed. Any issues regarding lack of management depth, complicated
ownership structures or intergroup transactions should be addressed, and risks mitigated.
Industry Analysis. The key risk factors of the borrowers industry should be assessed. Any issues
regarding the borrowers position in the industry, overall industry concerns or competitive forces
should be addressed and the strengths and weaknesses of the borrower relative to its competition
should be identified.
Supplier/Buyer Analysis: Any customer or supplier concentration should be addressed, as these
could have a significant impact on the future viability of the borrower.
Historical Financial Analysis: 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 financial statements should also be analyzed. The analysis should address
the quality and sustainability of earnings, cash flow and the strength of the borrowers balance
sheet. Specifically, cash flow, leverage and profitability must be analyzed.
Projected Financial Performance: Where term facilities are being proposed, a projection of
the borrowers future financial performance should be provided, indicating an analysis of the
sufficiency of cash flow to service debt repayments. Loans should not be granted if projected
cash flow is insufficient to repay debts.
Account Conduct: For existing borrowers, the historic performance in meeting repayment
obligations (trade payments, cheques, interest and principal payments, etc) should be assessed.
Adherence to Lending Guidelines: Credit Applications should clearly state whether or not the
proposed application is in compliance with the banks Lending Guidelines. The Banks Head of
Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the
banks Lending Guidelines.
Mitigating Factors: Mitigating factors for risks identified in the credit assessment should 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. 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:

Volatility
High debt
Overstocking
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Rapid growth
Acquisition
Debtors issues
Succession

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 increases the risk of fund diversion and may adversely impact the borrowers repayment
ability.
Security: A current valuation of collateral should 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 should be assessed.
Name Lending: Credit proposals should not be unduly influenced by an over reliance on the
sponsoring principals reputation, reported independent means, or their perceived willingness to
inject funds into various business enterprises in case of need. These situations should be
discouraged and treated with great caution. Rather, credit proposals and the granting of loans
should be based on sound fundamentals, supported by a thorough financial and risk analysis.
Credit Assessment System:
Commercial banks and financial institutions intermediate between lenders and borrowers. These
financial intermediaries collect deposit and disburse it as loan and advance to the individual
people, business, commercial, industrial entity. The loan and advance should be given to them
who has the certain and predicted cash flow to repay the credit. If the credit officer fail to
analyze the clients viability of repaying the loan and the projects cash flow possibility of default
may arise due to the information. In sanctioning the loan, is the key to identify the borrowers
ability, expertise, efficiency, and industry analysis, business performance to ensure the recovery
of the credit along with the good supervision, monitoring and the relationship. The purpose of
appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for
acceptable purpose covered by adequate security.
Allocation of Authority:
To assure proper and orderly conduct of the banking operation, the board of directors
empowered the Managing Directors and executives of the bank to lend up-to certain under
certain terms and conditions at their discretion. Important point is that an officer will not be
delegated certain power on the basis of his position. In other words, an officer does not
automatically get lending authority by virtue of his corporate /functional title. Specified lending
authority will be delegated by the Managing Director to various Executives after taking into
consideration his proven credit judgment, Knowledge, and experience.
Approving Authority:

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UCBL credit proposal go through certain steps that are ordered in terms of hierarchy. The board
of directors is the ultimate authority and it delegates different power to the different committees.
In UCBL there are following hierarchies in approving credit facilities.
Branch Credit Committee
The branch credit department is maintained by the branch manager and the other members are
second man or manager operation, credit in-charge, and other members are nominated by the
branch manager and the credit officer who prepares the proposal calls them relation officer. As
the ultimate performance of the branch depends on the loan all of the members are give
importance. If the credit amount wanted is not under the sanctioning authority of the branch
committee, it is sent to the Head Office Credit Committee for approval.
Head Office Credit Department
After receiving the loan proposal from different branches, credit committee (HO) seats after
certain interval for analyzing the proposal. The credit officers review the proposal and look for
what other information is needed to provide with it to present before the executive committee.
Here they also appraise the loan proposal in the same way the branch does. The Head office
credit committee is headed by the Managing Directors of the bank and other members are
selected by him. Mainly the head office credit department is responsible for the following
activities:

The committee evaluates the quality of the lending staff posted in the branch and take
appropriate steps to made them efficient and effective.
Ensuring that all the required information and documents are collected and are in order.

Executive Department
If the limit of the loan proposal exceeds the authority delegated to the head office credit
committee, the loan proposal is forwarded to the executive committee for sanction. Approving
the credit facility as delegated by the Board of Directors.

Supervising implementing the directives of the Board of Directors.

Reviewing of each extension of the credit approval by the HO credit committee or
Managing Director.
Communicate the result of all the above function to the Board of Directors.

Board of Directors
If the credit demand of the client crosses the delegated power of the executive committee, the
proposal is sent to the board of directors for approval. The Board of Directors has, in the UCBL
retain the following credit related responsibilities in their hand:

Delegating authority to approve and review credit

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The board of directors will approve the credit for which authority is not delegated to
anybody.
The board of directors will establish the credit-related, policy and procedures.

Risk Acceptance Criteria

The Management will review and prepare periodically Risk Acceptance Criteria (RAC) duly
approved by the Executive Committee/Board and disseminate to the concerned executives at
operational level. In preparation of RAC the following area would be covered with flexibility for
deviations by the competent authority:
a) Maximum amount in each type of facility line
b) Maximum limit to a single obligor and group
c) Acceptable Leverage, Current ratio, Interest coverage, Operating margin for an industry.
d) Geographical location
e) Security & Support
United Commercial Bank will extend credit only to qualified borrowers where the amount and
intended purpose are clear and legitimate. Credit facilities shall be allowed in a manner that the
expansion in credit does not compromise the asset quality of the Bank.
Risk Grading
Risk grading is a key measurement of a Banks 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.
Significance of Credit Risk Grading
Credit risk grading is an important tool for credit risk management as it helps the Banks &
financial institutions to understand various dimensions of risk involved in different credit
transactions. The aggregation of such grading across the borrowers, activities and the lines of
business can provide better assessment of the quality of credit portfolio of a bank or a branch.
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 loan price, what should be the extent of
exposure, what should be the appropriate credit facility, what are the various facilities,
what are the various risk mitigation tools to put a cap on the risk level.

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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 of credit risk grading, it becomes imperative for the banking
system to carefully develop a credit risk grading model which meets the objective outlined
above.
Credit Risk Grading
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 should be the
extent 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.

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.

Function 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 he 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 CRG scale consists of eight categories with Short names and Numbers are provided as
follows:

Grading
Superior
Good
Acceptable
Marginal/Watch list
Special Mention
Sub standard
Doubtful
Bad & Loss

Short Name
SUP
GD
ACCPT
MG/WL
SM
SS
DF
BL

Number
1
2
3
4
5
6
7
8

UCBL Risk
Framework

Grading

Effective
risk
management requires an
accurate and forward looking estimation of the probability of default over the next 12 months. It
should be noted that Credit Risk Grading is not a replacement of comprehensive credit appraisal.
Credit Risk Grading is a dynamic process for measuring credit risk to help the sanctioning
authority in taking decisions. All credit proposals whether new or renewal must be supported by
Credit Risk Grading. It will encompass the following two things:
(a) Risk Grading Scorecard and
(b) Risk Grading Sheet.
No proposal will be processed until Risk Grading is completed, submitted for approval and the
result is shown in proposal. It is the responsibility of the originating officer to ensure that
analysis has been carried out with authentic and reliable information.
Risk Grading Scorecard
As per instruction of Bangladesh Bank, Risk Grading Score Card has been developed for all
exposures of UCBL (irrespective of amount) other than those covered under Consumer and
Small Enterprise Financing Prudential Guidelines and also under The Short-Term Agricultural
and Micro-Credit. The Score Card will be updated if required. The score of the risk grading
scorecard will be weighted one. There are 5 (five) broad head rating components and separate
parameters have been set to measure borrowers position against each component. Score Cards
are tools to determine a borrowers aggregate score based on assessment of quantitative and
qualitative factors. Score Cards shall records the Assigned rating through a combination of the
Aggregate Score as well as exercise of judgment. Judgment plays an important role in the
scoring of qualitative factors as well as recommendations made to change the risk rating in case
of disagreement. It should be noted that Industry volatility is a key driver in the Risk Grading as
it has been proved that the probability of default is higher in industries with higher volatility.
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However, since there is no acceptable industry average of key financials and industry volatility
factor is absent, the matter has not been included in the present Risk Grading Score Card. A
snapshot of Principal Risk components and corresponding Parameters and weight assigned to
each Component is as follows:
Sl. No.
1)

Components
Financial Risk

Parameters
a) Leverage

Weight (%)
50

b) Liquidity
c) Profitability

2)

Business Risk

d) Coverage
a) Turnover of Business

18

b) Age of Business
c) Business Outlook
d) Technology/Resource
e) Industry Growth
f) Inventory/Receivables
g) Market Competition

3)

Management Risk

h) Entry/Exit Barriers
a) Business experience

12

b) Expertise of the Management

c) Second line /Succession

4)

Security Risk

d) Team Work
a) Security Coverage(Primary)

10

b) Security Coverage (FSV)

c) Security Coverage(Location)

5)

Relationship Risk

d) Support/Guarantee
a) Account Conduct

10

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b) Utilization of limit
c) Compliance of
Covenants/Conditions
The Relationship Officer of the Branch will prepare Risk Grading Scorecard in case of new
proposal, renewal and/or enhancement of existing facility, any deterioration in the borrowers
business position, any breach of contract by the borrower or as and when he/she feel it necessary.
In addition, aggregate weighted score of the customer is to be affixed in the relevant field of the
Credit Assessment Sheet.
A clear definition of the different categories of Credit Risk Grading is given below
After preparation of Risk Grading Scorecard, concerned Relationship Officer will assign risk
grade to the customer within the following definition of Credit Risk Grading:
Superior (SUP)

Credit facilities, which are fully secured i.e. fully cash covered.
Credit facilities fully covered by government guarantee.
Credit facilities fully covered by the guarantee of top tier international bank.

Good (GD)

Strong repayment capacity of the borrower.

The borrower has excellent liquidity and low leverage.
The company demonstrates consistency strong earning and cash flow.
Borrower has well established, strong market share.
Very good management skill and expertise.
All security documentations are in place.
Credit facilities fully covered by the guarantee of a top tier local bank
Aggregate score of 85 or greater based on Risk Grade Score sheet.

Acceptable (ACCPT)

These borrowers are not strong as good grade borrowers, demonstrate earnings, cash flow
and have a good track record.
Borrowers have adequate liquidity, cash flow and earnings.
Credit in this grade is secured acceptable collateral (1st charge over
inventory/receivables/equipment/property).
Acceptable management.
Acceptable parent/sister company guarantee.
Aggregate score of 75-84 based on Risk Grade Score sheet.

Marginal/Watch list (MG/WL)

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This grade warrants 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.
Weaker business credit and early warning signals of emerging business credit detected.
The borrower incurs a loss.
Loan repayment routinely falls past due.
Account conduct is poor, or other untoward factors are present.
Credit requires attention.
Aggregate score of 65-74 based on Risk Grade Score sheet.

Special Mentioned (SM)

This grade has potential weakness that deserves managements close attention. If left
uncorrected, this weakness may result in a deterioration of the repayment prospects of the
borrower.
Severe management problems exist.
Facilities are downgraded to this grade if sustained deterioration in financial condition is
noted (consecutive losses, negative net worth, excessive leverage).
Bangladesh Bank criteria for Special Mentioned (SM) shall apply.
Aggregate score of 55-64 based on Risk Grade Score sheet.

Sub Standard (SS)

Financial condition is weak and capacity or inclination to repay is in doubt.

These weaknesses jeopardize the full settlement of loans.
Bangladesh Bank criteria for Sub Standard (SS) shall apply.
Aggregate score of 45-54 based on Risk Grade Score sheet.

Doubtful (DF)

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 yet is not classified as Bad & Loss.
Bangladesh Bank criteria for Doubtful Credit shall apply.
Aggregate score of 35-44 based on Risk Grade Score sheet

Bad and Loss (BL)

Credit of this grade has long outstanding with no progress in obtaining repayment or on
the verge of wind up/ liquidation.
Prospects of recovery are poor and legal options have been pursued.
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.
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This classification reflects that it is not practical or desirable to defer writing off this
basically valueless asset even though partial recovery may be affected in the future.
Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal
procedures/ suit initiated.
Bangladesh Bank criteria for bad and loss (BL) shall apply.
Aggregate score of less than 35 based on Risk Grade Score sheet.

Credit Risk Grading Model:

United Commercial Bank Limited
Credit Risk Grading Model
Score Summary
Reference No.:
Name of the Borrower
Key Person
Group Name (if any)
Branch:
Industry
Sector
Date of Financials
Originated by (RO/SRO)
Completed by (RM/SRM)
Approved by (CO/SCO)

Aggregate Score:

Risk Grading:

Numeric Grade

Grade

Superior

2
3
4
5
6
7
8

Good
Acceptable
Marginal/Watchlist
Special Mention
Substandard
Doubtful
Bad/Loss

Short

Score
Fully cash covered, secured
by
SUP
Government/International
Bank Guarantee
GD
85+
ACCPT 75-84
MG/WL 65-74
SM
55-64
SS
45-54
DF
35-44
BL
<35

Score Calculation Sheet

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Criteria
A. Financial
Risk
A-1 Leverage
A-1.1 Debt-Equity (x)
Times

Weight
50%

Parameter

Score

Actual Parameter

10%
5%

< 0.25 x

5.00

3.81

5%

0.26 to 0.35 x
0.36 to 0.50 x
0.51 to 0.75 x
0.76 to 1.25 x
1.26 to 2.00 x
2.01 to 2.50 x
2.51 to 2.75 x
> 2.75
< 0.25

4.50
4.25
4.00
3.50
3.25
3.00
2.50
0.00
5.00

0.79

0.26 to 0.35 x
0.36 to 0.50 x
0.51 to 0.75 x
0.76 to 1.25 x
1.26 to 2.00 x
2.01 to 2.50 x
2.51 to 2.75 x
> 2.75

4.50
4.25
4.00
3.50
3.25
3.00
2.50
0.00

> 2.74

5.00

0.66

2.50 to 2.74 x
2.00 to 2.49 x
1.50 to 1.99 x
1.10 to 1.49 x
0.90 to 1.09 x
0.80 to 0.89 x
0.70 to 0.79 x
< 0.70
> 2.00

4.50
4.25
4.00
3.50
3.25
3.00
2.50
0.00
5.00

0.54

1.75 to 2.00 x
1.50 to 1.74 x
1.25 to 1.49 x
1.00 to 1.24 x

4.50
4.25
4.00
3.50

Total Liabilities to
Tangible Net worth

A-1.2 Debt-Total Asset

(x)- Times

Total Liability to Total

Assets

A-2 Liquidity
A-2.1Current Ratio (x)
Times

10%
5%

Current Assets to Current

Liabilities

A-2.2 Quick Ratio (x)

Times
Quick Assets to Current
Liabilities

5%

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A-3 Profitability
A-3.1 Operating Profit
Margin (%)

0.75 to 0.99 x
0.50 to 0.74 x
0.25 to 0.49 x
Less than 0.25

3.25
3.00
2.00
0.00

20%
5%

> 25%

5.00

9.02%

Weight
5%

23% to 25%
20% to 22%
17% to 19%
14% to 16%
11% to 13%
8% to 10%
< 8%
Parameter
> 15.00%

4.50
4.00
3.50
3.25
3.00
2.50
0.00
Score
5.00

Actual Parameter
2.99%

13% to 15%
11% to 12%
9% to 10%
7% to 8%
5% to 6%
3% to 4%
< 3%
> 30%
26% to 30%
22% to 25%
18% to 21%
14% to 17%
8% to 13%
5% to 7%
< 5%
> 15.00%
13% to 15%
11% to 12%
9% to 10%
7% to 8%
5% to 6%
2% to 4%
< 2%

4.50
4.00
3.50
3.25
3.00
2.50
0.00
5.00
4.50
4.00
3.50
3.25
3.00
2.50
0.00
5.00
4.50
4.00
3.50
3.25
3.00
2.00
0.00

> 2.00

5.00

(Operating Profit/Sales) X
100

Criteria
A-3.2 Net Profit Margin
(%)

(Net Profit/Sales) X 100

A-3.3 Retrun on Asset

5%

(Net Profit/Total Asset) X

100

A-3.4 Return on Equity

5%

(Net Profit/Total Equity) X

100

A-4 Coverage
A-4.1 Interest Coverage

10%
5%

1.77%

8.52%

1.50
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() Times
Earning before interest &
tax (EBIT)
Interest on debt
A-4.2 Debt Service
Coverage

5%

EBITDA/(Total
Interest+CMLTD)

1.51 to 2.00
1.25 to 1.50

4.00
3.00

1.00 to 1.24
< 1.00
> 2.00

2.00
0.00
5.00

1.51 to 2.00
1.25 to 1.50
1.00 to 1.24
< 1.00

4.00
3.00
2.00
0.00
50.00

> 60.00

4.00

30.00 59.99
10.00 29.99
5.00 9.99
2.50 4.99
< 2.50

3.50
3.00
2.00
1.00
0.00

> 10 Years
6 10 Years
2 5 Years
< 2 Years
Favorable
Stable
Slightly Uncertain
Cause for Concern

3.00
2.00
1.00
0.00
2.00
1.50
1.00
0.00

Parameter
Locally available

Score
2.00

Actual Parameter
Locally available

Partially import
dependent
Fully import
dependent
Scarce
Strong (10%+)

1.00

Total Score- Financial

Risk
B. Business/ Industry
Risk
B-1 Size of Business (in
BDT crore)
Size of the borrowers
business measured by

18%
4%

the most recent years total

sales. Preferably audited
numbers.
3%
B-2 Age of Business
Number of years the
borrower is engaged in the
primary line of business
2%
B-3 Business Outlook
Critical assessment of
medium term prospects of
industry, market share and
economic factors.
Criteria
Weight
2%
B-4 Raw Material
Availability

B-5 Industry Growth

1.41

3%

12.53

Favorable

0.50
0.00
3.00

Strong (10%+)
20 | P a g e

B-6 Market Competition 2%

Consider market share,
demand supply gap etc.
B-7 Entry/Exit Barrier
(Technology, capital,
regulation etc)
Total Score- Business
Risk

2%

C. Management
12%
Risk
5
C-1 Experience
Total length of experience
of the senior management
in the related line of
business.
2
C-2 Track record
Reputation, commitment,
track record of owners in
business.

C-3 Second
Line/Succession

C-4 Team Work

Good (>5% 10%)

Moderate (1%-5%)
No Growth (<1%)
Dominant Player
Moderately
Competitive
Highly Competitive
Difficult
Average
Easy

2.00
1.00
0.00
2.00
1.00

More than 10 years

610 years
15 years
No experience

5.00
3.00
2.00
0.00

15 years

Very Good
Moderate
Poor
Marginal

2.00
1.00
0.50
0.00

Very Good

Ready Succession

3.00

Ready Succession

Succession within 12 years

Succession within 23 years
Succession in
question
Very Good
Moderate
Poor
Regular Conflict

2.00

0.00
2.00
1.00
0.00
18.00

Dominant Player

Difficult

1.00
0.00
2.00
1.00
0.50
0.00

Very Good

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Total ScoreManagement Risk

Criteria
D. Security
Risk
D-1 Security Coverage
(Primary)

12.00

Weight
10%

Parameter

Score

Actual Parameter

4%

Fully covered by
underlying
assets/substantially
cash covered
Registered
Hypothecation (1st
Charge/Pari passu
Charge)
2nd charge/Inferior
charge
Simple
hypothecation /
Negative lien on
assets
No security
R/M on Municipal
corporation/Prime
Area property
R/M on
Pourashava/SemiUrban area property
E/M or No property
but other Plant &
Machinery as
collateral
Negative lien on
collateral
No collateral
Personal Guarantee
with high net worth
or Strong Corporate
Guarantee
Personal Guarantees
or Corporate
Guarantee with
average financial
strength
No
support/guarantee

Fully covered by
underlying
assets/substantially cash
covered

D-2 Collateral Coverage 4%

(Property Location)

D-3 Support (Guarantee) 2%

2
1

0
4

No collateral

1
0
2

Personal Guarantee with

high net worth or Strong
Corporate Guarantee

0
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Total Score- Security

Risk
E. Relationship
Risk
10%
E-1 Account Conduct

10

10%
5%

E-2 Utilization of Limit 2%

(actual/projection)Consider both revolving &
non-revolving limits.
Criteria
E-3 Compliance of
Covenants

E-4 Personal Deposits

Total Score- Relationship

Risk
Grand Total All Risk

Weight
2%

1%

More than 3 years

5.00
Accounts with
faultless record
Less than 3 years
4.00
Accounts with
faultless record
Accounts having
2.00
satisfactory dealings
with some late
payments.
Frequent Past dues & 0.00
Irregular dealings in
account
More than 80%
2.00
61% 80%
1.50
40% 60%
1.00
Less than 40%
0.00
Parameter
Score
Full Compliance
2.00
Some NonCompliance
No Compliance
Personal accounts of
the key business
Sponsors/ Principals
are maintained in the
bank, with
significant deposits
No depository
relationship

More than 3 years

Accounts with faultless
record

80%+

Actual Parameter
Full Compliance

1.00
0.00
1.00

Personal accounts of the

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

0.00

10.00
100.00

Note: All calculations should be based on annual financial statements of the borrower (audited
preferred).

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Findings of the Study

Findings of Study
Based on the previous chapter analysis segments and the brief description of credit risk
management system of UCBL following findings are originated:

Bank income mostly depended on the activities of foreign exchange division and credit
division. For this UCBL handle both of department very strongly.
The rate of interest or product cost set up by the head office. Interest rate has to be within
a limit for every bank which is notified by the Bangladesh Bank.
Sometime risk manager can not find necessary documents and information for credit risk
assessment. Thats why risk managers use their assumption on risk management. Data
collection checklists are not duly filled by the Relationship Managers.
Credit quality depends on close follow-up and monitoring of loans. The follow-up and
monitoring of loans is not strong here.
An insurance coverage should obtain for both funded and non funded credit facility. But
reality is very few borrowers confirm their insurance coverage. So Banks has no security
in case of any uncertainty like fire, strike, riot etc.
The Banks in Bangladesh has faces a lot of illegal pressure from Political persons,
Directors and Management of the Bank for approval of loan. in that cases Risk managers
are bound to approve the loan without any assessment and rationality.
The risk managers have often insufficient time for credit risk management. Huge
workload and hurries for loan approval prevent them from through assessment. So, it is
very troublesome to manage the risk in a prudent manner for the risk managers.
Credit allocation is set-up by the Head Office Credit committee. The Head of the Branch
can authorize credit up to Tk.20 Lac.
Some big credit facilities recommended by the Head Office credit Committee which is
processed with fast monitoring and screening.
Quality development may help the bank to hold on the old customers and attract potential
customers.

Recommendation
Recommendation:

The Credit Policy of the Bank is very complicated. Bank need to make it easy and
understandable. So that all credit officer can understand the instruction and follow this
instruction correctly at the time of credit risk management..
To assessment the credit proposal correctly management should recruit sufficient risk
manager in credit department.

24 | P a g e

The management must be careful to sanctioning that loan which is recommended by

powerful bodies. Because these loans sometimes become more risky.
To reduce the credit risk the original documents of the client must be verified thoroughly.
If manager sanction the loan without the original documents, that may involves more
risk.
To reduce the default risk the repayment capacity of loan of the client should be properly
investigated. Otherwise, here have the chance to default.
The process of sanctioning a loan is very time consuming. Management should give more
effort to reduce the time of processing a loan.
The main portion of profit comes from the foreign exchange and credit division, but
there are not enough employees on these departments to serve the clients. So number of
employees should be increased in these departments.
Management should arrange training in regular basis to develop their employee skill.
Bank need to develop an industry wise integrated Credit Risk Grading system. So that
risk can measure for different industry of business in a correct way.
Bank has a few numbers of tools and techniques to assessment the credit risk. Bank need
to introduce new and advance risk assessment tools and techniques.

Conclusion
Conclusion:
As an organization the United Commercial Bank Limited has earned the reputation of top listed
banks operating in Bangladesh. The organization is much more structured compared to any other
listed bank operating in Bangladesh. It is relentless in pursuit of business innovation and
improvement. It has a reputation as a leader in financing manufacturing sector. With a bulk of
qualified and experienced human resource, United Commercial Bank Limited can exploit any
opportunity in the banking sector. It is pioneer in introducing many new products and services in
the banking sector of the country. Moreover, in the retail-banking sector, it is unmatched with
any other listed banks because of its wide spread branch networking thought the country. United
Commercial Bank Ltd. explores their business day by day. In 2009 to may 2010 it introduce 17
new branches and many of branches is going to open.
UCBL does very good in credit risk management. Bangladesh Bank has introduce a good
numbers of circulars, guidelines, tools and techniques for managing the credit risk in a prudent
manner as well as to minimize the rate of default/ non-performing loans at a standard level.
UCBL always follow these circulars, guidelines and techniques and they have also use some
internal policy, guidelines, tools and techniques for better risk management. Despite a prudent
credit approval process, loans may still become troubled.
The success of credit risk management has resulted from dedication, commitment, dynamic
leadership, effective strategy, planning and decision making, motivating and controlling of
banks management. In formulating a credit judgment and making quality Credit Decisions, the
lending officer must be equipped with all information needed to evaluate a borrowers character,
25 | P a g e

management competence, capacity, ability to provide collaterals and external conditions which
may affect his ability in meeting financial obligations. So, it is obvious that prudent management
of these risks is fundamental to the sustainability of a bank.

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