Credit Risk Management of JBL PDF

Janata Bank Limited
Bangladesh
Chapter-1
INTRODUCTION
Janata Bank Limited
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Janata Bank Limited
Bangladesh
1.1 Introduction
Financial institutions are very much essential for the overall development of a country.
Especially banks play an important role in the field of promotion of capital,
encouragement of entrepreneurship, generation of employment opportunities etc. Market
economy or free economy is widely used-concept about the present economy of
Bangladesh. The country adopted the concept in the late seventies with the privatization
of significant number of enterprises. The practices of free market economy started from
the eighties with the changing of the world economy. A number of initiatives were taken
from the nineties to increase the competition and efficiency in money market, relaxation
of unwanted rules and regulations, improvement of loan related law and other situations
and improve the financial base of the banks of the country.
1.2 Statement of the Problem

Commercial banks are in the risky business. In the process of providing financial
services, they assume various kinds of financial risks. Over the last decade our
understanding of the place of commercial banks within the financial sector has improved
substantially.
The very nature of the banking business is so sensitive because more than 85% of their
liability is deposits from depositors (Saunders, Cornett, 2005). Banks use these deposits
to generate credit for their borrowers, which in fact is a revenue generating activity for
most banks. This credit creation process exposes the banks to high default risk which
might led to financial distress including bankruptcy. All the same, beside other services,
banks must create credit for their clients to make some money, grow and survive stiff
competition at the market place.
The principal concern of this report is to assess
 What is the credit structure of Janata Bank Limited?

 What tools or techniques they use to manage their credit risk?
 What extent their performance can be affected by credit risk management policies
and strategies?
 What are the client’s perceptions towards the performance of the bank?
 What are the processes followed by the bank to disburse credit?
 What are the major fields of credit?
 Who are borrowers of credit and what are their purposes?
 What are the requirements needed to get credit facility?
 What are the actions the bank normally takes in the case of loan recovery?
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Janata Bank Limited
Bangladesh
 What are the problems faced by the bank to credit risk management process?
 How can the credit risk management process be improved?
1.3 Origin of the Report
The report entitled “Credit Risk Management Process from the Perspective of Janata
Bank Limited” has been prepared as a partial fulfillment of BBA Program authorized by
Administrator of BBA Program, Department of Management Studies, Jagannath
University, Dhaka.
1.4 Rationale of the Study

Due to the increased competition of the increased number of commercial banks and the
growing economy, the expectations of the customers have also increased than ever
before. Realizing the present condition, banks, especially the commercial banks are trying
to elevate their loan giving service as much as reachable to their customers. The most
serious difficulty facing the financial sector is the high level of interest rate and inflation
rate. So it is the duty of the top management of the commercial banks to work with the
situation.
1.5 Objectives of the Report

The objectives of the report are to determine how credit policy applied in sanctioning and
recovering loans and advances. Credit policy varies in terms of loan sector, status of the
organization, government policy, fiscal budget and guidelines etc. There are mainly two
objectives behind the preparation of this report- primary objective and secondary
objectives.
Primary Objective
► To represent the “Credit Management” of Janata Bank Limited.
Secondary Objectives
► To assess the credit structure of the bank in practice.

► To measure the effectiveness of credit risk management process.
► To identify the recovery performance of the bank.
► To analyze the credit management process followed by the bank.
► To assess and highlight on the legal actions followed by the bank.
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Janata Bank Limited
Bangladesh
► To find out problems and suggesting recommendations for further

improvement.
1.6 Scope of the Study

Janata Bank Ltd. is the second largest commercial Bank in Bangladesh. Janata Bank Ltd.
operates through 889 branches including 4 overseas branches at United Arab Emirates. It
is linked with 1202 foreign correspondents all over the world. The researcher is assigned
to learn practical knowledge from Janata Bank Ltd. Alubazar branch. In this study I
would try to concentrate on the theoretical aspect of credit management, that is, the
definition of credit management, policy of credit management, tools for managing credit
etc. I would analyze the data on the bank and various programs for loan recovery,
problems in loan in loan recovery, pattern of loan recovery and the performance of the
bank under study in loan recovery, the information in respect to the classification of
unsound credit and provision thereon and also concentrates on the performance of the
bank. And finally I would conclude with the critical evaluation of the credit management
under the guidelines of the Bank Companies Act 1991 and a discussion on the major
findings and recommendations.
1.7 Methodology of the Study
The report is descriptive in nature. To fulfill the objectives of this report total
methodology has divided into two major parts:
A) Data Collection Procedure:

In order to make the report more meaningful and presentable, two sources of
data and information have been used widely.
The “Primary Sources” are as follows:-

• Face to face conversation with the official staff.
• Practical deskwork
• Simple depth interview technique was used by asking a number of open-ended
questions to collect the information.
• Relevant file study as provided by the officers concerned.
The “Secondary Sources” are as follows:-

• Annual report of Janata Bank Ltd.
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Janata Bank Limited
Bangladesh
• Periodicals Published by Bangladesh Bank

• Office files and documents
• Study related books and journals
• Web sites.
b) Data Processing & Analysis:

Collected information have then processed & compiled with the aid of MS Word,
Excel & other related computer software. Necessary tables have been prepared on the
basis of collected data and various statistical techniques have been applied to analyses
on the basis of classified information. Detail explanation and analysis have also been
incorporated in the report.
1.8 Limitations of the Study
To prepare a report on the topic like this in a short duration is not easy task. In preparing
this report some problems and limitations have encountered which are as follows:
a) The main constraint of the study was insufficiency of information, which was
required for the study. There are various information the bank employee cannot
provide due to security and other corporate obligations.
b) As the data, in most cases, are not in organized way, the bank failed to provide all
information.
c) Due to time limitation, many of the aspects could not be discussed in the present
report.
d) Political unrest during the internship period.
e) Since the bank personnel were very busy, they could not pay enough time.
f) Lack of opportunity to access to internal data.
g) The researcher had to base on secondary data for preparing this report.
h) Legal action related information was not available.
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Janata Bank Limited
Bangladesh
Chapter-2
AN OVERVIEW OF JANATA BANK

LIMITED
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Janata Bank Limited
Bangladesh
Janata Bank Limited
2.1 History of Janata Bank Ltd.
Janata Bank Limited, one of the state owned commercial banks in Bangladesh, has an
authorized capital of Tk. 20000 million (approx. US$ 250 million), paid up capital of Tk.
11000.00 million, reserve of Tk.17234 million. The Bank has a total asset of Tk. 508567
million as on 31st December 2012. Immediately after the emergence of Bangladesh in
1971, the erstwhile United Bank Limited and Union Bank Limited were renamed as
Janata Bank. On 15th November, 2007 the bank has been corporatized and renamed as
Janata Bank Limited.
Janata Bank Limited operates through 889 branches including 4 overseas branches at
United Arab Emirates. It is linked with 1202 foreign correspondents all over the world.
The Bank has more than 15(fifteen) thousand employees.
2.2 Company profile
Name of the company Janata Bank Limited

Registered address Janata Bhaban, 70, Motijheel C/A,
Dhaka-1000.Bangladesh.
Legal status Public limited
Date of incorporation 21 may, 2007.
Paid up capital Tk. 11000.00 million
Website http://www.janatabank-bd.com
Swift code JANB BD DH
Fax Pabx ; 9560000
Overseas branches
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Janata Bank Limited
Bangladesh
1 ABU DHABI 2 SHARJAH 3 DUBAI 4 AL-AIN
2.3 Governing Body and Management

The Board of Directors is composed of 13 (Thirteen) members headed by a Chairman.
The Directors are representatives from both public and private sectors. The Bank is
headed by the Chief Executive Officer & Managing Director, who is a reputed banker.
Name Designation
DR.Abul Barkat Chairman
Mr . Md. Enamul Haq Choudhury Director
Dr. Jamaluddin Ahmed, FCA Director
Ms. Parveen Mahmud, FCA Director
Mr. Nagibul Islam Dipu Director
Dr. R M Debnath Director
Syed Bazlul Karim, B.P.M. Director
Prof. Mohammed Moinuddin Director
Mr. Md. Abu Naser Director
Ms. Sangita Ahmed Director
Dr. Nitai Chandra Nag Director
Mr. S. M. Aminur Rahman CEO & Managing Director
2.4 Vision of Janata Bank Ltd.
To become the effective largest commercial bank in Bangladesh to support socio-

economic development of the county and to be a leading bank in South Asia.
2.5 Mission of Janata Bank Ltd.
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Janata Bank Limited
Bangladesh
The mission of the bank is to be an effective commercial bank by maintaining stable

growth strategy, delivering high quality financial products, providing excellent customer
service through an experienced management team and ensuring good corporate
governance in every step of banking network.
2.6 Organizational Structure

Hierarchy of Janata Bank Ltd. Management
Chairman
Managing Director
Deputy Managing Director
General Manager
Deputy General Manager
Assistant General Manager
First Assistant General

Manager
Senior Executive Officer
Executive Officer
Assistant Executive Officer
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Janata Bank Limited
Bangladesh
Officer
Assistant Officer
2.7 Departments of Janata Bank Ltd.
According to the 1st principle of management if the jobs are not organized considering
their interrelationship and are not allocated in a particular department, it would be very
difficult to control the system effectively. If the departmentalization is not fitted for the
particular works there would be haphazard situation and the performance of a particular
department would not be measured. Janata Bank Limited has done this work very well.
1. Central Accounts Division (CAD)
2. Credit Division
3. International Division
4. Information & Technology Division
5. Human Resources Division
6. Audit & Inspection Division
7. Foreign Remittance Management Division
8. Treasury Department
a) Foreign Currency Management Division
b) Local Currency Management Division
9. Legal Matters Division
10. Human resources management division
Besides above divisions there are also some divisions like:

Agro-Based Financing Division Disciplinary & Appeal Division
Establishment &Engineering Division Project Monitoring & Review
Division
Employee Welfare & Transport Public Relation Division
Division
MIS& Statistics Division Vigilance & Control Division
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Common Division Marketing &Development Division

General Advance Division Micro-Credit Division
Modernization & Restructuring Rural Credit Division
Division
Reconciliation Division
Chapter-3
THEORETICAL BACKGROUND OF
CREDIT RISK MANAGEMENT
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Janata Bank Limited
Bangladesh
Janata Bank Limited
3.1 What is Credit?
In banking terminology, credit refers to the loans and advances made by the bank to its
customers or borrowers. Bank credit is a credit by which a person who has given the
required security to a bank has liberty to draw to a certain extent agreed upon. It is an
arrangement for deferred payment of a loan or purchase. (Wikipedia dictionary)
Credit means a provision of, or commitment to provide, funds or substitutes for funds, to
a borrower, including off-balance sheet transactions, customers’ lines of credit,
overdrafts, bills purchased and discounted, and finance leases. (Guideline on credit risk
management, Bank of Mauritius)
3.2 What is Credit Risk?
Risk means the exposure to a chance of loss or damage. Risk is the element of
uncertainty or possibility of loss that exist in any business transaction. Credit risk is the
likelihood that a borrower or counter party will be unsuccessful to meet its obligation in
accordance with agreed terms and conditions. Credit risk means the risk of credit loss that
result from the failure of a borrower to honor the borrower’s credit obligation to the
financial institution. Credit risk is most simply defined as the potential that a bank
borrower or counterparty will fail to meet its obligations in accordance with agreed terms.
3.3 What is Credit Risk Management?
Credit risk management is the lending institution's primary line of defense to protect itself
against customers who fail to meet the terms of the loans or other credit that was
extended to them. Credit risk management is an important aspect of a bank's success and
ensures a lending institution will not take on more risk than it can handle.
3.4 Functions of Credit Risk Management
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 Identification of risk,
 Measurement,
 Aggregation,
 Planning and management,
 Monitoring of the risks arising in a bank's overall business.
3.4.1. Identification of Risk
A bank's risks have to be identified before they can be measured and managed.
Typically banks distinguish the following risk categories:
 Credit risk
 Market risk
 Operational risk
3.4.2. Measurement
The consistent assessment of the three types of risks is an essential prerequisite for
successful risk management. While the development of concepts for the assessment of
market risks has shown considerable progress, the methods to measure credit risks and
operational risks are not as sophisticated yet due to the limited availability of historical
data. Credit risk is calculated on the basis of possible losses from the credit portfolio.
Potential losses in the credit business can be divided into
1. Expected losses: Expected losses are derived from the borrower's expected
probability of default and the predicted exposure at default less the recovery rate,
i.e. all expected cash flows, especially from the realization of collateral. The
expected losses should be accounted for in income planning and included as
standard risk costs in the credit conditions.
2. Unexpected losses: Unexpected losses result from deviations in losses from the
expected loss. Unexpected losses are taken into account only indirectly via equity
cost in the course of income planning and setting of credit conditions. They have
to be secured by the risk coverage.
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Janata Bank Limited
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Two main methods are used to measure unexpected losses today:

1. Scenario analysis
2. Value-at-Risk concept
1. Scenario analysis: Under a scenario analysis, the available historical market data
and/or internal bank data are used to create scenarios concerning the possible
development of default rates. Like in VaR analysis, scenarios for the normal case, in
which loss developments are assumed that have already occurred in a certain historical
period under review; and worst case scenarios assuming the incurrence of extreme losses
are assumed. These scenarios are used to determine the extent of the fluctuations, in the
portfolio’s value for the occurrence of the event. Value fluctuations may, for example,
refer to the extent of losses from lending or changes in the value of the collateral. The
highest possible risk is calculated on the basis of the scenario analysis. The scenario
analysis is limited in its explanatory power as it takes into account only a few changes in
parameters. Its results will be of lower quality than those of the VaR concept, as the
scenarios applied are limited to a small number of historical events and the diversity of
the parameters contained in the VaR concept cannot be achieved. Banks that base their
risk controlling on the results from scenario analysis usually have to accept less precise
results than they would get using the VaR approach. Therefore, it seems advantageous to
shift to a value-at-risk process, but it is essential to determine what additional cost would
be incurred in implementing the concept, and what additional benefit would be derived
from more effective management that would result from the implementation.
2. Value-at-Risk Concept: The VaR states the maximum loss that will not be exceeded
with a certain probability (confidence level) at a given horizon (holding period). To
determine the value at risk a confidence level is determined which reflects the probability
that the calculated maximum loss will not be exceeded within the holding period. The
confidence level is usually between 95% and 99.95%, which means that higher losses are
possible, but will only occur with a probability of between 5% and 0.05%. The holding
period states the horizon during which the losses can occur and is derived from the
liquidity of the assets observed. To calculate the credit VaR, it is necessary to determine
the distribution of potential losses in the credit portfolio. For this purpose, assumptions
are made in terms of the future development of the default rate and the exposure at
default (credit amount outstanding at the time of default, minus proceeds from collateral
and estate).
3.4.3 Aggregation
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When aggregating risks, it is important to take into account correlation effects which
cause a bank's overall risk to differ from the sum of the individual risks. This applies to
risks both within a risk category as well as across different risk categories.
3.4.4. Planning and Management

Furthermore, risk management has the function of planning the bank's overall risk
position and actively managing the risks based on these plans.
The most commonly used management tools include:
• Risk-adjusted pricing of individual loan transactions
• Setting of risk limits for individual positions or portfolios
• Use of guarantees and credit insurance
• Securitization of risks
• Buying and selling of assets
3.4.5. Monitoring
Risk monitoring is used to check whether the risks actually incurred lie within the
prescribed limits, thus ensuring an institution's capacity to bear these risks. In addition,
the effectiveness of the measures implemented in risk controlling is measured, and new
impulses are generated if necessary. (Basel Committee on Banking Supervision, 2000)
3.5 Objectives of Credit Risk Management

Credit risk management must satisfy other objectives while retaining customers. Credit
risk management is chiefly responsible for the protection of an organization's lending
assets. It must also provide internal communication to its credit representatives with
policies and procedures that reduce ambiguity and allow them to best fulfill their duties.
 Risk Reduction: Credit risk management satisfies it primary objective of risk

reduction through credit analysis and review. Credit analysis is the research and
investigation required to determine the risk involved with lending to a customer.
This is performed by using information from credit applications, public records
and credit reports. Credit applications provide information like the applicant's
name, address, age, Social Security number, driver's license number and credit
references. Information from public records may include judgments, liens and
business registrations. Credit reports provide financial information from credit
bureaus like Experian, Equifax and Trans Union. They can reveal an applicant's
credit lines, payment history, legal information (bankruptcies and judgments) and
credit score. By researching and investigating an applicant's financial background,
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credit risk management is able to gauge the risk involved in doing business with
him. For established customers, a credit review process should be employed to
stay familiar with the credit situation of clients. This process allows for credit
limit adjustments and other actions to reduce the company's credit risk.
 Internal Communication: Credit risk management must provide internal

communication to its credit department and representatives. This not only allows
them to fulfill their obligations in risk reduction, but also allows them to operate
more efficiently by providing clear instruction on how to perform or act. Through
the use of credit policies and procedures, credit risk management is able to better
satisfy this objective. Credit policy defines the rules and guidelines regarding the
performance of lending functions within an organization. This can include target
customers, interest rates, loan amounts, collateral requirements and other risk
analysis requirements. To provide the credit department with specifics on how to
achieve the company's credit policies, credit procedures are used. These
procedures can include information requirements for the investigation and
analysis of credit. They can also detail information about the credit approval
process, account suspension notifications and circumstances requiring
management approval or notification. Credit policies and procedures reduce
ambiguity amongst the organization's credit representatives. This facilitates an
easier and more efficient approach to credit risk management.
 Customer Services: Providing good service is necessary to retain customers. The

company's marketing and sales departments are directly responsible for sales by
attracting new clients. Credit risk management, while not charged with making
sales, are still indirectly responsible for them in how they treat clients (customer
service). Being polite and professional are rudimentary skills. But learning to
work with customers, while satisfying a risk reduction role, takes training and
development. Without good customer service as a basic objective, the
organization stands to lose customers. Hard credit measures such as overly-
conservative credit limits, payments terms and collateral requirements can chase
customers away. Without customers there is no need for credit risk management,
as the organization will naturally cease to exist.
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 Departmental Coordination: Another objective of credit risk management

involves coordinating with other departments. By working with the collections
department, credit risk management is better able to stay in touch with customer
payment issues and possible financial problems. Coordinating with the accounting
and finance departments can provide information regarding cash-flow
requirements and possible changes needed regarding financial risk.
Communicating closely with the sales department can reduce internal and external
conflicts regarding account decisions.
3.6 Tools Used to Manage Credit Risk in International Finance:
When trading crosses international borders a whole new layer of complexity appears.
This complexity breeds risk factors particular to international finance. The major risks
international finance has to deal with are changes in foreign exchange rates and shifts in
economic and political climates. The use of financial tools can help mitigate these and
other risks.
 Risk-Reward Ratio: Risk-Reward Ratio compares the potential profit of an

investment with the risk involved in the transaction. Calculate it by dividing the
projected profit of the trade by what you stand to lose if the trade goes wrong. In
the Foreign Exchange market (Forex) the minimum acceptable risk-reward ratio is
1:2, although beginners should try and keep to ratios of 1:3 and above.
 Black-Schools Formula: Black-Schools formula is a mathematical tool widely
used in the pricing of options. It provides an approximation to the right long and
short position in a stock. Use this formula with caution as it relies on
unsubstantiated assumptions like the "normality assumption," which ignores the
possibility of an extreme change in the market.
 Diversification: Diversification reduces the overall risk of an investment by
spreading its components to a mixed variety of investments. Use it to reduce the
overall effect on your portfolio of changes (positive or negative) in the value of a
security.
3.7 Limits
The definition of limits is necessary to curb the risks associated with bank's activities. It
is intended to ensure that the risks can always be absorbed by the predefined coverage
capital. When the limits are exceeded, risks must be reduced by taking such steps as
reducing exposures or using financial instruments.
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Janata Bank Limited
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3.7.1 Limit Structure
The maximum risk limit is determined by the capital allocated to cover credit risks in the
planning process. The bank's organizational structure has a significant impact on the way
in which the limits are designed. One important success factor in the effective use of
limits for risk controlling purposes is that a unit or an employee has the appropriate
responsibility for an organizational unit which is assigned a limit. This is the only way to
ensure that compliance with the limits is monitored and suitable measures are taken.
(Bernanke, 2006)
3.7.2 Limit Monitoring and Procedures Used When Limits Are Exceeded
The stipulated limits can have a direct impact on the credit approval. It needs to be
determined if compliance with the limits should be examined before or after the credit
decision is taken. In practice, this compliance is usually checked ex post, i.e. after the
credit approval based on the portfolio under review, and is not a component of the
individual loan decision. The credit decision is taken based on the borrower's credit
standing and any collateral, but independently of the portfolio risk. Such ex-post
observation can result in a relatively high number of cases in which limits are exceeded,
thus reducing the effectiveness of the limit stipulations.
Some banks check the compliance with the limits immediately during the credit approval
process. Prior to the credit decision, compliance with the relevant limits is checked in
case the credit is approved. Bringing limit monitoring into play at this early stage is also
referred to as ex-ante monitoring. This helps prevent the defined limits from being
exceeded in the course of approving new loans. Ex-ante monitoring is quite complex.
Graph 1: Responsibilities in case of excess over limit
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Source: (Credit Approval Process and Credit Risk Management, 2005)
The limit utilization has to be documented in the credit risk report. Processes and
responsibilities concerning measures to be taken when limits are exceeded have to be
defined clearly. The decision makers responsible have to be informed depending on the
extent to which the limits are exceeded and the approach taken to remedy the situation.
3.8 Credit Risk Management Process

Credit risk management process should cover the entire credit cycle starting from the
origination of the credit in a financial institution’s books to the point the credit is
extinguished from the books (Morton Glantz, 2002). It should provide for sound practices
in:
3.8.1 Credit processing/appraisal

3.8.2 Credit approval/sanction
3.8.3 Credit documentation
3.8.4 Credit administration
3.8.5 Disbursement
3.8.6 Monitoring and control of individual credits
3.8.7 Monitoring the overall credit portfolio (stress testing)
3.8.8 Credit classification and
3.8.9 Managing problem credits/recovery
3.8.1 Credit Processing/Appraisal
Credit processing is the stage where all required information on credit is gathered and
applications are screened. Credit application forms should be sufficiently detailed to
permit gathering of all information needed for credit assessment at the outset. In this
connection, financial institutions should have a checklist to ensure that all required
information is, in fact, collected. Financial institutions should set out pre-qualification
screening criteria, which would act as a guide for their officers to determine the types of
credit that are acceptable. For instance, the criteria may include rejecting applications
from blacklisted customers. These criteria would help institutions avoid processing and
screening applications that would be later rejected.
Moreover, all credits should be for legitimate purposes and adequate processes should be
established to ensure that financial institutions are not used for fraudulent activities or
activities that are prohibited by law or are of such nature that if permitted would
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contravene the provisions of law. Institutions must not expose themselves to reputational
risk associated with granting credit to customers of questionable repute and integrity.
The next stage to credit screening is credit appraisal where the financial institution
assesses the customer’s ability to meet his obligations. Institutions should establish well
designed credit appraisal criteria to ensure that facilities are granted only to creditworthy
customers who can make repayments from reasonably determinable sources of cash flow
on a timely basis (Morton Glantz, 2002).
Financial institutions usually require collateral or guarantees in support of a credit in

order to mitigate risk. It must be recognized that collateral and guarantees are merely
instruments of risk mitigation. They are, by no means, substitutes for a customer’s ability
to generate sufficient cash flows to honor his contractual repayment obligations.
Collateral and guarantees cannot obviate or minimize the need for a comprehensive
assessment of the customer's ability to observe repayment schedule nor should they be
allowed to compensate for insufficient information from the customer.
Care should be taken that working capital financing is not based entirely on the existence
of collateral or guarantees. Such financing must be supported by a proper analysis of
projected levels of sales and cost of sales, prudential working capital ratio, past
experience of working capital financing, and contributions to such capital by the
borrower itself.
Financial institutions must have a policy for valuing collateral, taking into account the
requirements of the Bangladesh Bank guidelines dealing with the matter. Such a policy
shall, among other things, provide for acceptability of various forms of collateral, their
periodic valuation, process for ensuring their continuing legal enforceability and
realization value (Morton Glantz, 2002).
In the case of loan syndication, a participating financial institution should have a policy
to ensure that it does not place undue reliance on the credit risk analysis carried out by
the lead underwriter. The institution must carry out its own due diligence, including
credit risk analysis, and an assessment of the terms and conditions of the syndication. As
a general rule, the appraisal criteria will focus on:
 amount and purpose of facilities and sources of repayment;
 integrity and reputation of the applicant as well as his legal capacity to assume
the credit obligation;
 risk profile of the borrower and the sensitivity of the applicable industry sector
to economic fluctuations;
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 performance of the borrower in any credit previously granted by the financial

institution, and other institutions, in which case a credit report should be sought
from them;
 the borrower’s capacity to repay based on his business plan, if relevant, and
projected cash flows using different scenarios;
 cumulative exposure of the borrower to different institutions;
 physical inspection of the borrower’s business premises as well as the facility
that is the subject of the proposed financing;
 borrower’s business expertise;
 adequacy and enforceability of collateral or guarantees, taking into account the
existence of any previous charges of other institutions on the collateral;
 current and forecast operating environment of the borrower;
 background information on shareholders, directors and beneficial owners for
corporate customers; and
 Management capacity of corporate customers (L.R.Chowdhury,2004).
3.8.2 Credit-approval/Sanction
A financial institution must have in place written guidelines on the credit approval
process and the approval authorities of individuals or committees as well as the basis of
those decisions. Approval authorities should be sanctioned by the board of directors.
Approval authorities will cover new credit approvals, renewals of existing credits, and
changes in terms and conditions of previously approved credits, particularly credit
restructuring, all of which should be fully documented and recorded. Prudent credit
practice requires that persons empowered with the credit approval authority should not
also have the customer relationship responsibility.
Approval authorities of individuals should be commensurate to their positions within
management ranks as well as their expertise. Depending on the nature and size of credit,
it would be prudent to require approval of two officers on a credit application, in
accordance with the Board’s policy. The approval process should be based on a system of
checks and balances. Some approval authorities will be reserved for the credit committee
in view of the size and complexity of the credit transaction.
Depending on the size of the financial institution, it should develop a corps of credit risk
specialists who have high level expertise and experience and demonstrated judgment in
assessing, approving and managing credit risk. An accountability regime should be
established for the decision-making process, accompanied by a clear audit trail of
decisions taken, with proper identification of individuals/committees involved. All this
must be properly documented.
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Graph 2: Credit Approval Process

3.8.3 Credit Documentation
Documentation is an essential part of the credit process and is required for each phase of
the credit cycle, including credit application, credit analysis, credit approval, credit
monitoring, and collateral valuation, and impairment recognition, foreclosure of impaired
loan and realization of security. The format of credit files must be standardized and files
neatly maintained with an appropriate system of cross-indexing to facilitate review and
follow up.
The Bangladesh Bank will pay particular attention to the quality of files and the systems
in place for their maintenance. Documentation establishes the relationship between the
financial institution and the borrower and forms the basis for any legal action in a court of
law. Institutions must ensure that contractual agreements with their borrowers are vetted
by their legal advisers (L.R.Chowdhury, 2003).
Credit applications must be documented regardless of their approval or rejection. All

documentation should be available for examination by the Bangladesh Bank. Financial
institutions must establish policies on information to be documented at each stage of the
credit cycle. The depth and detail of information from a customer will depend on the
nature of the facility and his prior performance with the institution. A separate credit file
should be maintained for each customer. If a subsidiary file is created, it should be
properly cross-indexed to the main credit file (L.R.Chowdhury, 2004).
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For security reasons, financial institutions should consider keeping only the copies of
critical documents (i.e., those of legal value, facility letters, signed loan agreements) in
credit files while retaining the originals in more secure custody. Credit files should also
be stored in fire-proof cabinets and should not be removed from the institution's
premises.
Financial institutions should maintain a checklist that can show that all their policies and
procedures ranging from receiving the credit application to the disbursement of funds
have been complied with. The checklist should also include the identity of individual(s)
and/or committee(s) involved in the decision-making process (Morton Glantz, 2002).
Graph 4: Credit Documentation
3.8.4 Credit Administration
Financial institutions must ensure that their credit portfolio is properly administered, that
is, loan agreements are duly prepared, renewal notices are sent systematically and credit
files are regularly updated. An institution may allocate its credit administration function
to a separate department or to designated individuals in credit operations, depending on
the size and complexity of its credit portfolio (Credit Risk Management: Industry Best
Practices2005, Bangladesh Bank).
A financial institution’s credit administration function should, as a minimum, ensure that:
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 credit files are neatly organized, cross-indexed, and their removal from the
premises is not permitted;
 the borrower has registered the required insurance policy in favor of the bank
and is regularly paying the premiums;
 the borrower is making timely repayments of lease rents in respect of charged
leasehold properties;
 credit facilities are disbursed only after all the contractual terms and conditions
have been met and all the required documents have been received;
 collateral value is regularly monitored;
 the borrower is making timely repayments on interest, principal and any agreed
to fees and commissions;
 information provided to management is both accurate and timely;
 responsibilities within the financial institution are adequately segregated;
 funds disbursed under the credit agreement are, in fact, used for the purpose for
which they were granted;
 “back office” operations are properly controlled;
 the established policies and procedures as well as relevant laws and regulations
are complied with; and
 On-site inspection visits of the borrower’s business are regularly conducted and
assessments documented (L.R.Chowdhury,2004).
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Graph 5: Functions of Credit Administration Department
Source: (Credit Risk Management: Industry Best Practices2005, Bangladesh Bank)
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3.8.5 Disbursement
Once the credit is approved, the customer should be advised of the terms and conditions
of the credit by way of a letter of offer. The duplicate of this letter should be duly signed
and returned to the institution by the customer. The facility disbursement process should
start only upon receipt of this letter and should involve, inter alia, the completion of
formalities regarding documentation, the registration of collateral, insurance cover in the
institution’s favor and the vetting of documents by a legal expert. Under no
circumstances shall funds be released prior to compliance with pre-disbursement
conditions and approval by the relevant authorities in the financial institution
(L.R.Chowdhury, 2004).
3.8.6 Monitoring and Control of Individual Credits
To safeguard financial institutions against potential losses, problem facilities need to be

identified early. A proper credit monitoring system will provide the basis for taking
prompt corrective actions when warning signs point to deterioration in the financial
health of the borrower. Examples of such warning signs include unauthorized drawings,
arrears in capital and interest and deterioration in the borrower’s operating environment
(Morton Glantz, 2002). Financial institutions must have a system in place to formally
review the status of the credit and the financial health of the borrower at least once a year.
More frequent reviews (e.g at least quarterly) should be carried out of large credits,
problem credits or when the operating environment of the customer is undergoing
significant changes.
In broad terms, the monitoring activity of the institution will ensure that:
 funds advanced are used only for the purpose stated in the customer’s credit
application;
 financial condition of a borrower is regularly tracked and management advised
in a timely fashion;
 borrowers are complying with contractual covenants;
 collateral coverage is regularly assessed and related to the borrower’s financial
health;
 the institution’s internal risk ratings reflect the current condition of the customer;
 contractual payment delinquencies are identified and emerging problem credits
are classified on a timely basis; and
 Problem credits are promptly directed to management for remedial actions.
More specifically, the above monitoring will include a review of up-to-date information
on the borrower, encompassing:
 Opinions from other financial institutions with whom the customer deals;
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 Findings of site visits;

 Audited financial statements and latest management accounts;
 Details of customers' business plans;
 Financial budgets and cash flow projections; and
 Any relevant board resolutions for corporate customers.
 The borrower should be asked to explain any major variances in projections
provided in support of his credit application and the actual performance, in
particular variances respecting projected cash flows and sales turnover (Credit
Risk Management: Industry Best Practices2005, Bangladesh Bank).
3.8.7 Monitoring the Overall Credit Portfolio (Stress Testing)

An important element of sound credit risk management is analyzing what could
potentially go wrong with individual credits and the overall credit portfolio if
conditions/environment in which borrowers operate change significantly. The results of
this analysis should then be factored into the assessment of the adequacy of provisioning
and capital of the institution. Such stress analysis can reveal previously undetected areas
of potential credit risk exposure that could arise in times of crisis (Morton Glantz, 2002).
Possible scenarios that financial institutions should consider in carrying out stress testing
include:
 Significant economic or industry sector downturns;
 Adverse market-risk events; and
 Unfavorable liquidity conditions.
Graph 6: Early Warning Systems

Financial institutions should have industry profiles in respect of all industries where they
have significant exposures. Such profiles must be reviewed /updated every year. Each
stress test should be followed by a contingency plan as regards recommended corrective
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actions. Senior management must regularly review the results of stress tests and
contingency plans. The results must serve as an important input into a review of credit
risk management framework and setting limits and provisioning levels (Morton Glantz,
2002).
3.8.8 Classification of Credit
It is required for the board of directors of a financial institution to “establish credit risk
management policy, and credit impairment recognition and measurement policy, the
associated internal controls, documentation processes and information systems;”
Credit classification process grades individual credits in terms of the expected degree of
recoverability. Financial institutions must have in place the processes and controls to
implement the board approved policies, which will, in turn, be in accord with the
proposed guideline. They should have appropriate criteria for credit provisioning and
write off. International Accounting Standard 39 requires that financial institutions shall,
in addition to individual credit provisioning, assess credit impairment and ensuing
provisioning on a credit portfolio basis. Financial institutions must, therefore, establish
appropriate systems and processes to identify credits with similar characteristics in order
to assess the degree of their recoverability on a portfolio basis.
Financial institutions should establish appropriate systems and controls to ensure that
collateral continues to be legally valid and enforceable and its net realizable value is
properly determined. This is particularly important for any delinquent credits, before
netting off the collateral’s value against the outstanding amount of the credit for
determining provision. As to any guarantees given in support of credits, financial
institutions must establish procedures for verifying periodically the net worth of the
guarantor.
3.8.9 Managing Problem Credits/Recovery
A financial institution’s credit risk policy should clearly set out how problem credits are
to be managed. The positioning of this responsibility in the credit department of an
institution may depend on the size and complexity of credit operations. The monitoring
unit will follow all aspects of the problem credit, including rehabilitation of the borrower,
restructuring of credit, monitoring the value of applicable collateral, scrutiny of legal
documents, and dealing with receiver/manager until the recovery matters are finalized.
The collection process for personal loans starts when the account holder has failed to
meet one or more contractual payment (Installment). It therefore becomes the duty of the
Collection Department to minimize the outstanding delinquent receivable and credit
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losses. This procedure has been designed to enable the collection staff to systematically
recover the dues and identify / prevent potential losses, while maintaining a high standard
of service and retaining good relations with the customers. It is therefore essential and
critical, that collection people are familiar with the computerized system, procedures and
maintain effective liaison with other departments within the bank (Prudential regulations
for consumer financing 2004, Bangladesh Bank).
3.8.9.1 Collection Objectives
The collector’s responsibility will commence from the time an account becomes
delinquent until it is regularized by means of payment or closed with full payment
amount collected. The goal of the collection process is to obtain payments promptly
while minimizing collection expense and write-off costs as well as maintaining the
customer’s goodwill by a high standard of service. For this reason it is important that the
collector should endeavor to resolve the account at the first time worked. Collection also
protects the assets of the bank. This can be achieved by identifying early signals of
delinquency and thus minimizing losses. The customers who do not respond to collection
efforts - represent a financial risk to the institution. The Collector’s role is to collect so
that the institution can keep the loan on its books and does not have to write-off / charge
off.
3.8.9.2 Identification and Allocation of Accounts
When a customer fails to pay the minimum amount due or installment by the payment
due date, the account is considered in arrears or delinquent. When accounts are
delinquent, collection procedures are instituted to regularize the accounts without losing
the customer’s goodwill whilst ensuring that the bank’s interests are protected.
3.8.9.3 Collection Steps
To identify and manage arrears, the following aging classification is adopted:

For all products other than credit cards
Days Past Due (DPD) Collection Action
1-14 Letter, Follow up & Persuasion over phone (Annexure V)
15-29 1st Reminder letter & Sl. No. 1 follows
30-44 2nd reminder letter + Single visit
45-59 • 3rd reminder letter (Annexure VI)
• Group visit by team member
• Follow up over phone
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• Letters to Guarantor, Employer, Reference all above effort follows

• Warning on legal action by next 15 days
60-89 • Call up loan (Annexure VII)
• Final Reminder & Serve legal notice
• legal proceedings begin
• Repossession starts
90 and above • Telephone calls/Legal proceedings continue
• Collection effort continues by officer & agent
• Letter to different banks/Association
Table 1: Credit Recovery Steps

Source: (Prudential regulations for consumer financing 2004, Bangladesh Bank)
For credit cards:
Days Past Due (DPD) Collection Action
X • Letter reminding payment past due
• Soft call requesting payment
30-59 • Block card with “decline” response
• Call insisting payment
• Letter advising account status (blocked)
60-89 • Block card with “decline” response
• Call insisting payment
• Letter advising a/c status (blocked) and threatening card
cancellation if not regularized
90-119 • Call insisting immediate payment
• Letter advising cancellation & surrender of card
• Hot-list & circulate within the merchants
• Employ recovery agent where appropriate
120-149 • Call threatening litigation
• Threatening letter to employer (for salaried only)
• Publish name & photograph in newspaper
• Personal visitation by recovery agent
• Set-off SCB Account(s), if any
• Serve legal notice where appropriate
150+ • Bad debt allocation
• Account handed over to recovery agency
• Stop interest accrual
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• Personal visitation by recovery agent

• Legal action
Table 2: Credit Recovery Steps for Credit Card
Source: (Prudential regulations for consumer financing 2004, Bangladesh Bank)
Chapter-4
PRACTICAL EXPERIENCE
Janata Bank Limited
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This report is based on the internship program. Janata Bank Limited arranges internship
program provide practical knowledge about banking activities for university students as
universities conducted with different organization after the completion of theoretical
courses of program of Bachelor of Business Administration (BBA). A group of interns
must carry out a specific project, which is assigned by Janata Bank. In this particular
report, I am an internee of the previously mentioned program and the concerned
organization is Janata Bank Limited which is a prominent Bank of Bangladesh. Hence I
was placed in Alubazar Branch, Dhaka of Janata Bank Limited from November 11, 2013
to January 11, 2014.
During these two months of internship program I was assigned with many tasks, mainly
with the credit disbursement process. In the process of credit management, I learned
 Filling customer loan request form,

 Writing credit proposal,
 Stock valuation,
 Renewal of loan,
 Writing sanction letter
 Preparing profit and loss account or last 3 years for clients
 Evaluation and description of collateral property
 Preparing Credit Investigation Bureau (CIB) report,
 Gathering charge documentation,
 Filling inquiry form,
 Writing TT (Telegraphic Transfer), DD (Demand Draft), MT (Mail
Transfer), pay order, pay slip etc.
Besides these, I got valuable skills and experience, and benefit from close support and
guidance from senior staff, that enabled me to work in the corporate sector and developed
an edge that I can take into my career after university.
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Chapter-5
CREDIT RISK MANAGEMENT OF

JANATA BANK LIMITED
Janata Bank Limited
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Credit Risk Management of Janata Bank Limited

The credit risk management process followed in Janata Bank Limited can be categorized
in the following specific segments:
5.1 Credit Mission Statement of Janata Bank Limited
5.2 Credit Policy Guidelines
5.3 Credit Assessment
5.4 Credit Risk Grading
5.5 Credit Approval Process
5.6 Credit Risk Management
5.7 Credit Recovery
5.1. Credit Mission Statement

To provide credit facilities to customers of Janata Bank Limited with care and
competence and institute Janata Bank Ltd. as the ideal credit service provider in the
country in terms of wide range of credit products, competitive price, adherence to credit
norms, exercising due diligence and effective management of risk assets.
5.2. Credit Policy Guidelines

The credit policy guidelines of Janata Bank Limited include the following:
4.2.1 Credit principles
4.2.2 Credit Portfolio mix
4.2.3 Products and services of Janata Bank Ltd
5.2.1 Credit Principles in Janata Bank Limited

The credit division of Janata Bank Ltd is guided by 10 specific credit principles. They are
as follows:
i) Evaluate borrower's nature for reliability and keenness to pay.
ii) Evaluate borrower's loan settlement capability.
iii) Develop action plans for the likelihood of non-payment.
iv) Extension of credit in satisfactorily controllable risk areas.
v) Guarantee self-directed participation of the credit officials in the credit
extension process.
vi) Perform the credit process in an ethical manner.
vii) Be proactive in recognizing, administering and conveying credit risk
viii) Janata Bank Ltd. requirements must be followed in ensuring the credit
exposures and operations.
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ix) Try to achieve an acceptable equilibrium between risk and reward.

x) Construct and sustain a diversified credit portfolio.
i) Evaluate borrower's nature for reliability and keenness to pay
A borrower's capacity and commitment to repay a loan are two important factors to a
bank. In this respect, the bank has to examine the customer's records and background in
his former credit / loan related dealings. The bank should not engage itself into any
commitment where there is potential threat and in these cases the bank the bank should
be prepared for some exit plans.
ii) Evaluate borrower's loan settlement capability
The loan servicing capacity of the borrower is an essential factor that has to be assessed
by the bank prior to the extension of any credit facilities. For this purpose, financial
techniques and procedures can be used by the bank. The bank should examine the
customer's reason for borrowing, major modes of repayment, historical and projected
financial information, industry and competitive position, managerial skills, information
source and systems, borrower's operational efficiency, cyclical fluctuations in operations,
supply and distribution position.
iii) Develop action plans for the likelihood of non-payment
Any kind of loan carries the possibility of default and thus it is very important for the
bank to assess the secondary and tertiary modes of repayment along with the primary
source. For this purpose, the bank should consider the security value, value impairment
conditions, should define and document the terms and conditions of loan and ensure
effective assessment.
iv) Extension of credit in satisfactorily controllable risk areas
To avoid any potential adverse situation, the bank should engage itself only in those areas
where it can effectively manage and handle the transaction risk as well as the entity or
business risk. In this regard, the bank has the responsibility toward developing and
maintaining a productive and efficient relationship with the borrower.
v) Guarantee self-directed participation of the credit officials in the credit
extension process
The independent credit participation of the credit officials is desired since it can aid in
achieving the benefits of synergy and accountability. The credit personnel should utilize
his or her personal skill and ability in determining the credit worthiness of the borrower
and should convey all positive and negative information in time of seeking credit
approval.
vi) Perform the credit process in an ethical manner
Any kind of unethical and illegal behavior, speculation, conflict of interests is prohibited
in Janata Bank Ltd. Customer related information should be kept confidential.
vii) Be proactive in recognizing, administering and conveying credit risk
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The bank has to be proactive in identifying the state of the borrower's after disbursement
performance. Regular monitoring of the accounts, prompt reporting of material
deterioration, utilizing Early Warning System (EWS), adjusting of lending terms and
conditions are also important factors to be confirmed.
viii) Janata Bank Ltd. requirements must be followed in ensuring the credit
exposures and operations
Bank's guidelines, requirements and internal directives must be complied with. The
Relationship Manager must exercise his or her judgment in unforeseen circumstances.
ix) Try to achieve an acceptable equilibrium between risk and reward
The bank should be compensated for the risk it takes. Therefore, an appropriate as well as
competitive pricing strategy has to be followed. Credit exposure, loan period, security,
credit structure etc. should be arranged in accordance with the bank's policies and
guidelines keeping the risk return priorities in view.
x) Construct and sustain a diversified credit portfolio
Undiversified investment can expose the bank to industry specific risk. Therefore, Janata
Bank Ltd. has to adhere to its policy about sectoral allocation of portfolio, maintain
approved ceiling for single borrower, and accurately identify risk characteristics of each
exposure.
5.2.2 Credit portfolio mix

• Trade finance------------------------------------ xx %
• Industry- Short term working capital -------- xx %
• Retail and SME --------------------------------- xx %
• Project- Finance medium and long term ----- xx %
• Others --------------------------------------------- xx %
5.2.3 Products offered by Janata Bank Ltd

Secured Overdraft General purpose
(SOD) 100% cash covered
12 months period
Overdraft (OD) General purpose
12 months period
Time loan Against security or collateral
To finance inventory / receivables
12 months
Term loan Against fixed assets
Over 12 months
Maximum 7 years
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Packing Credit Against export LC and export order

180 days
Payment against Against sight LC
document (PAD) 21 days
Loan against trust Against import LC
receipt (LATR) 180 days
Cash credit (Hypo) To finance inventory
12 months
Local documentary To purchase discount against local usence LC
bill purchased 180 days
(LDBP)
Foreign To purchase discounted export document
documentary bill 45 / 180 days
purchased (FDBP)
Sight LC For imports
12 months
Back to back LC & For import of raw materials and accessories for subsequent
Acceptance export
Maximum 180 days
Letter of Guarantee For contractual obligations
Specific period
Table 3: Products offered by JANATA BANK LTD
Source: JANATA BANK LTD credit policy
5.3. Credit Assessment
Before extension of loans, a comprehensive credit risk appraisal is done and annual
reviews are made. A credit memorandum (CM) is prepared by the Relationship Manager
(RM) which includes the findings of such assessment. The RM used to be the owner of
the customer relationship and he / she is held responsible for complying with all the
policies and guidelines of Bangladesh bank, bank laws, Janata Bank Ltd. policies and
guidelines etc.
The credit assessment procedure can be segregated into three segments:
5.3.1 Call report

5.3.2 Credit Memorandum
5.3.1 Call report

At the time inception of a relationship, the relationship manager tries to gather more and
more information about the client. He / she sometimes visit the business premises to get
an idea about the financial and operational condition of the prospective client. The market
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reputation, competitive position etc. are also duly assessed. Branch manager along with
the relationship manager is also connected in this process. These initial visits or enquiries
are referred to as 'calls'.
Based on the findings of such calls, RM and the branch manager send a call report to the
Head of Marketing, Head of Credit and Managing Director for initial review.
The call report contains some basic information about the client such as:
a) Client's background
b) Business
c) Market share
d) Reliability
e) Credit exposure
f) Existing banking relationships
g) Credit requirements
h) Pricing of the proposed credit facility
5.3.2 Credit Memorandum (CM)

If the Head Office conveys positive sign for a call report, then only the branch RM goes
for preparing a CM. The preparation of CM includes the in-depth analysis of credit risk
factors, critical assessment of the client in the light of credit policy guidelines of the
bank. Then it is sent to the Head of Marketing to enclose the necessary recommendations
and to commence the credit approval process. The CM has to be accompanied with all the
required legal documents and the financial information of the prospective client.
The CM generally contains the followings:
a) A specific control number and base number for each client.

b) The credit risk grading score.
c) The authorization for the approval process.
d) The description of the proposed facility.
e) Rationale behind the loan extension.
f) Financial information of the client mainly the income statements for the
past years, earnings forecasts in normal and adverse conditions.
g) Forecasted earnings from the relationship to be established.
h) Lending agreement.
i) Compliance of the policies and guidelines of Bangladesh Bank and Janata
Bank Ltd.
Most of the times CM also contains the followings:
a) Facility Plan
b) Security Schedule
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c) Security Assistance
d) Payment
e) Lending Covenants
f) Risks and Mitigates
g) Visit and Inspection
h) Repayment
The CM also contains the assessment of the following areas:

a) Borrower analysis
The majority shareholders, management team and group or affiliate companies are
assessed. Any issues regarding lack of management depth, complicated ownership
structures or intergroup transactions are addressed, and risks mitigated.
b) Industry Analysis
The key risk factors of the borrower’s industry are assessed. Any issues regarding the
borrower’s position in the industry, overall industry concerns or competitive forces are
addressed and the strengths and weaknesses of the borrower relative to its competition
are identified.
c) Supplier/Buyer Analysis
Any customer or supplier concentration is addressed, as these could have a significant
impact on the future viability of the borrower.
d) Historical Financial Analysis
An analysis of a minimum of 3 years historical financial statements of the borrower is
presented. Where reliance is placed on a corporate guarantor, guarantor financial
statements are also analyzed. The analysis addresses the quality and sustainability of
earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash
flow, leverage and profitability are analyzed.
e) Projected Financial Performance
Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s
future financial performance is provided, indicating an analysis of the sufficiency of cash
flow to service debt repayments. Loans are not granted if projected cash flow is
insufficient to repay debts.
f) Account Conduct
For existing borrowers, the historic performances in meeting repayment obligations
(trade payments, cheques, interest and principal payments, etc) are assessed.
g) Adherence to Lending Guidelines
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Credit Applications clearly state whether or not the proposed application is in compliance
with the bank’s Lending Guidelines. The Bank’s Head of Credit or Managing
Director/CEO approve Credit Memorandum that does not adhere to the bank’s Lending
Guidelines.
h) Mitigating Factors
Mitigating factors for risks identified in the credit assessment are identified. Possible
risks include, but are not limited to: margin sustainability and/or volatility, high debt load
(leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion;
new business line/product expansion; management changes or succession issues;
customer or supplier concentrations; and lack of transparency or industry issues.
I) Loan Structure
The amounts and tenors of financing proposed are justified based on the projected
repayment ability and loan purpose. Excessive tenor or amount relative to business needs
increases the risk of fund diversion and may adversely impact the borrower’s repayment
ability.
j) Security
A current valuation of collateral is obtained and the quality and priority of security
being proposed are assessed. Loans are not granted based solely on security. Adequacy
and the extent of the insurance coverage are also assessed. (Janata Bank Ltd. credit
policy, 2005)
5.4. Credit Risk Grading

According to Bangladesh Bank guidelines, all Banks should adopt a credit risk grading
system. Therefore, Janata Bank Ltd. has duly implemented a credit risk grading policy in
its credit risk assessment program. The system defines the risk profile of borrower’s to
ensure that account management, structure and pricing are commensurate with the risk
involved.
(Focus Group on Credit Risk Management, (2005), Credit Risk Management: Industry
Best Practices, Managing Core Risks of Financial Institutions, Bangladesh Bank)
Risk grading is a key measurement of a Bank’s asset quality. All facilities are assigned a
risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower
and its facilities are immediately changed. Credit Memorandum includes a clear
statement of the borrower's risk grade.
Janata Bank Ltd. applies the following credit risk grading matrix as provided by
Bangladesh Bank guidelines.
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Risk Rating Grade

Superior – Low Risk 1
Good – Satisfactory Risk 2
Acceptable – Fair Risk 3
Marginal - Watch list 4
Special Mention 5
Substandard 6
Doubtful and Bad 7
(non-performing)
Loss 8
(non-performing)
Source: (Focus Group on Credit Risk Management, (2005), Credit Risk Management:
Industry Best Practices, Managing Core Risks of Financial Institutions, Bangladesh
Bank)
If any facility is to be downgraded, the RM prepares The Early Alert Report and it is duly
forwarded to the higher authority for approval. After approval, the report is forwarded to
Credit Administration, who is responsible to ensure the correct facility/borrower Risk
Grades are updated on the system.
5.5. Credit Approval Process

Before commencing the credit approval process, a proper credit analysis is done through
Credit Memorandum. No credit facility may be approved unless a satisfactory
presentation package has been prepared. Prior to securing the requisite approval, the
authority ensures due diligence that:
a) The Bank is in possession of all credit information required to properly evaluate
the risk being undertaken.
b) A detailed credit analysis has been completed, to include a written analysis of the
financial condition of the borrower.
c) The proposed extension of credit fully meets the standard of purpose, quality etc.
d) The Board of Investment Registration, permission for all regulatory bodies, clean
CIB reports etc. are obtained.
In the approval process, the bank segregates its relationship management from the
approving authority. All the facilities offered by the branch must be approved from the
Herd of Credit Committee.
5.5.1 Sanction Advice
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After the facility has been approved, the credit officers of the branch prepare a sanction
advice which is addressed to the client. It is a kind of formal letter addressed to the client
that provides information regarding the amount of the loan, its purpose, tenor, interest,
security details, insurance coverage and other specific and general conditions applicable
to the client.
A sanction advice contains the following information:
a) Address of the client
b) Subject
c) Facility type
d) Review / repayment date
e) Security details
f) Insurance coverage
g) Specific conditions
h) General conditions
i) Other conditions and covenants
A sanction advice is accompanied with the necessary legal documents. These documents
may include:
a) Demand promissory note
b) Letter of agreement
c) Letter of continuity
d) Letter of revival
e) Letter of disbursement
f) Letter of hypothecation with supplementary documents
g) Registered deed of mortgage
h) Letter of guarantee
i) Registered power of attorney etc.
5.6. Credit Risk Management
The credit risk management process of Janata Bank Ltd. has the function of consistent
monitoring of the transactions within approved limits and recovering the bank's dues in
time. The key responsibilities of the credit risk management process are as follows:
a) Oversight of the bank’s credit policies, procedures and controls relating to all
credit risks arising from corporate/commercial/institutional banking, personal
banking, & treasury operations.
b) Oversight of the bank’s asset quality.
c) Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize
recovery and ensure that appropriate and timely loan loss provisions have been
made.
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d) To approve (or decline), within delegated authority, Credit Applications

recommended by RM. Where aggregate borrower exposure is in excess of
approval limits, to provide recommendation to MD/CEO for approval.
e) To provide advice/assistance regarding all credit matters to line
management/RMs.
f) To ensure that lending executives have adequate experience and/or training in
order to carry out job duties effectively.
(Focus Group on Credit Risk Management, (2005), Credit Risk Management:
Bank)
The credit risk management process of Janata Bank Ltd. includes the following
operations:
5.6.1 Loan Administration
5.6.2 Credit Monitoring
5.6.1 Loan Administration

The main responsibilities performed by the loan administration department are as
follows:
a) To ensure that all security documentation complies with the terms of approval and
is enforceable.
b) To monitor insurance coverage to ensure appropriate coverage is in place over
assets pledged as collateral, and is properly assigned to the bank.
c) To control loan disbursements only after all terms and conditions of approval
have been met, and all security documentation is in place.
d) To maintain control over all security documentation.
e) To monitor borrower’s compliance with covenants and agreed terms and
conditions, and general monitoring of account conduct/performance.
Bank)
5.6.1.1 Documentation
Credit administration department ensures the following in connection with
documentation:
a) All approvals and documents are in place.
b) Documents are prepared in accordance with the approved terms and conditions
and are legally enforceable
c) Vetting of required documents is done.
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Janata Bank Limited
Bangladesh
d) Protection of the bank's security interest.

e) Any exception from the standard loan facility is duly authorized from the Head of
Credit.
5.6.1.2 Disbursement
The loan administration department performs the following responsibilities in connection
with the disbursement to ensure that:
a) All standard security and charge documents are in place.
b) Documentation check list has been prepared.
c) Credit administration department has duly authorized the disbursement.
d) Disbursement authorization form is documented as an evidence of document.
e) A proper back up of all the documents is maintained in the computer system.
f) Incomplete documentation has received temporary waiver from the authority.
g) Pricing of the facility is appropriate.
h) All disbursements / drawings are in the form of approved credit facility.
i) Excess over limit are allowed under pre-fact approval.
j) A clean updated CIB report is obtained before disbursement.
k) The lending cap of the bank is duly maintained. (Janata Bank Ltd credit policy)
5.6.2 Credit Monitoring
To minimize credit losses, monitoring procedures and systems are in place that provides
an early indication of the deteriorating financial health of a borrower. Credit monitoring
process at Janata Bank Ltd tries to monitor the following:
 Past due principal or interest payments, past due trade bills, account excesses, and
breach of loan covenants
 Loan terms and conditions are monitored, financial statements are received on a
regular basis, and any covenant breaches or exceptions are referred to CRM and
the RM team for timely follow-up.
 Timely corrective action is taken to address findings of any internal, external or
regulator inspection/audit.
Bank)
5.6.2.1 Branch Monitoring

Credit monitoring activities in the branch performs the following responsibility:
a) Monitor transactions in accounts to ensure turnover and utilization of limits.
b) Thoroughly review all past dues, collateral short fall, covenant breach and other
irregularities.
c) Rectify all audit objections and follow their suggestions.
[44]
Janata Bank Limited
Bangladesh
d) Periodic client calls and review by branch head.

e) Formal periodic review of all relationships.
f) Factory visit / stock inspection and progress of work against work /
implementation of projects are to be recorded and reviewed.
g) Borrower to be communicated about past dues, over due installments, expiry of
insurance, guarantee, limits etc.
h) Early alert reports are prepared within 7 days of identification of weakness in the
business and financial weakness of the client and sent to Head Office Loan
Administration.
5.6.2.2 Loan Review Committee:
The IT system of Janata Bank Ltd produces overdue positions on 3 periods viz. 30 days,
60 days and 90 days and above. It also produces expired limits and excess over limits
(EOLs). The loan MIS are duly distributed to branches, HOM, HOC, HOO, HOCA and
MD. A designated loan admin officer follows up the position on a daily basis. Besides,
the loan review committee of the bank formally follows up the overdue positions, expired
limits and EOL with the branches on a monthly basis which is minute for taking actions
at the earliest, before the account further deteriorates.
5.6.2.3 Early Alert Process:
An Early Alert Account is one that has risks or potential weaknesses of a material nature
requiring monitoring, supervision, or close attention by management. If these weaknesses
are left uncorrected, they may result in deterioration of the repayment prospects for the
asset or in the Bank’s credit position at some future date with a likely prospect of being
downgraded to CG 5 or worse (Impaired status), within the next twelve months. Early
identification, prompt reporting and proactive management of Early Alert Accounts are
prime credit responsibilities of all Relationship Managers and must be undertaken on a
continuous basis.
An Early Alert report is completed by the RM and sent to the approving authority in
CRM for any account that is showing signs of deterioration within seven days from the
identification of weaknesses. The Risk Grade is updated as soon as possible.
Despite a prudent credit approval process, loans may still become troubled. Therefore, it
is essential that early identification and prompt reporting of deteriorating credit signs be
done to ensure swift action to protect the Bank’s interest.
5.7 Credit Recovery

The credit division performs the following recovery related functions:
[45]
Janata Bank Limited
Bangladesh
a) Directly managing accounts with sustained deterioration (a risk rating of sub

standard or worse)
b) Determining work out plan / Recovery strategy.
c) Pursuing all avenues to maximize recovery, including placing customers into
receivership or liquidation as appropriate.
d) Ensuring adequate and timely loan loss provisions are made based on actual and
expected losses.
e) Keeping top management appraised of grade 6 or worse accounts.
Chapter-6
RECOMMENDATIONS AND
CONCLUSIONS
[46]
Janata Bank Limited
Bangladesh
Janata Bank Limited
6.1 Findings
Every bank has its own credit procedure. Bank under study possesses a standard credit
procedure. As the objective of my study is to make a comment on the Credit Management
of Janata Bank Limited, I try my best to collect data for the study and find out the reality.
Based on the data generated during my study period I will sum up my findings here and I
think this will help me to achieve my objectives.
 If we look at historical background of Janata Bank Ltd, we can see that, the
objective of JB is to earn profit as well as to improve the economic welfare of the
people as a whole.
 Janata Bank Limited has a significant role in long term project financing in both
agriculture and industrial sectors. Again Janata Bank Ltd has a deep concern for
rural farmers. Private sector usually concentrates in the urban areas where as
public sector i.e. Janata Bank Ltd spread their banking network all over the world.
 With a view to implementing government policies, Janata Bank Ltd has been
maintaining its position in extending credit to government bodies, sector
corporations and private enterprises.
 According to the standard and bank’s credit procedure, credit operation is started
from the customer application to the branch for the loan. But in most cases, many
customers go directly to the directors of the bank and directors send them to the
branch offices with his/her reference. In these cases, proper appraisal is not
possible as directors the most powerful persons and bank management must give
priority towards the decision of the directors. This phenomenon is very common
in the bank which hampers the spontaneous procedure of credit appraisal.
 Bangladesh Bank monitors all the policies of all the private and nationalized
banks of the country. According to the Bangladesh Bank’s strategy, all banks
[47]
Janata Bank Limited
Bangladesh
must possess the standard policies which are designed by the central bank. Janata
Bank Limited also possesses a standard credit proposal form. In that form all
necessary information are required to fill up. But in practice credit officers do not
fill up the proposal form properly. Most of the cases, they use assumption rather
than exact figure. This practice might end up with bad or classified one.
 A standard policy starts from the customer’s direct application for the loan in the
branch office. But it’s a common phenomenon that most of the customers directly
contact with Head office and Head office choose the branch offices to disburse
the loan. It hampers the normal procedure. Branches always stay under pressure
when they get order for disbursement from Head office. When branches get order
from the head office, then appraisal system loses its formal track. So Head office
should not send any order to the branch office without prior appraisal.
 Every bank has its own budget and plan regarding loan portfolio. This loan
portfolio must be diversified so that bank could diversify its risk. A proper and
preplanned portfolio can eliminate the risk of huge classified loan or bad loans as
this aspect is very much sensitive toward many external and internal factors. The
bank under study i.e. Janata Bank Limited does not have any proper guide line
where to invest; moreover they do not do any future plan to maintain a well
structured portfolio to decrease the possibility of classified loan. This type of
practice is working as an obstacle in smooth credit disbursement as well as in
credit appraisal system.
 Janata Bank Ltd distributes loans without sufficient security in some cases. This is
violation of the Bangladesh bank order.
 In many cases bank face this problem because bank’s credit officer fails to value
collateral property. Proper valuation means collateral will exactly cover the risk of
bad loan. Officials must do it with due care.
 The recovery performance of Janata Bank Ltd is not in a satisfactory level at all
and the position of those in that respect deteriorated heavily during last two
phases. The recovery performance in agriculture is worse than in other sectors. On
the other hand, as private sector banks distribute more loans on short term basis
and relatively better than public sector. But if we compare it from the efficiency
point, then it is clear that they are not still efficient in credit management as they
are unable to recover half of their distributed loan in different sectors.
 Janata Bank Ltd does not keep enough provisions against classified loans and
advances.
 Private sector banks are relatively efficient in processing and executing legal
actions against defaulters for their nonpayment of loans and advances in due time
that of public sector bank.
[48]
Janata Bank Limited
Bangladesh
 The Credit Management of Janata Bank Ltd is not fully conformity with the
guidelines prescribed in the Bank Companies Act 1991 and International
Accounting Standard-30(IAS-30).
6.2 Conclusions
During the two months internship program at Janata Bank Limited, Alubazar Branch,
almost all the desks have been observed more or less. This internship program, at first,
has been arranged for gaining knowledge of practical banking to compare this practical
knowledge with theoretical knowledge. Comparing practical knowledge with theoretical
involves identification of weakness identified. Though all departments and sections are
covered in this program, it is not possible to go to the depth of each activities of branch
because of time limitation. However, highest effort has been given to achieve the
objectives the internship program.
I have discussed so far about the different aspects of Credit Management Process of
Janata Bank. For my report, I have selected Janata bank. JB plays an important role in the
banking sector as well as in our economy. The success of a bank depends largely on the
efficient credit management. A successful credit management is not only need for a
bank’s own performance but also it is needed for the smooth development of an
economy. In any strategy of economic development, therefore, it is essential to
emphasize the evaluation of a sound and well integrated credit management system from
the view point of both resources mobilization and efficient allocation of funds. Janata
Bank Ltd, Alubazar Branch is playing an important role in the banking system and in the
payment system of Bangladesh.
6.3 Recommendations
 Central bank should take proper actions for ensuring equivalent distribution of
loan and advances..
[49]
Janata Bank Limited
Bangladesh
 Lending policies in our country should be geared to growth potential rather than
being determined by the pre-existing collateral.
 Changes in lending policies will not suffice the purposes unless it is followed by a
change in the attitude and outlook of both the borrowers and the bankers.
 Improvement of credit management depends on the development of relevant,
adequate, proper and reliable data base at the public sector banks as well as
private sector banks in Bangladesh.
 For developing a reliable credit management system for the commercial banks
specially Janata Bank, it should require to introduce as improved information
system within bank as well as among the borrowers. Because ultimately it is what
a borrower does with money that should guide the credit plan, the borrowers also
have to know exactly where they are going, what their opportunities and how fast
they can move.
 The security must be valued properly by the independent values and constantly
watched so that the value of mortgage property becomes sufficient to recover the
default loan.
 Publishing the names of defaulter as well as good and regular payers in various
dailies and granting various sorts of facilities to good borrowers will create a
moral persuasion on the borrowers. This may decrease the number of defaulters
and the volume of large outstanding loan amounts as well.
 Pressure from outsider and influence extorted by borrowers are also a great
impediment in the smooth functioning of loan recovery process. The role of
government in this case is the most important factor required to solve these sorts
of problem.
 More and more competent personnel must be recruited to reduce the weakness of
credit management. Competent executives will ensure the reduction of wrong
appraisal and evaluation of projects.
 Prompt legal actions be taken against willful loan defaulters
 The new entrepreneurs should be encouraged in disturbing loans and those who
have the records of regular payment, should be given preference.
 Steps should be taken so that guarantors cannot avoid their responsibility.
 It is observed that the defaulters generally get various sorts of exemptions as
declared by the government from time to time. Government must not show any
kind of mercy to the defaulters in any way which may encourage the default
culture. This type of action may discourse the borrowers to become willful
defaulters.
 The existing huge amount of classified loans demand for special and corrective
attention for example:
[50]
Janata Bank Limited
Bangladesh
o By obtaining suitable reduction on amount.

o Additional security.
o More complete financial data concerning the obligor’s condition or
o Other such action as the specific circumstances may require.
 The attempt to encourage banks to require borrowers comply with banking laws
and regulations and clear up industrial properties prior to granting a loan.
 Janata Bank should follow some straight ward mechanical procedures in assessing
the risk of a borrower.
 The formulation of a sound credit policy in the possibility of default loans.
 The formulation of a sound credit policy in the banking sector as a whole has to
take into account all these factors and each bank has to attempt to work out for
itself what it is capable of doing so as best as possible.
References
1. Annual reports of Janata Bank Limited and Bangladesh Bank.

2. Several booklets from Janata Bank limited.
3. Several newsletters from Janata Bank Limited.
4. Website: www.janatabank-bd.com; 1/1/14; 8:00PM
5. Practical participation of JBL
6. Different Types of Forms of JBL
7. Managing Core Risk in Banking: Credit Risk Management, Janata Bank, Head
Office, Dhaka.
Appendices-A: Abbreviations
A/C Account
AGM Annual General Meeting
ATM Automated Teller Machine
BB Bangladesh Bank
[51]
Janata Bank Limited
Bangladesh
BAB Bangladesh Association of Banks

CC Cash Credit
CIB Credit Information Bureau
DD Demand Draft
EXP Form Export Form
IMP Form Import Form
JBL Janata Bank Limited
L/C Letter of Credit
PO Pay Order
TIN Tax Identification Number
TT Telegraphic Transfer
CM Credit Memorandum
CRM Credit Risk Management
Appendices-B: Questionnaires
Dear Respondents,
This is a questionnaire designed to collect data on the credit risk management and its
impact on bank performance which will be used as an input for a report in a partial
fulfillment of BBA degree in Management Studies. Your genuine response is solely used
for academic purpose and the data will be treated utmost confidentiality. Therefore, your
kindly cooperation is appreciated in advance.
Responses to this questionnaire will be used to develop general findings and conclusions
without specific reference to institutions, clients or credits, except where information may
be independently available in the public domain or where permission has been granted
approval.
I assure you that your personal details will be held confidential. Thank you!
Personal Information:
Full Name: ______________________________________________________________
[52]
Janata Bank Limited
Bangladesh
Nationality: ___________________________Profession: _________________________
Contact Details: Office: ________________ Mobile: _______________________
Which best describes your position in the bank?

o Board Member
o Senior Executive
o Manager
o Head of department
o Risk Officer
o Others_______________________
Specific Questions:
1. How many years of experience do you have working with bank and I the area risk
management?
o Less than 1 year
o 1-5 years
o 5-10 years
o More than ten years
2. What is your expectation from effective credit risk management in your
organization? (You can use more than one answer)
o Reduce financial loss
o Improve communication with the stake holders
o Improve decision making
o Improve resource allocation
o Other (please specify)
3. Who has the authority to establish credit risk management in policy or procedure
your organization?
o Chief executive officer(CFO)
o Chief financial officer(CFO)
o Board/ committee
o Executive management committee
o Internal auditor
o Staff
o Other(please specify)
[53]
Janata Bank Limited
Bangladesh
4. Does your organization have a documented credit risk management guideline or

policy?
o Yes
o No
5. Does the guideline support the goals and objectives of credit risk management?
o Yes
o No
6. Do you understand the credit risk management guideline or policy?
o Yes
o No
7. How often does your organization change its guidelines or policies to manage
risks?
o Once per year
o Once per two years
o Once in more than two years
o Never
8. In the future, does your organization have a policy to support the development of
credit risk management?
o Yes
o No
9. Does your organization offer training for employees?
o Yes
o No
10. How does your organization effectively communicate to reduce credit risk?(you
can choose more than one answer)
o Creating clear and trustworthy information
o Developing understanding between management team and employee
o Fast and sharp communication between management team and
stakeholders
o Regularly communicating among management and staff
[54]
Janata Bank Limited
Bangladesh
o Creating and maintaining a clear communication

o Other (please specify)
11. How often does your organization provide credit risk management training
courses?
o Never
o 1 times per year
o 2 times per year
o More than 2 times per year
12. Does your organization have established procedures for keeping up-to-date and
informed with changes in regulations?
o Yes
o No
13. Do the bank uses Altman Z score for credit evaluation?
o Yes
o No
14. Does the bank have internal credit rating system?
o Yes
o No
15. What challenges you face in credit risk management?
16. What are the major kinds of method or process used by the bank in the
management of credit risk?
[55]
Janata Bank Limited
Bangladesh
17. How it is suitable for your bank?
Thank you very much for your patient!
[56]

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Janata Bank Limited

Janata Bank Limited

1.2 Statement of the Problem

The principal concern of this report is to assess

 What is the credit structure of Janata Bank Limited?

1.4 Rationale of the Study

1.5 Objectives of the Report

► To represent the “Credit Management” of Janata Bank Limited.

► To assess the credit structure of the bank in practice.

► To find out problems and suggesting recommendations for further

1.6 Scope of the Study

1.7 Methodology of the Study

A) Data Collection Procedure:

The “Primary Sources” are as follows:-

The “Secondary Sources” are as follows:-

• Periodicals Published by Bangladesh Bank

b) Data Processing & Analysis:

1.8 Limitations of the Study

AN OVERVIEW OF JANATA BANK

Janata Bank Limited

2.1 History of Janata Bank Ltd.

2.2 Company profile

Name of the company Janata Bank Limited

1 ABU DHABI 2 SHARJAH 3 DUBAI 4 AL-AIN

2.3 Governing Body and Management

2.4 Vision of Janata Bank Ltd.

To become the effective largest commercial bank in Bangladesh to support socio-

2.5 Mission of Janata Bank Ltd.

The mission of the bank is to be an effective commercial bank by maintaining stable

2.6 Organizational Structure

Deputy Managing Director

Deputy General Manager

Assistant General Manager

First Assistant General

Senior Executive Officer

Assistant Executive Officer

2.7 Departments of Janata Bank Ltd.

Besides above divisions there are also some divisions like:

Common Division Marketing &Development Division

Janata Bank Limited

3.1 What is Credit?

3.2 What is Credit Risk?

3.3 What is Credit Risk Management?

3.4 Functions of Credit Risk Management

3.4.1. Identification of Risk

Two main methods are used to measure unexpected losses today:

3.4.4. Planning and Management

3.5 Objectives of Credit Risk Management

 Risk Reduction: Credit risk management satisfies it primary objective of risk

 Internal Communication: Credit risk management must provide internal

 Customer Services: Providing good service is necessary to retain customers. The

 Departmental Coordination: Another objective of credit risk management

3.6 Tools Used to Manage Credit Risk in International Finance:

 Risk-Reward Ratio: Risk-Reward Ratio compares the potential profit of an

3.7.1 Limit Structure

Graph 1: Responsibilities in case of excess over limit

Source: (Credit Approval Process and Credit Risk Management, 2005)

3.8 Credit Risk Management Process

3.8.1 Credit processing/appraisal

Financial institutions usually require collateral or guarantees in support of a credit in

 performance of the borrower in any credit previously granted by the financial

Graph 2: Credit Approval Process

3.8.3 Credit Documentation

Nationality: ___Profession: _

Contact Details: Office: Mobile: _______