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Credit Approval and Monitoring Process of Bank Asia Limited

with Respect to Bangladesh Bank Guidelines

1.0 INTRODUCTION
1.1 Origin of the Report
Masters of Business Administration (MBA) Course requires a three months attachment
with an organization followed by a report assigned by the supervisor in the organization
and endorsed by the faculty advisor. I took the opportunity to do my internship in Bank
Asia Limited at Gulshan Branch, Dhaka. Here the organizational supervisor Md. Zahid
Hossain, Assistant Vice President & Sub-Manager of Gulshan Branch asked me to conduct
a study on Credit Approval & Monitoring process of Bank Asia Limited with respect to
Bangladesh Bank guidelines. My faculty supervisor Mr. Mohiuddin Ahmed, Lecturer of
Institute of Business Administration, University of Dhaka, also approved the topic and
authorized me to prepare this report as part of the fulfillment of internship requirement.
1.2 Background of the Report
Last year Bangladesh Bank undertook a project to review the global best practices in the
banking sector and examines in the possibility of introducing these in the banking industry
of Bangladesh. Four Focus Groups were formed with participation from Nationalized
Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from
the Bangladesh Bank as team coordinators to look into the practices of the best performing
banks both at home and abroad. These focus groups identified and selected five core risk

areas and produced a document that would be a basic risk management model for each of
the five 'core' risk areas of banking. The five core risk areas are as followsa) Credit Risks;
b) Asset & Liability / Balance Sheet Risks;
c) Foreign Exchange Risks;
d) Internal Control & Compliance Risks; and
e) Money Laundering Risks.
Bangladesh Bank in one of its circular (BRPD Circular no.17) advised the commercial
banks of Bangladesh to put in place an effective credit approval and monitoring system by
December, 2003 based on the guidelines sent to them.
While doing internship in the Credit Department of Bank Asia Limited, Gulshan Branch,
and for preparing the report, I will try to make a comparative analysis of Credit Approval
& Monitoring process of Bank Asia Limited existing credit policy following Bangladesh
Banks suggested guidelines.
1.3 Objectives of the Report
The study has been undertaken with the following objectives:
To fulfill the requirement of the internship program under MBA program.
To have better orientation on various credit management activities specially credit
policy and practices, credit appraisal, credit-processing steps, credit management,
financing in various sector and recovery, loan classification method and practices of
Bank Asia Limited (BAL).
To compare the existing credit approval and monitoring process of Bank Asia Limited
with that of Bangladesh Bank guidelines.
To identify and suggest scopes of improvement of existing methods of loan approval,
maintenance and monitoring in the credit division of BAL.
To get an overall idea about the performance of Bank Asia Ltd.

1.4 Scope of the Report


The study would focus on the following areas of Bank Asia Limited.
Credit approval system of Bank Asia Limited.
Procedure for different credit facilities.
Portfolio (of Loan or advances) management of Bank Asia Limited.
Organization structures and responsibilities of management.
Each of the above areas would be analyzed in depth in order to determine the efficiency of
BALs credit approval and monitoring system.
1.5 Sources of Information
The following sources have been used for the purpose of gathering and collecting data as
required.
a) Primary sources & b) Secondary sources.
A. Primary sources: 1) Observation 2) Personal interview
B. Secondary sources:
1) Different Report of Bank Asia Ltd. 2) Head Office Circulars 3) Brochures of Bank
Asia Ltd. & 4) Other Publications from IBA, BIBM and Bangladesh Bank Library.
1.6 Methodology of the Report
The following methodology will be followed for the study:
Both primary and secondary data sources will be used to generate this report. Primary data
sources are scheduled survey, informal discussion with professionals and observation while
working in different desks. The secondary data sources are annual reports, manuals, and
brochures of Bank Asia Limited and different publications of Bangladesh Bank.
To identify the implementation, supervision, monitoring and repayment practice- interview
with the employee and extensive study of the existing file and practical case observation
were done.

1.7 Limitation of the Report


This report will only consider credit risks of Bank Asia Limited. It will not cover Asset and liability/ balance sheet risk.
Foreign Exchange Risk
Internal control and compliance risk
Money laundering Risk.
Besides I was not able to visit the different branches of Bank Asia and had to rely mostly
on the information gathered from the Gulshan Branch.
1.8 Report Organization
This report is divided in five sections. The following section is the organization part i.e.
this section will give an overview of Bank Asia Limited. In section iii, Credit approval
policy and practice of BAL is significantly analysed with respect to Bangladesh Banks
guidelines for credit management in section iv. Section v deals with findings and
recommendations.

SECTION II: THE ORGANIZATION

2.0 AN OVERVIEW OF BANK ASIA LIMITED (BAL)


Bank Asia Limited is one of the leading private sector banks in Bangladesh offering full
range of Personal, Corporate, International Trade, Foreign Exchange and Capital Market
Services. Bank Asia Limited is the preferred choice in banking for friendly and
personalized services, cutting edge technology, tailored solutions for business needs, global
reach in trade and commerce and high yield on investments, assuring Excellence in
Banking Services.
2.1 Background of Bank Asia Limited
Bank Asia started its journey on the 27th of November 1999 with the inauguration of the
banks Corporate Office at the Rangs Bhaban. By a great number of public responses has
enabled the Bank to keep up the plan of expanding its network. The opening of the
Principal Office was the big leap forward and successively the opening of Gulshan and
Chittagong Branch expanded the horizon of Bank Asia to bring its services to the valued
clients more effectively.
Within a very short period, the Bank has opened 2 more branches in Dhaka and 2 branches
in Sylhet and Kishorganj. In February 2001 Bank Asia took over the Bangladesh operation
of The Bank of Nova Scotia of Canada, the first acquisition of a foreign bank by a local
bank in the history of Bangladesh. Later, Bank Asia took over the Bangladesh operation of
Muslim Commercial Bank Limited (MCB) of Pakistan in January 2002. These courageous
moves were possible for some visionary decision-makers and also dedicated team of
professionals who are constantly putting all their best efforts to establish the bank as one of
the leading concern in the industry.
Bank Asia has so far been highly successful in keeping its clientele satisfied with its high
quality services, while continuing its expansion to reach more people around the whole

nation. Bank Asia conducts all types of commercial banking activities. The core business
of the bank comprises of import, export, working capital finance and corporate finance.
The bank is also rendering personal credit, and services related to local and foreign
remittances. The Personal Credit scheme of the bank, which is designed to help the fixed
income group in raising standard of living is competitively priced and has been widely
appreciated by the customers. The Bank also has ATM services and very lucrative deposit
schemes i.e. DG+, DB+, MB+ which have earned the Bank a name in the market.
However, these products are temporarily suspended at present. Bank Asia has also
embarked on a new Era of banking automation by migrating to Stelar Software System
since January 01, 2004.It is also the first local bank to initiate SMS banking via Citycell
and Grameen Phone. The banks strategy is to gradually cover the total arena of banking.
Bank Asia has said its aim high enough: to provide high quality service to its customers, to
participate in the growth and expansion of our national economy, to set high standards of
integrity, to bring total satisfaction to our clients, shareholders and employees, and to
become the most sought after bank in the country, rendering technology driven innovative
services by the dedicated team of professionals.
Bank Asia is expecting to concentrate on efforts to set high standards for quality of service
at all levels. Highest emphasis is given on quality in recruiting human resources, and in
adopting state-of-the-art technology for serving the clients. The management of Bank Asia
is determined to maintain and upgrade the quality of these resources through continuous
training and upgrading of technology to keep pace with market demands, new
developments and practices of the competitors. Bank Asia entered the market at a time
when the economic policy environment of the country is poised for higher levels of
business activities and growth. The prevailing macroeconomic management and the
governments determination to carry on reforms in the banking sector provide a supporting
and encouraging environment.
The breakthrough was possible for some visionary decision-makers and also dedicated
team of professionals who are constantly putting all their best efforts to establish the bank
as one of the leading concern in the industry.

2.2 Capital Base


Authorized Capital

BDT 1200.00 million.

Paid up Capital

BDT 600.00 million (as on December 31, 2003)

2.3 Mission Statement


To assist in bringing high quality service to our customers and to participate in the
growth and expansion of our national economy.
To set high standards of integrity and bring total satisfaction to our clients,
shareholders and employees.
To become the most sought after bank in the country, rendering technology driven
innovative services by our dedicated team of professionals
2.4 Corporate Objectives
Bank Asias objectives are reflected in the following areas.
Highly personalized service
Customer-driven focus
Total commitment to quality
Competitive products with some unique features
Contribution in the economy.
Quality of human resources
Managing the core and support risks
The company believes that communication with, and feedback from, its clients help it
achieve its goal of providing world-class products and services. Bank Asia regularly
conducts client satisfaction surveys and make immediate accommodations and adjustments
where needed. It also constantly monitors its standards, and strives to meet clients
requirements.

2.5 Values that are considered as the guiding factors


All the activities and decisions of Bank Asia are based on, and guided by, these values.
Placing the interests of clients and customers first.
A continuous quest for quality in everything the company does.
Treating everyone with respect and dignity.
Conduct that reflects the highest standards of integrity.
Teamwork from the smallest unit to the enterprise as a whole.
Being good citizens in the communities, in which they live and work.
2.6 Branches
Bank Asia Limited has 17 conventional Branches of which 10 branches are located in
Dhaka City, 4 branches are located in Chittagong. The other 3 branches are located in
Sylhet, Kishoreganj & Munshiganj one each. It is also in the process of introducing
banking functions on Islamic Banking Principles. The corporate office (Head Office) of
Bank Asia Limited is at Rangs Bhaban (8th Floor), 113-116 Old Airport Road, Dhaka-1215.
2.7 Management Information System (MIS)
Since its journey as commercial Bank in 1999 Bank Asia Limited has been laying great
emphasis on the use of improved technology. It has gone to online operation system since
2003. Previously the Bank used the Banking Software named Bexibank and now the
Bank uses new Banking Software named Stelar. As a result the Bank now can provide
improved standard of services.
2.8 Correspondent Relationship
The Bank established correspondent relationships with a number of foreign banks, namely
Standard Chartered Bank, American Express Bank, Credit Suisse First Boston, CITI Bank

NA-New York & London, Arab Bangladesh Bank-India, Bank of Tokyo, Commerz Bank
AG, Habeeb American Bank, Habeeb Bank AG Zuirch, Hypovereins Bank, Mashreq Bank,
National Westminister Bank & Hong Kong Shanghai Banking Corporation etc. The Bank
is maintaining foreign exchange accounts in New York, Australia, Germany, Tokyo,
Pakistan, Calcutta, and London. The bank has set up letter of credit on behalf of its valued
customers using its correspondents as advising and reimbursing Banks. As of end 2003
Bank Asia established correspondence relationship with 206 banks in 173 countries.
2.9 Human Resources Management of BAL
Bank Asia Limited recognizes that their employees are the most important assets.
Therefore, the Bank consistently channels a great deal of resources into training and
development of managers and employees.
Job satisfaction, growth opportunities, due recognition and good working environment
promotes a high level of loyalty and commitment into the employees. Realizing this Bank
Asia Limited has placed the utmost importance on continuous development of its human
resources, identify the strength and weakness of the employee to assess the individual
training needs, they are sent for training for self-development. To enhance and update the
professional skills and knowledge of the officers and staff, regular training and orientation
courses are organized at Bangladesh Institute of Bank Management (BIBM), a few other
professional institutions and other correspondent Bank as well as in the Banks own
training center. The Bank also sends its Executives outside Bangladesh for specialized
training on money, banking and commercial activities.
The remuneration is very competitive in comparison with industry average. Beside these
the recruitment procedure is comprehensive. By the end of 2003 the manpower strength
increased to 273 from 214 at the end of the previous year.
2.10

SWOT Analysis of Bank Asia Ltd.

Every organization is composed of some strengths and weaknesses, which are its internal
factors. The opportunities and threats it encounters are external elements. The following

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will briefly list some of Bank Asias internal strengths and weaknesses, and external
opportunities and threats, as I perceive from my experience.
2.10.1 Strengths
Quality

Bank Asia strives to endow its customers with appreciable quality in every service it
provides. Customer satisfaction claims the highest priority, as it should be in any serviceoriented organization.
Adaptability

Bank Asia draws its strength from the adaptability and dynamism it possesses. It has
quickly adapted to world class standard in terms banking services. Bank Asia has also
adopted state of the art technology to connect with the world for better communication to
integrate facilities.
Financial strength

Bank Asia is a financially sound company backed by the enormous resource base of the
mother concern RANGS group. As a result customers feel comfortable and more secure
while dealing with the bank.
Efficient management

All the levels of management are solely directed to maintain a culture for the betterment of
the quality of the service and for developing a brand image in the market through the
organizations wide team approach and horizontal communication system.
State of the art technology

Bank Asia utilizes state-of-the-art technology to ensure consistent quality and operation.
The evidence of that can be found in one of its branches, Gulshan that is equipped with
Reuters and SWIFT. All these facilities will be introduced in every branch very shortly.
Bank Asia Limited has also started using the Stelar Software since January 01, 2004

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Human Resource Expertise

One of the key-contributing factors behind the success of Bank Asia is its HR who are
highly trained and most competent in their own respective fields. Bank Asia provides its
employees with training both in-house and out side job.
Logistics

Bank Asia is free from dependence from the ever-disruptive power supply. The company
generates the required power through generator operating on diesel. Water generation at
present is also done by deep tube wells on site and is abundant in quantity. Also support
tools, like laser printers, photocopiers, microwave oven etc. that have become essential
these days are available at arms length much to the convenience of the users.
First-Rate working environment

Bank Asia provides its workforce an excellent place to work in. The total complex has
been centrally conditioned. The interior decoration has been done exquisitely with the
blend of tasteful colors and artistic yet useful furniture that is comparable to any
multinational bank.
2.10.2 Weaknesses
Limited workforce

Bank Asia has very limited human resources compared to its financial activities. There are
not many people to perform most of the tasks. As a result many of the employees are
burdened with extra workloads and works late hours without any overtime facilities. This
might cause high employee turnover that will prove to be too costly to avoid.
2.10.3 Opportunities
Government support

Government of Bangladesh has rendered its full support to the banking sector for a sound
financial status of the country, as it is becoming one of the vital sources of employment in
the country now. Such government concern will facilitate and support the long-term vision
for Bank Asia.

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Evolution of e-banking

Emergence of e-banking will open more scope for Bank Asia to reach the clients not only
in Bangladesh but also in the global area. It will also facilitate wide area network in
between the buyer and the production unit of Bank Asia to smooth operation to meet the
desired need with least deviation.
2.10.4 Threats
Mergers and acquisitions

The worldwide trend of mergers and acquisition in financial institutions is causing


concentration in power in the industry and competitors are increasing in power in their
respective areas.
Political instability

Unstable political situations cause great distraction in the otherwise smooth flow of
business. Sudden hartals and other political programs sometimes present problems for the
employees (esp. female employees) in commuting to and from the office. Political
instability also promotes a weak law and order system leading to an increase in crime rate
in the society. This might also be considered as a potential external threat for a financial
institution.

Emergence of competitors

Due to existence of unfulfilled demand in financial sector, it is expected that more financial
institutions will be introduced in the industry very shortly. And we have already seen such
cases in our country that lots of new banks are coming in the scenario with new services,
which signifies the faster rate of growth of competitors. Bank Asia should always be
prepared to encounter more competition in the coming years.
2.11 Product and Services
The product and services that are currently available are given below:

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Bank Asia Limited launched several financial products and services since its inception.
Among them are Monthly Savings Scheme, Monthly Benefit Scheme, Special Savings
Scheme, Consumer Credit Scheme, Small Loan Scheme, Rural Finance Scheme & E-cash
ATM. All of these have received wide acceptance among the people.
Monthly Savings Scheme (DG+): The prime objective of this scheme is to encourage

people to build up a habit of saving. In this scheme, one can save a fixed amount of money
every month and receive substantial lump sum of money after three or five years.
Monthly Benefit Scheme (MB+): MB+ is a five (05) years scheme that lets depositors

earn monthly benefit of TK. 1000 or its multiple by minimum initial deposit of TK.
100,000 or its multiple and after maturity depositors will get refund of his/her principle
amount.
Special Savings Scheme (DB+): DB+ is a six (06) or ten (10) years scheme. The deposit

doubles in 06 years and triples in 10 years.


Bonus Savings Scheme: A savings account with a minimum balance of TK. 50,000 will

attract not only the usual savings interest but also a further 10% bonus on interest.
Personal Credit: Personal credit is a relatively new field of collateral-free finance of the

bank. People with fixed income can avail of these credit facilities to buy household goods,
consumer items, buy car or to renovate/expand existing house, etc.
Credit Loan: If anyone is in possession of BSP (Bangladesh Sanchaya Patra), which will

mature within the next 05 years, but he/she is in need of funds, the scheme can come to
rescue.
Rural Development Scheme: Rural Development Scheme has been evolved for the rural

people of the country to make them self-employed through financing various incomegenerating activities. This scheme is operated through the rural branches of the Bank.
E-Cash Banking Facility: The E-cash card is an ATM card. It can be used as a

combination of debit facility. The E-cash card network offers ball banking requirements
without ever setting foot in a bank. Its more than just an ATM service for quick cash
withdrawals or account enquiries. E-cash card provides round the clock banking.

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2.11.1 Depository Product


Bank Asia Limited is now offering different types product for mobilizing the savings of the
general people.
Deposit Product
Current Deposit
Saving Deposit Account
Short Time Deposit (STD) Account
Fixed Deposit
Foreign Currency Deposit Account
NFCD Non Resident Foreign Currency Account
2.11.2 Interest paid to different Deposits
The revised rate of Bank Asia Ltd. on all types of Deposits viz. Savings, Short Term &
Fixed effective from May 01,2004 for new as well as existing deposits from its next
maturity are as follows:
Tenor 3
months
8.00% P.A.

Tenor 6
months
8.50% P.A.

Tenor 1 year
9.00% P.A.

Short Term
Deposit
5.00% P.A.

Savings
Deposit
6.00% P.A.

2.11.3 Loan Product


The Bank Asia is offering the following loan and advance product to the client for
financing different purpose that fulfill the requirements of the bank and have good return to
the investment as well as satisfy the client. The loan and advance products are:
Name of the Products
Personal Credit (PC)
Term Loan
Small & Medium Enterprise loan
Working Capital Financing
Import Financing
Export Financing
Syndicate Loan
Industrial Financing
2.11.4 Personal Banking Products

ATM Card Service

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Internet Banking

SMS Service/Mobile Banking

Locker Service

2.12 Financial Performance of BAL


The Bank Asia Limited is one of the most successful private sector commercial bank in our
country, though it started its operation only five years back. It has achieved the trust of the
general people and made reasonable contribution to the economy of the country by helping
the people investing allowing credit facility.
2.12.1 Profit
Bank Asia Limited achieved an operating profit of Tk. 419 million in 2003 as against an
amount of 230 million for the previous year. Amongst the third generation banks, Bank
Asia maintained its third position in terms of profitability. This happened in a year of
downward pressure on interest rates, and Bank Asia was able to reduce its costs and
lending rates keeping spreads at reasonable level.
2.12.2 Capital
Bank Asia Limited commenced its operation with an authorized capital of Tk. 800 million
with paid up capital of Tk. 218 million which amounted Tk.1200.00 million and Tk.600.00
million respectively by the end of the year 2003. The total shareholders equity as of
December 31, 2003 stood at Tk.889 million (inclusive of 1% general provision on
unclassified loans & advances and balances in the exchange equalization account). The
Bank maintained a capital adequacy ratio of 13.30% against the requirement of 9.0%.

2.12.3 Deposits

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With growing consumer confidence and pro-active marketing Bank Asia increased its
deposit base of TK. 10,431 million by the end of 2003 compared to TK. 7,008 as of 2002.

2.12.4 Loan and Advances


The Bank from its inception adopted a credit policy of maximizing return by building up a
well-diversified loan portfolio and taking acceptable risks including those for new
ventures. The result has been impressive. Loans and advances increased to Tk.8,190
million as of December 2003 compared to Tk. 5,449 million in 2002.
These covered term finance and working capital finance for industries and trade finance.
Greater attention was given to small and medium enterprises and to consumer credit,
gradually expanding to the retail sector.
2.12.5 Treasury Operations
Bank Asia has been actively participating in the local money market as well as foreign
currency market without exposing the Bank to vulnerable position. The Banks
investment in Treasury Bills and other securities went up noticeably making the
scope for ensured profit in the context of a regime of interest rate decline. These
increased to Tk.2,497 million as on December 2003 from Tk.1,338 million during
the previous year. An amount of Tk.464 million was placed at call and short notice as
on December 2003. These resulted in more than 156% rise in earnings from the
treasury operations.
2.12.6 Remittances, Foreign Trade Business
Inward and outward remittances handled by the Bank increased and reached Tk.506
million and Tk.170 million respectively in 2003 compared to Tk.422 million and Tk.130
million respectively in 2002. The Bank has established remittance and arrangement with
Placid NK Corporation having offices in USA to facilitate foreign remittance inflows to the
country. It has also established agency arrangements with May Bank of Malaysia,
Myanmar Investment Bank and Bhutan National Bank. The import business of the Bank

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increased to Tk.14,556 million in 2003 from Tk.7,761 million in 2002 and export bills
increased to Tk.5,996 million in 2003 from Tk.5,336 million in 2002. The Bank is using
SWIFT communication system for fast and accurate handling of foreign trade. The Bank is
connected to REUTERS also.

BANK ASIA AT A GLANCE: 1999-2003


Financial Highlights.

Authorised Capital
Issued, Subscribed & Paid
up Capital
Shareholders Equity
Total Assets
Deposits
Loans & Advances
Import Business
Export Business
Net Interest Income
Operating Income
Operating Expenses
Operating Profit
Investments
Dividend
Profit before Tax
Profit after Tax
Fixed Assets
No of Branches

(Figures in million Taka )

1999* 2000
2001
2002
2003
8,00.00
8,00.00
8,00.00 **8,00.00 1,200.00
218.00
218.00
218.00
235.44
600.00
213.14
632.01
341.91
19.52
2.98
0.19
8.03
(4.86)
557.95

219.80
2,122.82
1,512.17
1,114.06
1,520.47
262.60
43.99
33.55
58.16
19.37
813.73

167.85
94.64
6.01
1

255.66
173.17
21.85
5

282.81
4,721.76
3,848.81
3,012.69
3,953.75
1,135.86
106.85
121.30
102.46
125.70
1,274.46
18%
453.24
290.39
32.84
7

375.23
889.72
8,457.85 12,599.81
7,008.47 10,431.38
5,449.13 8,189.82
7,761.08 14,556.11
5,336.26 5,996.48
183.65
268.00
218.78
408.04
172.77
256.95
229.66
419.09
1950.28 2,046.10
28%
24%
429.78
509.62
234.31
269.01
105.67
87.45
12
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* In 1999, there were 35 (thirty Five) days operating days.


** Subsequent to 31st December 2002, the authorized capital was enhanced to TK. 1,200
million from TK. 800 million.

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SECTION III:
CREDIT MANAGEMENT

IN BANK ASIA LIMITED

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3.0 CREDIT MANAGEMENT IN BANK ASIA LIMITED


3.1 Overview
The word credit comes from the Latin word Credo meaning I believe. It is a lenders
trust in a persons/ firms/ or companys ability or potential ability and intention to repay.
In other words, credit is the ability to command goods or services of another in return for
promise to pay such goods or services at some specified time in the future. For a bank, it is
the main source of profit and on the other hand, the wrong use of credit would bring
disaster not only for the bank but also for the economy as a whole.
The objective of the credit management is to maximize the performing asset and the
minimization of the non-performing asset as well as ensuring the optimal point of loan and
advance and their efficient management. Credit management is a dynamic field where a
certain standard of long-range planning is needed to allocate the fund in diverse field and
to minimize the risk and maximizing the return on the invested fund. Continuous
supervision, monitoring and follow-up are highly required for ensuring the timely
repayment and minimizing the default. Actually the credit portfolio not only constitutes the
banks asset structure but also a vital factor of the banks success. The overall success in
credit management depends on the banks credit policy, portfolio of credit, monitoring, and
supervision and follow-up of the loan and advance. Therefore, while analyzing the credit
management of BAL, it is required to analyze its credit policy, credit procedure and quality
of credit portfolio.
3.2 Principles of Sound Lending
Bank performs different functions. Lending of money to different kinds of borrowers is
one the most important functions of commercial bank. Not only this, it is the most
profitable business of the commercial bank and the major source of income. But lending is
a risky business. The borrower of a bank range from individuals to partnership, companies,
institutions, societies, corporations etc. engaged in such activities as business, industry,
transport, farming etc. The nature of their activities, the location of business, financial

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stability, earnings and repaying capacity, purpose of advance, securities all differ and their
degree of risks also differ. Although all lending involve risks yet a bank has to go with it
for degree profit and economic upliftment as well. But the fact is this while go on lending;
a bank must follow certain principles. The principal of sound lending is which where risk
involvement may be kept at minimum.
The principal of sound lending involves following things:
a) Safety: The survival of a banker and for the matter of that safety of bank depends on
his/her loans and advances. The ideal position is when all the loans and advances positions
are fully secured. The safety of the advances should be the first principle of lending. To
ensure safety of lending following factors may be considered:
Five Cs : Character/conduct, Capacity/capability, Capital/Credit worthiness, Condition and
Collateral Security.
Five Ps : Person, Purpose, Product(s), Place and Profit.
Five Ms : Man, Management, Money, Materials and Market.
Five Rs : Reliability, Responsibility, Resources, Respectability and Returns
b) Purpose: The purpose of loans helps the banker to determine his course of action as
regards lending. Banker should avoid making loans for unproductive purpose and
speculative activities.
c) Liquidity: Liquidity means availability or readiness of banks funds on short notice. The
liquidity of advance means its repayment on demand on due date or after a short notice.
The bank while making advances must see to it that the money lent is not locked up for
long time because, majority of commercial bank liabilities are payable either on demand or
after short notice. So the bank should be sure that the loan would be liquid.
d) Security: The security offered by a borrower for an advance is an insurance to the
banker. It serves as the safety valve for an unforeseen emergency. There are different types
of security, which call for particular attention and care on part of bank who has to see it
that the title he/she gets on them is not unsafe. The security accepted by a bank to cover a
bank advance must be adequate, readily marketable, easy to handle and free from any
encumbrances. Whatever be the security, a bank must realize that it is only a cushion to fall

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back upon in case of need, and its adequate alone should not form the sole consideration
for judging the suitability of a loan.
e) Profitability: Banks obtain funds from shareholders and if dividend is to be paid on
such shares it can be paid by earning profits. The working funds of a bank are collected
mainly from by means of deposits from the public and interest has to be paid on these
deposit as well as the bank has to cover establishment charges and other expanses. This is
not possible unless funds are employed profitably.
f) Spread/Dispersal/Diversification: The advances should be as much broad based as
possible and must be in conformity with the deposit structure. There should be spread of
advances against different securities, industries/activities, borrowers, areas etc.
g) National Interest/Social benefit: Bank has a significant role in the economic
development process of a country. They should keep in mind the national development
plan/program while going for lending but maintaining safety, liquidity and profitability.
3.3 Modern Concept of Good Lending
A. Modern concept of lending presupposes a well-developed loan proposal/loan case/
project. This covers as many as six pertinent aspects like Managerial, Organizational,
Technical, Marketing, Financial and Economic/Socio-economic. These are technically
known as feasibility or viability study of a proposal/ loan case/ projects. By studying all
these six aspects if a banker is satisfied about the viability of a loan proposal/loan case/
project, then the bank can finance i.e. grant for lending or otherwise not.
Managerial feasibility will ensure the character/conduct, capacity/capability to run the
project/activity, sincerity/honesty/integrity, education, experience, and reputation of the
borrower. Organizational feasibility will see under what type of organization the activities
will be undertaken. Whether it is under proprietor/sole tradership or partnership or private
limited company, public limited company etc Technical side will take care of location of
business/activities/project, construction of building, shed etc. requirements to be used like
power, fuel, water material etc. Marketing side will ensure about the marketability of the
product(s) out of activities/ business project, consider demand, supply etc. Financial

22

aspect will tell total requirement of fund for the business/activities/projects and how much
will be required from bank, what amount will be given by the borrower himself/herself,
cash inflow and cash outflow, sale forecasts, balance sheet, profit and loss account etc.
Economic aspect will look into socioeconomic benefit and cost out of the
business/activities/project.
B. Financial Spread Sheet (FSS) and Lending Risk Analysis (LRA) are the new technique
of assessing soundness of a loan proposal/project. With the help of FSS bank analyses the
financial statements regarding a loan proposal/project. Credit decision is made by the
bankers on the basis of FSS and LRA and it is a new and modern technique. In LRA
bankers analyze eight risks such as supplies risk and sales risk which are Industry Risk,
performance risk, resilience risk, management competence risk, management integrity risk
which are under Company Risk and security control risk and security cover risk which are
under Security Risk.
Modern approach thus is an integrated approach of lending by bank, which covers safety,
liquidity, purpose, security, profitability etc.
3.4 Credit Policy of Bank Asia Limited
Credit policy is the guideline for the credit division which includes the terms and
conditions of extending credit, which is followed by the credit division. It is prepared in
accordance with the philosophy of the management. Sectors to be covered, steps to be
followed, factors to be considered, limits to be maintained and all other relevant matters
with expectations relating to the credit extension are clearly described here, which helps
the credit division to perform their activities and also in taking the decisions.
Bank Asia (BA) makes loan only to reputable clients who are involved in legitimate
business activities and whose income and wealth are derived from legitimate sources.
Bank Asia encourages lending to socially desirable, nationally important and
financially viable sectors and will not lend to unproductive purpose or socially
undesired projects.

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At all times a policy of Know Your Customer (KYC) must be foremost in the credit
applications process.
Bank Asia extends credit in its discretion, only to qualified borrowers where the
amount and intended purpose or use if proceeds are clear and legitimate and where the
amount and use is reasonable in context of what is known about the particular client
and the intended use or purpose.
BA requires that borrowers have a source of repayment established at the inception of
the credit, and that any exception must be specifically addressed in the credit approval.
There should be identified, whenever possible, a secondary source of repayment. As
with any funds received, any all repayment sources must be legitimate and consistent
with what is known and documented about the client. Borrowers must provide, and the
credit approval package must contain, sufficient information on the borrower to
approve the extension of credit. Satisfactory security and collateral is required as
appropriate. BAs main thrust is on case flow statement of the business rather than on
collateral security.
BA discourages the client with relatively low or no founds of their own and with a
relatively high ratio of borrowed to own founds tend to face liquidity problems, with
adverse repercussions on their ability to service their obligations.
BA dose not engage in Name Lending based only on the general reputation of the
borrower. There are cases however, where certain financial information about private
clients is highly confidential and may not be disseminated. Such situations are
addressed individually at the discretion of management.
BA engages primarily in the extension of credit in Bangladesh Taka or in the same
currency as the collateral.
BA dose not extend any credit facility against cheque (owners cheque) or pledge of
goods / merchandise
BAs unsecured lending practices favor extensions of credit for short term, selfliquidating transactions. To the extent possible, the maturity of the loan should be
matched to the cash conversion cycle of the transaction being financed. General-

24

purpose loans to finance working capital, which are either unsecured or not specifically
secured by the assets, financed and have no clean up requirement; represent policy
exceptions unless secured by pledged liquid collateral.
Overdraft lines should have an annual clean up period unless there is evidence of credit
to the accounts annually two times the average credit. Loans secured by cash or readily
marketable securities may be renewed at the discretion of the approving officers;
however, interest may not be capitalized.
BA may consider term loans with maturities up to five years, or longer. None except
the President & Managing Director approves such loans. Management reviews the term
loan portfolio periodically.
BA extends venture capital to start up businesses, which are entirely dependent on new
technologies, but is considered with extreme caution and also secured by First Class or
other acceptable collateral.
BA dose not extend credit where it does not have the industry knowledge or highly
specialized skills needed to properly evaluate the proposal.
BA extends credit facilities to the area in which the branch located and the size &
ability of its supervise and monitor the same also is considered.
3.5 Global Credit Portfolio of BAL
Credit Portfolio means total investments by a bank segregated under the folios of
different industries. Bank Asia Limited is operating within its own internal environment
under skirt of external macro environment, consisting of elements like economic,
political/legal, demographic, technological, social etc. The size of loan portfolio is
determined by various priorities for banks fund. Besides, the prudent management of Bank
Asia Limited has designated its portfolio considering the following factors under two
broad categories.
External factors:
1. Sectoral Attractiveness.
2. Government Regulation

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3. Credit need of the area or community.


Internal factors:
1. Capital Position
2. Types of Loan
3. Deposit pattern
4. Skills and Expertise of Banks personnel
5. Credit policy of the bank.
Strategies of the Bank Asia Limited are as follows:
Invest in those sectors where yield/sector is growing over years.
Hold investment in those sectors where yield/sector is high but not growing.
Divest in those sectors where yield/sector is diminishing over years.
This is a new generation bank. It is committed to provide high quality financial
services/products to contribute to the growth of GDP of the country through stimulating
trade and commerce, accelerating the pace of industrialization, boosting up export, creating
employment opportunity for the educated youth, poverty alleviation, raising standard of
living of limited income group and overall sustainable socio-economic development of the
country.
In achieving the aforesaid objectives of the bank, credit operation of bank is of paramount
importance as it generates the greatest share of total revenue of the bank. Maximum risk is
centered in it and even the very existence of the bank depends on prudent management of
its credit portfolio and is less often the result shrinkage in the value of other assets. As
such, credit portfolio not only features dominant in the assets structure of the bank but also
the success of the bank.
3.6 Types of Credit
Credit may be classified with reference to -elements of time, nature of financing and
provision base.

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3.6.1 Classification on the basis of time


On the basis of elements of time, bank credit may be classified into three heads, viz.
Continuous loans
These are the advances having no fixed repayment schedule but have a date at which it is
renewable on satisfactory performance of the clients. Continuous loan mainly includes
"Cash credit both Hypothecation and Pledge" and "Overdraft".
Demand loan
In opening letter of credit (L/C), the clients have to provide the full L/C amount in foreign
exchange to the bank. To purchase this foreign exchange, bank extends demand loan to the
clients at stipulated margin. No specific repayment date is fixed. However, as soon as the
L/C documents arrive, the bank requests the clients to adjust their loan and to retire the L/C
documents. Demand loans mainly include Payment Against Documents, "Loan Against
Imported Merchandise (LIM)" and "Letter of Trust Receipt".
Term loans
These are the advances made by the bank with a fixed repayment schedule. Terms loans
mainly include "Consumer credit scheme", "Hire purchase", and "Staff loan". The term
loans are defined as follows:
Short-term loan: Upto 12 months.
Medium term loan: More than 12 months & up to 36 months
Long-term loan: More than 36 months.
3.6.2 Classification on characteristics of financing
Credit

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Funded

Non-funded

Overdraft

* Letter of Credit

Loan

* Bank Guarantee

Consumer Credit

LTR

PAD

Cash Credit (Pledge & Hypo)

Staff Loan

Term Loan

Packing Credit

The varieties used by BAL are briefly described below with the common terms and
condition. Banks generally offer different kinds of credit facilities to the customers.
Industrial Finance:
Finance It is a term financing repayable by installment within a fixed period.
These loans are usually made for:

Setting up of industries and to meet working capital


Balancing, modernization, replacement and expansion of exiting industries.
Construction of commercial/residential/building/ware house etc.

Consumer Credit Scheme: This loan is allowed for acquiring consumer durable to the
fixed income group and other eligible borrowers. The subject facility is known as personal
credit.
Export Finance: An exporter requires financial accommodation at two stages, namely:

Pre-shipment stage

Post-shipment stage.

Overdraft: It is an arrangement between the borrower and the Bank, whereby the
borrower may overdraw his account up to an agreed amount, within a specified period of
time. Overdrafts represent short-term funds and may be extended to business customers to

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meet a shortfall in their working capital requirements. Requests for financial capital
expenditure should be considered under fixed loans.

Different types of Overdrafts are Secured overdrafts, Overdraft against pledged of

goods/stocks,

Overdraft against Hypothecation of good, stocks, plant and Machinery.

Other Advances:
Advanced against import bills:
- Bills against L/C are originated from the lodgment of shipping documents received from
foreign banks against L/C established by the bank.
- Advance against trust receipt
- Advance against Export bills purchased/discounted
- Advance against work order-advance made to client to perform work order
- The credit facilities against cash collateral are FDR/Sanchaya patra/ ICB unit certificates
etc.
Fixed Loans: They represent an arrangement entered into between the borrower and the
bank, whereby the borrower is granted a loan for a specified amount with an agreed period.
A separate fixed loan account is opened, to which is debited the amount of the loan; the
proceeds of the loan being credited to the borrowers current or saving account, from
which source repayments are debited on an installment basis under a standing instruction,
either monthly, bi-monthly, quarterly, half-yearly, annually, or in one lump sum when the
loan matures i.e., a bullet repayment.
Project Loans: Fixed term loans are particularly appropriate for business customers who
require finance on a long term basis for the development of their factories, for purchases of
plant and machinery and other fixed assets as they are able to match the cost of the assets
with the profits expected to be generated over the period. Such loans are invariably subject
to the fundamental principle that the Banks funds go in last: this ensures the borrowers
have sufficient resources to complete their project and there is no necessity for further

29

resource to bank borrowings. In Hong Kong, construction loans are typical project
financing activities.
Syndicated Loans: There are circumstances when a banks regal lending limit to a
particular borrowing group will be exceeded after taking on an additional project loan. In
this instance, the bank will invite its correspondent banks to participate in the loan, with it
acting as an arranger. Agent and/or Lender, whereby its relationship with customer could
be fostered, and generous fee income (i.e., Arranger Fee, Agency Fee, Front-End Fee)
could be earned to improve on its return on assets.
Loan Against Trust Receipts (LATR): Trust receipt accommodation is usually
complementary to letter of credit i.e., bills coming forward under a letter of credit
established by the bank may be converted into a trust receipt.
Under a trust receipt facility, the importer is permitted to take delivery of the inward
shipping documents against the execution by him of a trust receipt. Thereafter, he collects
the goods, processes them and arranges to sell them over a fixed period of time. Upon
releasing the goods to the customer, the Bank undertakes to pay the exporter, while the
trust Receipt document duly signed gives a legal undertaking by the importer that will hold
the goods or the sale proceeds from any part of the goods to the order of the bank until
such times as the loan plus interest has been fully paid.
Guarantees: Guarantees are undertakings of a bank, up-to a specific amount,
guaranteeing a beneficiary the fulfillment of an obligation prior to a certain date. The bank
issues guarantee on behalf of their customer. The guarantee is also valid until the validity
of a credit limit. There are different forms of guarantee:
Bid Bonds: They are issued before any guarantees Performance guarantees are given
after the bid bond.
Local Guarantees: It is for the client who has business here in Bangladesh.
Foreign Guarantees: It is usually used for foreign currencies.

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Counter Guarantees: They are used to ensure payment.


Shipping Guarantees: Shipping guarantees are often issued within arranged and approved
LATR limits for the purpose of enabling importers to obtain their goods prior to receipt of
the relative documents of title. These guarantees indemnify the transport agent for any loss
incurred as a result of releasing shipping documents, and, therefore, the goods without the
proper document of title. The bank will confirm that upon receipt of the document of title it
will hand them to the transport agent who will then release the guarantee.
3.7 Credit Approving Authority
Credit decisions are heart of all credit works. Generally branch manager and the credit incharge of a branch are held responsible for appraising of a loan proposal. The customer
request for credit limit and the credit officer prepares a credit memo and send it to the head
office, credit division. After taking all the relevant information from the branch the head
office credit division sent the credit memo to the credit committee. Credit committee of
BAL is comprised of Managing Director and other top-level executives, that is, SEVPs and
EVPs. If credit committee is convinced about the merit of the proposal then it is sent the
broad of directors. The board is final authority to approve or decline a proposal. The whole
process takes a month or more.
Branch Credit
Section

Head Office Credit


Committee

Managing Director

Board of
Directors

3.8 Functions of Credit Department


The responsibilities/ functions performed by the credit department for processing of all
types of advances as well as maintaining the records are as follows:

Know their borrowers fully.

Comply with the applicable instructions, manual, circulars and other rules of the bank

as well as those of Bangladesh Bank including Banking companies act 1991.

Take interview of the prospective borrower

Assemble the credit information received and place in the customers credit file.

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Process and sanction credits to the customers.

Disburse credit facilities to borrowers in accordance with established procedures.

Record the credit facilities.

Prepare vouchers pertaining to credit facilities disbursed and maintain records of

relevant entries.
Tasks of credit departments of both corporate office and branch are interrelated. The
branch credit department is responsible for mainly marketing, operational and monitoring,
whereas the head office credit department is mainly responsible for credit policy, credit
approval and supervising. The zonal office also plays the same role as head office.
3.9 Delegation of Lending Authority:
Presently Bank Asia Limited has four levels of sanction authorities:
1.

Branch: Branch Manager is authorized to approve fully secured credit when credit

facility does not exceed 90% of security (en-cashable) value.


2. Zonal Office: Zonal Office approves proposal from the branch up to certain limit. If
the limit exceeds its authority, it recommends to higher authority for approval.
3. Credit Committee: The credit committee in corporate office is headed by the
Managing Director and Head of Credit and respective members and other
departments. The credit committee approves credit facility up to BDT 10.00 million.
4. Board of Directors: The credit proposal beyond BDT 10.00 million is presented to
the Board of Directors for approval
3.10 Documentation of the Loan:
Documentation is obtaining such agreement where all the terms and condition and
securities are written and signed by the borrower. It specifies rights and liabilities of both
the banker and the borrower. In documentation each type of advances requires a different
set of documents. It also differs with the nature of securities. The documents should be
stamped according to the stamp Act. There are no hard and fast rules of documentation and
it varies from bank to bank. Generally, the documents taken in the case of a secured
advance by Bank Asia are:

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i.

Demand promissory note: Here the borrower promises to pay the loan as
and when demand by bank to repay the loan.

ii.

General Loan & Collateral Agreement.

iii.

Letter of Continuity.

iv.

Letter of Hypothecation of goods and capital machinery.

v.

Stock Report: This report is used for OD and CC. In this report, information
about the quality and quantity of goods hypothecated is furnished.

vi.

Memorandum of Deposit of Title Deed of property duly signed by the


owners of the property with resolution of Board of Directors.

vii.

Personal Guarantee of the owners of the property with PNW Statement.

viii.

Guarantee of all the directors of the company.

ix.

Resolution of the board of directors to borrow fund to execute documents


and completes other formalities

x.

Form no. XVII/XIX for filling charges with the register of joint stock
companies under relevant section.

xi.

Letter of lien for advance against FDR.

xii.

Letter of Charge/Lien & Set-Off

xiii.

Memorandum & Articles of Association (for limited company Borrower)


with Certificate of Incorporation

3.11 Classification of Loan on the Basis of Security


For internal use, banks classify the loan and advance on the basis of how much the bank is
secured in respective of the loan:
-

Debts considered good in respect of which the bank is fully secured.

Debts considered good for which bank holds no other security than the debtors
personal security

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Debts considered good and secured by the personal security of one or more parties
in addition to the personal security of the debtor.

3.12 Objective Basis of Classification


In classifying the loan and advance there are four classes in the loan review practiced in
Bank Asia Limited. They are as follows:
3.12.1 Unclassified
The loan account is performing satisfactorily in the terms of its installments and no
overdue is occurred. This type of loan and advances are fall into this class.
3.12.2 Substandard
This classification contains where irregularities have been occurred but such irregularities
are temporarily in nature. To fall in this class the loan and advance has to fulfill the

Category of Credit
S-T Agri & Micro Credit
Continuous loan
Demand Loan

Time overdue (irregularities)


3 months & above but less than 6 months.

Substandard

following factor.

Un-recovered for 3 months & above but less


than 6 months from the date of the loan is
claimed.
Repayable within 5years: If the overdue
installment equals or exceeds the amount
Fixed Term loan
repayable within 6 months.
Repayable more than 5years: If the overdue
installment equals or exceeds the amount
repayable within 12 months.
The main criteria for a substandard advance is that despite these technicalities or
irregularities no loss is expected to be arise for the bank. These accounts will require close
supervision by management to ensure that the situation does not deteriorate further.
3.12.3 Doubtful

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This classification contains where doubt exists on the full recovery of the loan and advance
along with a loss is anticipated but cannot be quantifiable at this stage. Moreover if the
state of the loan accounts falls under the following criterion can be declared as doubtful

Category of Credit
S-T Agri & Micro Credit
Continuous loan
Demand Loan

Fixed Term loan

Time overdue (irregularities)


6 months & above but less than 12 months.
Un-recovered for 6 months & above but less
than 12 months from the date of the loan is
claimed.
Repayable within 5years: If the overdue
installment equals or exceeds the amount
repayable within 12 months.
Repayable more than 5years: If the overdue
installment equals or exceeds the amount
repayable within 18 months.

Doubtful

loan and advance.

3.12.4 Bad and Loss


A particular loan and advance fall in this class when it seems that this loan and advance is
not collectable or worthless even after all the security has been exhausted. In the following
table the criteria to be fulfilled to fall in this category are summarized:
Category of Credit
S-T Agri & Micro Credit
Continuous loan
Demand Loan

Fixed Term loan

Time overdue (irregularities)


Not recovered within more than 12 months.
Un-recovered more than 12 months from
the date of the loan is claimed.
Repayable within 5years: If the overdue
installment equals or exceeds the amount
repayable within 18 months.

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Bad and Loss

Repayable more than 5years: If the overdue


installment equals or exceeds the amount
repayable within 24 months.

3.13 Qualitative Judgment Basis of Classification


Beside the above-mentioned objective criteria, Bank Asia Limited has other few qualitative
judgment for classifying the loan and advance. This judgement totally depends on the
Branch Manger and or the Head Office credit division. If there is any doubt or uncertainty
regarding the recovery of any continuous credit, demand loan, fixed term loan and
classified or not on the basis of the above mentioned objective criterion then the loan can
be classified on the basis of the Qualitative Judgment. The qualitative factors that are
considered in Bank Asia Limited are as follows:
Borrower sustains a loss of capital.
Significant decrease in the value of the security.
Weakening of banks position as creditor due to any reason whatsoever.
Diversification of the funds to uses other than the facility for which the credit
was approved.
Incorrect information supplied by the borrower or bankruptcy of the borrower.
Credit is rescheduled frequently or the rules of rescheduling are violated or a
suit is filed for the recovery of the credit
.
Last year the classification of the loan and advance of Bank Asia Limited were like this
Table: Classification position last two years.
Year
2002
2003

Unclassified
5,368
8,047

Substandard
0.47
0.87

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Doubtful
0.27
59.52

Tk in million
Bad
80.85
82.56

3.14 Managing Delinquent Client


When a problem loan is detected the responsible branch manager takes the corrective
action and tries to minimize the loan losses allowing different facilities to the client. The
steps practices in Bank Asia Limited to manage the delinquent loan are:
Persuasion: This is the first step practiced in the BAL to mange the problem loan.

Negotiation: If the persuasion failed, the loan officer negotiates a plan of action with
the borrower to try to extract both the bank and the borrower from possible loss. This
calls for certain sacrifices on the part of the bank and borrower in their mutual interest.

Litigation: If after rescheduling the loan and or failed to negotiate with the delinquent
client, BAL go for taking legal action against the delinquent client to recover the loan.
3.15 Provisioning
Specific Provision
Head office credit division prepares a list of credit accounts, which are considered to be
totally or partially be unrecoverable & keeps a provision against the outstanding loans.
Rate of Provisioning
Bank Asia Limited in the time of loan provisioning to get the real picture of the income
mainly follows the Bangladesh Bank guideline. The rate of provisioning used in BAL is
summarized in the following table.
Table 4: Rate of provisioning
Class
Unclassified (UC)
Substandard (SS)
Doubtful
Bad or Loss

Short Term
credit.

Agriculture All other credit


Rate of Provisions
1%
20%
50%
100%

5%
5%
5%
100%

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3.16 Credit Appraisal System


The function of commercial banks to collect deposit from the common people and to invest
deposited money in different sectors for overall development of the economy of the
country. So the banks have to be very much careful in credit appraisal. The person who is
primarily held responsible for appraising a loan proposal in Bank Asia Limited is called the
credit officer.
The most important measure of appraising a loan proposal is safety of the project. Safety is
measured by the borrower and repaying capacity of him. The attitude of the borrower is
also an important consideration; liquidity means the inflow of cash into the project in
course of its operation. The profit is the blood for any commercial institution. Before
approval of any loan project the bank authority has to be sure that the proposed project will
be a profitable venture. Profitability is assessed from the projected profit and loss
statement. The security is the only tangible remains with the banker. Securing or collateral
it is accepting must be easy to sell and sufficient to cover the loan amount. But bank cannot
sanction loan by only depending on collateral. The sources of repayment of the project
should be a feasible one. During sanctioning any loan bank has to be attentive about
diversification of risk. All money must not be disbursed amongst a small number of
people. In addition any project must be established for the national interest and growth.
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
relationship manager fail to analyze the clients viability of repaying the loan and the
projects cash flow possibility of default may arise due to the fact. So the importance of
APPRAISAL, in sanctioning the loan, is the key to identify the borrowers ability,
expertise, efficiency, industry analysis, and business performance to ensure the recovery of
the credit along with the good supervision, monitoring and the relationship. In a word it
can be said that 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. At the

38

time of credit proposal the bank has to come to an acceptable compromise between over
caution and under caution.
3.17 Guiding Principle of Credit appraisal for Credit Officer
To determine the worth of a client, the following conceptual exercises should be
undertaken. There are no fixed and set methods to perform credit marketing, and scope for
application of individual judgment/ perception always plays over set rules in such work.
For example, drop in revenue of a contractor may indicate the clients failure to get work,
or it may be due to adaptation of policy to do higher margin quality jobs.
3.18 Steps Involved in Credit Processing
The credit appraisal process here at Bank Asia limited is a detailed and through one,
complying to the central banks standards as well as analyzing all feasible sources of risk.
Though there is a prescribed format for appraising the potential borrower, the creativity of
the credit officer is very important for identifying various aspects of the investment
proposal. Bank Asia therefore allows some room for flexibility, which may enrich the
appraisal or make it a more complete one.
The credit division follows certain procedures to decide whether or not to allow the credit
facilities demanded. The credit division maintains the tight control over credit reports and
keeps the proper documentation and records in the files. In general following steps are
followed for a standard credit procedure:
3.18.1 Application for Loan
For any type of credit facility relating to the working capital, trade finance, project finance
and contract work, clients/borrowers must fill an application form with following
information: Name of firm/ company/ individual, Business address, Permanent address,
Constitution/ Status (Proprietorship/ Partnership/ Public Limited Co./ Private Ltd. Co.),
Date of establishment and place of incorporation, Background and business experience,
Particulars of assets (Land/Building, Bank Deposit, Stock/Shares), Nature of the business,

39

Statement of liabilities with Bank Asia and other banks, Financial statements for the last 3
years explaining the following terms, Capital Funds/ Net Worth (Paid up capital, Retained
earnings, General reserve ),

Balance Sheet Statistics (Current assets, Fixed assets, Term

liabilities, Capital/equity, Total liabilities).


For working capital finance clients/ borrowers must provide the following information
(Annual production, Annual sales, Sources of raw materials, Cash flow statements).
Following factors are to be considered while submitting the loan application form to the
bank:
Proposed debt/equity ratio

For processing and getting approval of the requested credit facility the client must provide
the above information and should fully co- operate with the bank for further information as
needed. The analyst should verify the information through both primary and secondary
sources. While evaluating the project for approval the analyst should have adequate
knowledge of the economic environment in which the project is to thrive. Such as
information related to money, banking foreign exchange, reserves, production, price,
national income, cost of living indices, govt. policies covering wages, taxation, tariff,
import control, investment, marketability of product etc.
Projected financial statements

For all credit proposals, the borrowers should submit their financial statements including
last 3(three) years profit and loss A/C and balance sheet-audited/ statement of affairs.
When an individual borrower or guarantor applies for any credit facility, the submitted
financial statements must be signed by competent authority and must contain legend to the
signatory, the assets and liabilities and sources of income and items of expenses.
Here this discussion is like preliminary screening of the plant. So the credit officers need to
be cautious about the facility the client is seeking and the available fund in the bank. More
over most of the businesses in our country dont have any standard form of accounting
department and dont have any audited statement. So the main task of the credit officers is
to make a relationship with the client to find out the hidden income sources.

40

3.18.2 Scrutinizing the documents


In this step the bank collects and correlates the information about the client. After receiving
the credit application form, the credit officer thoroughly checks the form and all the
submitted documents. Here, the point of importance whether the documents are certified
and or attested by the respective authority.

General check-whether the required documents are submitted authenticated.

Gross verification for identifying consistency.

3.18.3 Analyzing the information


Appraising the client or Credibility Appraisal

When we talk about good lending portfolio, few principals are highlighted, which are
judicious selection or borrower, safety, security, purpose, profitability, liquidity,
supervision, national interest. The main task and the first task of the credit officer is to
select a good borrower as if the borrower selected is good, the recovery and supervision
becomes easy and harmless. Like any other bank, the potential clients approach to Bank
Asia Limited for credits are highly appraised for the ensuring the repayment of the amount
to be disbursed. The credit policy has a prescribed criterion for selecting a borrower beside
this the credit officers take contingent factor analysis and use their analytical ability in the
time of selecting the borrower. The credit officer has to check the integrity and the honesty
of the client using different suitable tools. Lets take a look some of the most frequently
used ones:
Personal interview with the entrepreneur/management

When the client approaches for credit, the credit officer talks to him with a view to
identifying whether the client has only need of seeking credit facility or not. The credit
officer has to have deep analyzing power to find out the clue. The out come of a personal
interview session is to have overall idea about the integrity, experience, and business sense
of the borrower. Prompt and consistent information supply, willingness to supply

41

information and other verbal and non-verbal clues can be of value to the credit officer in
judging the client. If possible, a visit is made to the proposed/existing plant/factory.
Report from Bank Asia Limited

If the customer hold an account or is enjoying credit facility from the Bank Asia Limited,
the statements of the accounts are collected for analyzing the performance of the existing
facility, transaction summary of the accounts along with the integrity of the client.
Report from other banks

The client has to mention whether he has other liability in other bank in the name of the
project and or in the name of the sister concern in the time applying for credit. From the
given information the credit officer communicates with the respective authority of those
banks with which the credit seeker has transaction to collect the information about few
things:

Whether the client has taken any loan in the name of the proposed project or any

other sister concern.

The amount outstanding and whether classified or not.

The payment behavior of the client.

All the collected information is kept confidential.


Report from Society

Sometimes the credit officer collects in formation on a client from other businessmen
having relationship with Bank Asia. Informally the credit officer discusses about the
project, the sponsor(s) and the prospects of the project with persons he thinks can provide
him with information. Moreover, information about the sponsor is also collected from the
socially important person like community representative and chamber representative.
Contacting the clients supplier can also be another way to verify the payment character of
the client.
CIB Report

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There is possibility that client conceals information about his/her companys current
liability and transaction with other banks. So to get the accurate information about the
credibility of the customer the branch office collects CIB report through the head office.
The CIB authority provides the relevant information about the client.
3.18.4 Appraising the business
Appraising the business comprises of analyzing the industry outlook, the potential of the
business for which credit is being sought, market potential of the products, major
competitors, distinctive competitiveness and strategies taken.
In analyzing the industry, number of competitors, the current total production, demand and
supply position of the industry, prospect of demand growth etc are some of the factors that
are looked into. Also assessed is the vulnerability of the industry in the face of changes in
government regulation.
Overall growth of the business and performance are also looked into, using their financial
statements of last three financial years. The trend of sales, net margin, net income etc. is
examined.
Another important consideration is customer base of the firm and relationship with major
buyers. As mentioned earlier, competition in the market is an important factor all through.
Major competitors, distinctive competitiveness of the incumbent firm and the strategic
taken to combat the competition are also analyzed.
Management Competence or Capability Appraisal
The ability of the management to run the business smoothly and business background of
the promoter and the sponsor directors and the management are crucial factors in
determining the success or failure of any business operation. Capability of the borrower in
running the business in highly emphasized in the time of selecting a good borrower. As the
management of the business is the sole authority to run the business that is use the fund
efficiency, effectively and profitability, proper investigation must be carried out in this
regard. With this end in view Bank Asia collects the following information from the client:

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Brief description of the directors educational background & business background.

Brief profile of the management.

Business performance for the last three years as performance of the business implies

the capability of the managers running the business.

Equity mobilization of the directors as it implies their risk-taking attitude.

Entrepreneurship skills.

Managements experience in the business/businesses of similar nature.

Resilience or shock absorption.

If it is revealed that the directors are in the business for a long time and have operated the
business well are said to have the capability to run the business.
Financial strength Analysis
Analyzing the financial position of the borrower is one of the most crucial jobs to perform
before financing any business. It includes financial base analysis of the borrower/business,
liability position analysis in terms of risk and return measures, and lending risk analysis in
the specified format of Bangladesh Bank.
Financial base
This part of credit appraisal is concerned with whether there is a strong financial standing
of the Borrower Company and its directors. The following information are required: Networth statement of all the directors, Paid-up capital, Investment in business, Leverage
(Equity Multiplier), Cash flow, Allied deposit in Bank Asia Limited, Tangible net-worth of
the business for the lasts three years and projected two years, Total Asset- Total Debt,
Overall group strength (if applicable), Business performance.
Also, in order to get a clear picture of the financial viability of the business credit is asked
for, Bank Asia credit authority emphasizes on financial viability analysis of the client,
using some spreadsheet programs. The clients submit last three years audited/un-audited
financial statements as well as forecasted income and balance sheet in the time of applying
for credit. Using that data and the banks standardized spreadsheet format called
Spreadsheet, the credit officer calculates different ratios, cash flow, risk and return

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measures, working capital, and two standard credit scores (Y Score and Z score). Findings
of the Spreadsheet provide the credit section with all the analysis of the financial
information, and some guidelines as to whether the client is bankable or not. In a word, it
gives the credit appraiser meaningful insight of the financial standing of the borrowing.
Liability Position Analysis
Facility from Bank Asia & other banks taken by the client must be provided while applying
for credit facility. The credit officer looks for-Existing facility enjoying by the Client
Company from the Bank Asia Limited and other banks, Existing facilities for the sister
concerns (if applicable), Debt to Asset ratio, the amount outstanding are classified or not,
Monthly installment payment or fixed charge coverage performance of the client and also
look for the nature, limit, outstanding, overdue, CL status, security value of the credit
facilities.
Financial Viability Analysis
In this part, NPV and IRR of the project are calculated, and breakeven analysis is also
performed in terms of sales volume and capacity utilization. Payback period and modified
IRR are also calculated if deemed necessary for the completeness of the analysis.

3.18.5 Evaluation/ Approval


An accurate appraisal of risk in any credit exposure is highly subjective matter involving
quantitative and qualitative judgments, where
Quantitative factors refer to the analysis of financial statement ratio and Qualitative factors
refer to the assessment of management, industry position, customer/ supplier relations,
account performance and reputation.
In evaluating any credit proposal, the analyst uses the following distinct and logical steps:

Evaluating the past performance of the borrowers.


Assessing the risk of failure by identifying factors in the borrowers present
condition and past performances, which indicates likelihood of success to repay the
loan.

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Forecasting the probable future condition of the borrower and deciding whether to
accept or reject a loan proposal
Setting terms and conditions of credit facilities

The most pertinent and prime part of the process is assessment of risk of failure to repay
deals with the overall lending risk combining. In all cases, the banks basic lending criteria
must be satisfied and its policy of Know Your Customer implemented in full. Once
overall risk assessment done credit proposal are forwarded to appropriate authority for
approval.
3.18.6 Documentation & Disbursement
Once credit proposal is approved, a sanction letter is issued to client conveying offer to the
client-mentioning terms of sanction-type of facility, facility amount, repayment, security,
interest rate & fees, positive and negative covenants, etc. Client is advised to complete
documentation. It should be mentioned that documentation should be obtained prior to
disbursement of any loan. All the necessary documentation required meeting the terms and
conditions of the facility in the manner in which it was approved.
Apparently there are three parts of documentation, namelya) Obtaining instruments/ documents-charge documents, standard documents
& other specified documents as specified in terms and conditions in
sanction letter.
b) Stamping
c) Execution
Once documentation is complete, facility is disbursed as per term and conditions in
sanctioned advice.

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1. Request for Credit from the client to a Branch

2. Credit Application form filled up by the


customer & collection of document

3. Scrutinizing the documents

4. Analyzing the information

5. Preparing the proposal

6. The proposal goes to the Board of Directors


through other necessary steps

7. Sanctioning of the credit

8. Informing the client, Loan Disbursement,


Supervision and Monitoring

Figure: Steps involved in Credit Processing

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3.19 Credit Monitoring and Review


It is the last step in credit policy and procedure framework. Credit monitoring and review
is very important, because it ensures proper utilities and repayment of bank fund. Credit
monitoring and review feature of BAL is concerned was assessing the quality of different
type of loan.
Periodic review and follow up should, inter-alia aims at ensuring:
That conduct (Turnover, regularity of repayment etc) of the borrowing accounts during
the period under review has been satisfactory or as expected.
The terms and condition of the sanctioned letter are strictly followed.
The account is not having excess over limit.
The value of the collateral security is adequate.
There is not any unfavorable situation in market, economy and political conditions,
which may endanger the reliability of the borrower account.

The analysis of the borrowers business performance and comparison of the projected
and actual to find any deviations.

Apparent profitability from the loans.


3.20 Security against Advances
The documentation process is depended on types of securities, which are i) primary
security and ii) collateral security. The securities can be tangible or intangible, movable or
immovable. The securities, which are acceptable to the Bank in respect of the credit
facilities are-Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate,
Wage earners bond, FDR, Shares (Listed in Stock Exchange), Pledge of goods,
Hypothecation of goods, products and machinery, Fixed assets of manufacturing unit,
Shipping documents.
Qualities of a good security are clean title, easily saleable, easily valuable, price stable and
easily controllable, etc.

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3.20.1 Modes of Charging Security


A wide range of securities is offered to banks as coverage for loan. In order to make the
securities available to banker, in case of default of customer, a charge should be created on
the security. Creating charge means making it available as a cover for advance. The
following modes of charging securities are applied in the Bank Asia Limited. Different
methods of creating charges over security are lien, pledge, hypothecation, mortgage (legal
& equitable), trust receipt, advance against work order, advance against approved shares,
advance against FDR etc.
Lien
A lien is right of banker to hold the debtors property until the debt is discharged. Bank
generally retains the assets in his own custody but sometimes these goods are in the hands
of third party with lien marked. When it is in the hand of third party, the third party cannot
discharge it without the permission of bank. Lien gives banker the right to retain the
property not the right to sell. Permission from the appropriate court is necessary. Lien can
be made on moveable goods only such as raw materials, finished goods, shares debentures
etc.
Pledge
Pledge is also like lien but here bank enjoys more right. Bank can sell the property without
the intervention of any court, incase of default on loan, But for such selling proper notice
must be given to the debtor. To create pledge, physical transfer of goods to the bank is
must.
Hypothecation
In this charge creation method physically the goods remained in the hand of debtor. But
documents of title to goods are handed over to the banker. This method is also called
equitable charge. Since the goods are in the hand of the borrower, bank inspects the goods
regularly to judge it s quality and quantity for the maximum safety of loan.

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Mortgage
Mortgage is transfer of interest in specific immovable property. Mortgage is created on the
immovable property like land, building, plant etc. Most common type of mortgage is legal
mortgage in which ownership is transferred to the bank by registration of the mortgage
deed. Another method called equitable mortgage is also used in bank for creation of
charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration
is not required. In both the cases, the mortgage property is retained in the hank of
borrower.
Trust Receipt
Generally goods imported or bought by bank's financial assistance are held by bank as
security. Bank may release this lien / pledge these goods against trust receipt. This means
that the borrower holds goods in trust of the bank, trust receipt arrangement is needed
when the borrower is going to sell this goods or process it further but borrower has no
sufficient fund to pay off the bank loan. Here proceeds from any part of these goods are
deposited to this bank.
Advance against Work-Order
Advances can be made to a client to perform work order. The following points are to be
taken into consideration.
The clients management capability, equity strength, nature of scheduled work and
feasibility study should be judiciously made to arrive at logical decision. If there is a
provision for running bills for the work, appropriate amount to be deducted from each bill
to ensure complete adjustment of the liability within the payment period of the final bill
besides assigning bills receivable, additional collateral security may be insisted upon.
Disbursement should be made only after completion of documentation formalities and
fulfillment of arrangements by the client to undertake the contract. The progress of work
under contract is reviewed periodically.

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Advance against Approved Shares


Credit facilities to extend against shares will be called Investment Scheme against
Shares. Advance may be allowed against shares of companies listed with the Stock
Exchange Ltd. Subject to margin or may other restrictions imposed by Bangladesh
Bank/Head Office of the bank from time to time. Value of shares & margin should be
worked out as per guidelines issued from time to time by Bangladesh Bank / Head Office
of the bank.
Advance against Fixed Deposit Receipts
Advance against Fixed Deposit Receipt will be subject to credit Restrictions imposed from
time to time by Head Office / Bangladesh Bank. Scrutinize the Fixed Deposit Receipts
with regard to the following points.
a) The Fixed Deposit Receipt is not in the name of minor.
b) It is discharged by the depositor on revenue stamp of adequate value & his
signature is verified.
c) Creation of liability on Fixed Deposit issued in joint names by any one of the
depositors is regular.
d) If the Deposit Receipt is offered as a security for allowing advances, a letter of
lien shall be obtained from the depositors, on the appropriate form.
e) If the Deposit Receipt has been issued by the branch-allowing advance, lien
against that specific Deposit Receipt to be marked in the fixed Deposit Register
of the branch.
f) The discharged receipt, the letter of lien duly verified by the issuing branch &
the letter confirming registration of the lien on the deposit receipts shall be kept
along with other documents under safe custody of the bank.

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3.20.2 Relation between Advance with the Security


Types of advance
Loans
Overdraft
Bills purchased

Securities
Lien of various kinds of Sanchaya patras, Govt. Securities, FDR,
Collateral of immovable property, shares quoted in stock exchange
Pledge or hypothecation of machinery, land and building on which
machinery are installed, stock in trade, goods products and
merchandise.
Bills itself

3.21 Lending Risk Analysis (LRA): Modern Technique of Credit Appraisal


The Financial Sector Reform Project (FSRP) has designed the LRA package, which
provides a systematic procedure for analyzing and quantifying the potential credit risk.
Bangladesh Bank has directed all commercial bank to use LRA technique for evaluating
credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess
the credit risk in quantifiable manner and then find out ways & means to cover the risk.
However, some commercial banks employ LRA technique as a credit appraisal tool for
evaluating credit proposals amounting to Tk. 5 million and above. Broadly LRA package
divides the credit risk into two categories, namely --- Business risk and Security risk.
A detail interpretation of these risks and the procedure for evaluating the credit as follows:
3.21.1 Business risk
It refers to the risk that the business falls to generate sufficient cash flow to repay the loan.
Business risk is subdivided into two categories.
3.21.2 Industry risk
The risk that the company fails to repay for the external reason. It is subdivide into
supplies risk and sales risk.

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LENDING RISK
BUSINESS RISK
INDUSRTY RISK
SUPPLY RISK
SALES RISK

COMPANY RISK
MANAGEMENT RISK
MANAGEMENT
MANAGEMENT

SECURITY RISK

COMPANY POSITION
SECURITY CONTROL

PERFORMANCE RISK

SECURITY COVER

RESILIENCE RISK

3.21.3 Supplies risk


It indicates that the business suffers from external disruption to the supply of imputes.
Components of supplies risk are as raw material, Labor, power, machinery, equipment,
factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then
assessing the risk of disruption of supplies of each item.
3.21.4 Sales risk
This refers to the risk that the business suffers from external disruption of sales. Sales may
be disrupted by changes to market size, increasing in competition, change in the regulation
or due to the loss of single large customer. Sales risk is determined by analyzing

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production or marketing system, industry situation, Government policy, and competitor


profile and companies strategies.
3.21.5 Company risk
This refers to the risk that the company fails for internal reasons. Company risk is
subdivided into company position risk and Management risks.
3.21.6 Company position risk
Within an industry each and every company holds a position. This position is very
competitive. Due to the weakness in the company's position in the industry, a company is
the risk for failure. That means, company position risk is the risk of failure due to
weakness in the companies position in the industry. It is subdivided into performance risk
and resilience risk.
3.21.7 Performance risk
This risk refers to the risk that the companys position is so weak that it will be unable to
repay the loan even under Favor able external condition. Performance risk assessed by
SWOT (Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, Cash flow
forecast analysis and credit report analysis (i.e. CIB repot from Bangladesh Bank).
3.21.8 Resilience risk
Resilience means to recover early injury, this refers to risk that the company falls due to
resilience to unexpected external conditions. The resilience of a company depends on its
leverage, liquidity and strength of connection of its owner or directors. The resilience risk
is determined by analyzing different financial ratio, flexibility of production process,
shareholders willingness to support the company if need arise and political and private
affiliation of owners and key personnel.

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3.21.9 Management risk


The management risk refers to the risk that the company fails due to management not
exploiting effectively the companys position. Management risk is subdivided into
management competence risk and integrity risk.
3.21.10 Management competence risk
This refers to the risk that falls because the management is incompetent. The competence
of management depends upon their ability to manage the company's business efficiently
and effectively. The assessment of management competence depends on management
ability and management team work. Management ability is determined by analyzing the
ability of owner or board of the members first and then key personnel for finance and
operation. Management team work is determined by analyzing management structure and
its strength and weakness.
3.21.11 Management integrity risk
This refers to the risk that the company fails to repay the loan amount due to lack of
management integrity. Management integrity is a combination of honesty and
dependability. Management integrity risk is determined by assessing management honesty,
which requires evaluating the reliability of information supplied and then management
dependability.
3.21.12 Security risk
This sort of risk is associated with the realized value of the security, which may not cover
the exposure of loan. Exposure means principal plus outstanding interest. The security risk
is subdivided into two major heads i.e. security control risk and security cover risk.
3.21.13 Security control risk
This risk refers to the risk that the bank falls to realize the security because of bank's
control over the security offered by the borrower i.e. incomplete documents. The risk of

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failure to realize the security depends on the difficulty in obtaining favorable judgement
and taking possession of security. For analyzing the security control risk the credit office is
required to verify documentation to ensure security protection, documentation
completeness, documentation integrity and proper insurance policy. He/she also conducts
site visit to verify security existence. Assessment of security control risk requires analyzing
the possibility of obtaining favorable judgement and analyzing the case with which the
bank could take the possession and liquidate the securities.
3.21.14 Security cover risk
This refers to the risk that the realized value of security is less than exposure. Security
cover risk depends on speed of realization and liquidation value. For analyzing security
cover risk, the official requires assessing the power of the customer to prolong the legal
process and to analyze the market demand for the security For assessment of security
control risk, the officials times the time that would require to liquidate the security and
assess the risk and estimates the security value at liquidation and assess the risk.
Before completing the LRA form, the relationship manager collects data specially industry
specific from published sources and company specific data that not usually published., by
personally visiting the company. After collecting the necessary data he/ she prepares
financial spreadsheet. This spreadsheet provides a quick method of assessing business
trend & efficiency and helps to assess the borrower ability to pay the loan Obligation.
Financial spreadsheet includes balance sheet, income statement, cash flow statement and
ratios for the purpose of financial statement analysis. Through analyzing data and collected
information, the concerned official completes the LRA form and all scores are transferred
to the scoring matrix to find the overall risk of lending. The overall matrix provides four
kinds of lending risk for decision making viz.--(I) Good (ii) Acceptable (iii) Marginal and
(iv) Poor. The bank does not provide any credit request having an over all risk as
marginal" and " Poor" without justification. All credit application rated "Poor" shall require
the approval of the Board of Directors regardless of purpose tenor or amount.
Therefore-bank can minimize the dangers regarding the bad loan and advances through
using the LRA.

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SUMMARY OF CREDIT RISK

Prism of Good Governance


Bangladesh Bank strictly requires the financial institutions to abide by the prism of good
governance, which basically explains how to carry out business activities and meeting the
targets by maintaining the socio ethical standards and keeping within the regulatory
framework. It suggests creating the environment for institutions building in the financial
industry- which requires creating sustainable organization that have embedded risk

Business strategy

Targets and Buds

Regulatory framework

management system which essentially translates to good governance.

-Asset
liability
Management
-Foreign exchange
-Internal control
-AML

-HRM -Revenue - ALM standard


-Security - InfoTech -Corporate
affairs

Policy + People + Process

Socio Ethical Standards

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SECTION IV: CREDIT RISK MANAGEMENT GUIDELINES


BY BANGLADESH BANK

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4.0 INDUSTRY BEST PRACTICES AS SUGGESTD BY BANGLADESH BANK


4.1 POLICY GUIDELINES
This section details fundamental credit risk management policies that are recommended for
adoption by all banks in Bangladesh. The guidelines contained herein outline general
principles that are designed to govern the implementation of more detailed lending
procedures and risk grading systems within individual banks.
4.1.1 Lending Guidelines
All banks should have established Credit Policies (Lending Guidelines) that clearly
outline the senior managements view of business development priorities and the terms and
conditions that should be adhered to in order for loans to be approved. The Lending
Guidelines should be updated at least annually to reflect changes in the economic out look
and the evolution of the banks loan portfolio, and be distributed to all lending/marketing
officers. The Lending Guidelines should be approved by the Managing Director/CEO &
Board of Directors of the bank based on the endorsement of the banks Head of Credit Risk
Management and the Head of Corporate/Commercial Banking. (Section 2.1 of these
guidelines refers) Any departure or deviation from the Lending Guidelines should be
explicitly identified in credit applications and a justification for approval provided.
Approval of loans that do not comply with Lending Guidelines should be restricted to the
banks Head of Credit or Managing Director/CEO & Board of Directors. The Lending
Guidelines should provide the key foundations for account officers/relationship managers
(RM) to formulate their recommendations for approval, and should include the following:
Industry and Business Segment Focus The Lending Guidelines should clearly identify
the business/industry sectors that should constitute the majority of the banks loan
portfolio. For each sector, a clear indication of the banks appetite for growth should be
indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This
will provide necessary direction to the banks marketing staff.

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Types of Loan Facilities


The type of loans that are permitted should be clearly indicated, such as Working Capital,
Trade Finance, Term Loan, etc.
Single Borrower/Group Limits/Syndication
Details of the banks Single Borrower/Group limits should be included as per Bangladesh
Bank guidelines. Banks may wish to establish more conservative criteria in this regard.
Appendix-3.4.3 provides brief description of financing under syndicated arrangement.
Lending Caps
Banks should establish a specific industry sector exposure cap to avoid over concentration
in any one industry sector.
Discouraged Business Types
Banks should outline industries or lending activities that are discouraged. As a minimum,
the following should be discouraged:
- Military Equipment/Weapons Finance
- Highly Leveraged Transactions
- Finance of Speculative Investments
- Logging, Mineral Extraction/Mining, or other activity that is Ethically or
Environmentally Sensitive
- Lending to companies listed on CIB black list or known defaulters
- Counter parties 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

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Facility parameters (e.g., maximum size, maximum tenor, and covenant and security
requirements) should be clearly stated. As a minimum, the following parameters should be
adopted:
- Banks should not grant facilities where the banks 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 prior to loans being granted.
A recognized 3rd party professional valuation firm should be appointed to conduct
valuations.
Cross Border Risk
Risk associated with cross border lending. Borrowers of a particular country may be unable
or unwilling to fulfill principle and/or interest obligations. Distinguished from ordinary
credit risk because the difficulty arises from a political event, such as suspension of
external payments
- Synonymous with political & sovereign risk
- Third world debt crisis
For example, export documents negotiated for countries like Nigeria.
4.1.2 Credit Assessment & Risk Grading
4.1.2.1 Credit Assessment
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 to be. All banks should have established Know Your

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Customer (KYC) and Money Laundering guidelines which should be adhered to at all
times. Credit Applications should summarize the results of the RMs 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 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 inter group 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 analysed. 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 (tenor > 1 year) are being
proposed, a projection of the borrowers future financial performance should be provided,

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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.
- 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

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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.
Appendix iv contains a template for credit application.
4.1.2.2 Risk Grading
All Banks should adopt a credit risk grading system. The system should define the risk
profile of borrowers to ensure that account management, structure and pricing are
commensurate with the risk involved. 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. 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 judgement and the Risk Grade Scorecard results. It is recognized that
the banks may have more or less Risk Grades, however, monitoring standards and account
management must be appropriate given the assigned Risk Grade:
Risk Rating Grade Definition
Superior Low Risk (Grade 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 (Grade2) 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 and have an unblemished track

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record. All security documentation should be in place. Aggregate Score of 95 or greater


based on the Risk Grade Scorecard.
Acceptable Fair Risk (Grade3) 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. A borrower should not be graded better than 3 if realistic audited financial
statements are not received. These assets would normally be secured by acceptable
collateral (1st charge over stocks / debtors / equipment / property). Borrowers should have
adequate liquidity, cash flow and earnings. An Aggregate Score of 75-94 based on the Risk
Grade Scorecard.
Marginal - Watch list (Grade 4) Grade 4 assets warrant greater attention due to conditions
affecting the borrower, the industry or the economic environment. These borrowers have
an above average risk due to strained liquidity, higher than normal leverage, thin cash flow
and/or inconsistent earnings. Facilities should be downgraded to 4 if the borrower incurs a
loss, loan payments routinely fall past due, account conduct is poor, or other untoward
factors are present. An Aggregate Score of 65-74 based on the Risk Grade Scorecard.
Special Mention (Grade 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. Facilities should be downgraded
to 5 if sustained deterioration in financial condition is noted (consecutive losses, negative
net worth, excessive leverage), if loan payments remain past due for 30-60 days, or if a
significant petition or claim is lodged against the borrower. Full repayment of facilities is
still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based
on the Risk Grade Scorecard.
Substandard (Grade 6) financial condition is weak and capacity or inclination to repay is
in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be

65

downgraded to 6 if loan payments remain past due for 60-90 days, if the customer intends
to create a lender group for debt restructuring purposes, the operation has ceased trading or
any indication suggesting the winding up or closure of the borrower is discovered. Not yet
considered non-performing as the correction of the deficiencies may result in an improved
condition, and interest can still be taken into profits. An Aggregate Score of 45-54 based on
the Risk Grade Scorecard.
Doubtful and Bad (non-performing) Grade 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. Assets should be downgraded to 7 if loan payments
remain past due in excess of 90 days, and interest income should be taken into suspense
(non-accrual). Loan loss provisions must be raised against the estimated unrealizable
amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on
all non-performing loans, and the bank should pursue legal options to enforce security to
obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the
requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning
must be followed. An Aggregate Score of 35-44 based on the Risk Grade Scorecard
Loss (non-performing) Grade 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. The prospect of recovery is poor and legal options have been pursued. The
proceeds expected from the liquidation or realization of security may be awaited. The
continuance of the loan as a bankable asset is not warranted, and the anticipated loss
should have been provided for. This classification reflects that it is not practical or
desirable to defer writing off this basically worthless asset even though partial recovery
may be effected in the future. Bangladesh Bank guidelines for timely write off of bad loans
must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard
At least top twenty-five clients/obligors of the Bank may preferably be rated by an outside

66

credit rating agency.


The Early Alert Process should be completed in a timely manner by the RM and forwarded
to CRM for approval to affect any downgrade. After approval, the report should be
forwarded to Credit Administration, who is responsible to ensure the correct
facility/borrower Risk Grades are updated on the system. The downgrading of an account
should be done immediately when adverse information is noted, and should not be
postponed until the annual review process
4.1.3 Approval Authority
The authority to sanction/approve loans must be clearly delegated to senior credit
executives by the Managing Director/CEO & Board based on the executives knowledge
and experience. Approval authority should be delegated to individual executives and not to
committees to ensure accountability in the approval process. The following guidelines
should apply in the approval/sanctioning of loans:
Credit approval authority must be delegated in writing from the MD/CEO & Board (as
appropriate), acknowledged by recipients, and records of all delegation retained in CRM.
Delegated approval authorities must be reviewed annually by MD/CEO/Board.
The credit approval function should be separate from the marketing/relationship
management (RM) function.
The role of Credit Committee may be restricted to only review of proposals i.e.
recommendations or review of banks loan portfolios.
Approvals must be evidenced in writing, or by electronic signature. Approval records
must be kept on file with the Credit Applications.
All credit risks must be authorized by executives within the authority limit delegated to
them by the MD/CEO. The pooling or combining of authority limits should not be
permitted.

67

Credit approval should be centralized within the CRM function. Regional credit centers
may be established, however, all large loans must be approved by the Head of Credit and
Risk Management or Managing Director/CEO/Board or delegated Head Office credit
executive.
The aggregate exposure to any borrower or borrowing group must be used to determine
the approval authority required.
Any credit proposal that does not comply with Lending Guidelines, regardless of
amount, should be referred to Head Office for Approval
MD/Head of Credit Risk Management must approve and monitor any cross border
exposure risk.
Any breaches of lending authority should be reported to MD/CEO, Head of Internal
Control, and Head of CRM.
It is essential that executives charged with approving loans have the relevant training
and experience to carry out their responsibilities effectively. As a minimum, approving
executives should have:
- At least 5 years experience working in corporate/commercial banking as a relationship
manager or account executive.
- Training and experience in financial statement, cash flow and risk analysis.
- A thorough working knowledge of Accounting.
- A good understanding of the local industry/market dynamics.
- Successfully completed an assessment test demonstrating adequate knowledge of the
following areas:
oIntroduction of accrual accounting.
oIndustry / Business Risk Analysis
oBorrowing Causes
oFinancial reporting and full disclosure
oFinancial Statement Analysis
oThe Asset Conversion/Trade Cycle
oCash Flow Analysis

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oProjections
oLoan Structure and Documentation
oLoan Management.
A monthly summary of all new facilities approved, renewed, enhanced, and a list of
proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.
4.1.4 Segregation of Duties
Banks should aim to segregate the following lending functions:
- Credit Approval/Risk Management
- Relationship Management/Marketing
-

Credit Administration

The purpose of the segregation is to improve the knowledge levels and expertise in each
department, to impose controls over the disbursement of authorized loan facilities and
obtain an objective and independent judgment of credit proposals.
4.1.5 Internal Audit
Banks should have a segregated internal audit/control department charged with conducting
audits of all departments. Audits should be carried out annually, and should ensure
compliance with regulatory guidelines, internal procedures, Lending Guidelines and
Bangladesh Bank requirements.
4.2 PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES
The appropriate organizational structure must be in place to support the adoption of the
policies detailed in Section 1 of these guidelines. The key feature is the segregation of the
Marketing/Relationship Management function from Approval / Risk Management /

69

Administration functions. Credit approval should be centralized within the CRM function.
Regional credit centers may be established, however, all applications must be approved by
the Head of Credit and Risk Management or Managing Director /CEO /Board or delegated
Head Office credit executive.
4.2.1 Preferred Organizational Structure
The following chart represents the preferred management structure:
Managing Director/ CEO

Head

of

Credit

Risk

Management
(CRM

Head of Corporate /
Commercial Banking

Other Direct Report


Internal Audit, etc
Other Direct Reports

Credit Administration

Relationship

(Internal Audit, etc.)

(May report separately

Management /

Managing

to MD/CEO)

Marketing (RM)

CEO

Director

Business Development
Credit Approval

Business Development

(Internal Audit, etc.)

(Includes regional credit

Managing

Centers if applicable)

Director

CEO

Monitoring / Recovery
(includes

Other Direct Reports

regional
Other Direct Reports

recovery
Monitoring/Recovery
centres
applicable)
(includesifregional
recovery

(Internal Audit, etc.)


Managing

centres if applicable)

Director

CEO
Other Direct Reports
(Internal Audit, etc.)
Managing
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CEO

Director

(Internal Audit, etc.)


Managing

Director

CEO
Other Direct Reports
(Internal Audit, etc.)
Managing

4.2.2 Key Responsibilities

Director

CEO
The key responsibilities of the above functions are as follows.

Credit Risk Management (CRM)


Oversight of the banks credit policies, procedures and controls relating to all credit risks
arising from corporate/commercial/institutional banking, personal banking, & treasury
operations.
Oversight of the banks asset quality.
Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize
recovery and ensure that appropriate and timely loan loss provisions have been made.
To approve (or decline), within delegated authority, Credit Applications recommended
by RM. Where aggregate borrower exposure is in excess of approval limits, to provide
recommendation to MD/CEO for approval.
To provide advice/assistance regarding all credit matters to line management/ RMs.
To ensure that lending executives have adequate experience and/or training in order to
carry out job duties effectively.

Credit Administration:
To ensure that all security documentation complies with the terms of approval and is
enforceable.
To monitor insurance coverage to ensure appropriate coverage is in place over assets
pledged as collateral, and is properly assigned to the bank.
To control loan disbursements only after all terms and conditions of approval have been
met, and all security documentation is in place.
To maintain control over all security documentation.

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To monitor borrowers compliance with covenants and agreed terms and conditions, and
general monitoring of account conduct/performance.

Relationship Management/Marketing (RM)


To act as the primary bank contact with borrowers.
To maintain thorough knowledge of borrowers business and industry through regular
contact, factory/warehouse inspections, etc. RMs should proactively monitor the financial
performance and account conduct of borrowers.
To be responsible for the timely and accurate submission of Credit Applications for new
proposals and annual reviews, taking into account the credit assessment requirements
outlined in Section 4. 1.2.1 of these guidelines.
To highlight any deterioration in borrowers financial standing and amend the
borrowers Risk Grade in a timely manner. Changes in Risk Grades should be advised to
and approved by CRM.
To seek assistance/advice at the earliest from CRM regarding the structuring of facilities,
potential deterioration in accounts or for any credit related issues.

Internal Audit/Control
Conducts independent inspections annually to ensure compliance with Lending
Guidelines, operating procedures, bank policies and Bangladesh Bank directives. Reports
directly to MD/CEO or Audit committee of the Board.
4.3 PROCEDURAL GUIDELINES
This section outlines of the main procedures that are needed to ensure compliance with the
policies contained in Section 1.0 of these guidelines.
4.3.1 Approval Process

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The approval process must reinforce the segregation of Relationship Management/


Marketing from the approving authority. The responsibility for preparing the Credit
Application should rest with the RM within the corporate/commercial banking department.
Credit Applications should be recommended for approval by the RM team and forwarded
to the approval team within CRM and approved by individual executives. Banks may wish
to establish various thresholds, above which, the recommendation of the Head of
Corporate/Commercial Banking is required prior to onward recommendation to CRM for
approval. In addition, banks may wish to establish regional credit centers within the
approval team to handle routine approvals. Executives in head office CRM should approve
all large loans.
The recommending or approving executives should take responsibility for and be held
accountable for their recommendations or approval. Delegation of approval limits should
be such that all proposals where the facilities are up to 15% of the banks capital should be
approved at the CRM level, facilities up to 25% of capital should be approved by
CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only
after recommendation of CRM, Corporate Banking and MD/CEO.
The following diagram illustrates the preferred approval process:
Credit Application
Recommended by RM/ Marketing
1
2
Zonal Credit Officer (ZCO)
3

Head of Credit &


Head of Corporate Banking (HOBC)
5

Managing Director

73

7
7
Executive Committee/ Board
1. Application forwarded to Zonal Office for approved/decline
2. Advise the decision as per delegated authority (approved /decline) to recommending
branches. A monthly summary of ZCO approvals should be sent to HOC and HOCB to
report the previous months approvals sanctioned at the Zonal Offices. The HOC should
review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank
policies.
3. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for
endorsement, and Head of Credit (HOC) for approval or onward recommendation.
4. HOC advises the decision as per delegated authority to ZCO
5. HOC & HOCB supports & forwarded to Managing Director
6. Managing Director advises the decision as per delegated authority to HOC & HOCB.
7. Managing Director presents the proposal to EC/Board
8. EC/Board advises the decision to HOC & HOCB
** Regardless of the delegated authority HOC to advise the decision (approval/decline) to
marketing department through ZCO
Recommended Delegated Approval Authority Levels
HOC/CRM Executives

Up to 15% of Capital

Managing Director/CEO

Up to 25% of Capital

EC/Board all exceed

25% of Capital
Appeal Process

Any declined credit may be re-presented to the next higher authority for
reassessment/approval. However, there should be no appeal process beyond the Managing
Director.
4.3.2 Credit Administration

74

The Credit Administration function is critical in ensuring that proper documentation and
approvals are in place prior to the disbursement of loan facilities. For this reason, it is
essential that the functions of Credit Administration be strictly segregated from
Relationship Management/Marketing in order to avoid the possibility of controls being
compromised or issues not being highlighted at the appropriate level. Credit
Administration procedures should be in place to ensure the following:
4.3.2.1 Disbursement:
Security documents are prepared in accordance with approval terms and are legally
enforceable. Standard loan facility documentation that has been reviewed by legal counsel
should be used in all cases. Exceptions should be referred to legal counsel for advice based
on authorization from an appropriate executive in CRM.
Disbursements under loan facilities are only be made when all security documentation is
in place. CIB report should reflect/include the name of all the lenders with facility, limit &
outstanding. All formalities regarding large loans & loans to Directors should be guided by
Bangladesh Bank circulars & related section of Banking Companies Act. All Credit
Approval terms have been met.
4.3.2.2 Custodial Duties:
Loan disbursements and the preparation and storage of security documents should be
centralized in the regional credit centers.
Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets
pledged as collateral.
Security documentation is held under strict control, preferably in locked fireproof
storage.

75

4.3.2.3 Compliance Requirements:


All required Bangladesh Bank returns are submitted in the correct format in a timely
manner.
Bangladesh Bank circulars/regulations are maintained centrally, and advised to all
relevant departments to ensure compliance.
All third party service providers (valuers, lawyers, insurers, CPAs etc.) are approved and
performance reviewed on an annual basis. Banks are referred to Bangladesh Bank circular
outlining approved external audit firms that are acceptable.
4.3.3 Credit Monitoring
To minimize credit losses, monitoring procedures and systems should be in place 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.
Computer systems must be able to produce the above information for central/head office as
well as local review. Where automated systems are not available, a manual process should
have the capability to produce accurate exception reports. Exceptions should be followed

76

up on and corrective action taken in a timely manner before the account deteriorates
further. Refer to the Early Alert Process (section4.3.3.1).
4.3.3.1 Early Alert process:
An Early Alert Account is one that has risks or potential weaknesses of a material nature
requiring monitoring, supervision, or close attention by management. If these weaknesses
are left uncorrected, they may result in deterioration of the repayment prospects for the
asset or in the Banks credit position at some future date with a likely prospect of being
downgraded to CG 5 or worse (Impaired status), within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts
are prime credit responsibilities of all Relationship Managers and must be undertaken on a
continuous basis. An Early Alert report should be completed by the RM and sent to the
approving authority in CRM for any account that is showing signs of deterioration within
seven days from the identification of weaknesses. The Risk Grade should be updated as
soon as possible and no delay should be taken in referring problem accounts to the CRM
department for assistance in recovery.
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 Banks interest. The symptoms of early alert are
by no means exhaustive and hence, if there are other concerns, such as a breach of loan
covenants or adverse market rumors that warrant additional caution, an Early Alert report
should be raised.
Moreover, regular contact with customers will enhance the likelihood of developing
strategies mutually acceptable to both the customer and the Bank. Representation from the
Bank in such discussions should include the local legal adviser when appropriate.

77

An account may be reclassified as a Regular Account from Early Alert Account status
when the symptom, or symptoms, causing the Early Alert classification have been
regularized or no longer exist. The concurrence of the CRM approval authority is required
for conversion from Early Alert Account status to Regular Account status.

4.3.4 Credit Recovery


The Recovery Unit (RU) of CRM should directly manage accounts with sustained
deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer
EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM
and Corporate Banking. Whenever an account is handed over from Relationship
Management to RU, a Handover /Downgrade Checklist should be completed.
The RUs primary functions are:
Determine Account Action Plan/Recovery Strategy
Pursue all options to maximize recovery, including placing customers into receivership
or liquidation as appropriate.
Ensure adequate and timely loan loss provisions are made based on actual and expected
losses.
Regular review of grade 6 or worse accounts.
The management of problem loans (NPLs) must be a dynamic process, and the associated
strategy together with the adequacy of provisions must be regularly reviewed. A process
should be established to share the lessons learned from the experience of credit losses in
order to update the lending guidelines.
4.3.4.1 NPL Account Management

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All NPLs should be assigned to an Account Manager within the RU, who is responsible for
coordinating and administering the action plan/recovery of the account, and should serve
as the primary customer contact after the account is downgraded to substandard. Whilst
some assistance from Corporate Banking/Relationship Management may be sought, it is
essential that the autonomy of the RU be maintained to ensure appropriate recovery
strategies are implemented.
4.3.4.2 Account Transfer Procedures
Within 7 days of an account being downgraded to substandard (grade 6), a Request for
Action (RFA) and a handover /downgrade checklist should be completed by the RM and
forwarded to RU for acknowledgment. The account should be assigned to an account
manager within the RU, who should review all documentation, meet the customer, and
prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR
should be approved by the Head of Credit, and copied to the Head of Corporate Banking
and to the Branch/office where the loan was originally sanctioned. This initial CLR should
highlight any documentation issues, loan structuring weaknesses, proposed workout
strategy, and should seek approval for any loan loss provisions that are necessary.
Recovery Units should ensure that the following is carried out when an account is
classified as Sub Standard or worse:
Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or
advances should be restricted, and only approved after careful scrutiny and approval from
appropriate executives within CRM.
CIB reporting is updated according to Bangladesh Bank guidelines and the borrowers
Risk Grade is changed as appropriate.
Loan loss provisions are taken based on Force Sale Value (FSV).

79

Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines
of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and
should be strictly monitored.
Prompt legal action is taken if the borrower is uncooperative.
4.3.4.3 Non Performing Loan (NPL) Monitoring
On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU
Account Manager to update the status of the action/recovery plan, review and assess the
adequacy of provisions, and modify the banks strategy as appropriate. The Head of Credit
sho uld approve the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval
needed for NPLs in excess of 15%. The CLRs for NPLs above 25% of capital should be
approved by the MD/CEO, with a copy received by the Board.
4.3.4.4 NPL provisioning and Write Off
The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write
off of bad and doubtful debts, and suspension of interest should be followed in all cases.
These requirements are the minimum, and Banks are encouraged to adopt more stringent
provisioning/write off policies. Regardless of the length of time a loan is past due,
provisions should be raised against the actual and expected losses at the time they are
estimated. The approval to take provisions, write offs, or release of provisions/upgrade of
an account should be restricted to the Head of Credit or MD/CEO based on
recommendation from the Recovery Unit. The Request for Action (RFA) or CLR reporting
format should be used to recommend provisions, write-offs or release/upgrades.
The RU Account Manager should determine the Force Sale Value (FSV) for accounts
grade 6 or worse. Force Sale Value is generally the amount that is expected to be realized
through the liquidation of collateral held as security or through the available operating cash
flows of the business, net of any realization costs. Any shortfall of the Force Sale Value
compared to total loan outstandings should be fully provided for once an account is

80

downgraded to grade 7. Where the customer in not cooperative, no value should be


assigned to the operating cash flow in determining Force Sale Value. Force Sale Value and
provisioning levels should be updated as and when new information is obtained, but as a
minimum, on a quarterly basis in the CLR.
Following formula is to be applied in determining the required amount of provision:
1.

Gross Outstanding

2.

Less: (i) Cash margin held or Fixed

3.

XXX

Deposits /SP under lien.

( XXX )

(ii) Interest in Suspense Account

( XXX )

Loan Value

(For which provision is to be created before considering


estimated realizable value of other security/collateral held)

XXX

4.

( XXX )

Less: Estimated salvage value of security/collateral held


(See Note below)
Net Loan Value

XXX

Note: The amount of required provision may, in some circumstances, be reduced by an


estimated realizable forced sale value of (i.e. Salvage Value) of' any tangible collateral held
(viz: mortgage of property, pledged goods / or hypothecated goods repossessed by the
bank, pledged readily marketable securities etc). Hence, in these situations, it will be
advisable to evaluate such collateral, estimate the most realistic sale value under duress and
net-off the value against the outstanding before determining the Net Loan value for
provision purposes. Conservative approach should be taken to arrive at provision
requirement and Bangladesh Bank guideline to be properly followed.
4.3.4.5 Incentive Program:

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Banks may wish to introduce incentive programs to encourage Recovery Unit Account
Managers to bring down the Non Performing Loans (NPLs). The table below shows an
indicative incentive plan for RU account managers:
Recovery as a % of Principal plus

Recommended Incentive as % of

interest

Net recovery amount


If CG 7-8
if written off
1.00%
2.00%
0.50%
1.00%
0.25%
0.50%

76% to 100%
51% t0 75%
20% to 50%

SECTION V: COMPLIANCE OF BANGLADESH BANK


GUIDELINES BY BANK ASIA LIMITED

82

5.0 COMPLIANCE OF BANGLADESH BANK GUIDELINES BY BANK ASIA LIMITED

In the previous sections of this report we have critically analysed Bank Asias existing
credit risk management system as well as Bangladesh Banks best practices guidelines for
managing credit risk. Comparing Bank Asias current credit risk management system with
the Bangladesh Bank guidelines we can evaluate Bank Asia Limiteds existing practices in
banking industry 5.1Credit Policies/ Lending Guideline: In the above analysis we have seen that Bank
Asia Limited possesses a newly introduced written credit policy, which was prepared in
accordance with Bangladesh Bank Guidelines. Corporate Office sent CRM manual to
every Branch Managers, Zonal Heads and all Departmental Heads with a circular on 8 th
July 2004.
The purpose of this document was to provide guidelines to improve the credit risk
management and for the credit officers to take quick decision whether to accept or reject a
project. The lending guideline includes

Industry or business segment focus.

Types of loan facilities

Details of single borrower/ group limit

Lending caps

Discouraged business type

Loan facility parameters

Cross Border risk

As there was no written guideline before therefore Bank Asia has just started implementing
the guidelines.
5.2 Credit Assessment & Risk Grading: Proper credit processing and risk grading system
is present here. Adoption of credit risk grading system is required to ensure account
management, structure and pricing to commensurate with the risk involved. Still this

83

grading system does not match completely i.e. lower interest rate for lower risk and vice
versa. Therefore pricing should commensurate while processing credit.
5.3 Approval Authority: In Bangladesh Banks guideline it is written, Approval
authority should be delegated to individual executives and not to committees to
ensure accountability in approval process. But we see, in Bank Asia Limited, that
every credit goes to the Board via credit committee. As a result, wastage of time
occurs and no one is held accountable for a bad loan.
5.4 Segregation of Duties: According to Bangladesh Bank Guideline Banks should aim to
segregate the following lending functions to improve the knowledge levels and expertise in
each department:
-

Credit Approval/ Risk Management

Relationship Management/ Marketing

Credit Administration

But in Bank Asia there is no such departmentation or segregation of duties. But it has just
started its delegation of duties like formation of Credit Administration Division in the
Corporate Office. In small branches of Bank Asia only single loan officer do all the tasks
relating credit like loan marketing, risk assessing and credit administration.
5.5 Internal Audit: Bank Asia Limited has a segregated internal audit/ control department
charged with conducting audit of all departments as suggested by Bangladesh Bank
guideline.
5.6 Preferred Organizational Structure: Bank Asia is yet to follow the preferred
management structure as suggested by Bangladesh Bank guideline. The key feature in the
preferred management structure is the segregation of Marketing/ Relationship function
from approval/Risk management/ Administration function.

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5.7 Approval process: According to Bangladesh Bank best practices guideline, the
recommending or approving executives should take responsibility for and be held
accountable for their recommendations and approval. The recommended delegated
approval authority levels are as follows
Head of Credit/CRM Executives

up to 15% of capital

Managing Director/ CEO

Up to 25% of capital

EC/ Board

All exceed 25% of capital

But in Bank Asia we see that every credit proposal goes to Executive committee i.e. board.
5.8 Credit Administration:

Bangladesh Bank guidelines suggest that Credit

administration be strictly segregated from relationship management/ marketing. As a result


the possibility of controls being compromised or issues not being highlighted at the
appropriate level can be avoided. The credit administration has the following functions

Disbursement

Custodial duties

Compliance requirement

In Bank Asia credit officers under supervision of Branch Credit In-charge or Branch
Manager carry out all the three functions of credit administration. Therefore Credit
Marketing and Administration is yet to be segregated.
5.9 Credit Monitoring: To minimize credit losses, monitoring procedures and systems
should be in place that provides an early indication of the deteriorating financial health of a
borrower. Early identification, prompt reporting and proactive management of Early Alert
Accounts are prime credit responsibilities of all relationship Managers. An early Alert
Account is one that has risks or potential weakness of a material nature requiring
monitoring, supervision or close attention by management.
In Bank Asia credit monitoring is also done by Credit-In-Charge or branch managers. As
they be busy with their day-today activities Early Alert Accounts do not get that much
attention as needed.

85

5.10 Credit Recovery: According to Bangladesh Bank guidelines the recovery unit (RU)
of CRM should directly manage accounts with sustained deterioration. On a quarterly
basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to
update the action/ recovery plan, review and assess the adequacy of provisions, and modify
as appropriate.
In Bank Asia the non-performing loan is very low (1.75% till December 31, 2003) and the
recovery unit is yet to be formed. Even for personal loan program, Personal Banking
Division also lacks a recovery unit.
5.11 Account Transfer Procedures: Bangladesh Bank guidelines suggested that within 7
days of an account being downgraded to substandard, a Request for Action (RFA) and a
handover/downgrade checklist should be completed by RM and forwarded to RU for
acknowledgement. An account manager is to be assigned to review all documentation,
meet the customer and prepare a Classified Loan Review (CLR) report within 15 days of
transfer.
This account transfer is yet to be followed as there is no official Recovery Unit (RU) for
this purpose. But at present branch officials perform these activities themselves. Besides
according to Bangladesh Bank guidelines, after classifying as substandard or worse actions
like withdrawal/restriction of facilities, updating CIB report, changing risk grade,
rescheduling of loans or even prompt actions are taken if the borrower is not cooperative.
5.12 Incentive Program: The Bangladesh Bank guidelines also encourage Banks to
introduce incentive programs for the Recovery Unit Account Managers to bring down the
Non Performing Loans (NPLs).
Bank Asia Limited currently has no such incentive program as it does not have such a
Recovery Unit.
5.13 Non-Performing Loan Account Management: This also does not comply with
Bangladesh Bank Guidelines as the officials for recovery unit is yet to be prepared. The

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branch officials therefore consulting with higher management initiate coordinating and
administering the action plan/recovery of the account. The branch officials/credit officer
contacts with the client, tries to negotiate to recover the loan by reducing the interest rate
or even waiving the interest to recover the loan capital and finally finding no other
alternative goes for legal actions.
5.14 Custodial Duties: Bangladesh Bank advises disbursement of loan and security
documents to be kept centrally in regionally credit centers, maintain insurance coverage
and security documents to keep in locked fireproof storage. In Bank Asia security
documents are kept in locked in the vault in their own branches and proper insurance
coverage is maintained.
5.15 Compliance Requirement:

Bangladesh Bank suggests submitting all required

documents in correct format, maintain circulars, review performance of third party service
providers (valuers, lawers, insurers,etc.). Bank Asia sends documents as required by
Bangladesh Bank; keep circulars provided by Bangladesh Bank but third party providers
are not reviewed as advised.
5.16 Analysis of Other Parameters: According to Bangladesh Bank guidelines before
sanctioning any loan some other important parameters like borrower analysis, industry
analysis, supplier/buyer analysis, historical financial analysis, projected parameters,
account conduct, security, loan structure etc. have to be done extensively. We have found
all of these parameters presence in Bank Asia Limiteds loan proposal format and also the
existence in reality.

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SECTION VI: CONCLUSION

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06 CONCLUSION
A banker cannot sleep well with bad debts in his portfolio. The failure of commercial
banks occurs mainly due to bad loans, which occurs due to inefficient management of the
loans and advances portfolio. Therefore any banks must be extremely cautious about its
lending portfolio and credit policy. So far Bank Asia Limited has been able to manage its
credit portfolio skillfully and kept the classified loan at a very lower rate ---thanks goes to
the standard and stringent credit appraisal policy and practices of the bank.
But all things around us are changing at an accelerating rate. Today is not like yesterday
and tomorrow will be different from today. Given the fast changing, dynamic global
economy and the increasing pressure of globalization, liberalization, consolidation and
disintermediation, it is essential that Bank Asia Limited has a robust credit risk
management policies and procedures that are sensitive to these changes.
Bank Asia Limited is one of the few local banks that has been able to keep non-performing
assets below 5% -mainly due to the standard and stringent credit appraisal policy and
practices of the bank. The bank has so far been able to make efficient use of the deposit
and has the classified loan under control. Loan mix reveals the diversification sought by
the bank in its loan placements. While keeping on expanding its reach, Bank Asia aims at
maintaining the high quality of services it has already achieved, at the same time being in a
sound financial health.
Bank Asia has set its mission high enough: to provide high quality service to its customers,
to participate in the growth and expansion of our national economy, to set high standards of
integrity, to bring total satisfaction to its clients, shareholders and employees and to
become the most sought after bank in the country, rendering technology driven innovative
services by the dedicated team of professionals. The management of the bank is working
continuously to make their mission a realizable one.

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