ASSIGNMENT

ON
Credit Risk Management
In the perspective of Bangladesh

SUBMITTED TO
Md. Shahriar Parvez
Course teacher
City University.

SUBMITTED BY
Name

ID#

Md Sharwar jahan Sagor

06313130

Md Yeasin Mondol

06

Md Mobasher Ahmed

DATE: 30th August, 2010

ACKNOWLEDGEMENT
Preparing such a report has been a thrilling and learning experience for a new research
student like me. I would like to express my deep sense of gratitude to all those who are
always a source of inspiration for their involvement, unconditional cooperation and
support in the successful and timely preparation of this report. At the very beginning I
give thanks to Allah who keeps me feet to make this assignment. Then I give thanks to
my group members who help me by providing information. And I give my special thanks
to my honorable teacher who gives us proper guideline to prepare this assignment.
without their encouragement; I could not stand in pride as having done some academic
work. I am indebted to all of them.

INTRODUCTION
Credit risk analysis is one of the basic to risk management and control, as it is the risk
factor inherent in many bank businesses as the quality of credit is critical to sound
banking Loans comprise the most important asset as well as the primary source of
earning for the banking financial institutions. On the other hand, this (loan) is also the
major source of risk for the bank management. A prudent bank management should
always try to make an appropriate balance between its return and risk involved with the
loan portfolio. An unregulated banking financial institution might be fraught with
unmanageable risks for the purpose of maximizing its potential return. In such a
situation, the banking financial institutions might find itself in serious financial distress
instead of improving its financial health. Consequently, not only the depositors but also
the general shareholders will be deprived of their money from the bank. The
deterioration of loan quality will also affect the intermediation efficiency of the
financial institutions and thus the economic growth process of the country. This
establishes the fact that banks should provide increasing emphasis on various analytical
tools and techniques for screening proposals and loan decision taking. Credit Risk
Management is one of the new management and operational tools for improving the
operational efficiency of nationalized and private sector commercial banks, initiated by
Financial Sector Reform Program (FSRP) in 1993. It focus on international changes to
the lending process to improve the loan portfolio of banks. FSRP team has designed a
new system to assess credit risk called Lending Risk Analysis (LRA) Manual.
Bangladesh Bank has made it mandatory for commercial banks to exercise it for large
scales loan. Proper credit analysis helped to minimize loan losses by identifying
risk/weakness in either prospective or existing loan relationship

Rationale of the Study:

Bangladesh is one of the underdeveloped countries in the world. The economy of the
country has a lot left to be desired and there are lots of scopes for massive improvement.
In an economy like this, banking sector can play a vital role to improve the overall socialeconomic condition of the country. The banks by playing the role of an intermediary can
mobilize the excess fund of surplus sectors to provide necessary finance, to those sectors,
which are needed to promote for the sound development of the economy. As the banks
provide finance or lending to its counter parts, there arises a risk of credit risk which is
the possibility that a borrower or counter party will fail to meet its obligations in
accordance with agreed terms. It was a massive problem for the last two decades when
the nationalized banks would give out loan to any client they wanted without thinking of
the consequences of getting the loan back or the risk associated with it. As a result, there
was a period when about 45% of the total loan of these nationalized banks was Classified
Loan. That percentage was reduced to 26% by writing off the BAD/LOSS account. But
that doesnt lessen the burden the country has to suffer because by writing off those
classified loan, the money is not realized. Even at present, this problem is haunting many
banks and poses a major threat towards their sound performing. So its very important to
have an effective and sound credit risk management system in place which will help the
bank mitigate its risk factors and carry out successful financing service or lending. With
that issue in mind, the topic Credit Risk Management

CREDIT MANAGEMENT SCENARIO

Origin of Credit
Imagine the very first credit transaction in history. It certainly took place hundreds of
years ago, before the existence of bank, credit bureaus, or credit departments. Perhaps a
farmer asked his neighbor for some seeds to grow a crop promising to give the lender
some of his produce. Perhaps a family breadwinner simply needed food for his or family
and promised to repay with a bonus to compensate the lender for this generosity.
The prospective lender would have been surprised and apprehensive. An element of trust
would be needed, of course, and some guarantee of repayment would be nice. How could
one evaluate the risk of making this loan? What compensation should be sought for
delivering property for another persons use? How could one collect if repayment was not
promptly provided?
If a farmer or businessperson obtains the means to produce employment opportunities
and products, certainly the community would benefit. Loans and other credit programs
have provided these opportunities throughout history. Financial institutions developed to
put funds from savers into the hands of borrowers who used this value to create economic
value. Credit has contributed to economic growth of countries throughout the world as it
makes goods and services available to consumers, businesspersons, and governments.
Although the basic tasks of evaluating risk, extending credit, and collecting payments
have not changed, the mechanisms for marketing and conducting credit programs have
changed dramatically over the years. Computers using sophisticated credit scoring
systems speed up the disbursement and collection of account balances. Credit bureaus
maintain vast database of information about borrowers available online through computer
networks. Lenders continue to find more ways to offer more credit options to businesses
and consumers.

Definition of Credit
Credit is a contractual agreement, in which a borrower receives something of value now,
with the agreement to repay the lender at some date in the future. One of the basic
functions of bank is deposit extraction and credit extension. It helps this kind of
organizations to earn around 80% of the total revenue. Managing credit operation, thus, is
the crying need for any bank

Importance of credit:
Credit plays a very vital role in national economy in the following ways1. It provides working capital for industrialization.
2. It helps to create employment opportunities.
3. Credit controls almost all kinds of production activities of the country.
4. Peoples purchasing power increases for it.
5. It brings social equity.
6. Cash generation occurs for its successful performance.
7. Business cycle can run well only by the help of lending system.
8. Economic Stabilization
9. Raise standard of living

Factors Related with Credit

Risk

Time

Interest rate

Security or Collateral

Operating Expense

Legal Considerations

Inflation

Finance Charge

EMERGENCE OF CREDIT RISK MANAGEMENT

Introduction:
Credit Risk Management is basic to risk management and controlling, as it is the major
risk factor in most bank business. Therefore, a bank should assess the degree of risk
associated with each loan and its profitability. In this connection prior assessment of and
follow up on a loan transaction constitute essential ingredients of the credit risk control
process. An in-depth analysis of the borrower financial conditions, expected usage of
funds, ability to repay, willingness to repay and sources of repayment all together
constitute step one in the risk control processes.

Credit Risk Management and its implication in risk analysis:

Credit Risk Management is one of the new management and operational tools for
improving the operational efficiency of all banks excepting the foreign banks initiated by
Financial Sector Reform Project (FSRP) in 1993. It focuses on internal changes to the
lending process to improve the loan portfolio of banks. According to FSRP international
consultant, in a successful country (in terms of lending), all applications for credit are
thoroughly analyzed to assess the risk that the bank might not fully recover the loan. That
is profitable enterprises will get fund and grow but loss making enterprises will be
refused funding and will go out of business. Through the better practices of CRM, all the
banks will be benefited as well as the economy will grow and the people will be
benefited.
The same FSRP international consultant further says, in Bangladesh, loan analysis
typically covers only 25% of the potential risks that are analyzed by banks in the
developed world (1993). Analysis skills are virtually non-existent in the commercial
banks. Most of the lending officers do not know how to analyze a set of accounts. So, the
ultimate results of the lending process are- the countrys scarce financial resources are not

applied effectively, loss making enterprises receive funding and stay in business and
allowing them to loss even more, profitable enterprises are constrained by lack of
funding, the tax payers are obliged to subsidies heavily the banking system, Bangladesh
remain one of the poorest countries in the world.
In these circumstances, FSRP team has designed a new system to assess lending
risk called LRA Manual. Bangladesh Bank has already made it mandatory for
commercial banks to exercise it for granting loan above taka 1 chore. But, in near future,
Bangladesh Bank may suggest for all kinds of loans.
By going through this manual the lending bankers can assess the credit worthiness of
their prospective borrowers. Therefore, LRA is such an instrument, which is definitely
and directly related with lending information to analyze the borrowers financial,
marketing, managerial and organizational aspects subjectively and objectively and is a
part of CRM. It also facilitates the analyst to know the security risk of the credit.

Different types of risks associated with CRM

Broad divisions of CRM are as follows:

CRM

Security Risk

Business Risk

Industry
Risk

Supply
Risk

Risk Company

Sale Risk

Company
Position Risk

Performance
Risk

Management
Risk

Reliance
Risk

Management
Competence
Risk

Management
Integrity Risk

Security Control
Risk

Security Cover
Risk

Business Risk
Business Risk is concerned with whether the borrowing company would fail to generate
sufficient cash out of business to repay the loan. Business Risk, the main component of
lending risk, consists of the Industry Risk and the Company Risk.

A. Industry Risk: Due to some external reasons a business may fail and the risk, which
arrives from external reasons of the business, is called industry risk. It has two
components:

1) Supply risk: It indicates the risk of failure of the business due to disruption in
the supply of inputs resulting from their price, quantity or quality. The inputs
of supply risk are labor, raw materials, machinery and equipment, power,
premises etc. The price, quality or quantity of supplies may be disrupted
because of the following measures.
Scarcity of supplies causes production loss. Supply scarcity causes due tolabor unrest, erratic power supply, imposition of power controls makes
supplies scarce, supply of raw materials disrupted by transport difficulties,
critical raw materials only available from one supplier, who goes out of
business etc.

2) Sales risk: It is another component of industry risk. When the business fails
for disruption in sales, this type of risk would generate. Sales may be
disrupted due to changes in market size, increased competition, changes in
regulations, losing of a single large customer etc. To assess sales risk at first
we have to analyzes industry turnover and compare the same with other two
major competitors. Next we have to assess how easy it is for new competitors
to enter the industry, then we have to assess the risk that changes to
regulations will damage sales and then we have to assess the risk that a single
large customer switches to a competitor and finally we will assess the risk
involve in sales.

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B. Company Risk: Company risk is shown for some internal reasons of the business.
It has also two main components and four sub components.

1) Company position risk: Each and every company holds a position within an
industry. This position is very much competitive. Due to weakness in the
companys position in its industry, a company may fail and the risk of failure
is called company position risk. It depends on-

a) Performance risk: If a company fails to perform well enough to

repay the loan because of its weakness under given expected external
conditions, the company is said to suffer from performance risk. It
depends on competitive position, realistic business strategy, cash
generating ability etc.

b) Resilience risk: When a company fails due to lack of its resilience to

unexpected external conditions, the resilience risk is generated. The
resilience risk of a company depends on companys leverage, its
liquidity and the strengths of the owner/key personnels connections.

2) Management risk: If the management of a company fails to exploit the

companys position effectively, the company can fail to and this risk of failure
is called management risk. It can be subdivided further-

a) Management competence risk: Management competence risk is the

risk that the company fails because the management is incompetent.
It is a part of management risk under company risk. The competence
of the managers depends on their ability and level of teamwork. To
assess the ability of the managers we have to analyze their education,
experience, relevant skill etc.

b) Management integrity risk: Management integrity risk is the risk

that the company fails to repay its loan due to lack of management
integrity. Management integrity is a combination of honesty and
dependability.

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Security Risk:
Security Risk is the risk that the realized value of the security does not cover the exposure of
loan. Exposure means principal plus outstanding interest. Security risk can be divided into
two parts. This are-

A. Security control risk: security control risk is the risk that the bank fails to realize the
security because of lack of banks control over the security offered by the borrowers.
The risk of failing to realize the security depends on the difficulty with which the
bank can both obtain a favorable judgment and take possession of security.

B. Security cover risk: security cover risk is the risk that the realized security value
may not cover the full exposure of loans. Security cover risk depends on speed of
realization and liquidation value.

Current Scenario of CRM Practices in Lending Decisions in Banks

Most of the banks in our country use LRA technique for the loan facilities (both funded and
non-funded) of Tk 50 lac and above though prescribed loan amount for mandatory
application of LRA stands at Tk 1 chore and above. On verification, it was revealed that
almost all the banks use LRA technique as a supplementary tool along with the traditional
approach for processing loan proposals. Virtually, LRA helps to magnify the use of
traditional approach of credit analysis and no conflict is found to exist between these two
approaches because of complementing each other. The reason behind this is that the use of
LRA technique is dependent on the findings of the traditional credit analysis. This implies
that LRA plays an insignificant role in the credit decision-making process. No banks are
using LRA following the systematic order as prescribed in the manual. The areas of noncompliance are, risk adjusted loan pricing methodology, follow-up and monitoring
mechanism based on completed LRA, early warning system regarding non-payments,
auditing practices to identify documentation and security irregularities etc. It is observed that
credit officers are generally tempted to put their option on average risk level out of four risk
levels in all risk categories without justification. As a result the ultimate risk level comes to

12

Acceptable rating which goes in favor of the borrower. The banks are not doing any
exercise regarding the extent of the loan classification for the loan cases where LRA has been
used.

CREDIT RISK MANAGEMENT IN BANGLADESH

Source of Fund:
The following are the regular sources of fund:
Deposit received from the customers.
Borrowing.
Shareholders equity.
Recognizing banks highly satisfactory performance in terms of its operational capability and
financial health organizations like

Bangladesh Bank.

Asian Development Bank ( ADB).and

Kreditanstalt fur Wiederaufbau ( KWF) of Germany have given long term

financial assistance to BASIC for providing loans to industrial and micro
enterprise in Bangladesh.

Commercial Credit:
Overdraft (OD): It is a continuous advance facility. By this agreement, the banker allows his
customer to overdraft his current account up to his credit limits sanctioned by the bank. The
interest is charged on the outstanding amount not on the sanctioned amount. OD is of two
types practiced in BASIC Bank Limited.
Secured Overdraft (SOD): BASIC sanctions SOD against different securities like
FDR, Work Orders etc
Temporary Overdraft (TOD): It is given to the valued customers only. It is not that
much secured. Usually it forwards without any security or sometimes exercise lien
against the instrument, deposited in the bank. It is given by the branch manager
discretionary power.

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Cash Credit (CC): By this agreement, a banker allows his customer to borrow money up to
a certain limit. CC is a favorite mode of borrowing by traders, industrialists, etc for meeting
their working capital requirements. It is operated like overdraft account. Depending on the
needs of the business, the borrower can draw on his cash credit account at different time and
when he gets money can adjust the liability. BASIC Bank charges interest on the daily
outstanding balance of the account.
Loan (General): It is given against personal guarantee, hypothecation of goods and land and
building.
Bills Portfolio: Branch purchases demand bills of exchange that are called Draft
accompanied by documents of title to goods such as bill of lading, railway receipt, and truck
receipt. The purchase of bill of exchange is drawn at an issuance, i.e. for a certain period
maturing on a future date and not payable on demand or sight.
Letter of Credit: An undertaking by the bank to make payment to the seller subject to
submission of documents drawn in strict compliance with the stipulated terms giving title to
goods to the buyer/ bank.
Back to Back Letter of Credit: Letter of credit for importing raw materials/ accessories
opened against lien of an export items. Payment is usually settled from export proceeds. A
letter of credit is an instrument by which a banker for account of a buyer gives formal
evidence to a seller of its willingness to permit him to draw on certain terms and stipulates in
legal form that all such bills will be honored.
Export Cash Credit: Advance allowed as ash credit for processing goods for exports. The
advance is usually adjusted from export proceeds. The term PC (Packing Credit) is also used
for such advance.
Loan Against Imported Merchandise (LIM): Loan allowed against imported merchandise
and storing the same in banks custody. The bank through its approved clearing agent clears
the merchandise. The advance is adjusted by delivering the goods against payment by the
importer.
Local Bill Purchase (LBP): Advance allowed against bills drawn under an inland L/C
opened and accepted by a local bank. Such local L/C is usually opened as back to back L/C
against export L/C.
Payment against Documents (PAD): The bank that establishes the letter of credit is bound
to honor its commitment to pay for import bills when these are presented for payment, if
drawn strictly in terms of the letter of credit. In fact, the amount stands as advance to the
importer, which is adjusted by delivery of documents against payment or by allowing post
import finance such as LIM or LTR.

14

Foreign Bill Purchase (FBP): Post export credit allowed against export bills. If the bills are
drawn as per terms of the L/C, the bank purchases the same and pay equivalent amount of the
bill to the credit of the clients account. The advance is adjusted on realization of export
proceeds through foreign agent.

Procedure for getting approval of a loan

The following procedure is applicable for giving loans to the customer.

Duly filled-up First Information Sheet

(FIS)
Application for Credit Line
Collecting CIB report from BB.
Making Credit Line Proposal
Project Appraisal
Head Office Approval
Sanction Letter

Documentation

Disbursement

Monitoring and Follow-Up

15

How to apply for credit

The investor may contact head office or any of the branch offices of the bank for preliminary
discussion on his proposal and the facilities provided by the bank. The proposal will then be
examined at the branch or head office of the bank and if the proposal appears to be a viable
one and the promoter is found creditworthy and proposed project is acceptable then intending
investor will be supplied with a prescribed loan application form. The application form
should be submitted in triplicate with the requisite project examination fees, which are not
refundable. The borrower will be required to deposit equity in advance (partial) .

Project Appraisal
Commercial banks and financial institutions intermediate between lenders and borrowers.
The loan and advance should be given to them who has certain and predicted cash flow repays the credit. If the credit officer fails to analyze the clients viability of repaying the loan
and projects cash flow, possibility of default may arise. In other words, it can be said that the
purpose of appraisal is to be sure that the proposed advance will be safe, liquid, profitable
and covered by adequate security. At the time of credit proposal, the bank has to come to an
acceptable compromise between over caution and under caution.
BASIC bank was established to provide term loan and other financial assistance including all
kinds of banking facilities to accelerate the pace of development to small industry. The
financial assistance included short term working capital loan, medium term and long term
capital finance to viable new small scale industry (SSI) projects and BMRE of SSI projects
which will fulfill the banks criteria of viability and acceptability. Project appraisal in the
banking sector is needed for the following reasons:
To justify the soundness of an investment
To ensure repayment of bank finance
To achieve organizational goals
The entrepreneurs of small industry concern/ project requiring financial assistance from
BASIC Bank need to fulfill the following criteria:

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, and is recommended by
Branch Credit Committee (BCC). The RM should be the owner of the customer relationship,

16

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 CUSOMTER (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 are analyzed:
Borrower analysis
Industry analysis
Supplier/ Buyer analysis
Historical financial analysis
Projected financial performance
Account conduct
Adherence to lending guidelines
Mitigating factors
Loan structure
Security

Head Office Approval

The respective credit officer at ICD appraises the project by preparing a summary named
TOP Sheet, Executive Summary and Office Note which contains a brief description of
the loan proposal. Then he submits it to the Head Office Credit Committee (HOCC) for the
approval of the loan. The Head Office Credit Committee considers the proposal and takes
decision whether to approve the project or not.

Sanction Letter
After getting the approval from the head office, the branch issues the sanction letter to the
borrower. A sanction letter contains the following particulars amongst other details: name of

17

the borrower, managing partner, nature of facility, amount, expiry, rate of interest, purpose,
security and the following terms and conditions:

Before availing the loan all documentation formalities must be completed. Registered
power of attorney in favor of BASIC Bank to sell the mortgaged property without the
consent of the court or owner of the lender.
DP note and other usual charge documents/ undertakings etc duly stamped must be
signed and submitted to the authority before disbursement of loan
The loan shall be governed by all other firms and conditions as per policy and
practices of the bank that will be acceptable for the sanction to safe guard the interest
of the bank.
The bank reserves the right to amend, modify or withdraw any or all the terms of the
loan at any time without assigning any reason whatsoever or to terminate/ call back
the loan facility at any time for which bank or its official cannot be held responsible
for any loss for such cancellation of the loan.

The borrower receives the letter and returns a copy of this letter duly signed by him/ her as a
token of having understood and acceptance of the terms and conditions above.

Disbursement:
A proper disbursement procedure is essential for implementing a project small or big, within
the estimated time and cost.
However, constant monitoring of the projects on the one hand and timely mobilizing the
equity on the other hand cannot be under estimated for efficient implementation of a project.
The following factors are taken into account.
After machinery contract is finalized the Bank will open irrevocable letter of credit on
behalf of the borrower in the joint names of the Bank and the borrower.
Disbursement of foreign currency loan is made automatically as soon as irrevocable
letter of credit for import of machinery is established and the foreign suppliers make
shipment of machinery.
The local currency loans are to be made available to the project after satisfactory and
full utilization of equity by the borrowers by creating required physical facilities
(tangible assets) for the project
The sponsors have to request for release of local currency loan to the Bank supported
by papers like progress report, statement of account, documents.
The local current loan of the Bank to be disbursed in one or more installment
according to nature of project
The borrower must use the loan for the purpose for which the advance is extended
The borrower shall apply the proceeds of the loan exclusively to finance the cost of
the goods and services required to carry out the project. Foreign currency shall be

18

disbursed only for goods and services that have neither been paid for in Bangladeshi
currency not were produced in here
If the completion of the project or its successful operation is hindered or delayed
because the funds available are inadequate to ensure its completion, it shall be the
responsibility of the borrower to make prompt arrangements in accordance with
financial plan approved by the bank to provide the necessary funds.

Classification of Loans and Provisions

Types of Loan
Continuous Loan
(OD/CC, PC, LIM,
LTR etc) Overdue
period will be
accounted from the
day following the
date of expiry of
such loan
Demand Loan
(Forced LIM, BLC/
PAD, EBP etc)
Overdue period will
be accounted the
day following the
date of expiry of
such loan
Term loan payable
within 5 years
Overdue period will
be accounted from
the day following
the expiry of the due
date of payment of
installment of such
loan
Term loan payable
more than 5 years
Overdue period will
be accounted from 6
months following
the expiry of the due
date of payment of

Length of Overdue

Status of
Classification
Unclassified
Sub-Standard

Rate of
Provision
1%
20%

Doubtful

50%

Bad/Loss

100%

Less than 6 months

6 months or more but
less than 9 months
9 months or more but
less than 12 months
More than 12 months

Unclassified
Sub- Standard

1%
20%

Doubtful

50%

Bad/ Loss

100%

If default amount of
installment is equal to
installment payable in 6
months
In 12 months
In 18 months

Sub- Standard

20%

Doubtful
Bad/ Loss

50%
100%

If default amount of
installment is equal to
installment payable in
12 months
In 18 months
In 24 months

Sub- Standard

20%

Doubtful
Bad/ Loss

50%
100%

Less than 6 months

6 months or more but
less than 9 months
9 months or more but
less than 12 months
More than 12 months

19

installment of such
loan
Stag/ Micro Credit
Overdue period will
be accounted from 6
months following
the expiry of the due
date of payment on
installment of such
loan

Less than 12 months

12 months or more but
less than 36 months
36 months or more but
less than 60 months
More than 60 months

Unclassified
Sub- Standard

5%
5%

Doubtful

5%

Bad/ Loss

100%

Special Mention Account:

Bangladesh Bank recently introduced this account under BRPD Circular No. 02 dated 15th
February 2005 in order to strengthen credit discipline and bring classification gradually in
line with international standards. This circular makes the following adjustments:
A continuous credit, demand loan or a term loan which will remain overdue for a period of
90 days or more will be put in to special mention account and interest accrued on such loan
will be credited to interest suspense account, instead of crediting the same to income account.
This will help banks to look at accounts with potential problems in a focused manner and it
will capture early warning signals for accounts showing first signs of weakness. Loans in the
SPECIAL MENTION ACCOUNT will not be treated as defaulted loan.

Monitoring and Follow-up

Monitoring is tackling the risk aspect of the loan and advance portfolio to be sure that the
portfolio is complying with the criteria set down in the credit policy. For analyzing and
monitoring the loan portfolio branch manager is the main responsible person.

Factors analyzed in loan monitoring

The following factors are taken into consideration at the time of monitoring the loan and
advance.
The account is not having excess over limit
The terms and condition of the sanctioned letter are strictly followed
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

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Supervision Procedure
The supervision of projects includes adequate control procedures in the disbursement of loan
and the continuous monitoring of project operations during its period of construction and
implementation through report requirement as well as plant visits. A project under
implementation is visited every month and progress report is submitted to the management.
Bank official on project supervision keeps watch over the estimation made and notes the
deviation for taking quick remedial measures. An entrepreneur is encouraged to come to the
Bank and talk about his project and problems. It is emphasized for taking up comprehensive
insurance policy covering the properties of the project. All sorts of papers, reports, received
from the borrowers is promptly reviewed/ scanned for some signals that may need special
close attention of Bank Management. Branches of the bank are effectively utilized for project
supervision including disbursement of local currency loan in their respective areas.
Recovery is the recurring worry for the bank officials. Moreover, recycling of advances is
important without which the banks liquidity is in jeopardy. Besides that the community
doesnt get benefited unless new advances and new borrowers are encouraged. Strategic
supervision of the loan and advance can ensure the timely recovery of the loan and advances
along with the interpersonal relationship with the client. Supervision techniques are as
follows:
1. Loan account statement check to find out:
Whether the limit is within that has been sanctioned
Satisfactory transaction has been made
Whether the borrower has sustained a loss of capital
Significant decrease in the value of security
Weakening of banks position due to any reason
Used of credit other than the purpose for which it was approved
Incorrect information supplied by the borrower or bankruptcy of the borrower
Credit is rescheduled frequently or the rules of rescheduling are violated.
2. Collection of the financial statements of the client and analyzing them and comparing the
actual performance with that of projected. If actual is less than projected then the credit
officers take the following measures:
Meet the owner and discuss to identify the reason
Analyze the business strategy regarding the price, quality and competitors
Whether the amount disbursed was used properly
No banker wants the loan to be turned into bad; at least they are not bad at the time they are
made. However, bank find that invariably a small portion of the loan become delinquent and

21

eventually must be written off. The loan review process is a crucial tool in reducing losses
and in monitoring loan quality. It consists of a periodic audit of the ongoing performance of
some or all of the active loans in a banks loan portfolio. Other than its basic objective of
reducing loan losses, some intermediate objectives of the loan review of BASIC Bank are as
follows:
To detect actual or potential bad loans as early as possible
To ensure that the loan policy is followed
To inform management and the board of directors about the overall condition of the
loan and advance portfolio

Limitations and Drawbacks in Implementing CRM Techniques:

Traditionally, it has been observed that banks in Bangladesh used to operate funds business
i.e. lending activities under security-oriented principle. Before 1989, banks used to give more
emphasis to the security without considering the business risk of the borrowers at the time of
sanctioning loan. But CRM does not give more emphasis on the security rather it gives more
emphasis on the business risk of the borrowers. CRMs unique system of scoring and various
analyses give the bankers an opportunity to scrutinize the capable borrowers with due
consideration regarding their competence, integrity, repayment capacity and cash flow
projection of the project. The criteria specified in the LRA manual are very much appropriate
and pragmatic to minimize the risks of lending. But in some cases it becomes very difficult to
the bankers because of the following reasons:
a) Inadequate Data: To apply financial data relating to performance of a firm, it is very
important to assess its existing or projected strength. In many cases up-to-date and
reliable data like production, trade, business raw-materials, total demand and supply
of different product of different industries, industry growth, sales turnover,
performance data for major competitors are inadequate, which are necessary for
assessing risk.
b) Inaccurate data: CRM calls for submission of financial statements by the borrowers.
Most of the prospective borrowers are observed not to prepare financial statements.
But the lending officer has to depend largely on the Balance Sheet and Income
Statement figures. As the business concern of Bangladesh, in most cases they do not
maintain proper records of their transactions, so they fail to provide accurate data.

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Experience shows that even the financial statements submitted by the applicants
cannot be relied upon. Inconsistencies are observed in the information provided by
applicants. Collection and compilation of these data are very laborious and in many
cases problematic. So analysis of performance risk and resilience risk are becoming
cumbersome.
c) Unwillingness to disclose information: Generally, competitors do not have the habit
of disclosing their business information. They always tend to maintain secrecy for
their business interest. But LRA calls for submission of competitors performance.
d) Non-cooperation between different banks: LRA techniques require information
regarding exposure to other banks. Though credit bureau report has an important role
in this regard, the non-cooperation between different banks is a real difficulty.
e) Lack of experienced assessor: In most cases, the value of security actually realized
is less than what a bank estimates. Sometimes, security also loses value before it is
realized. Due to lack of experienced, qualified and reliable surveyor institutions to
assess value of security along with its quality and market demand are very scarce in
Bangladesh.
f) Lack of skill and knowledge of the personnel: Human resources are the most
valuable resources of an organization. The trained and skilled manpower is an
important factor for effective and efficient handling of CRM. Preparing CRM
requires special skill and knowledge in risk management and knowledge in national
and international economy is also required for successful analysis of CRM. But most
of the banks are facing the acute problem regarding the skilled and knowledgeable
personnel who know the modern tools and techniques of analyzing the financial
statements, trend and dynamism of market.
g) Insufficient independence: Banks and financial institutions are not apart from any
type of political influence or pressure group in respect of loans and advances.
Besides, independence of credit analysis/ risk management section at branch level is
not fully ensured.

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h) Economic factors: The various components at the macro and micro level of our
national economy are not yet stable enough. As a result, the analysis of demand,
supply, sales forecast etc. do not contribute enough to the Lending Risk Analysis
(LRA).
i) Legal environment: Analysis of security risk often does not become accurate
because of lengthy and complicated legal proceedings. However, the law of the
country does not make auditing compulsory for all the enterprises except the joint
stock company. In such a situation analysis of lending risk on the basis of un-audited
financial statements may become useless.
j) Biasness and Irregularities: In the LRA manual the degree of risks of the borrowers
are measured subjectively and as such the question of biasness and irregularities of
the concerned personnel cannot be avoided. If they do not apply their judgment
ethically, the result of LRA may be misleading.
k) Absence of discounting technique: Term loan is sanctioned for longer period of time
for meeting the cost of assets of a capital nature for the establishment, renovation,
expansion and modernization of industrial units and also for financing permanent
current assets. In this method, each years cash inflow is discounted at the required
rate of return and these present values are cumulated until they equal or exceed the
amount invested. In its simplest terms, this is value today of the money received in
future, is not present in this technique, but is very much required for medium and
long term loan.
l) Political Pressure: Also at times it is seen that there are many loans which are not
sanctioned at the branch level because they are considered too risky or not worthy
enough but because of political pressure, they are sanctioned at the Head Office
which creates an unnecessary and extra pressure on the Overall financial position of
the Bank

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Recommendation

The awareness that Credit Risk Management is an essential part of modern

Commercial Banking should be developed from the top level of the concerned
authorities of the Government itself to make the overall Banking Sector more
efficient.

More training should be conducted for the bankers to improve their analytical ability
and professional standard regarding the use of CRM and other tools and techniques in
selecting the borrowers and analyzing the loan proposals.

Proper loan classification and provisioning system ensures operational soundness,

better asset quality and sound liquidity of the Bank. And it is possible by introducing
proper technique to manage the core risk on assets as well as overall operation of the
bank.

Proper implementation of Money Loan Court Act-2003 shall help to reduce classified
loan and to manage the present loan portfolio in order.

Bangladesh Bank should introduce On-line CIB database system among all FIs &
NBFIs that all concerned can get available information regarding loan status of the
borrower for taking immediate decision.

All banks and financial institutions should undertake coordinated efforts to urge the
Government for taking initiatives to improve the standard of professional services
provided by the chartered accountants under the authority of the Institute of Chartered
Accountants of Bangladesh (ICAB) in order to facilitate accurate disclosure of facts
and figures of the various business entities.

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Top management of the Bank should assign importance to CRM as a principal tool
for credit screening of the loan cases where the application of LRA is mandatory.
Further CRM should be effectively used as a monitoring devices or early warning
signal system at the post disbursement stage in order to locate the deviations and
update the risk status.

For the purpose of realistic assessment of security risk the legal system in terms of
realization of security should be reviewed so that the period of realization could be
properly estimated.

An effective and efficient loan pricing technique on the basis of cost of Fund should
be introduced for sound landing.

Also for better n fast assessing the credit worthiness of the client, there can be
different types of Credit Risk Assessing Firms set up who will grade or assess the
client and give their report to the concerned banks.

Government should take steps to grow awareness to the normal public that people
who doesnt repay loan should be treated as enemy of the countries and they should
be separated from the society.

There should be different departments for approval process, credit administration, and
credit monitoring and credit recovery. By doing so, the degree of biasness should be
reduced and more accurate assessing will be done

If the above mentioned recommendations are followed carefully, the given objectives of the
report can be accomplished. The percentage of non performing loan should be reduced and
then can slowly divert towards cash flow based lending and also further improve the overall
position of the banks.

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Conclusion
Credit Risk Management (CRM) reflects the degree of risk of repayment involved with the
borrower. This practice of CRM should be made compulsory for all commercial banks and
specialized banks like Bangladesh Shilpa Bank (BSB), Bangladesh Krishi Bank (BKB) and
Nationalized Banks also and the special form should be developed for the agricultural
lending. Since banks and financial institutions play an important role in the progress of
national economy, it is the duty of our bankers to manage their loan portfolio very carefully.
Our national economy has been suffering enough for the misuse of banks money in loans
and advance and wastage of public assets. This is the high time to manage the public assets
effectively and contribute to the nations progress.

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