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Chapter: One

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Introduction

Introduction:

Prime Bank Limited is a second-generation private commercial bank


established in Bangladesh in the year 1995 under the Companies Act,
1994. Since inception, it is committed to provide high quality financial
services to the countrymen with a view to accelerate economic
development of the nation.
As such, it has been working for stimulating trade and commerce,
accelerating the pace of industrialization, boosting up export, creating
employment opportunity, alleviating poverty, raising standard of living of
the people etc and thereby contributing to the sustainable development of
the country.
At present, the bank has a network of 111 (one hundred and eleven)
branches stationed in both rural and urban areas of the country and this
are further extended every year by 4/5 new branches. Since inception, the
Bank has been making significant profit every year and positioning itself
as second highest profit-making bank in the country for last five
consecutive years. This has been possible due to significant credit growth
of the bank. On an average, credit portfolio of the bank has been growing
@ 40% every year. However, asset quality of the Bank was never
compromised for this high growth. It has been well maintained which is
reflected in its classification rate that never exceeded 2% in its 10 (Ten)
years of life. As the lion share of the total revenue comes from credit
operation and the existence of the Bank depends on quality of asset
portfolio, efficient management of credit risk is of paramount importance.
A banker should employ his funds in such a way that they will bring him
adequate return because like all other commercial institutions banks are
run for profit. But its policy must comply with current growth of loan

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portfolio and market position.

1.1 Credit Policy:


Credit policy needs to be a robust process that enables a Bank to
proactively manage its loan portfolio in order to minimize losses and earns
an acceptable level of return for stakeholders. Given the fast changing
dynamic global economy and the increasing pressure of globalization,
liberalization, consolidation and disintermediation, it is essential that
Prime Bank has a robust credit risk management policy and procedures
that are sensitive and responsive to these changes.
To provide a board guideline for the Credit Operation towards efficient
management of the Credit portfolio of the Bank, a clearly defined, wellplanned, comprehensive and appropriate Credit Risk Management Policy
is a pre-requisite.
In the above backdrop, this policy document has been prepared. And, it is

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hereby named as Credit Policy.

1.2 Credit Risk:


Risk is inherent in all types of business. However, for Banks and financial
institutions credit risk is considered to be the toughest one. Though Banks
and Financial Institutions have been facing difficulties over the years for a
multitude of reasons, the major cause of serious banking problems
continues to be directly related to lax credit standards for borrowers and
counterparties, poor portfolio management or lack of attention to changes
in economic or other circumstances that can lead to a deterioration in the
credit standing of a banks counterparty.
Credit risk is most simply defined as the potential that a borrower or
counterparty will fail to meet its obligations in accordance with the agreed
terms and conditions. In other words, it is the loss associated with
degradation in the credit quality of the borrowers or counterparties. In a
Banks portfolio, losses stem from outright default due to the inability or
unwillingness of the customer or counterparty to meet commitments in
relation to lending, trading, settlement and other financial transactions.
Alternatively, losses result from reduction in portfolio value arising from
actual or perceived deterioration in credit quality. Credit risk emanates
from a banks on and off balance sheet dealings with an individual,
corporate, bank, financial institution or a sovereign. Credit risk may take
the following forms:
In the case of direct lending: principal and/or interest may not be
repaid;

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In the case of guarantees or letters of credit: funds may not be


forthcoming from the constituents upon crystallization of the
liability;

In the case of treasury operations: the payment or series of


payments due from the counter parties under the respective
contracts may not be forthcoming or ceases;
In the case of security trading business: funds/securities settlement
may not be effected;

1.3 Purpose:
The main purpose of this policy document is to set out yardsticks for and
spell out standard practices for management of credit risk in the Bank. As
such, it specifically addresses the following areas:
a) to set out yardsticks for and spell out standard practices
b) to establishing an appropriate credit risk environment,
c) setting up a sound credit approval process,
d) maintaining

an

appropriate

credit

administration

&

monitoring process
e) To ensuring adequate controls over credit risk.

1.4 Scope:
This policy document will be applicable for issues related to credit risk
with respect to both direct and indirect credit products of traditional and
islamic banking as well. This is also to be read in conjunction with the
Guidelines for Consumer Finance with respect to retail banking products.

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1.5 Access to the Policy:

This policy document is categorized as a confidential one and will be


officially distributed to all executives of the Bank and all officers working
in the Corporate Banking and Credit Division (comprising of Credit Risk
Management Unit, Credit Administration Unit and Recovery Unit), Retail
Credit Division of both Branch and Head Office, Foreign Exchange
Department of Branches and International Division of Head Office.
Anybody other than the above will have to apply to collect this document
to Credit Risk Management Unit of Credit Division, Head Office through
proper channel.

Chapter: Two

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Principles for Sound Lending

Principles for Sound Lending:


Lending of money to different kind of borrowers is one of the most important functions of the
commercial banks. It is a vital function in the sense that it involves high risk of non-payment
by the borrowers. On the other hand lending risk significantly affects the profitability of the
banks since a bad loan may eat up all the profits of good loans. So before any lending banks
need to keep sound principles in mind to maximize profitability and to minimize risk. These
principles are discussed below:

Figure: Model for Determining Creditworthiness of Loan Applicant


Formal
education

Willingnes
s to repay

Personal
History

Character
(C1)

Capability
(C2)
Credit
Worthiness

Financial
Capacity

Easy
Realizable

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Integrity

Managemen
t Capacity

Institutions

Local
Business
Communit
Communit
y

Certification
(C6)
Own
Capital

Borrowed
CapitalCapital

Collateral
(C5)
Industry
Conditions

Status of
Collateral
Market
Not easily
Social
Conditions
realizable
Conditions

Conditions
(C4)

2.1 Safety
Safety is the most significant element of sound lending. The success of the bank depends
upon the confidence of the depositing public. Confidence could be infused by investing the
money in safe securities. Safety depends upon the security offered by the borrower and the
repaying capacity and willingness of the debtor to repay the loan along with the interest.
Therefore, the banker should ensure that the security offered is adequate and readily
realizable and the borrower is a person of integrity, good character and reputation.
Character of Borrower (C1) represents three factors. Related variables of each factor are as
follows:
Factors

Associated variables

Factor 1 (F1): willingness of the borrower to

Technical expertise

repay the loan


Factor 2 (F2): personal honesty of the

Business and management experience


Success as entrepreur
Family business history
Educational qualification

borrower
Factor 3 (F3): integrity of the borrower

Professional training
Net profit
Bank deposit

Thus,

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C1= F1+F2+F3
Capability (C2) represents four factors. Related variables of each factor are as follows:

Factors

Associated variables

Factor 4 (F4): management capability of the

Technical expertise

borrower
Factor 5 (F5): education

Business and management experience


Success as entrepreur
Family business history
Educational qualification

Factor 6(F6): financial capability

Professional training
Net profit

Factor 7 (F7): investment ability from own

Bank deposit
Retained earnings

fund.
Thus,

C2= F4+F5+F6+F7
Capital (C3) represents two factors . related variables of each are as follows:
Factors
Factor 8 (F8): own capital of borrower.
Factor 9 (f9): borrowed capital by the
borrower.

Associated variables
Own capital
Public issue shares
Loan capital
Credit from suppliers

Thus,

C3= F8+F9
Conditions (C4) represents three factors . related variables of each factor are as follows:
Factors

Associated variables

Factor 10 (F10): industry conditions.

Ecological factors
Availability of raw material s
Government regulation
Industry success

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Factor 11 (F11): market conditions

Domestic demand
Demand in the international market

Factor 12 (F12): social conditions

Social unrest
Political stability

Thus,

C4= F10+F11+F12
Collateral (C5) represents three factors. Related variables of each factor are as follows:
Factors
Factor 13 (F13): easily realizable property

Factor 14 (F14): not easily realizable


property
Factor 15 (F15): status of collateral

Associated variables
Land and building
Stock and share
Equipment
Inventory and residential properties
Account receivables
Other real estate inventories
Realizable value
Easily marketable
Free from encumbrances
Possession status

Thus,

C5 = F13+F14+F15
Certifications (C6) represents three factors. Related variables of each factor are as follows:
Factors
Factor 16 (F16): local community of the
borrower
Factor 17 (F17): institutional reference
with which borrower has past relationships
Factor 18 (F18): Business Community
With Whom The Borrower Has Business

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Interactions

Thus,

Associated variables
Community leaders
Local shopkeepers
Neighbors
Employees
Bank/creditors
Employers
customers
Suppliers
Competitors

C6 = F16+F17+F18

2.2 Liquidity
Liquidity refers to the ability of an asset to convert into cash without loss within short time.
As the liabilities of a bank are repayable on demand or at short notice, the bank should keep
its funds in liquid state so that it can meet the demand of the depositors in time. Money
locked up in long term loans such as land, building, plant, machinery etc., can not be received
back in time and so less liquid. Short term loans and loans granted against securities such as
goods can be converted into cash easily and so liquid. Therefore, a bank should confine its
lending to short term against marketable securities.

2.3 Profitability
A banker should employ his funds in such a way that they will bring him adequate return
because like all other commercial institutions banks are run for profit. Banks can earn profit
to pay interest to depositors, declare dividend to shareholders, meet establishment charges
and other expenses, provide for reserve and for bad and doubtful debts, depreciation,
maintenance and improvements of property owned by the bank and sufficient resources to
meet contingent loss. Therefore, profit is an important consideration. The main source of
profit comes from the difference between the interest received on loans and those paid on
deposit. For this, a banker should give importance to profitability.

2.4 Purpose
Bank gives advances for making profit but before sanctioning loans bank should enquire
about the purpose about which it is needed. Loans for undesirable activities such as
speculation and hoarding should be discouraged. It is also equally important on the part of
banks to ensure that a loan is utilized for the purpose for which it is granted so that repayment

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will be prompt.

2.4 Security
Customer may offer different kinds of securities such as land, building, machinery, goods and
raw materials to get advances. The securities of the customers are insurance and banker can
fall back upon them in times of necessity. For the sake of safety, he should ensure that the
securities are adequate, marketable and free from encumbrances. Securities, which could be
marketed easily, quickly and without loss, should be preferred.

2.5 Sources of repayment


Before giving financial accommodation, a banker should consider the source from which
repayment is promised. In some instances, debentures, which are to be redeemed in few
months time or a life policy, which is to mature in near future, may be offered as security.
Advances against such security give no trouble.

2.6 Diversity
Only consciousness of the banker and integrity of the borrower cannot ensure the safety of a
bank. Portfolio management is very is very important in giving loans and advances. That
means diversification is more important. Bank should not deploy all its funds to any single
borrower, to an industry, or to one particular region. An adverse change in the economy of
these may affect the entire business. In such a case, repayment will be highly difficult and the
survival of the bank becomes questionable.

2.7 National Interest


Banking Industry has significant role to play in the economic development of a country. They
may advance in priority sector in the larger national interest. Such as financial assistance to
self employed person etc. Side by side to promote retail trade, transport business, small

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businesses etc. are also be taken into consideration.

2.8 Factors affecting Lending

Qualitative and Quantitative factors of sound lending

Principles of Sound Lending

Qualitative Factors

1
2
3
4
5

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6
7

Purpose of the loan


Safety
Social Responsibility
Business ethics
Spread and risk
diversification
National Interest
Recovery Possibility

Quantitative Factors

1
2
3
4

Liquidity
Profit and
profitability
Business solvency
Adequacy of the
collateral

Chapter: Three

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Policy Guideline advised by Bangladesh


Bank

Policy Guideline advised by Bangladesh Bank

Risk is an associated factor with financial service industry. Banks are exposed to a number of
risks of which Credit Risk, Market Risk (interest risk and foreign exchange risk), Operational
Risk and Reputation risk. In order to manage al these risks properly, an effective risk
management system in banking operation is must which is actually reflected in sound lending
policy. Bangladesh Bank has undertaken a project to review the global best practices and to
examine the possibility of introducing the same in the banking industry of Bangladesh.
Bangladesh Bank vide BRPD circular no. 17 dated 07.10.2003 has sent directional
Guidelines/ Manuals of five core risk areas in banking including Credit Risk Management. In
this circular a) Centralization, b) Policy, c) Risk Grading, d) Customization, e) Segregation of
Duties, and f) Approval Authority has been outlined. Among these Policy has been
recommended to include the following:
a. Industry Analysis, business segment focus and credit environment
b. Banks loan Portfolio size, Capital position, Tenure of Deposit etc.
c. Types of Loan facility and level of risk and profitability of different types of loan,
d. Credit needs of the covered area,
e. Business development priorities
f. Single/Group borrower exposure
g. Borrower type and loan type
h. Lending cap to avoid concentration in any sector
i. Discouraged business type,
j. Credit facility parameter,
k. Existing loans classification status,
l. Security consideration
m. Lending procedure

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n. Ability and experience of banks personnel to handle the loan etc.

3.1 Lending Policy of Prime Bank Limited

Lending is a vital function of a commercial banking. While going for lending, the decision
should be taken considering the lending principles as well as Bangladesh Bank guidelines for
lending. For a sound lending, there must be a sound lending policy covering all the issues
discussed in lending principles, Bangladesh Bank policy guideline, PBLs own mission and
vision as well as business strategies. Encompassing all possible aspects a policy guideline is
webbed in a systematic framework in this section. PBLs sound lending policy will cover the
following major points:
1. Governance framework
2. Business segments and financial products
3. Prudential exposure limits
4. Regulatory restrictions on lending
5. Priority sector advances (PSA)
6. Credit appraisal system
7. Credit pricing
8. Credit approvals and denials
9. Margin and security (collateral) management
10. Credit Documentation
11. Credit administration and monitoring
12. Consortium/ syndicated/ multiple bank lending
13. Income recognition, asset classification and provisioning
14. Non-Performing Assets (NPAS) Management
15. Capital market exposures
16. Credit risk management

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17. Credit risk assessment of a bank

Chapter: Four

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Governance Framework

Governance Framework
The Bank has structured its Governance framework for ensuring effective credit risk
management. The credit policy framed in this document reckons the Governance framework
and other structures laid down/ to be laid down by the Bank for overall Credit Risk
management.
Level 1:
(i)

Board of Directors:

The Board of Directors of the Bank (Board) will have the overall responsibility for
risk management in the Bank, including Credit Risk management. The Board will
approve the Banks credit policy covering every aspects of this policy.
Level 2:
(ii)

Risk Management Committee (RMC):

There shall be a Risk Management Committee which will be a Board level subcommittee and will act independently, as per BB Guidance on Core Risk Management
issued in 2005. RMC should ideally comprise the following members of the Board:
Chairman,
MD & CEO/CEO,
Member Independent Director of the Board,
Member Independent Director of the Board,

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Member of Board,

The RMC will primarily discharge the roles/ responsibilities pertaining to:

a.

Issuance and modification of the guidelines for Credit Risk Management


System and prudential exposure/concentration limits (borrower/ group
borrower, industries, sectors etc.) in the Bank with the Boards approval.

b.

Updating the Board at periodic intervals with the Banks credit risk exposure
profiles concentration risk (borrower groups/ industries/ location/ sectors),
risk rating of the obligors, along with the necessary remedial measures taken/
recommended.

c.

Recommending changes/ modifications in this credit policy of the Bank and


ensuring that it remains in tune with the changing business conditions,
regulatory requirements/ guidelines and the Banks structural needs
( particularly from the ALM perspective) and risk appetite.

d.

Ensuring, that all activities related to Credit function are managed in


compliance with this Credit Policy of the Bank.

e.

Delegating the broad credit risk monitoring responsibility to the Credit Risk
Management Department (CRMD), to review the risk analysis reports from
CRMD and approving/ disapproving the decisions of CRMD and documenting
it with observations.
Sanctioning/ approving/ reviewing credit proposals as per the Delegation of

f.

Powers of the Bank and beyond the powers of the CRMD.


g.

Approving exceptions to risk exposure/limits, as per the Banks Delegation of


Powers and documenting it with observations.

h.

Approving settlements/compromise/upgradation /write-offs of NPA accounts,


as appraised and put up by the CRMD.

(i)

An internal Credit Committee ( within CRMD) comprising the following


would be constituted:

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a. The MD & CEO


b. The Chief Risk Officer ( till such time Head of CRMD)
c. The Head of Corporate Banking

d. DMD (to whom Corporate Banking or CRMD does not report)


e. V.P./A.V.P. in CRMD

This Credit Committee would discuss proposals, which will be approved through
consensus. The minutes of Credit Committee
Meetings would be kept for record and for review, as required, by the RMC,
on behalf of the board.
(ii)

Credit Risk Management Department (CRMD):


The CRMD should be headed by the Chief Credit Officer (CCO) who can be
assisted by Head (Corporate Banking), Head (SME Banking Credit) and Head
(Retail Banking Credit). Later, this can be enlarged to rename the CCO as
Chief Risk Officer (CRO) who will report directly to the MD & CEO.
The main role and responsibilities of CRMD will include:
a. To measure, control, review and manage

Corporate credit risk on

Bank-wide basis within the limits set by the Banks Board of


Directors /RMC/ BB.
b. To enforce compliance with the credit risk parameters and credit

exposure/ concentration limits set by the Board of Directors/ RMC/BB.


c. To lay down credit risk assessment systems and develop MIS, monitor

quality of loan/ investment portfolio ( of treasury) proactively identify


problems, correct deficiencies in appraisal and monitoring of loans and
undertake loan review/audit.
d. To conduct a detailed Credit risk analysis of the proposed obligor and

facility, before approval of the exposure. The original rating given by


Corporate banking/Relationship Manager shall be vetted/modified by
CRMD.
e. The CRMD would be primarily accountable for protecting the quality

of the entire loan/ investment portfolio and would undertake portfolio


evaluations and conduct regular comprehensive studies on the

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operating and business environment to test the resilience of the loan


portfolio.

Chapter: Five

43

Business segments and financial


products

Business segments and financial products


The business segmentation and financial product offerings to the target customers will be
governed mainly by the Banks Banking Strategy, which would include the following:
(i)

Identifying key business/ industry segments for credit extension based on high
growth potential and domain knowledge/expertise of the Bank.

(ii)

Cluster-based approach to lending in identified growth areas.

(iii) Ensuring credit portfolio quality is maintained and is suitably diversified,


while pursuing a focused sector strategy.

PBLs overall universe of customers would be handled by three main


business groups Corporate Banking (which could also later include
Institutional Banking), SME Banking and Retail Banking. PBL believes
that the sales approach, credit evaluation techniques and segment
behavior are different for each of the three segments and has,
therefore, decided that different business groups would manage these
businesses. The regulatory requirements would also necessitate
business segmentation resulting differentiated products for each
segment with separate policy.
PBL would target various Industry segments, as per the Banks Business Plan, based on an
overview of macro economic factors, industry analysis in terms of growth and profit potential
and the Banks domain knowledge and expertise, keeping in view the directives/ guidelines
issued from time to time, by BB and Government of Bangladesh. The Bank would
accordingly prioritize specific industry sectors, to achieve the twin objectives of spotting and
seizing opportunities and revamping its product and delivery mechanism ahead of

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competition.

5.1

Financial products:

The Bank would offer a wide range of products to the target customer segments to satisfy
their financial needs. The products range includes:
(i)

Credit Products:

a. Trade Finance
b. Short-term Working Capital Finance: Cash credit, overdraft, demand loan,

bills purchase/ discounting, channel financing, subscription to commercial


paper.
c. Medium-term Loans (suggested term 3-5 years) for business expansion,

technology up-gradation, R&D expenditure, implementing early retirement


scheme, supplementing working capital, repaying high cost debt.
d. Long-term Loans or Project Finance for new industrial/ infrastructure

projects (suggested term over 5 years), Takeout Finance


e. Bridge Finance.
f.

Off-balance sheet products: Letters of credit, guarantees, bills collection.

g. Securitisation and Derivative products.


h. Structured Products: e.g. acquisition finance, IPO finance.
i.

Capital Market operations

j.

Lease Financing

k. Priority Sector Advances


l.

(ii)

Pre-approved Products/ Programmes for specific company/ business.

Transactional Products:

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a. Bankers Acceptances
b. Documentary Credit
c. Forfaiting

d. Cash Management
e. Factoring

(iii) Asset Products:


a. Retail loan Products covered in Retail Loan Policy
b. Credit Cards & receivable financing there against

(iv) Financial Markets products


a. Foreign exchange Spot, forward and future contracts
b. Taka interest rate derivatives
c. Foreign exchange derivatives
d. Options

Loan and advances have primarily been divided into two major groups:
a)

Fixed term loan: These are the loans made by the Bank with fixed repayment
schedules. Fixed tern loans are categorized into three based upon its tenure
which is defined as follows:

Short term

Medium term
Long Term

Upto 12 months
:

More than 12 and upto 36 months

More than 36 months

b) Continuing Loans: These are the loans having no fixed repayment schedule, but have
an expiry date at which it is renewable on satisfactory performance of the customer.

The product mix offering will vary from one business/ industry segment to another. The Bank
would attempt to customize the product-mix to maximize customer satisfaction using Banks
knowledge and innovativeness for building enduring and sustaining relationship with the
Corporate Banking and SME Banking segment customers and retail segment with value
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added bundled services (like insurance etc), to gain a competitive edge.

Chapter: Six

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Prudential Exposure Limits

Prudential Exposure Limits


6.1 General:

(i)

The objective of the prudential exposure limits is to reduce credit


concentration risk by maintaining a balanced and well-diversified credit
portfolio.

(ii)

The prudential exposure limits/ guidelines will be set by the Risk Management
Committee (RMC), as per the guidelines of BB, and approved by the Banks
Board of Directors. These limits will be reviewed periodically by RMC in the
light of the changes in the BB guidelines on Exposure Norms and also in the
Banks risk appetite and risk profile of its credit portfolio, and revisions, as
necessary put up to the Banks Board of Directors, for approval.

(iii) For the purposes of this document, the term sanctioning authority would
mean and include the designated levels/individuals/committee as authorized to
approve credit proposals from time to time.
3.1. Individual /group borrowers limits:

Single Customer Exposure Limit: Prime Bank will always comply with the prevailing
banking regulation regarding Single Customer Exposure Limit set by Bangladesh Bank
from time to time. As per prevailing regulation, Bank will take maximum exposure
(outstanding at point of time) on a single customer (Individual, Enterprise, Company,
Corporate, Organization, Group) for the amount not exceeding 35% of Banks total
capital subject to the condition that the maximum outstanding against funded facilities
does not exceed 15% of the total capital. However, for single customer of the export
sector maximum exposure limit shall be 50% of the total capital subject to the condition
total funded facility shall not exceed 15% of the total Capital of the Bank at any point of

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time.

Large Loan: Credit facility to a single customer (Individual, Enterprise, Company,


Corporate, Organization, Group) shall be treated as Large Loan if total outstanding
amount against the limit at a particular point of time equals or exceeds 10% of the total
capital of the Bank. Prime Banks total Large Loan Portfolio exposure shall not exceed
56% of the total outstanding funded loans and advances at any point of time.
Exposure includes:
(i)

Credit exposure: Sanctioned credit limits (funded or non-fund facilities) or


outstandings, whichever is higher. Credit exposure shall include non-fund
exposure at 100% of the limit or outstanding (whichever is higher),
forward contracts in foreign exchange and other derivative products (at
their replacement cost value) but shall exclude loans against the Banks
own term deposits, credit facilities granted to weak/sick industrial units
under rehabilitation package, Food Credit under limits allocated by BB
and credit limits fully guaranteed by Government of Bangladesh.

(ii)

Investment exposure (including underwriting and similar commitment)


and certain types of investment in companies.
Investment exposure includes investment in:
a. Shares and debentures (acquired via direct subscription, devolvement

under underwriting, secondary market).


b. PUBLIC/GOVT SECTOR bonds acquired via any of above three

modes of acquisition.
c. Commercial Papers
d. Exposure under Securitisation as per BB

(iii)

All treasury related traded product' exposures, which are monitored on a


credit equivalent basis as per the Current Exposure Method, prescribed

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by the BB.
Capital Funds means the Banks Tier I plus Tier II capital as at the end of the last
published balance sheet, as defined by BB under Capital Adequacy Standards.

6.2 Industry exposure limits:

(i)

Starting January 1, every year, in order to diversify & disperse credit risk
across industries/ sectors, the RMC will set appropriate exposure ceiling per
industry/ sector, except Priority/Special Sectors for which BB prescribed
minimum lending targets would apply. The Credit portfolio concentration will
be reviewed at RMC meetings to avoid industry concentration and the
approving authorities shall, before sanctioning, consider the concentration
levels.

(ii)

The RMC may consider prescribing lower exposure limits for specific
industries/ sectors where the Banks exposure needs to be curtailed/
discouraged due the industry/ sector-specific risk factors and the risk profile of
the Banks loans portfolio. This would draw on inputs provided by the
research & analysis wing under the CFO.

(iii) BB has also prescribed certain other requirements/guidelines for extension of


credit to Leasing/ Hire Purchase/ Factoring services, Bangladeshi Joint
Ventures Abroad and certain other specified industries/ sectors (e.g. real
estate). Check A few of these are mentioned in the Notes on the specific
objects as annexure to the Credit Policy.
6.3 Unsecured exposures:

(i)

BB has the following exposure norm guideline for unsecured advances and
unsecured guarantees, viz. xxx% of a banks outstanding unsecured guarantees
plus total outstanding unsecured advances do not exceed xxx% of its total
outstanding advances.

(ii)

The RMC will review the unsecured exposures at every RMC meeting and

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provide guidance & advice to the CRMD on managing this exposure.


6.4 Exposure limits against shares/ bonds of companies:

(i)

The Bank shall not hold shares in any company as pledgee, mortgagee or
absolute owner of an amount exceeding xxx% of the companys paid up
capital, or xxx% of the Banks own paid up capital and reserves, whichever is
less (Statutory limit in terms of Section xxx of Banking Companies Act).

(ii)

The Banks aggregate exposure to the Capital Market (direct investment in


equity shares, convertible bonds and debentures and units of Equity oriented
Mutual Funds; advances against shares to individuals for investment in equity
shares (including IPOs/ESOPs), bonds and debentures, units of Equity
oriented Mutual Funds, etc. and secured and unsecured advances to stock
brokers and guarantees issued on behalf of stock brokers and market makers)
must not exceed xxx% of the Banks total outstanding advances (including
Commercial Paper) as at the end of the previous financial year. Within this
limit prescribed by BB, the Banks investment in shares, convertible bonds/
debentures, and units of equity-oriented MFs would not exceed xxx% of the
Banks networth (vide section xxx of BB xxx circular dated xxx).

(iii) Within the above regulatory ceiling, sub-limits for advances against
shares/debentures/PUBLIC/GOVT SECTOR bonds are stipulated as follows:
a. Loans to individual borrower : Taka x million (securities held in physical

form)
Taka x million (securities held in demat
form)
Individuals will qualify under capital market exposure only if the end use
of funds is investments.
b. Loans to Stock brokers: Suitable sub- limits may be fixed at the time of

next review of the Credit Policy within the limit of xx% as above for all
stockbrokers and also for each broking entity.
6.5 Maturity-wise exposure limits:

The RMC may consider prescribing maturity-wise exposure limits in consonance with
the Banks Asset-Liability Management policy, e.g. for medium term loans for more
than 3 years and for long term loans for more than 7 and 10 years
6.6 Rating-wise exposure limits:

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As a part of its Risk management policy, the RMC may also consider borrower rating-wise
exposure limits at whole Bank level for borrowers falling in risk rating categories of P1 to P5.

Chapter: Seven

43

Regulatory restrictions on lending

Regulatory restrictions on lending


PBL will not grant any type of credit facility (funded or non-fund based) to certain
categories of borrowers and also against certain securities and for certain purposes
as mentioned in this chapter, in view of the statutory restriction under Banking
Companies Act, and regulatory restrictions issued by BB from time to time.
7.1

Restrictions relating to purpose of lending:

(i)

The Bank will not grant loans and advances for the following purposes:
a. To a company for buy-back of its shares/ securities (Sec. xxx of
Companies Act)
b. For financing speculative or any arbitrage related transactions in the
capital markets

(ii)

The Bank will not ordinarily lend to NBFIs for the following activities:
Bills Discounted/Rediscounted by NBFIs, except for rediscounting of

a.

Bills towards sale of commercial vehicles (including LCV) and two/three


wheeler vehicles, subject to the following:

The bills should be drawn by the manufacturer, on dealers


only;

The bills should represent genuine sale transactions as may be


ascertained from the chassis/engine number; and

Before rediscounting the bills, the Bank should satisfy itself


about the bona fides and track record of NBFIs which have discounted
the bills.

b.

Investments of NBFIs both of current and long-term nature, in any


company/entity by way of shares, debentures, etc. However, stock broking
companies may be provided need-based credit against shares and
debentures held by them as stock-in-trade in conformity with BB

43

guidelines as applicable.
c.

Unsecured loans/inter-corporate deposits by NBFIs to/in any company

d.

All types of loans and advances by NBFIs to their subsidiaries, group


companies/entities

Finance to NBFIs for further lending to individuals for subscribing to IPOs.

43

Credit Appraisal system


8.1

(i)

General principles:

A credit proposal originating from the Relationship Manager (RM) would involve
a rigorous credit appraisal process before it is recommended for sanction of
specific credit facilities by the designated authorities. The RM would follow the
following broad guidelines in appraising a credit proposal, irrespective of the
nature of the credit facility and the business segment involved.
a. Bankability of the Proposal: The first step in the appraisal process in any

credit
Chapter: Eight
is

Credit Appraisal system

proposal
to ensure
that there
are

no

regulatory restrictions as regards the borrower, the security offered and the
purpose of the loan and that the proposal conforms to the Banks Prudential
Exposure norms and other credit policy guidelines.
b. Due Diligence: The RM would conduct due diligence and conduct in-depth

analysis of the technical/ commercial/ economic/ financial/ managerial aspects


of the applicants business/ project; industry conditions; applicants past track
record/ standing in the industry and reputation in the market and other critical
aspects of the proposal. For technical/ economic/ commercial viability, the
help of external consultants may be sought, where necessary.

43

c. Credit Need Assessment: This would involve determining the kind of credit

facilities genuinely needed by the applicant and the limits for each of the
facilities.

d. Credit Rating: A preliminary credit rating would be recommended by the RM

for each borrower / credit facility, as per the Banks Credit Rating (Risk
Grading) model to reflect the credit risk involved in and determine the pricing
of credit.
e. Recommendations: The appraisal by the RM would cover both qualitative

and quantitative aspects of the proposal. Qualitative appraisal would be based


more on the evaluation and judgment of the appraiser/credit analyst, as
compared to the quantitative appraisal, which would cover assessment of need
based or turnover/ or cash budget, and would also reflect credit rating on the
prescribed risk parameter. On completion of the appraisal process, the
proposal would be submitted by the RM, in the prescribed appraisal format,
along with reasoned and precise recommendations to the designated
authorities for sanction.
(ii)

The credit proposal would be examined in depth by the sanctioning authorities,


under the three initial system of sanction and the creditworthiness and
assessment of credit requirement would be re-evaluated and determined having
regard to Risk rating of the borrower and the credit facilities, would be sanctioned
accordingly.

The sanction would cover, inter-alia, pricing and terms and

conditions specifically applicable to the facility (ies) sanctioned.


8.2 Term Loan/ Project Finance:

Term loans/ Deferred Payment Guarantees (DPGs) and Project Finance will be
appraised on the basis of project reports prepared by the borrower in-house or by
external consultants. The main appraisal parameters would be as follows:
(i)

Project Viability Evaluation: The techno-economic and commercial viability

43

of the project in the industries where the Bank has domain knowledge/ expertise
would be examined internally by the Bank. In other cases, assistance of suitable
external consultants may be sought, as found necessary, depending on the size of

the exposure and project complexity, etc. The appraisal report of Lead FIs may
also be relied upon after internal scrutiny.
(ii) Promoters Contribution: Generally, 25% contribution by the principal
promoters in the total equity of the project is considered a benchmark level,
whereas the overall equity itself is expected to offer adequate levels to give debt
gearing of 2:1. Deviations from the norm could be permitted by the sanctioning
authorities, on merits of each case.
(iii) Debt Service coverage: Debt service coverage ratio (DSCR) of 2:1 would be
the general benchmark level and deviations below this norm would be permitted
only in exceptional cases after careful consideration by the sanctioning
authorities.
(iv) Debt/ Equity gearing: Debt/ Equity gearing of 1.5 would be the norm and
gearing higher than 2.0 would be considered only in exceptional cases on
sufficient justification (e.g. capital intensive industry) and subject to protective
covenants.
8.3 Working capital facilities:

(i) Credit Need Assessment:


a. The over-riding principle of meeting the genuine working capital needs

adequately for productive use would be applicable in all cases and the
proposed limit would be within the prudential exposure norms set by the
Bank. The working capital requirements would be assessed as per the

43

guidelines, by

Cash budget method

Turnover Method

Projected Balance Sheet Method

Maximum

Permissible

Bank

Finance

(MPBF)

method
b. Under a consortium arrangement, the working capital assessment would

be made by the Lead bank and circulated to the members. After discussions,
the overall working capital limit would be finalized by the Lead bank. For
such credit facilities, the Bank would also independently carry out appraisal
and sanction its share of the agreed limit.
(ii) Delivery System of Bank Credit:
After determining the overall need-based credit limit, the following broad
principles of credit delivery would be implemented for allocation of limit into
cash credit and demand loan, in line with the BB guidelines:
a. In case of borrowers with working capital needs of Taka 100 million or

above from the banking system, the demand loan component would
normally be 80 % and the cash credit component at 20%. However,
depending on the needs of the borrower, PBL may approve a different mix.
This provides for better lending discipline and less volatility in limit
utilization.
b. In case of borrowers with working capital needs below Taka 100 million

from the banking system, PBL would encourage the borrowers to avail the
maximum working capital component in the form of demand loan. PBL may
selectively offer a lower interest rate for the demand loan than for the cash
credit in order to incentivise borrowers to increase the proportion of demand

43

loan in the working capital finance availed.


c. PBL would determine the proper mix of demand loan and cash credit for the

borrowers who are engaged in cyclical or seasonal business activities.

(iii) Financial Appraisal norms:


The following quantitative norms would generally be followed in the financial
appraisal for working capital finance:
a. Liquidity Indicators: The Current Ratio (CR) and Net Working Capital

(NWC) trends over a period of time have to be seen in conjunction, rather


than in isolation The Current Ratio at benchmark level of 1.33 will be
applicable. NWC is important as it provides margin cover available on the
current assets beyond the current liabilities, which should be at benchmark
level of 25%.

b. Financial Soundness Indicators: An indicative parameter to judge financial

soundness of a borrower / project is to ascertain the ratio of total outside


liabilities to tangible net worth (TOL/TNW ratio, or debt equity ratio-DER).
TOL/TNW of 2:1 to 3:1 should be considered as acceptable, depending on
the capital-intensive nature of the industry.

c. Profitability Parameters: Net Profit/ Turnover ratio offers a good yardstick

for evaluating the borrowers profitability. Gross Profit/ Turnover and


Operating Profit/ Turnover ratios offer better insight into the gross and
operating margin creation propensity of the borrower. Adequacy of cash
accruals (Profit before depreciation, taxation and non-finance charges) over
the years helps companies undertake growth projects and plan future
expansions more systematically. In such evaluations, non-operating / one
time profit needs to be excluded as it is, by nature, a one time gain.
Companies with losses / cash losses need closer appraisal scrutiny.

d. Credit Rating: Wherever external credit ratings are available, such ratings

43

need to be factored in at the time of appraisal and review / renewal. For the
standardized approach

under Basel II for Credit Risk Management, an

external credit rating is very relevant.

e. Capital Market: Where the applicants shares are listed on stock exchange,

the share price movements of the borrowing company vis--vis those of the
peers would also be examined and reckoned to assess the perceptions of the
investors in the company and its growth prospects etc. These perceptions
would serve as additional information in financial analysis.
f.

Relationship Value Assessment:

New Relationship: Where the Bank is entering into a new relationship


with a borrower/ group, it is essential to assess the track record of the
borrower as well as the group. Such assessment would include the
records of their relationship with other banks, market share, promoters
reputation and standing in the industry, business growth potential,
prospects of ancillary business etc.

Existing Relationship: In case of an existing relationship, apart from the


aforesaid factors, the experience of the Bank with the borrower / group
would be examined with reference to their accounts deposits, borrowal
and others with various branches of the Bank or Nodal branch for the
borrower/ group. Such evaluation would cover, interalia,the conduct of
their account (s), value of the relationship, growth potential, export /
foreign exchange earning potential, as also the growth prospects of the

43

industries in which the borrower / group are operating.

Chapter: Nine

43

Pricing Credit Facility

Pricing Credit Facility


9.1 Credit Pricing:
Credit facilities to the customer are the prime source of the Banks income. More specifically, interest
from loans accounts the lion share of the total revenue of the Bank. On the other hand, financial
market of our country is apparently very competitive due to participation of 49 (forty nine) banks in
our small financial market. As such, pricing is very crucial for business growth of the Bank. Prime
Bank Limited has been fixing/refixing price of different credit facilities from time to time considering
changes in the market condition.
9.2 Basis of Pricing:
Price of all credit facilities will be fixed based on the level of risk and type of security offered. Rate of
interest will be the reflection of risk inherent in a particular transaction i.e. the higher the risk, the
higher the rate of interest. Therefore, loan pricing will be directly correlated with the risk grade of the
customer.
9.3 Type of Rate:
Usually, Bank will charge fixed interest rate which will be subject to changes by the Management. In
this respect, all loan contracts will contain a provision to the effect that rate of interest is subject to
changes by the Management. And, interest rate will be revised as and when a significant fluctuation
occurs in the cost of fund of the Bank due to volatility of interest rate in the market. The Bank will
charge floating interest only in SOD (EDF). In all other cases, fixed interest rate will be applied.
For fixed interest rate, the Board of Directors will fix a Band for a particular Sector/Industry/Product.

43

Customers will be allowed a fixed rate within that band. Any deviation from the approved interest rate
band will be mentioned in the Credit Assessment Form with proper justification. The Managing

Director may sanction a credit facility at a rate within the Band. However, other executives will
exercise their delegated authority to sanction credit facility at the highest rate of the approved Band.
9. 4 Revision of Rates:
The Management of the Bank will continuously monitor interest rate situation in the market and
discuss the same in the Asset Liability Management Committee (ALCO) meeting at least once in a
month. As per decision of the Asset Liability Management Committee (ALCO), the Management of
the Bank may approach the Board of Directors to revise rate of interest, commission, charges etc.
9.5 Prevailing Interest Rate:
Since last revision of interest rate of our Bank, a lot of changes have taken place in the banking sector.
Specially, the cost of deposit is increasing day by day due to volatile money market. To match the
increased cost of fund with the yield on advances, the lending rates of the Bank was lastly revised by
the Executive Committee of the Board in its 359 th meeting held on 10.05.2005. The revised lending
rates of our Bank are as follows:

Sl.

Nature of Loan/Sector

No.
1.
2.
3.
4.
5.

Agricultural Credit
Term Loan/Project Loan
Working Capital Loan
Pre-shipment Export Credit
Commercial Lending

Interest Rate Band Mid


(p.a)
Rate
12.00 to 13.00%
12.50%
13.00 to 15.00%
14.00%
13.00 to 15.00%
14.00%
7.00%
12.00 to 15.00%
13.50%
14.00%
14.00%

Effective rate of
return should be
minimum 13%
-

14.00%

(CC, LIM, LTR, IBP etc.)


6.
7.
8.

Small/Cottage and SME scheme 13.00 to 15%


Other Special Program
13.00 to 15%
(Other than commercial)
Others
13.00 to 15.00%

Remarks

In addition to the above sector-wise rates, interest rates have been refixed for the following modes:

Sl.
No.
9.

Nature of Loan/Sector

Interest Rate Band Mid


(p.a)
Rate
Loan against deposits (FDR, 2.00 to 3.00% above MBDR, CSS etc) maintained the

10.

Remarks
-

respective

with our Bank


deposit rate
Loan against deposits (FDR, 12.00 to 13.00%

12.50%

14.00%
14.00%

43

MBDR, CSS etc) maintained


11.
12.

with other Bank


Loan against Share
Housing Loan

13.00 to 15.00%
13.00 to 15.00%

13.
14.

Consumer Credit Scheme


Loan to NBFIs

13.50 to 15.00%
12.00 to 14.00%

14.25%
13.00%

Apart from the above, interest rate for the prime customers (having excellent performance
record, resilience, minimum risk and good earning prospect from their non-funded business)
may be 12.00 to 13.00% p.a but effective rate should be minimum 13% p.a.

Chapter: Ten

43

Credit approvals

Credit approvals
Three Initial system for sanction/ approval:

a. The three initial system avoids credit approval based on the judgment of
one functionary alone. It establishes line accountability for credit decisions
and combines credit approval authorities and Discretionary Powers. Any
credit exposure (fund-based and/or non-fund based and/or treasury related
credit limits) would be assessed by the Relationship Manager and
recommended by the Head of Corporate Banking (in the branch or Head
Office) in the business group, who is designated as First Signature
Authority.
b. The proposal would then be sanctioned/approved by at least two
authorized Approvers as per the approval structure, one of whom must
have the Discretionary Powers (DP) equal to or greater than the amount of
the credit exposure recommended for sanction and the other must be a
designated Credit Approver/Analyst or a Senior Credit Approver/Analyst
from the CRMD.

43

c. The three initial system would be followed for sanction of fresh credit
limit, additional credit limit, changes in the terms & conditions of the
sanctioned credit limit, renewal/ review of the existing sanctioned credit
limit mentioned in the following paragraphs, and also other matters
requiring sanction or approval of credit limit/ facility. The sanction by the
functionary having Discretionary Powers mentioned in the following
paragraphs refers to the exercise of the Discretionary Powers by one of the
two authorised Approvers.

Chapter: Eleven

43

Security (collateral) management

Security (collateral) management


Security management involves creation of enforceable charge over the borrowers / third
party assets in favour of the Bank (before disbursement of the advances/ loans), proper
valuation/ storage/ maintenance and insurance of the securities so charged at regular intervals,
in order that the Banks advances/ loans remain fully covered by the realizable value of the
securities charged to it. To subserve this objective, the charged securities will be valued at
periodic intervals (once every 2 years) on conservative basis and stipulated margins
maintained at all times.

11.1 Security classification:


a. Primary Security
The security deposited by the borrower himself as cover for the loan is called the Primary
security. In the banking it refers to be the asset, which has been bought with the help of bank
finance.
b. Collateral Security
The term collateral security is used in two senses. In a narrow sense it refers to the securities
deposited by the third party to secure advance for the borrower. In a wider sense, it denotes
any type of security on which the creditor has a personal right of action on the debtor in
respect of the advance.

11.2 Valuation and insurance of securities:


(i)

The assets charged to the Bank would be valued in line with prevalent banking
norms/ accounting standards/ practices. The Book Debts statement, submitted by the
borrower, should be certified by a Chartered Accountant on a quarterly basis. The
valuation method would be prescribed in the terms and conditions of the sanctioned
facilities

(ii)

The assets charged to the Bank would be adequately insured against all applicable
risks to protect the Banks securities. The Banks lien would be duly registered with
the insurance companies and recorded in the respective insurance policies. The

43

insurance policies would be renewed periodically, until the Banks charge subsists
on the securities.

11.3 Forms of charge:


In order to make the securities available to the banker, in case of default by a customer, a
charge should be created on the security so that in the case of borrowers inability to repay the
bank can fall back upon the securities. Creating a charge means making it available as a cover
for an advance. The method of charged should be legal, perfect and complete. The common
forms of Charging Securities are as following
a. Hypothecation
b. Pledge
c. Mortgage
d. Lien
e. Assignment
f. Set-off

11.4 Monitoring of the banks securities:


(i)

CAD (Credit Administration Department) will closely monitor all aspects of


security, margins, charge creation and validity thereof, including insurance covers.
Prescribed guidelines in this regard, as operationally applicable, must be followed
and deviations, if any, brought to the notice of Head Corporate Banking/SME
Banking / Head of Credit / RMC. Remedial measures must be taken quickly to set
right the deviations, if any, as a control measure.

(ii)

Monitoring values of security charged / collaterals too would be ensured, so that


the valuation reflects the true values of the current assets / depreciated value of the
fixed assets / changed cost of acquisition, whichever is lower. Periodic crossverification of the valuation of plant and machinery, by approved valuer / engineer
in consultation with CAD / Sanctioning Authority, would be ensured by the RM.
Such valuation certificate should not be older than three two years old.

Sanctioning Authority would obtain specific confirmation from the RM, at the time of annual
renewal of working capital advances, and at least once every year in case of term loans /
DPGs, to the effect that measures are in place, at operating levels, to safeguard the Banks
interest in terms of value of the security charged, continued validity of the Banks charge /
43

lien thereon, proper storage and insurance cover thereon.

Chapter: Twelve

43

Credit Documentation

Credit Documentation

The objective of credit documentation is to clearly establish the debt obligation of the
borrower to the Bank. The primary responsibility for obtaining credit documents will rest
with the Relationship Manager (RM), who will ensure that appropriate documents are
properly executed in time by the concerned parties (obligors/ guarantors). The RM will
ensure that the following pre-execution, execution and post-execution requirements are fully
complied with.
a.

Pre-execution Process: It is aimed at ensuring that the documents cover the


creation of valid security in favour of the Bank over the assets financed and
cover all the credit facilities including quasi-credit facilities sanctioned.

b.

Execution of documents: The RM will ensure that all documents are completed
with relevant particulars accurately incorporated, and are executed by the
borrowers/ guarantors or their duly authorized representative as the case may be
in their legal capacity.

c.

Post-execution Process: RM will ensure that the required returns are filed,
where applicable, with the Registrar of Companies, within the stipulated time
frame, to register the charge created in favor of the Bank.

12.1 Credit administration and monitoring

Credit Monitoring involves follow-up and supervision of the Banks individual loans as well
as the entire loan portfolio, with a view to maintaining the assets quality at the desirable level,
through proactive and corrective actions, aimed at controlling and mitigating the risks to the
Bank. The following pre-disbursement, disbursement and post-disbursement administration

43

and monitoring requirements are required.

a. Pre- disbursement stage:

The RM would keep on record the detailed terms and conditions of the sanction and
the borrowers acceptance to these terms. Apart from the execution of the required
documents by the borrowers/ guarantors, the status of creation of the stipulated
charges over the specified assets, insurance of the charged assets with the Banks lien
noted thereon, bringing in the margin money/ promoters contribution, and
compliance with other terms and condition of sanction would be verified
meticulously.

b. Disbursement stage:

(i)

Upon receipt of the confirmation of the RM / Head of Corporate Banking/SME


Banking, the CAD would issue clearance memo for release of the approved credit
facilities, after satisfying that all pre-release requirements have been met. The
required approval for setting up the facility in the system from the competent
authority would also be obtained. Suitable Facility Advice Form (FAF) as
prescribed would be prepared by the CAD.

(ii)

The FAF would be the basis of entry into the Core Banking Solution (CBS) / Loan
Servicing System (LS) / Post Disbursement Tracking System (PDTS). These
ranges of functions may be available in the CBS or separately.

c. Post- disbursement supervision / follow - up:

(i)

Off- Site follow up (without visiting the borrowers factory/ office/ go downs)
includes:

a. Ensuring timely receipt of stocks/ assets statements at stipulated frequency and


their critical scrutiny and calculating the drawing power in the accounts after
reckoning the valuation, margins and liens.
b. Ensuring timely receipt of financial data from the borrower under the

43

monthly/quarterly information system, their scrutiny to check end-use of bank


funds activity level, profitability and liquidity etc. in the previous quarter and
plans for the next quarter( as part of the loan covenants)

c. Conduct of the borrowers accounts with the Bank and taking corrective measures
for irregularities, if any, and their prompt reporting for ratification to the specified
authority. It would also be ensured that the drawings do not exceed the sanctioned
limits or prudential norms, without the prior approval of the authorities concerned.
d. Ensuring compliance with covenants, including repayments of agreed sums by the
borrower.
e. Half yearly review of the borrowers accounts.
(ii)

On- site Supervision: It includes:

a. Visit to the borrowers factory at stipulated intervals for dialogue with the
borrowers management on issues of mutual interest, checking the assets levels
/accounts books and getting a feel of the activity level and general environment in
the factory.
b. Gathering and documenting market reports on the borrowers credit standing /
product acceptance etc.
c. Attending consortium meetings and dialogues with co- bankers regarding the
borrowers accounts.
(iii) The Bank would follow a closely monitored PDTS, the procedure for which is
outlined in the CAD manual, to track loans, receipt of documents (primary,

43

deferred etc.), financial covenants and the like.

Chapter: Thirteen

43

Consortium/ syndicated/
multiple bank lending

Consortium/ syndicated/ multiple bank lending


13.1

Suggested approach:

As there are no BB guidelines at present for mandatory formation of a consortium


or a syndicate for granting high value credit facilities to a borrower by more than
one bank, PBL would be open to adopt the multiple bank lending irrespective of the
amount of a credit proposal. However, the consortium/ syndicate approach for high
value credit (beyond a limit as laid down by the Banks Board) for new or existing
borrowers would be explored due to the following reasons, and if not found feasible,
multiple lending method would be adopted:
(i)

To help the Bank to adhere to the prudential exposure norms prescribed by BB


for single / group borrower

(ii)

To help Bank achieving its objective of dispersal of credit risk across


borrowers/ borrower groups/ industries/ sectors etc.

(iii) To help the bank maintain the desired financial discipline on the borrower,
which may not be possible in multiple lending system in which the borrower
attempts to play one banker against the other.
(iv) To facilitate the Bank in building reciprocal business relationships with other
banks.

13.2

Consortium approach:

The consortium approach, suitable for working capital finance where the primary
security for the advance changes frequently, provides a single window concept for
delivery of credit, execution of documents, submission of data and for recovery etc.
Following norms will be followed in consortium lending:
(i)

The Lead Bank (with the largest share of the advance) will conduct credit
appraisal in consultation with the members of the consortium. The overall
credit facilities/ limits from the banking system would be jointly fixed for the

43

borrower, with individual shares of the members, which are later approved by
the respective Boards of the banks.

(ii)

Only one loan document (BBA specimen ?) will be executed by the borrower,
signed by the Lead Bank on its own behalf as also on behalf of all other
members of the consortium. The sharing of the security and rights and
responsibilities of the member banks are usually set out in a separate Inter-se
Agreement.

(iii) The Lead Bank can make disbursement of the required credit to avoid delay
and recovers the pro-rata share of the disbursed amount from other members
(as participation certificate/s or bill of exchange basis).
(iv) The borrowers entire ancillary business (bills, letter of credit, foreign
exchange, deposits etc.) will be shared pro rata between the member banks and
suitable distribution method is evolved with consensus.
(v)

The borrower will submit to all the members quarterly financial statements,
for discussions in quarterly meetings of the members, for common financial
follow up and corrective action.

(vi) Monthly inspection of stocks will be carried out by an inspection team


comprising the Lead Bank (permanent member) and one member by rotation.

13.3
(i)

Syndication lending method:


Syndication lending method suitable for long- term loans where the value of
the security does not change frequently, allows dispersal of credit risk to the
lenders, freedom to the borrower in competitive pricing and discipline by way
of fixed repayment schedule. However, the mechanism of credit disbursement
and repayment of syndicated lending, does not permit cash credit type of
advance, which is possible under consortium method. Hence, consortium
lending method is more suitable for short-term working capital advances and
syndicated lending method for long-term loans of large size.

(ii)

The Bank would endeavour to follow International practices for Syndicated


lending. Some of the main features of such practices are:

43

a. Mandate to the Lead Manger by a borrower.

b. Information Memorandum containing all relevant financial data and credit


appraisal, prepared by the Lead Bank, is circulated to the prospective
lenders, soliciting their participation in the overall loan.
c. The Loan Agreement (containing all the terms of the loan vis--vis the
borrower and rights and responsibilities of the Lead Bank, Agent Bank,
participating banks, etc.) is signed by all the parties.
d. The drawdown of the loan takes place as per the agreed schedule.

43

e. The Lead Manager mainly supervises and monitors the loan.

Chapter: Fourteen

43

Income recognition, asset


Classification and provisioning

Income recognition, asset classification and


provisioning
(i)

The Bank will follow the norms for Income Recognition and Asset
Classification (IRAC norms) as per BB guidelines and amended from time to
time.

(ii)

A loan or advance or bill would be classified as Non-Performing Asset (NPA)


if it remains overdue/ out of order/ irregular for a continuous period of 90 days
or more. The availability of security or net worth of the borrower/ guarantor
would not be considered while treating an advance as NPA. The government
guaranteed advances would also be classified as NPA if they remain in default
for 90 days or more. In NPA accounts, the Bank would not recognize interest
income (including Government guaranteed NPAs), until it is actually received
by the Bank.

(iii) The Banks loans portfolio would be classified in 4 categories of assets as per
BB guidelines as follows:
a. Standard Assets: These are Performing assets (or Non- NPAs)
b. Non-Performing Assets (NPAs):
c. Sub-standard Assets: i.e. an asset which remains irregular/out of order
/overdue for 90 days and is classified as NPA for a period of 12 months from
the date of such classification.
d. Doubtful Assets: i.e. an NPA that remains Sub-standard Asset for a period of
12 months,
e. Loss Assets: i.e. Such loans whose realizable security drops to less than 50%
of the value assessed by the Bank at the time of the last inspection, or to less
than 10% of the outstanding in the account, would be classified as Loss
Assets without passing through the various stages of assets classification.
(iv) In case of reschedulement, the asset would be reclassified as standard after
satisfactory performance for a period of one year from the date the first payment
43

falls due. If the performance is not satisfactory during such period of one year,
the Bank would classify the account appropriately with reference to prerestructuring payment schedule.

(v)

In respect of advances to projects under implementation and facing time


overrun, the Bank would treat the asset as standard for the period not
exceeding two years beyond the date of completion of the project as envisaged
at the time of initial financial closure. Such projects would be treated as substandard after the period of 2 years and the income would be recognized only on
the basis of cash realization.

(vi) The Bank would adopt provisioning norms in respect of loan assets (including
Standard Assets) which are more conservative or stringent than the BB norms
based on asset classification as given below:
Classification

Provisioning requirement

Standard assets

0.25% of global loan portfolio

1.
2.
Sub-standard assets
Secured
Un-secured

10%
20%

3.
Doubtful assets
To the extent not covered by realizable value
of security
In respect of secured portion

100%

i.

Up to 1 year

20%

ii.

1 to 3 years

30%

iii.

Beyond 3 years

100%

4.
Loss assets

100%

Leased assets
5.
Sub-standard assets
Secured
Un-secured

10% of unrealized portion


20% of unrealized portion

43

6.
Doubtful assets
To the extent not covered by realizable value 100%

of security
In respect of secured portion
iv.

Up to 1 year

20%

v.

1 to 3 years

30%

vi.

Beyond 3 years

100%

7.
Loss assets
Provisions under special

100%

circumstances
8.

Normal provisions if the guarantee is

Government guaranteed
advances
9.

invoked and remains in default for 90


days.

Advances in terms of
rehabilitation package
approved by Term Lending
(TL) institutions
Advances in terms of
rehabilitation package
Additional facilities as per the
package finalized by TL
institutions
Credit facilities to SSI

Normal provisions as per the


classification
No provisions for one year from date
of disbursement

identified as sick and


rehabilitation package
prepared by PBL or under
consortium
10. Amounts guaranteed by

No provisions for one year from date


of disbursement

ECGC(Export Credit
Guarantee Corporation) /

43

DIGC (Deposit Insurance


Guarantee Corporation /

Provision only in respect of balance

similar guarantees (as

in excess of amounts guaranteed by

applicable)

such corporations

Chapter: Fifteen

43

Non-Performing Assets (NPAs)


Management

Non-Performing Assets (NPAs) Management


15.1
(i)

Objectives and general principles:


The primary objective of the Banks NPA management policy will be to
maintain its entire loan portfolio as Standard Asset, or zero level of
NPA as per BB definition. This can be achieved by taking Preventive
measures in a planned and proactive manner, to prevent the Standard assets
from slipping into the category of Sub-standard Asset or even potential Substandard asset. The preventive measures are based on the Early Warning
System and Special Mentioned Accounts (Credit Labeling) System
(watch accounts), in accordance with the best international practices.

(ii)

A critical component of the Banks NPA management policy relates to


Corrective measures to be taken in future when some of its loan assets are
impaired / classified as NPAs. The main objective of the corrective measures
will be to minimise the NPAs level as a percentage of the Banks total loan
assets and contain it within the target set by the Bank, from year to year.
The corrective measures include loan up-gradation by debt restructuring/ rehabilitation, exit option, settlement/ compromise, legal recovery action, and
write-offs of the NPAs.

(iii) The overall NPA management policy is based on the following principles:
a. Early recognition, identification and reporting of the borrowal accounts in
appropriate internally defined credit labels, in addition to the BB asset
classification into four categories.
b. Documenting the primary causes (as distinguished from symptoms) of

43

each of the problem loans and the attendant risks.

c. Taking preventive/ corrective steps to effectively mitigate the risk involved


in the impaired accounts, with the concurrence/ approval of the designated
sanctioning authorities.
d. Recovery of the Banks dues from the borrowers/ guarantors/ charged
assets, or exercising exit option appropriately to minimize the loss to the
Bank.
e. Provisioning for the expected loss from default by the borrower
f. Writing off partially or fully the Loss Assets against the provisions
already made.
g. Documenting learning lessons from the typical NPA case studies, using
them in the Credit training courses and circulating necessary guidelines for
preventing their recurrence.

15.2

Early warning system (EWS):

In addition to mandatory BB guidelines on Credit Risk Management, to inculcate best


practices as part of superior NPA management, the following approaches are suggested:
(i)

The Bank will follow the EWS for early identification of problem loans, as it
enables the Bank:
a. To take corrective measures before the position becomes irretrievable,
b. To minimize the risk of loss,
c. To improve the prospects of recovery in the event of possible default.

(ii)

The symptoms of a decline in the borrowers business and financial position


are evidenced from decreasing sales/ market share, prices, profit margins,
liquidity indicators (current ratio, net working capital etc.), dividend on one
hand and increasing unit costs, staff turnover rate, debtor provisions, short
term debt etc. on the other hand, or a combination of both the trends.

43

However, the primary causes of such decline in the borrowers business and
financial position should be identified and appropriate corrective measures
taken for mitigating the credit risk to the Bank.

(iii) The Relationship Manager (RM) and the Head Corporate Banking/SME
Banking concerned with the particular loan would be responsible for:

a.Identifying and documenting the primary causes for the decline in the
business/ financial position of the borrower,
b. Assessing realistically the borrowers ability to rectify the position within
a time frame,
c.Labeling the borrowers account into one of the four internal categories,
mentioned below, with the approval of the Head of Corporate
Banking/SME Banking Group and CRMD.

15.3
(i)

Credit Labeling system:


The credit labeling system will be independent of the asset classification
system prescribed by BB ( 8 grades, across a continuum from Standard to Loss
assets and preparatory to Basel II compliance).

(ii)

The internal labeling categories will be as follows as a part of the Early


Warning system:
a. Normal Category: This will be almost similar to the BB classified
Standard Asset and will represent a sound credit exposure for which
principal and interest payments are received in time and the future
repayment prospects are not in doubt.
b. Watch Category:

This will include the accounts which show

deteriorating trend in the borrowers operating/ net profits, operating loss


or increased leverage in the preceding year and where it has not been
possible to obtain current financial information from the borrower,
43

industry specific problems, etc.

c. Monitoring Category: This category will signal that the account requires
special attention due to specific developments after the sanction due to (a)
Internal issues like incomplete documentation, absence of financial
information, unsatisfactory credit discipline or, (b) External developments
like merger, take-over, qualified auditors report, legal suit/s against the
borrower.
d. Adversely Labeled Category: If the Banks payment is overdue for one
month and normal repayment of the obligation is in doubt and there is high
probability of at least some loss, such accounts will be classified in the
category.
(iii) The accounts under Adversely Labeled category involve highest risk and
would be monitored very closely by the RM concerned, who would submit a
detailed review of the account at monthly frequency to Head Corporate
Banking/SME Banking & CRMD along with regulatory and legal compliance
status and recommendations on remedial strategy. The Watch and
Monitoring Category accounts would also be reviewed by the concerned
RM, who will submit review of the account at quarterly intervals to the Head
Corporate Banking/SME Banking & CRMD along with recommendations.
The RM would arrange for rectification of the deficiencies, if any, in the
documentation and securities, in consultation with the Legal Department and
Head Corporate Banking/SME Banking in all these three categories of
accounts.
(iv) In the above three categories of accounts, additional credit facility or
transaction (within the sanctioned limits) would be allowed, only after
reckoning the risk factors involved, as also in tune with the remedial strategy
decided, in line with the approved authority structure.

43

15.4

Rehabilitation and debt re-structuring:

(i)

If the review of the adversely labeled or watch listed accounts indicates


that the business/ financial problems of the borrowing unit/s are only
temporary, viability studies of these specifically identified units may be
undertaken by the Bank with the help of external consultants, where necessary.
The units which exhibit long-term viability and are considered worth retaining
the relationship, would be the candidates for debt re-structuring/ rehabilitation,
provided their management are cooperative, trustworthy and are agreeable to
abide by the restrictive covenants, including re-compensation clause.
Additional exposure may be assumed by obtaining adequate collateral,
including guarantees of good companies of the Group. The other main
conditions of the rehabilitation/ debt restructuring, may include some or more
of the following (to be decided on merits of each case):

a. Sacrifice from the borrower and other stake holders commensurate with
the Banks sacrifice by way of concessionary package involving interest
waivers, debt reschedulement etc. as per BB guidelines.
b. Strengthening of the security package, including personal guarantees of the
promoters/ Group companies.
c. Appointment of the Banks nominee as Financial Controller and
concurrent auditor to exercise the desired control over the cash flows and
end-use of funds of the Company.
d. Appointment of suitable professionals on the Board of the Company to
strengthen the management.
(ii)

Any re-structuring package should comply with all the applicable regulatory
guidelines. Due to the unusual risks involved in rehabilitation/ re-structuring
of debt, it should also be approved by the RMC, irrespective of the amount of
the exposure involved.

43

(iii) After the Unit is turned-around through the Banks rehabilitation programme
and starts generating profits, the account would be upgraded to Standard

Asset as per BB norm and the borrower would be asked to execute the recompensation clause retrospectively in favour of the Bank.
(iv) RMC shall also be responsible based on specific recommendations by CRMD
and Corporate Banking, for approving settlement/ compromise/ write-off/ upgradation of NPA accounts, within the limits approved by the Board.

15.5

Exit option:

As the bank has to continuously maintain a good quality & liquid portfolio, it is
imperative that the bank has a strategy to exit exposures so that it is not saddled with an
exposure which is not in keeping with its risk appetite:
(i)

Exit option is a sensitive issue and would be exercised with due care and
deliberation by the appropriate sanctioning authority under the three initial
system. If the business/ financial viability of a borrowal unit classified as
Adversely labeled or Watch list continues to be suspect and the account is
likely to turn into a Sub-standard Asset, exit option may be exercised by
following one or more of these methods:

a. Freeze the exposure level in a phased manner without adversely affecting


the Units business operations.
b. Encourage the borrower to adopt multiple banking, particularly when
additional facility is required.
c. Gradually convert cash credit facility into bills purchase/ discounting
facility or short-term demand loan with repayment programme.
d. Tighten terms of the facility, such as margin, collateral, cash budget system
for drawings.

43

e. Settle for a compromise with the borrower.


f. Sell the asset to an Asset Reconstruction Company.

(ii)

Non-problem accounts may also be candidates for exercising exit option by


the Bank for reducing over-exposure to a Group/ industry or when the specific
accounts are considered undesirable by the Bank e.g. due to inadequacy of
risk-return yield. These options will be decided in terms of the approved
authority structure.

15.6

Settlement/ compromise:

As a corollary to
Adversely labeled or Watch listed accounts considered fit for exit option and also
old unresolved NPAs may be settled through compromise with the borrowers
(including guarantors). One-time final settlement of dues would normally be
preferred to a deferred settlement spread over an extended period of time.
BB guidelines on such Settlement/compromise, wherever applicable, would be
followed. The amount and period of settlement (one-time/deferral period) would be
negotiated with the borrower/ guarantor and who would normally be linked to the
realizable value of the securities charged (their Net Present Value should be lower
than the NPV of the settlement amount).

15.7
(i)

Legal action for recovery:


Legal action against the borrowers/ guarantors would be initiated by the Bank
generally as a last resort for recovery of its dues, when all the foregoing
options have been exhausted or are not considered feasible. This is the last
option because of the uncertain expense in terms of time (management time)
and money involved. However, in cases of willful default, (e.g. diversion and
siphoning of funds), fraud and malfeasance on the part of the borrower, legal
action may be the first and only option for recovery, as any other option of
recovery would not be appropriate. The names of such companies and their

43

directors/ promoters would also be advised to BB for being listed in the


Defaulters List published by BB. These companies and the Group companies,

in which their directors are common, would be ineligible for finance from any
bank/ FI as per BB guidelines.
(ii)

Legal recovery action by foreclosure of the charged securities would be


pursued under the relevant acts. In case of frauds, appropriate legal action may
also be considered against the proprietor/ partners/ directors .All legal action
would be initiated only after the approval of the designated authority and in
consultation with the Legal Department.

15.8
(i)

Write- off:
Write-off of the dues, fully or partially, would be done against the
corresponding provisions for the accounts in order to reduce the NPAs protanto and thereby clean the Banks balance sheet, in

(ii)

accounts where there are no prospects of recovery due to the absence/ lack of
realizable security, nor via legal action.

(iii) Written-off accounts would be transferred to pro-forma accounts under


collection outside the Banks balance sheet, for follow-up and possible
recovery in course of time depending on an analysis of the costs and

43

possibilities of recovery.

Chapter: Sixteen

43

Credit risk management

Credit risk management


While credit risk management is part of the entire value chain, from the point of credit
origination, to credit buying (approval) to credit monitoring & remedial management, certain
general principles are highlighted below:

16.1
(i)

General principles:
One of the main objectives of the Banks credit policy is to build and maintain
a sound and well-diversified credit portfolio. Credit Risk Management (CRM)
is an important tool for achieving this objective, as it would help the Bank:
b. to take informed credit decisions based on an adequate assessment of the
relevant factors involved in the credit risk,
c. to screen credit proposals and assume only such credit risk that is
acceptable to the Bank as per the Credit Risk Assessment guidelines and
d. to ensure diversification of the credit portfolio, by avoiding concentration
in credit exposures to individual/ group borrowers, industry/ sector etc.
beyond the Banks/ BB prudential exposure norms and taking proactive and
corrective action.

(ii)

As per the BB guidelines on Credit Risk Management, every bank should have
a credit risk policy document approved by the banks Board of Directors. The
Banks policy on credit appraisal, approval, documentation, administration and
monitoring (individual loans and credit portfolio), credit audit, management of
non-performing assets including risk mitigation/ control have already been set
out in the previous chapters of the Credit Policy. The Banks guidelines on

43

Credit Risk Assessment (CRA) for exposures on direct obligors covering


credit risk identification, measurement, grading/ aggregation, portfolio
management and linkage of risk grading to credit pricing are laid down in this

chapter. The guidelines on CRA for exposures on banks would be spelt out in
the next chapter.
(iii) While formulating the Banks policy on Credit Risk Assessment for exposures
on direct obligors and banks, the guidelines of BB have been duly considered.

Credit Risk Grading:


While providing credit facility to a customer, Bank undertakes many risks, among
which credit risk is considered to be the most important one. As such, an in-depth
study should be conducted on the borrowers creditworthiness which will help the
bank to identify all possible risks underlying in a particular credit transaction. A
formal evaluation of borrowers financial health and ability to repay debt obligation is
called credit rating which helps the Bank to grade the concerned customer. As such, it
is also called credit risk grading.

And, risk identified through credit rating/risk

grading is quantified for better understanding and taking appropriate mitigating


technique. Besides, it helps the Bank to charge commensurate risk premium on a
particular credit facility. Therefore, it is important to accurately measure the risks in a
transaction and rate/grade the facility accordingly.
Basic Framework:
As per recommendation of the Financial Sector Reform Project (FSRP), Bangladesh
Bank had made it mandatory for the Banks to conduct a Lending Risk Analysis
(LRA) in the prescribed format before sanction of a loan. In line with BB guidelines
on Credit Risk Management, dated October 2005, PBL has adopted the following
approach for moving towards a Credit Risk Grading framework from Lending Risk

43

Analysis (LRA) framework.


Later, Bangladesh Bank instructed all commercial Banks to develop its own credit risk
grading system vide its Guidelines on Credit Risk Management. In the said Guideline,

Bangladesh Bank provided a sample Risk Grading Model and advised Banks to design
their own model in line with that one.

Prime Banks Risk Grading Framework:


All credit proposals must be supported by a comprehensive risk analysis. It will
encompass the following three things: (a) Lending Risk Analysis (LRA), (b) Risk
Grading Scorecard and (c) Risk Grading. No proposal can be put up for approval
unless there has been a complete written analysis subject to the condition that LRA
will be conducted where it is applicable as per Bangladesh Bank Guideline. It is the
absolute responsibility of the proposal originating officer to conduct comprehensive
risk analysis and affix its result e.g Risk Grading Score, Risk Grade etc in the
proposal. He/she will also ensure that all necessary documents/papers/information in
support of the proposed risk grading are annexed with the proposal before the facility
request is sent to the competent approval authority.
Lending Risk Analysis (LRA):
Lending Risk Analysis (LRA) will be conducted for the credit facilities of Tk 50 lac or
above in the prescribed form. The lending risk analysis tool concentrates on analysis
of both the business risk and security risk. The important part of this analysis is the
assessment of risk of failure to repay which deals with the overall lending risk
composed of the business risks and security risks i.e (i) Suppliers risk, (ii) Sales risk,
(iii) Performance risk, (iv) Resilience risk, (v) Management Competence Risk, (vi)
Management Integrity Risk, (vii) Security Cover Risk and (viii) Security Control
Risk. The overall matrix provides four kinds of lending risk for decision makers i.e. (i)
Good, (ii) Acceptable, (iii) Marginal and (iv) Poor. Prime Bank will not approve any

43

credit facility having overall risk at Marginal or Poor level without proper
justification except for renewal of existing facilities under compelling circumstances.

Risk Grading Scorecard:


As per instruction of Bangladesh Bank, Prime Bank Limited has developed Risk
Grading Scorecard which will be used to find out rating of all credit facilities and/or
customers of the bank except the loans under Retail Credit Division. A copy of the
Risk Grading Scorecard is enclosed in Annexure-4. The score of the risk grading
scorecard will be weighted one. There are 10 (ten) rating criteria and separate
parameters have been set to measure borrowers position against each criterion. After
analyzing borrowers financials or other relevant documents, the Relationship Officer
will first find out the points the borrower earns against each criterion based on the
parameters set and then multiply the points obtained by the relevant risk weight which
will produce Weighted Score. A snapshot of criteria and weight assigned to each
criterion is as follows:
Sl. No.
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)

Criteria
Gearing
Liquidity
Profitability
Account Conduct
Business Outlook
Management/Key Person
Age of Business
Size of Business
Personal Banking Relationship
Security

Weight (%)
15
10
15
10
10
15
5
5
5
10

The Relationship Officer of the Branch will prepare Risk Grading Scorecard in case of
new proposal, renewal and/or enhancement of existing facility, any deterioration in the
borrowers business position, any breach of contract by the borrower or as and when
he/she feel it necessary. In addition, aggregate weighted score of the customer is to be

43

affixed in the relevant field of the Credit Assessment Sheet.

Risk Grading:

After preparation of Risk Grading Scorecard, concerned Relationship Officer will


assign risk grade to the customer within the following Credit Risk Grading Model:

Letter

Risk
Grade

Numeri
c Definition

Grade
Grade

Superior AAA

Facilities are fully secured by cash deposits,

Low Risk

government bonds or a counter guarantee from a top


tier international bank. All security documentation are
in place.

Letter

Risk Grade

Numeri
c Definition

Grade
Grade

Good

AA

The repayment capacity of the borrower is strong.

Satisfactory

The borrower should have excellent liquidity and

Risk

low leverage. The company should demonstrate


consistently strong earnings and cash flow and
have an unblemished track record. All security
documentation should be in place.

Aggregate

Score of 95 or greater based on the Risk Grade


Acceptable
Fair Risk

Scorecard.
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.

43

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
Loss

Grade Scorecard.
Assets graded 8 are long outstanding with no

(non-

progress in obtaining repayment (in excess of 180

performing)

days past due) or in the late stages of wind


up/liquidation. The prospect of recovery is poor
and legal options have been pursued.
proceeds

expected

from

the

The

liquidation

realization of security may be awaited.

or
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

The Relationship Officer will insert the risk grade of the customer in the concerned
field alongwith Risk Grading Score and forward the same trough proper channel to the

43

Credit Risk Management Unit, for approval.

Subjective Grading:

The more conservative risk grade (higher) should be applied if there is a


difference between the personal judgment and Risk Grading Scorecard
result and Credit Risk Grading Model. This will remain at the absolute
discretion of the concerned Relationship Officer(s) of the Branch or
Corporate Banking Division, Head Office and Credit Officer of the
Branch or Credit Risk Management Unit, Head Office.

Downgrading:
The Relationship Officer of particular customer shall continuously monitor the
customer and bear the responsibility of rating/grading surveillance. If any
deterioration in risk, whatever may be the reason, is noted or adverse information is
received, the Relationship Officer will propose change(s) in the risk grading of the
customer and prepare Early Alert Report and forward the same to the Credit Risk
Management Unit, Credit Division for approval. Changes in the risk grade will be in
effect only when it is approved by the Credit Risk Management Unit, Credit Division.
Once a credit facility/customer is downgraded to a lower grade, it will not be
postponed until the next annual review process. In case of downgrading, credit facility
to the customer may be immediately changed/restructured, if possible.
Asset Risk Migration:
Risk Grading Model will be used for assessing / measuring risk in the credit exposure
taken on a particular customer. It is the key measurement of Banks asset quality.
Therefore, all facilities will be assigned a risk grade. And, asset portfolio of the Bank
43

will be reviewed quarterly. At each quarter end, Credit Risk Management Unit, Credit
Division will report summarizing the migration of the assets with respect to risk grade

and place before the management for review. The Management will ensure nonconcentration of assets in lower grades.
External Rating:
At least top twenty five clients/obligors of the Bank may preferably be rated by an
outside credit rating agency.
System Review:
Proper application of the Risk Grading Scorecard and Risk Grading Model in Credit
operation shall reviewed at least once in a year. And, if change is required, it will be
done at the year-end. Furthermore, accuracy and consistency of the concerned
officers/executives will be reviewed annually.
While the above approach is the extant framework for Credit Risk Rating, in terms of better
approaches the bank needs to move into a combination of Borrower & Facility rating
mechanism, which can help determine the inherent risk in every exposure and thus serve as a
ready reckoner of the inherent riskiness in every portfolio. Thus:
(iv) The Banks system of Credit Risk Rating would reckon two major categories
of credit risk Borrower Risk and Facility Risk. Borrower Risk covers the
financial risk, industry risk and management risk. Facility Risk covers the
tenor and nature of security for an exposure, the value and type of charge on
the security. The two categories of risks are given suitable weights. Each
category of risk is assessed separately on the specified parameters with
suitable weights. The overall risk rating is arrived at by aggregating the scores.
The single rating of an entity will thus represent all the risk factors, associated

43

with the decision on a credit proposal, duly weighted/ calibrated.

(v)

Basel-II guidelines have suggested a minimum of 9-point risk rating scale that
includes at least 3 categories of ratings that are ineligible for exposure by a
bank. The Bank will have 12-point rating scale for direct obligors from P-1
(the highest quality risk category) to P-12 (the lowest quality risk category)
and minimum of 6 rating grades for eligibility for exposure by the Bank and
also for performing loans.

(vi) The following general principles would be followed in the Credit Risk
Assessment system of the Bank:
a. The CRA system will apply to all kinds of credit exposure (both fund
based and non-fund based), as defined in chapter 3.
b. Each borrower in the Banks credit portfolio will have a credit rating
assigned under the CRA system.
c. The credit ratings of all borrowers would be reviewed at least annually.
d. The credit ratings would be assigned to each entity/ borrower at the
origination and approved by the Credit Risk Management Department.
e. The officers of the Bank responsible for the rating process under the CRA
system would be suitably trained for this purpose.

16.9
(i)

Organizational structure for CRM:


A sound organizational structure is necessary for an effective system of Credit
Risk Management in a bank. The organizational structure for CRM in the
Bank would comprise the Board of Directors, the Risk Management
Committee (RMC) and the Credit Risk Management Department (CRMD).

(ii)

In pursuance of the BB guidelines, the Board of Directors will have the overall
responsibility for risk management in the Bank, including credit risk. The
Board will approve the CRM policy, credit exposure / concentration limits,

43

risk mitigation/ control policy and other credit policy matters.

(iii) The Risk Management Committee (RMC) will be a Board-level subcommittee that will integrate the various risk exposure management
approaches in the Bank and function independently. Its composition and
responsibilities have been described in chapter 1 of the Credit Policy.
(iv) The Credit Risk Management Department (CRMD) will be delegated specific
responsibilities of managing the credit risk in the Bank by the RMC. Its
composition and responsibilities have been mentioned in chapter 1. It will be
independent of the department that deals with credit administration.(CAD)

16.10 Risk identification and parameters:


(i)

Risk identification is the first step in the Credit Risk Assessment (CRA)
system. The credit risk inherent in credit proposal is a function of certain
important risk factors, which are specified below, along with the rating
parameters:
a. Financial Risk: This would include an assessment of the entitys
(applicant/ borrower) overall financial strength based on performance and
financial indicators, as derived from its financial statements -historical and
projected. The key parameters would be:

Current Ratio,
Total Outside Liabilities/ Tangible Net Worth (TOL /
TNW),
PBDIT (Profit Before Depreciation, Interest, Tax) /
Interest,
Profit After Tax (PAT) / Net Sales,
Return on Capital Employed (ROCE), and

43

(Inventory + Receivables) / Gross Sales.

While assessing the overall financial strength of the unit, the static ratios
and future business & financial prospects of the unit would be
considered. Industry comparisons of the above ratios will also be made.
b. Business Risk: Business risk analysis assesses the business fundamentals
of the unit, the competitive market position in the industry and its
operational efficiency. Key factors would include its geographic reach,
distribution and selling arrangement, capacity utilization, nature of the
technology employed. The business risk associated with the unit would be
reflected in its financial risk ratios and their comparison with the industry
averages, which are covered under financial risk parameters.
c. Industry Risk: This relates to the industry of which the unit is a
constituent. The unit/ firm will be subject to the risk factors to which the
industry is exposed. In assessing the industry risk, the key parameters
would be competition/ entry barriers, cyclicality/industry outlook,
regulatory risk/ government policies and other contemporary issues.
d. Management Risk: It involves evaluation of the management of the
enterprise, their risk philosophy, competence and past track record. The
key parameters are the integrity (corporate governance), managerial
competence and commitment, credibility (ability to meet the sales and
profit projections), payments track record, management system and
structure and length of relationship with the Bank. While some subjectivity
would creep in evaluation of these parameters, it should be minimized.
e. Transaction specific Risk (Facility Risk): The risk parameters would be
tenor of the facility, nature of the security, value of the security and type of
charge over the security.
f. Project related risk: This risk would apply only to project loans, as
43

distinct from corporate loans and working capital facilities. The key
parameters for risk assessment would be technology risk, environment

risk, supplier (off-taker) risk, availability of raw materials/ power/ utilities,


project management capability.
(ii)

The Borrower Risk would comprise the financial risk, business risk, industry
risk and management risk and Facility Risk would relate to the transaction
risk. In case of term loans or project loans, the project related risk would be
added to financial risk factors by way of Debt Service Coverage Ratio in lieu
of Current Ratio. The weightage of Borrower rating and Facility rating would
be 50:50 in the overall risk rating.

16.11 Risk measurement/ grading and hurdle grades:


(i)

The credit ratings under the CRS system would help the Bank in achieving the
following objectives:
a. It would differentiate easily, via numeric risk grades, the degree of credit
risk in different credit exposures of the Bank. This is the desired approach
towards Basel II risk differentiation, when the bank moves towards
Internal Rating based models under CRM.
b. It would help in identifying problem credits before they become NonPerforming Assets and thus help in taking proactive/ preventive measures
to maintain the risk quality of the Banks credit portfolio at a desired level.
This is explained further in section 16 which follows.
c. It would help in relating credit pricing to the credit ratings of the
borrowers, as explained in the subsequent section.

Summary
Every Corporate loan account shall be assigned a Customer
Risk Rating(CRR) and a

Facility Risk Rating(FRR) which are

important tools to rate and price credit risks to be undertaken


43

by a bank

There will be at least 8 risk grades to classify standard assets and 3 for sub standard
assets (in conformity with emerging Basel requirements).Large number of grades on

the rating scale is expensive to operate as the costs of additional information for fine
grading of credit quality increases sharply. The standard asset grades should also
have watch grades intended to capture heightened administrative attention. Further
the rating grades must be described well. (Exhibit A) This is in keeping with Basel II
norms towards finer risk differentiation

Ratings will be worked out on the basis of audited balance sheet figures, operational
track record & experience with the account, assessment of industry prospects at a
macro level and the quality of management in the account

The Facility Risk Rating will be used to price credit facilities

FRR is to be derived for each facility using the CRR as a base and factoring in risks
arising out of exposure tenor, loan security, guarantees and documentation covering
the facilities

CRR and FRR are to be reviewed at least once in 6 months

Analysis of CRR data and migration will help the top management/Board to control

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portfolio quality and in formulation of credit related policies.

Chapter: Seventeen

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Risk Assessment

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Risk Assessment

The primary factor determining the quality of the Banks credit portfolio is the
ability of each borrower to honor, on timely basis, all credit commitments made
to the Bank. This must be accurately determined by the authorized Credit
Officers/ Executives prior to approval. Therefore a thorough credit risk
assessment shall be conducted prior to the sanction of any credit facilities.
While assessing a credit proposal more emphasis shall be given on repayment
potential of loans out of funds generated from borrowers business (cash flow)
instead of realization potential of underlying securities. Credit risk assessment
process in the Bank shall be governed by the following principles:

Assessment Frequency:
A comprehensive Credit Assessment (Due Diligence) shall be conducted before
sanction of any loan. Thereafter, it will be done annually for all types of credit
facilities i.e Demand Loan, Continuous Loan and Term Loan.

Assessment Documentation:
The result of the Credit Assessment shall have to be presented in the Credit
Assessment Form enclosed in Annexure - 2. Initially, it will be originated by the
Relationship Officer of the Branch and reassessed in Corporate Banking
Division and finally in Credit Risk Management Unit of Credit Division. All
evidences of credit assessment have to be filed properly in the respective Credit

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File.

KYC Policy:

Banks KYC policy applicable for depositors shall also be applicable for
borrowing customers. In addition, before sanctioning any credit facility the
concerned relationship officer must physically visit the business premises of the
customer, talk with important personalities of the locality, collect information on
the borrower from his/her existing banker, if any and summarize all these
information in the Pre-sanction Inspection Report.

Accountability:
The Relationship Manager (presently Head of Branch) shall be the owner of the
customer relationship and be held responsible to ensure the accuracy of the
entire credit application/assessment form submitted for approval. He/she will be
responsible for conducting due diligence on the borrower, principals and
guarantors.

Filling up Credit Assessment Form:


Credit Assessment Form must be filled in with accurate information in full. No
field in the assessment form should be erased or overlooked. If information is
not available, concerned field should be filled in with Information Not

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Available with proper justification.

Repayment Source:

Repayment source of the borrower is to be validated in the Credit Assessment


Form by cash flow and other financial analyses. For such analyses, at least three
years financials are to be reviewed. Loan amount and tenor must be
commensurate with the repayment capacity of the borrower.
Credit Requirement:
Credit requirement of the borrower must be assessed properly. The relationship
officer will apply prudence to find out actual credit requirement of the borrower
and place his/her findings in the Credit Assessment Form.
Risk & Mitigating Factors:
Risks inherent in a credit proposal shall have to be identified and appropriate
mitigating factors should be applied. These are to be summarized in the Credit
Assessment Form.

Collateral:
Collateral offered against a credit facility shall properly be valued and verified
by the concerned Relationship Officer and/or Relationship Manager and
revalued and re-verified annually in the subsequent period(s). In addition to the
valuation of the Relationship Officer/Manager, the same collateral must be
valued and verified by an enlisted surveyor of the Bank if the total credit facility
to the concerned customer exceeds Tk 25.00 lac (Taka Twenty Five Lac). Any
valuation of collateral must be supported by the photograph and site map, where

43

applicable.

Insurance Coverage:

Adequacy and extent of insurance coverage must be assessed in the Credit


Assessment Form. Customers preference for not taking required insurance
policy must be justified properly and it must be mentioned as deviation. The
policy must be obtained from approved insurer of the Bank.
Adherence to Policy:
It should be clarified whether the customer is agreed to comply with banks
internal policy and external regulatory requirements. Any deviation from the
policy or other internal or external requirements must be justified properly and
mentioned as Deviation in the Credit Assessment Form. Furthermore, the
originating officer will affix a declaration in the Credit Assessment Form that
the proposal does not contradict with any rules and regulations of the Bank,
Banking Companies Act, any circulars of Bangladesh Bank etc.
Syndicated Loans:
Proposal for syndicated loans shall be analyzed with respect to risk and return in
the same manner as directly sourced loans. In case of participation in a
syndication deal, Bank will independently assess the proposal and will not
solely depend on the credit assessment of the Lead Arranger.
Change in pricing:
Any changes in the pricing of an existing credit facility must be highlighted and
justified in the Credit Assessment Form.

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Others:
In fine, detailed and complete credit risk assessment for each facility and customer
relationship is of paramount importance. The steps that should be followed in carrying
out such an assessment are set out in the Credit Operational Manual and in Head Office
circulars issued from time to time. No proposal shall be put up for approval unless there

has been a complete written analysis. It is the responsibility of the originating officer to
collect all necessary documents/papers before the facility request is sent to the
competent authority for approval.

Parameters of Credit risk assessment of Prime Bank bank:


The Credit Risk Assessment (CRA) of a bank would involve evaluation of key financial
parameters e.g. capital adequacy, liquidity and profitability. These can be accessed from
published sources and are largely quantifiable. The non-financial factors e.g. management
ability, ownership structure, peer comparison/ market perception and country of
incorporation/ regulatory environment involve judgmental evaluation and would be factored
into the overall evaluation of a bank.
Financial Parameters:
The total weight of the following financial parameters in the CRA model for a bank is 50%. It
includes historical and industry comparisons and negative scoring for adverse qualitative
factors.
a. Capital Adequacy: Banks with high capital adequacy ratios would be assigned a
higher quality risk. Ratios such as Capital/ Total Assets Ratio, Tier-I capital/ Total
Assets Ratio would be considered, to reflect the banks capacity to absorb the
collapse of a counter-party.
b. Liquidity: Liquidity management would be analyzed on the basis of ratios of Total
Liquid Assets to Total Assets, Total Deposits and Loans/ Deposits ratio. As the
deposit maturity profile of most commercial banks, is shorter than their loans
maturity profile, a proper evaluation of their liquidity management is vital.
c. Profitability: A banks profitability trend would be examined to determine its
sustainability, with reference to:

ROA,
ROE,
Net Interest Margin,

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Operating Expenses / Net Revenue,


Interest Income / Total Income ratios.

Other important Parameters:


a. Asset Quality: The weight age to this parameter in CRA model for a bank is 20%. It
considers ratios of:

Gross NPAs/ Gross Assets,


Net NPAs/ Net advances,
Provisions/ Gross Advances,
Return on Average Assets.
b. Industry Risk: This risk has 10% weight in CRA model for a bank. It reckons industry
outlook and regulatory environment and country of incorporation of the bank.
c. Ownership and Management ability: Evaluation of these factors, with a weight of
15%, is based on integrity, managerial competence, management structure and
quality of the promoters etc.
d. Capital Market Perception: This factor has a weight of 5% and reckons the track
record and ability of the bank to tap the capital market for its long-term capital

43

requirements.

Chapter: Eighteen

Attributes of Sound Lending Policy

Attributes of sound lending policy

43

Important attributed of an efficient loan policy include the points as given below:

A goal statement - types, maturities, sizes, qualities, etc.

Lending authority - who can sanction how much,

Operating procedures - application to final stage of the decision

Lines of responsibility - assignments and reporting

Documentation

Guidelines relating to collateral

Pricing strategies,

Basis of judging loan status,

Guidelines for supervision, monitoring, recovery drives, and

Guidelines to handle problem loans.

Other that these there are two types of attributes to be considered in framing an sound loan
policy. They are1. General attributes
2. Policy-procedure related attributes
The above elements are enumerated below:

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Factors of General attributes:

Goals and objectives of loans management,

Duties and responsibilities of the personnel,

Loan-mix strategy,

Liquidity strategy,

Determining loanable fund,

Determining higher and lower level of loans,

Geographic area of loan operations,

Scope of loan operations,

Loan maturity mix

Collateral strategy,

Procedure of loan approval

Business ethics,

Loan collection strategy,

Loan classification

Loan review procedure

Norms of loan operations.

Factors of Policy-procedure related attributes:

Loan insurance,

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Loan documentation

Loan pricing

Loan sanctioning authority,

Repayment schedule,

Maintenance of accounts loan transactions,

Regulatory scope of loan operations,

Delegation of authority to the executives,

Job description of the loan executives

Strategy of collecting credit information

Process and steps of credit analysis,

Minimum deposit balance of the loanee,

Identification of problem loans.

Chapter: Nineteen

Conclusion & Recommendations

Conclusion and Recommendations


A banker can not sleep well with bad debts in his portfolio. The failure of
commercial banks occurs mainly due to bad loans, which occurs due to

43

inefficient management of the loans and advances portfolio. Therefore any


banks must be extremely cautious about its lending portfolio and credit
policy. So far Prime Bank Limited has been able to manage its credit

portfolio skillfully and kept the classified loan at a very lower rate ---thanks
go 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 Prime bank limited has a robust credit risk management
policies and procedures that are sensitive to these changes. To improve
the risk management culture further, Prime Bank limited should adopt
some of the industry best practices that are not practiced currently. These
are

The lending guideline should include Industry and Business Segment


Focus, Types of loan facilities, Single Borrower and group limit,
Lending caps, Discouraged Business Types, Loan Facility Parameters
and Cross boarder Risk.

It should adopt a credit grading system All facilities should be


assigned a risk grade. And the borrowers risk grades should be
clearly stated on credit application.

Approval authority should be delegated to individual executives


rather than Executive Committee/ Board to ensure accountability.
This system will not only ensure accountability of individual
executives but also expedite the approval process.

The organization structure should have to be changed to put in


place the segregation of the Marketing/ Relationship Management
function from Approval / Risk Management / Administration function.

An Early Alert Account system should be introduced to have

43

adequate

monitoring,

management

supervision

or

close

attention

by

There should be a Recovery Unit to manage directly accounts with


sustained deterioration. To encourage Recovery Unit incentive
program may also introduced.

Researchers support the fact that economic and financial development of


a country are highly correlated to the development of its banking and
financial system. The more developed and efficient the banking sector of a
country is, the more developed is the business industry sectors will be.
We hope that PBL will lead by example by continuing its efficient lending
policy in keeping the banks financial performance indicators at above
industrial average and contribute to countrys economic developmentthus attaining a middle income status in the world.

43

References
1. http://www.primebank.com.bd
2. Khan, Ataur Rahman, Banking Policy and Management, 2008,
Dhaka.

3. www.bangladesh-bank.org
4. Ullah, Shahed and Islam, Fakhrul, Training Manual on Number 53
Foundation Training Course, 2011, Prime Bank Ltd.

43

5. Review of Economics and Statistics, Vol. 86, No. 4, (November


2004), pp. 946-958.

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