A Term Paper

On

Submitted To

Mr. MA Taleb

Professor

Department of Banking and Insurance

University of Dhaka

Submitted By

M.M. Azizur Rahman

Roll No: 164

MBA (Banking) 16th

Batch

Department Of Banking and Insurance

University of Dhaka

Date of Submission: December 23, 2014

Prepared By

M.M. Azizur Rahman

Id No: 16-037

MBA (Banking) 16th

Batch

Department Of Banking and Insurance

University of Dhaka

Dhaka, Bangladesh

Date of Submission: December 23, 2014

Acknowledgement

Its a great pleasure for me to work with the report based on a topic Credit Risk Grading & its

Compliance in the Banking Sector which is very much significant for the banking companies. I hope

working on this topic will help me to gather various exposures to practical field. So, at the very

beginning, I would like to express my gratitude to almighty Allah for whose kindness I am sound

mentally and physically enough to prepare this report.

I would like to thank my faculty supervisor, Mr. MA Taleb, Professor, Department of Banking and

Insurance, University of Dhaka for his valuable direction and guidelines for which I have been able to go

through the in depth of the topic.

Finally, I would like offer a special thank to Mrs. Dipti Rani Hazra, Joint Director, Bangladesh Bank,

Head Office and Mr. Fazlul Karim, Assistant Director, Head Office, Bangladesh Bank.

December 23, 2014.

Mr. MA Taleb

Professor,

Department of Banking and Insurance,

University of Dhaka.

Subject: Submission of Term Paper.

Dear Sir,

Here is the term paper on Credit Risk Grading & its Compliance in the Banking Sector that You

asked to submit on 23rd

December, 2014.

This report reveals the credit risk grading manual issued by the Bangladesh Bank, the controller of all the

scheduled and non-scheduled banking and financial institution and makes a practical example on the

Janata bank limited. In the preparing the practical example, I found some significant shortcomings of the

credit risk grading. But, still I conclude that Janata Bank Limited has less credit risk compare to the

banking industry in Bangladesh.

I have tried my best within my limitations to make this report presentable, information worthy. I really

enjoyed working on this topic, and I hope that you will consider all of my faults generously. If any

question arises regarding this report, I will be available for clarification.

Yours Sincerely

M.M. Azizur Rahman

Roll No: 164

MBA (Banking) 16th Batch

Department of Banking and Insurance

University of Dhaka.

Table of Contents

Topics Page No.

Chapter One : Introduction 01-05

1.1. Preface 02

1.2. Origin of the Report 03

1.3. Rational of the Report 03

1.4.Purpose of the Report

1 .4. (a). General Purpose

1.4. (b). Specific Purpose

03

03

04

1.5.Corporate Profile of JBL 05

Chapter Two: Literature Review 06-10

Chapter Three: Methodology 11-14

3.1. Data Sources

3.1.(a).Primary Sources

3.1.(b).Secondary Sources

3.2.Analytical Tool

3.3. Limitation of the Study

12

12

12

12

12

Chapter Four: Analysis and Discussion 15-35

4.Credit Management Performance 15

4.1.Sector Wise Break-up of Loans of JBL 15

INTRODUCTION

Credit Risk Grading is an important tool for credit risk management as it helps a Bank to understand

various dimensions of risk involved in different credit transactions. The credit risk grading system is vital

to take decisions both at the pre-sanction stage as well as post-sanction stage.

At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not

to lend, what should be the pricing for a particular exposure, what the extent should be of Exposure, what

should be the appropriate credit facility and the various risk mitigation tools. At the post-sanction stage,

the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the

grading, and other precautions to be taken. Having considered the significance and necessity of credit risk

grading for a Bank, it becomes imperative to develop a credit risk grading model which meets the

objective outlined above.

DEFINITION OF CREDIT RISK GRADING (CRG)

The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects

the underlying credit-risk for a given exposure.

A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks

associated with a credit exposure.

Credit Risk Grading is the basic module for developing a Credit Risk Management system.

FUNCTIONS OF CREDIT RISK GRADING

Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed

decision-making. Grading systems measure credit risk and differentiate individual credits and groups of

credits by the risk they pose. This allows bank management and examiners to monitor changes and trends

in risk levels. The process also allows bank management to manage risk to optimize returns.

USE OF CREDIT RISK GRADING

The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a

common standardized approach to assess the quality of an individual obligor and the credit

portfolio as a whole.

As evident, the CRG outputs would be relevant for credit selection, wherein either a borrower or

a particular exposure/facility is rated. The other decisions would be related to pricing (credit

spread) and specific features of the credit facility.

Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing

the aggregate risk profile. It is also relevant for portfolio level analysis.

NUMBER AND SHORT NAME OF GRADES USED IN THE CRG

The proposed CRG scale for the banks consists of 8 categories with Short names and numbers

are provided as follows:

CREDIT RISK GRADING DEFINITION CRITERIA

1. Strength of the bank.

2. Condition of the bank.

3. Condition of franchise value.

4. Condition of operating environment.

5. Capability for timely repayment for any commitment.

6. Possibility of being adversely affected by seen or unseen events.

7. Credit facilities fully secured/partly secured/unsecured.

8. Credit facilities fully covered by government guarantee.

9. Credit facilities fully covered by top tier international/local bank

CREDIT RISK GRADING DEFINITIONS

A clear definition of the different categories of Credit Risk Grading is given as follows:

Risk Rating Grade

Definition

Superior Low Risk 1 Facilities are fully secured by cash deposits Government bonds or a counter guarantee from a top

tier international bank.

All security documentation should be in place.

Good Satisfactory Risk 2 The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low

leverage.

The company should demonstrate consistently strong

earnings and cash flow.

All security documentation should be in place.

Aggregate Score of 95 or greater based on the Risk

Grade Scorecard.

Grading Short Name Number

Superior SUP 1

Good GD 2

Acceptable ACCPT 3

Marginal/watch list MG/WL 4

Special Mention SM 5

Substandard SS 6

Doubtful DF 7

Bad Loss BL 8

Acceptable Fair Risk 3 Adequate financial condition though may not be able to sustain any major or continued setbacks.

These borrowers are not as strong as Grade 2

borrowers, but should still demonstrate consistent

earnings, cash flow and have a good track record

An Aggregate Score of 75-94 based on the Risk Grade

Scorecard.

Marginal Watch list 4 Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the

economic environment.

These borrowers have an above average risk due to

strained liquidity, higher than normal leverage, thin

cash flow and/or inconsistent earnings.

Aggregate Score of 65-74 based on the Risk Grade

Scorecard.

Special Mention 5 Grade 5 assets have potential weaknesses that deserve

managements close attention. If left uncorrected, these weaknesses may result in a

deterioration of the repayment prospects of the

borrower

An Aggregate Score of 55-64 based on the Risk Grade

Scorecard.

Substandard 6 Financial condition is weak and capacity or inclination

to repay is in doubt

Loans should be downgraded to 6 if loan payments

remain past due for 60-90 days

Not yet considered non-performing as the correction of

the deficiencies may result in an improved condition,

and interest can still be taken into profits.

An Aggregate Score of 45-54 based on the Risk Grade

Scorecard.

Doubtful

(non-performing)

7 Full repayment of principal and interest is unlikely and

the possibility of loss is extremely high.

However, due to specifically identifiable pending

factors, such as litigation, liquidation procedures or

capital injection, the asset is not yet classified as Loss.

The adequacy of provisions must be reviewed at least

quarterly on all non-performing loans, and the bank

should pursue legal options to enforce security to

obtain repayment or negotiate an appropriate loan

rescheduling.

In all cases, the requirements of Bangladesh Bank in

CIB reporting, loan rescheduling and provisioning

must be followed.

An Aggregate Score of 35-44 based on the Risk

Grade Scorecard

Bad & Loss

(non-performing)

8 Assets graded 8 are long outstanding with no progress

in obtaining repayment (in excess of 180 days past

due) or in the late stages of wind up/liquidation.

The prospect of recovery is poor and legal options

have been pursued.

The proceeds expected from the liquidation or

realization of security may be awaited. The

continuance of the loan as a bankable asset is not

warranted

An Aggregate Score of 35 or less based on the Risk

Grade Scorecard

HOW TO COMPUTE CREDIT RISK GRADING OF A BANK

Step I: Identify all the Principal Risk Components (Quantitative & Qualitative)

Credit risk for counterparty may be broadly categories under Quantitative and Qualitative factors

which arise from an aggregation of the following:

QUANTITATIVE FACTOR:

Capital Adequacy

Asset Quality

Earnings Quality

Liquidity and Capacity of External Fund Mobilization

Size of the Bank & Market Presence

QUALITATIVE FACTOR:

Management status

Regulatory Environment & Compliance

Risk Management

Sensitivity to Market Risk

Ownership (Share holding pattern) & Corporate Governance

Accounting Quality

Franchise Value

Step II: Allocate weightages to Principal Risk Components

According to the importance of risk profile, the following weights are proposed for corresponding

principal risks components (Quantitative and Qualitative factors).

Principal Risk Components: Weights

QUANTITATIVE FACTOR: 60%

Capital Adequacy 15%

Asset Quality 15%

Earnings Quality 15%

Liquidity and Capacity of External Fund Mobilization 10%

Size of the Bank & Market Presence 5%

QUALITATIVE FACTOR: 40%

Management 10%

Regulatory Environment & Compliance 10%

Risk Management 5%

Sensitivity to Market Risk 5%

Ownership (Share holding pattern) & Corporate Governance 5%

Accounting Quality 3%

Franchise Value 2%

Step III: Establish the Key Parameters

Once weightages are allocated to the Principal Risk Components (Quantitative and Qualitative Factors)

the next task is to arrive at key parameters corresponding to the Principal Risk Components.

Key Parameters for Capital Adequacy

Banks plan to raise equity to support its growth (Internal Capital Generation)

Minimum Capital Adequacy Requirement (CAR) set by Bangladesh Bank

Leverage ratio of the bank is satisfactory

Dividend policy of the Bank

Key Parameters for Asset Quality

Risk Management includes exhaustive pre-approval and post approval activities

Portfolio Management System

Level of nonperforming loans

Sector from where the gross NPL are coming from

Nature of security/collateral and the frequency of valuation

Key Parameters for Earnings Quality

Level of earnings

Diversity of earnings

Return on Assets (ROA)

Return on Equity (ROE)

Average cost of fund,

Net Interest Income Margin (NIIM) trend is satisfactory

Key Parameters for Liquidity and Capacity of External Fund Mobilization

Statutory Liquidity Reserve, Cash Reserve Requirement and Loan Deposit Ratio compliance

Asset liability maturity structure

Core asset funded by core liabilities

Impact on interest rate volatility on deposit and its trend

Ability to raise fund through stable sources in cost effective manner

Key Parameters for Size of the Bank & Market Presence:

Number of branch network and employees

Level of automation

Products and services offered are regularly reviewed

Key Parameters for Management:

Quality of Management (details of Senior Management, background of MD and other top

executives)

Experience and educational background of the senior, mid level and junior management

Management Philosophy (Vision & Mission)

Human resource development plans

Quality of training being offered

Staff turnover

Emphasis to Information Technology and staff knowledge in this area

Key Parameters for Regulatory Environment & Compliance:

Policy on loan classification and provisioning

Policy on large loans

Disclosure requirement for banks

Delegation of power at operating level

Internal Control and Compliance mechanism

Status on Basel II compliance

Key Parameters for Risk Management:

Implementation of risk management in the areas of Credit Risk,

Implementation of risk management in the areas of Operational Risk

Implementation of risk management in the areas of and Market Risk

Key Parameters for Sensitivity to Market Risk

Degree to which changes in interest rates can adversely affect companys earnings

Degree to which changes in foreign exchange rates can adversely affect companys earnings

Degree to which changes in commodity prices can adversely affect companys business

Key Parameters for Ownership (Share holding Pattern) & Corporate Governance:

Ownership pattern & composition of Board (current shareholding with names of promoters)

Conflict of interest issues in the operational management

Personal policy and employee satisfaction

Application of information technology in the system

Key Parameters for Accounting Quality:

Policies for income recognition

Provisioning and valuation of investment are examined

Quality of Auditors

Key Parameters for Franchise Value:

Joint venture partner or Strategic Alliance

Management contract or Technical collaboration

Alliance/arrangement with World Bank/ADB/IFC/SEDF or awards/certification/recognition

Step IV: Assign weightages to each of the key parameters

Once the above mentioned key risk parameters are evaluated, analyzed and reviewed properly the next

step will be to further assign weightages against each key parameter depending on its strength and

merits.

Step V: Input data to arrive at the score on the key parameters

After the risk identification & weightages assignment process (as mentioned above), the next steps

will be to input actual score obtained by the Bank (under review process) against the key parameters in

the score sheet to arrive at the total scores obtained.

Step VI: Arrive at the Credit Risk Grading based on total score obtained

The following is the proposed Credit Risk Grade matrix based on the total score obtained by an

obligor (i.e. a Bank).

Risk Grading Short Name Score Grade

Superior SUP i. 85 100

ii. Credit facilities fully cash

covered (100%) or near cash.

iii. Government guarantee

iv. International Bank guarantee

1

Good GD 75 84 2

Acceptable ACCPT 65 74 3

Marginal/watch list MG/WL 55 64 4

Special Mention SM 45 54 5

Substandard SS 35 44 6

Doubtful DF 25 34 7

Bad & Loss BL < 25 8

Credit Risk Grading: A Practical Example on Janata Bank Limited

Qualitative Factor

KEY PARAMETERS Points Parameter Actual Score

Obtained

1.Capital Adequacy 15.00 11.50

Banks plan to raise equity to support its growth is acceptable

(Internal Capital Generation)

4.00

Excellent

Strong

Good

Moderate

4

3

2

1

Strong

3

Bank has maintained the

Minimum CAR set by BB

5.00

3% or more above RR

1% to 2% above RR

Required minimum ratio

1% to 2% below RR

More than 2% below RR

5

4

3

2

1

1.85 %

4

Leverage Ratio of the Bank is

acceptable

4.00

9 % or More

7 % to less than 9%

5% to less than 7%

2% to less than 5%

Less than 2%

4

3

2

1

Fair

3

Is the dividend policy of the Bank

satisfactory keeping in line with

capital adequacy requirement

2.00 Satisfactory

Acceptable

Unsatisfactory

2

1.5

1

Acceptable

1.5

2. ASSET QUALITY: 15 Points 15.00 10.00

CRM includes exhaustive pre-

approval and post -approval

process

2.00 Always

Sometimes

Never

2

1

0

Always 2

Portfolio Management System

2.00 Satisfactory

Moderate

2

1

Satisfactory

2

Unsatisfactory 0

Is level of non -performing loans

acceptable

3.00 Less than 3%

3% to5%

5% to 10%

10% to 15%

More than 15%

3

2.5

2

1.5

1

5% to 10%

2

Sector wise gross NPL 1.00 Satisfactory Moderate

Unsatisfactory

1

.5

0

Moderate .5

Sector from where the gross NPL

are coming from are periodically

reviewed

1.00 Regularly

Sometimes

Hardly

1

.5

0

Regularly

1

Are classified loans being

followed regularly with clear

action plan for recovery?

2.00 Yes

No

2

0

Regularly

Have Credit Risk Grading of

clients are in place and effective?

1.00 Always

Sometimes

Hardly

1

.5

0

Sometimes

.50

Portfolio Diversities are being

ensured by the management

1.00 Regularly

Irregularly

Not at all

1

.5

0

Irregularly .5

Nature of security/collateral are

clearly analyzed and the

frequency of valuation seems

justified

1.00 Justified

Poor

Unjustified

1

.5

0

Poor

1

Quality of non-industrial

lending are analyzed properly

and exposures are satisfactory

1.00 Satisfactory

Unsatisfactory

1

.5

Unsatisfact

ory

.5

3. EARNINGS QUALITY: 15

Points

15.00 12.00

Bank is maintaining satisfactory

growth in level of earnings

2.00 Yes

No

2

1

Yes 2

Diversity of earnings is regularly

pursued

1.00 Yes

No

1

.5

N0 .5

Growth in Return on Assets

(ROA)

2.00 Satisfactory

Moderate

Lower

2

1.5

1

Satisfactory

2

Growth in Return on Equity

(ROE)

2.00 Satisfactory

Moderate

Lower

2

1.5

1

Satisfactory

1.5

Interest Rate Management,

Interest rate policy are impacting

margin and profitability

2.00 Highly

Moderate

Low

2

1.5

1

Moderate 1.5

Non funded business prospects

and its contribution towards

earnings are regularly reviewed

for income growth

1.00 Yes

No

1

.5

Yes 1

Average cost of fund is well

under bank's established

1.00 Regularly

Sometimes

1

.5

Regularly 1

parameter and are being

monitored

Hardly .25

Average lending rates are well

under bank's established

parameter and are being

monitored

1.00 Regularly

Sometimes

Hardly

1

.5

.25

Regularly 1

Net Interest Income Margin

(NIIM) trend is satisfactory

1.00 Yes

No

1

.5

Yes 1

Yield per taka staff cost is well

under bank's control

1.00 Strong

Weak

1

.5

Weak .5

4. LIQUIDITY AND

CAPACITY OF EXTERNAL

FUND MOBILIZATION: 10

Points

10.00 9.00

Bank is complying to SLR

(Statutory Liquidity Reserve),

CRR (Cash Reserve Requirement)

and Loan Deposit Ratio

2.00 Satisfactory

Moderate

Hardly

2

1.5

1

Satisfactory 2

Asset liability maturity structure

is in place and is reviewed in

ALCO meeting.

2.00 Yes

No

2

1

Yes 2

Bank liquidity ratio is satisfactory 2.00

Yes

No

2.00

1.00

Satisfactory 2

Core asset funded by core

liabilities are been identified and

proper matching is ensured

1.00 Yes

No

1.00

.50

No .50

Bank regularly reviews the impact

on interest rate volatility on

deposit and its trend

1.00 Regularly

Irregularly

1.00

.50

Irregularly .50

Bank has the ability to raise fund

through stable sources

1.00

Capable

Failure

1.00

.50

Capable

1

Bank has the credibility of

funding sources in distress

situation

1.00

Yes

No

Yes

1.00 1

5. SIZE OF THE BANK &

MARKET PRESENCE: 5

Points

5.00 4.50

Number of branch network and

employees

2.00 Large

Medium

Small

2.00

1.50

1.00

Large 2.00

Level of automation 2.00 High

Medium

Low

2.00

1.50

1.00

Medium

1.50

Products and services offered 1.00 Regularly

Irregularly

1.00

0.50

Regularly 1.00

TOTAL QUANTITATIVE FACTOR 60.00 46.50

QUALITATIVE FACTOR

6. MANAGEMENT : 10 POINTS 10.00 7.00

Bank is viewed as a human resource based

institutions

1.00 Yes

No

1

.5

No .5

Quality of Management (details of Senior

Management, background of MD and other

top executives) is satisfactory

1.00 Satisfactory

Moderate

Unsatisfactory

1

.5

.25

Satisfactory 1.00

Experience and educational background of

the senior, mid level and junior management

is acceptable

1.00 Sufficient

Moderate

Good

1

.5

.25

Moderate .5

Management Philosophy is crystallized

through a well laid down Vision and

Mission

1.00 Yes

No

1

.5

No .5

Bank's human resource development plans

are properly documented and being properly

implemented

1.00 Always

Regular

Sometimes

1

.5

.25

Regular .5

Quality of training being offered by the bank

is acceptable

1.00 Satisfactory

Unsatisfactory

1

.5

Unsatisfactory .5

Management operating efficiency are being

calculated on the basis of earning and are

properly recognized

1.00 Yes

No

1

.5

Yes 1.00

More emphasis are placed on system &

process based banking

1.00 Yes

No

1

.5

No .5

Staff turnover rate is acceptable 1.00 Yes

No

1

.5

Yes 1

Management places emphasis on IT and

continuous enrichment of staff knowledge in

this area

1.00 Very Good

Fair

Poor

1

.5

.25

Fair .5

7. REGULATORY ENVIRONMENT &

COMPLIANCE : 10 Points

10.00 7.50

Policy on loan classification and provisioning

are in line with Bangladesh Bank

guidelines/circulars

2.00 Highly

Moderate

Low

2.00

1.50

1.00

Moderate 1.5

Policy on large loans are properly monitored

and followed per Bangladesh Bank

requirements

1.00 Yes

No

1.00

00

Yes .50

Loan against Shares, Debentures etc. are

properly approved and monitored as per

Bangladesh Bank guidelines

0.50 Yes

No

.50

00

Yes .50

Disclosure requirement for banks are handled

properly

1.00 Yes

No

1.00

.50

Yes 1.00

Delegation of power at operating level are

well defined and properly allocated

1.00 Sufficient

Negligible

1.00

.50

Sufficient .50

Instructions for compliance of provisions of

Money Laundering Prevention Act, 2002 are

properly handled at required level

2.00 Satisfactory

Moderate

Unsatisfactory

2

1.5

1

Moderate 1.5

Company has been operating satisfactorily in

complying to the regulations of BSEC and

related bodies

1.00 Excellent

Moderate

Low

1.00

.50

00

Moderate .50

Internal Control & Compliance mechanism

as per Bangladesh Bank guidelines are fully

implemented and is operative in all respect

1.00 Fully

Partially

Poorly

1.00

.50

00

Fully 1.00

Bank's effort in moving towards achieving

the way for Basel II compliance is

satisfactory

0.50 Satisfactory

Negligible

.50

00

Satisfactory .50

8. RISK MANAGEMENT: 5 Points 5.00 3.50

Is Credit Policy & Process Manual fully

implemented

2.00 Highly

Moderately

Partially

2

1.5

1

High 1.5

Implementation of risk management in the

areas of Operational Risk Management

2.00 Completely

Moderately

Partially

2

1.5

1

Moderately 1.5

Implementation of risk management in the

areas of Market Risk Management

1.00 Completely

Moderately

Partially

1

.5

.25

Moderately .5

9. SENSITIVITY TO MARKET RISK: 5

Points

5.00 3.50

Changes in interest rates substantially affect

companys earnings 2.00 Highly

Moderate

2.00

1.00

High 2

Changes in foreign exchange rate materially

affect companys earnings 2.00 Highly

Moderate

2.00

1.00

Moderate 1

Changes in commodity prices may affect

bank's business

1.00 Heavily

Lower

1.00

.50

Lower .5

10. OWNERSHIP & CORPORATE

GOVERNANCE

5.00 3.50

Ownership pattern & composition of Board 2.00 Joint

Single

2

1

Joint 2

Conflict of interest issues in the operational

management are fully analyzed

1.00 Always

Sometimes

1

.5

Sometimes .5

Personal policy and employee satisfaction 1.00 Satisfied

Unsatisfied

1

.5

unsatisfied .5

Application of information technology in the

system

1.00 Strong

Weak

1

.5

Weak .5

11. ACCOUNTING QUALITY: 3.00

Points

3.00 2.50

Policies for income recognition is

documented and properly accounted

1.00 Yes

No

1.00

0.50

Yes 1

Provisioning and valuation of investment are

properly examined

1.00 Yes

No

1.00

.50

No .5

Bank's Books of Accounts are being audited

by quality Audit Firm

1.00 Yes

No

1.00

.50

Yes 1

12. FRANCHISE VALUE: 2 Points 2.00 2.00

Joint Venture Partner/Strategic alliance

(foreign or local partners adding to the

synergy)

1.00 Joined

Single

1.00

.50

Joined

1.00

Management Contract/Technical

collaboration (foreign or local partners

adding to the synergy)

0.50 Joined

Single

Join

ed

.50

.25

.50

Alliance/arrangement with World

Bank/ADB/IFC/SEDF or any

awards/certification or any other recognition

granted to the Bank

0.50 Joined

Single

Join

ed

.50

.25

.50

TOTAL QULIITATIVE FACTOR 40.00 29.50

GRAND TOTAL 100.00 76.00

CREDIT RISK GRADING GOOD (GD)-2

Interpretation of the Findings: GOOD (GD)-2

Strong Bank Very good Financials Healthy and productive franchises Excellent operating environment Strong capability for timely payment of financial commitments Very low probability to be adversely affected by foreseeable events Excellent liquidity and low leverage. Well established cliental base and strong market share. Very good management skill & expertise. Credit facilities fully covered by the guarantee of a top tier local Bank. Aggregate Score of 75-84 based on the Risk Grade Score Sheet

EXCEPTIONS TO CREDIT RISK GRADING

Head of Credit Risk Management may also downgrade/classify an account in the normal

course of inspection of a Branch or during the periodic portfolio review. In such event, the

Credit Risk Grading Form will then be filled up by Credit Risk Management Department and

will be referred to Corporate Banking/Line of Business/Credit Administration

Department/Recovery Unit for updating their MIS/records.

Recommendation for upgrading of an account has to be well justified by the recommending

officers. Essentially complete removal of the reasons for downgrade should be the basis of any

upgrading.

In case an account is rated marginal, special mention or unacceptable credit risk as per the risk

grading score sheet, this may be substantiated and credit risk may be accepted if the exposure

is additionally collateralized through cash collateral, good tangible collaterals and strong

guarantees. These are exceptions and should be exceptionally approved by the appropriate

approving authority.

Whenever required an independent assessment of the credit risk grading of an individual

account may be conducted by the Head of Credit Risk Management or by the Internal Auditor

documenting as to why the credit deteriorated and also pointing out the lapses.

If a Bank has its own well established risk grading system equivalent to the proposed credit

risk grading or stricter, then they will have the option to continue with their own risk grading

system.

Limitations of CRG Credit Risk Grading is a good cushion for the banks. Hence it has some limitation. The most common

limitations are given below:

The weightage given are not proportionate equally.

The weights are fixed always rather than flexible.

Various categories of bank exist in the industry but the weightage are not of various

categories.

It is very complicated to identify the principle risk components.

Problems are found in case of setting key parameters.

It is very easier said than done to find consistency in the theory and practice.

No formal revision of the manual is made since its inaugural.

Its a very lengthy process to calculate the aggregate score

Complexity is observed in interpreting score obtained through the process.

Conclusion

An appropriate, precise and flexible Credit Risk Grading system is mandatory for creating and

adopting a risk management culture in the organization for developing a sustainable credit risk

management environment in the banking sector of Bangladesh. Credit risk generates not only from

counter party but also from improper policies, procedures and systems within the organization. This

paper focuses on the weakness of the existing risk evaluation system that entails assessing risk through

counter party or single obligor wise risk analysis. The new proposed Credit Risk Grading and

Evaluation system describes a new lending system that specifically addresses the flaws, thus helping

all parties to the process. Based on the proposed evaluation system, it is expected that the credit risk

analysis policies should: always follow the detailed and formalized credit evaluation or appraisal

process, provide risk identification, measurement, monitoring and control, define target markets, risk

acceptance criteria, credit approval authority, credit maintenance procedures and guidelines for

portfolio management, be communicated to branches or controlling offices and clearly spell out roles

and responsibilities of units involved in origination and evaluation system of credit risk for any

industrial project.

References

I. Lehaj-Ul-Hasan, Principles, Policies and Guidelines for Sustainable Credit Risk

Management in Bangladesh, A thesis work submitted to the Department of Industrial and Production

Engineering, Bangladesh University of Science and Technology (BUET), December, 2007.

II. Commercial Bank Financial Management, In the Financial Services Industry, Sixth Edition-

JOSEPH F. Sinkey, JR.

III.CRG Guidelines of Bangladesh Bank (www.bangladesh-bank.org)

IV.www.fe-bd.com

V.www.investopedia.com

VI.www.wikipedia.com