Introduction:

Prime Bank Limited is a second-generation private commercial bank established in Bangladesh in the year 1995 under the Companies Act, 1994. Since inception, it is committed to provide high quality financial services to the countrymen with a view to accelerate economic development of the nation. As such, it has been working for stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity, alleviating poverty, raising standard of living of the people etc and thereby contributing to the sustainable development of the country.

At present, the bank has a network of 111 (one hundred and eleven) branches stationed in both rural and urban areas of the country and this are further extended every year by 4/5 new branches. Since inception, the Bank has been making significant profit every year and positioning itself as second highest profit-making bank in the country for last five consecutive years. This has been possible due to significant credit growth of the bank. On an average, credit portfolio of the bank has been growing @ 40% every year. However, asset quality of the Bank was never compromised for this high growth. It has been well maintained which is reflected in its classification rate that never exceeded 2% in its 10 (Ten) years of life. As the lion share of the total revenue comes from credit operation and the existence of the Bank depends on quality of asset portfolio, efficient management of credit risk is of paramount importance.

A banker should employ his funds in such a way that they will bring him adequate return because like all other commercial institutions banks are run for profit. But its policy must comply with current growth of loan portfolio and market position.1.1 Credit Policy:Credit policy needs to be a robust process that enables a Bank to proactively manage its loan portfolio in order to minimize losses and earns an acceptable level of return for stakeholders. Given the fast changing dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential that Prime Bank has a robust credit risk management policy and procedures that are sensitive and responsive to these changes.

To provide a board guideline for the Credit Operation towards efficient management of the Credit portfolio of the Bank, a clearly defined, well-planned, comprehensive and appropriate Credit Risk Management Policy is a pre-requisite.

In the above backdrop, this policy document has been prepared. And, it is hereby named as Credit Policy.

1.2 Credit Risk:

Risk is inherent in all types of business. However, for Banks and financial institutions credit risk is considered to be the toughest one. Though Banks and Financial Institutions have been facing difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio management or lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a banks counterparty.

Credit risk is most simply defined as the potential that a borrower or counterparty will fail to meet its obligations in accordance with the agreed terms and conditions. In other words, it is the loss associated with degradation in the credit quality of the borrowers or counterparties. In a Banks portfolio, losses stem from outright default due to the inability or unwillingness of the customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality. Credit risk emanates from a banks on and off balance sheet dealings with an individual, corporate, bank, financial institution or a sovereign. Credit risk may take the following forms:

In the case of direct lending: principal and/or interest may not be repaid; In the case of guarantees or letters of credit: funds may not be forthcoming from the constituents upon crystallization of the liability; In the case of treasury operations: the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases; In the case of security trading business: funds/securities settlement may not be effected;

1.3 Purpose:

The main purpose of this policy document is to set out yardsticks for and spell out standard practices for management of credit risk in the Bank. As such, it specifically addresses the following areas:

a) to set out yardsticks for and spell out standard practices

b) to establishing an appropriate credit risk environment,

c) setting up a sound credit approval process,

d) maintaining an appropriate credit administration & monitoring process

e) To ensuring adequate controls over credit risk.

1.4 Scope:

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

1.5 Access to the Policy:

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

Principles for Sound Lending:

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

Figure: Model for Determining Creditworthiness of Loan Applicant

2.1 Safety

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

FactorsAssociated variables

Factor 1 (F1): willingness of the borrower to repay the loanTechnical expertise

Business and management experience

Success as entrepreur

Family business history

Factor 2 (F2): personal honesty of the borrowerEducational qualification

Professional training

Factor 3 (F3): integrity of the borrowerNet profit

Bank deposit

Thus,

Capability (C2) represents four factors. Related variables of each factor are as follows:

FactorsAssociated variables

Factor 4 (F4): management capability of the borrower Technical expertise

Business and management experience

Success as entrepreur

Family business history

Factor 5 (F5): educationEducational qualification

Professional training

Factor 6(F6): financial capabilityNet profit

Bank deposit

Factor 7 (F7): investment ability from own fund. Retained earnings

Thus,

Capital (C3) represents two factors . related variables of each are as follows:

Factors Associated variables

Factor 8 (F8): own capital of borrower.Own capital

Public issue shares

Factor 9 (f9): borrowed capital by the borrower.Loan capital

Credit from suppliers

Thus,

Conditions (C4) represents three factors . related variables of each factor are as follows:

FactorsAssociated variables

Factor 10 (F10): industry conditions.Ecological factors

Availability of raw material s

Government regulation

Industry success

Factor 11 (F11): market conditionsDomestic demand

Demand in the international market

Factor 12 (F12): social conditionsSocial unrest

Political stability

Thus,

Collateral (C5) represents three factors. Related variables of each factor are as follows:

FactorsAssociated variables

Factor 13 (F13): easily realizable propertyLand and building

Stock and share

Equipment

Inventory and residential properties

Factor 14 (F14): not easily realizable propertyAccount receivables

Other real estate inventories

Factor 15 (F15): status of collateralRealizable value

Easily marketable

Free from encumbrances

Possession status

Thus,

Certifications (C6) represents three factors. Related variables of each factor are as follows:

FactorsAssociated variables

Factor 16 (F16): local community of the borrowerCommunity leaders

Local shopkeepers

Neighbors

Factor 17 (F17): institutional reference with which borrower has past relationshipsEmployees

Bank/creditors

Employers

Factor 18 (F18): Business Community With Whom The Borrower Has Business Interactionscustomers

Suppliers

Competitors

Thus,

2.2 Liquidity

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

2.3 Profitability

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

2.4 Purpose

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

2.4 Security

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

2.5 Sources of repayment

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

2.6 Diversity

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

2.7 National Interest

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

2.8 Factors affecting Lending

Qualitative and Quantitative factors of sound lending

Policy Guideline advised by Bangladesh BankRisk is an associated factor with financial service industry. Banks are exposed to a number of risks of which Credit Risk, Market Risk (interest risk and foreign exchange risk), Operational Risk and Reputation risk. In order to manage al these risks properly, an effective risk management system in banking operation is must which is actually reflected in sound lending policy. Bangladesh Bank has undertaken a project to review the global best practices and to examine the possibility of introducing the same in the banking industry of Bangladesh.

Bangladesh Bank vide BRPD circular no. 17 dated 07.10.2003 has sent directional Guidelines/ Manuals of five core risk areas in banking including Credit Risk Management. In this circular a) Centralization, b) Policy, c) Risk Grading, d) Customization, e) Segregation of Duties, and f) Approval Authority has been outlined. Among these Policy has been recommended to include the following:

a. Industry Analysis, business segment focus and credit environment

b. Banks loan Portfolio size, Capital position, Tenure of Deposit etc.

c. Types of Loan facility and level of risk and profitability of different types of loan,

d. Credit needs of the covered area,

e. Business development priorities

f. Single/Group borrower exposure

g. Borrower type and loan type

h. Lending cap to avoid concentration in any sector

i. Discouraged business type,

j. Credit facility parameter,

k. Existing loans classification status,

l. Security consideration

m. Lending procedure

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

3.1 Lending Policy of Prime Bank Limited

Lending is a vital function of a commercial banking. While going for lending, the decision should be taken considering the lending principles as well as Bangladesh Bank guidelines for lending. For a sound lending, there must be a sound lending policy covering all the issues discussed in lending principles, Bangladesh Bank policy guideline, PBLs own mission and vision as well as business strategies. Encompassing all possible aspects a policy guideline is webbed in a systematic framework in this section. PBLs sound lending policy will cover the following major points:

1. Governance framework

2. Business segments and financial products

3. Prudential exposure limits

4. Regulatory restrictions on lending

5. Priority sector advances (PSA)

6. Credit appraisal system

7. Credit pricing

8. Credit approvals and denials

9. Margin and security (collateral) management

10. Credit Documentation

11. Credit administration and monitoring

12. Consortium/ syndicated/ multiple bank lending

13. Income recognition, asset classification and provisioning

14. Non-Performing Assets (NPAS) Management

15. Capital market exposures

16. Credit risk management17. Credit risk assessment of a bank

Governance Framework

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

Level 1:

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

Level 2:

(ii)Risk Management Committee (RMC):

There shall be a Risk Management Committee which will be a Board level sub-committee and will act independently, as per BB Guidance on Core Risk Management issued in 2005. RMC should ideally comprise the following members of the Board:

Chairman,

MD & CEO/CEO,

Member Independent Director of the Board,

Member Independent Director of the Board,

Member of Board,

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

a. Issuance and modification of the guidelines for Credit Risk Management System and prudential exposure/concentration limits (borrower/ group borrower, industries, sectors etc.) in the Bank with the Boards approval.

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

c. Recommending changes/ modifications in this credit policy of the Bank and ensuring that it remains in tune with the changing business conditions, regulatory requirements/ guidelines and the Banks structural needs ( particularly from the ALM perspective) and risk appetite.

d. Ensuring, that all activities related to Credit function are managed in compliance with this Credit Policy of the Bank.

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

f. Sanctioning/ approving/ reviewing credit proposals as per the Delegation of Powers of the Bank and beyond the powers of the CRMD.

g. Approving exceptions to risk exposure/limits, as per the Banks Delegation of Powers and documenting it with observations.h. Approving settlements/compromise/upgradation /write-offs of NPA accounts, as appraised and put up by the CRMD.(i) An internal Credit Committee ( within CRMD) comprising the following would be constituted:

a. The MD & CEO

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

c. The Head of Corporate Banking

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

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

This Credit Committee would discuss proposals, which will be approved through consensus. The minutes of Credit Committee

Meetings would be kept for record and for review, as required, by the RMC, on behalf of the board.

(ii) Credit Risk Management Department (CRMD):

The CRMD should be headed by the Chief Credit Officer (CCO) who can be assisted by Head (Corporate Banking), Head (SME Banking Credit) and Head (Retail Banking Credit). Later, this can be enlarged to rename the CCO as Chief Risk Officer (CRO) who will report directly to the MD & CEO.

The main role and responsibilities of CRMD will include:

a. To measure, control, review and manage Corporate credit risk on Bank-wide basis within the limits set by the Banks Board of Directors /RMC/ BB.

b. To enforce compliance with the credit risk parameters and credit exposure/ concentration limits set by the Board of Directors/ RMC/BB.

c. To lay down credit risk assessment systems and develop MIS, monitor quality of loan/ investment portfolio ( of treasury) proactively identify problems, correct deficiencies in appraisal and monitoring of loans and undertake loan review/audit.

d. To conduct a detailed Credit risk analysis of the proposed obligor and facility, before approval of the exposure. The original rating given by Corporate banking/Relationship Manager shall be vetted/modified by CRMD.

e. The CRMD would be primarily accountable for protecting the quality of the entire loan/ investment portfolio and would undertake portfolio evaluations and conduct regular comprehensive studies on the operating and business environment to test the resilience of the loan portfolio.

Business segments and financial products

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

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

(ii) Cluster-based approach to lending in identified growth areas.

(iii) Ensuring credit portfolio quality is maintained and is suitably diversified, while pursuing a focused sector strategy.

PBLs overall universe of customers would be handled by three main business groups Corporate Banking (which could also later include Institutional Banking), SME Banking and Retail Banking. PBL believes that the sales approach, credit evaluation techniques and segment behavior are different for each of the three segments and has, therefore, decided that different business groups would manage these businesses. The regulatory requirements would also necessitate business segmentation resulting differentiated products for each segment with separate policy.

PBL would target various Industry segments, as per the Banks Business Plan, based on an overview of macro economic factors, industry analysis in terms of growth and profit potential and the Banks domain knowledge and expertise, keeping in view the directives/ guidelines issued from time to time, by BB and Government of Bangladesh. The Bank would accordingly prioritize specific industry sectors, to achieve the twin objectives of spotting and seizing opportunities and revamping its product and delivery mechanism ahead of competition.

5.1 Financial products:

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

(i) Credit Products:

a. Trade Finance

b. Short-term Working Capital Finance: Cash credit, overdraft, demand loan, bills purchase/ discounting, channel financing, subscription to commercial paper.

c. Medium-term Loans (suggested term 3-5 years) for business expansion, technology up-gradation, R&D expenditure, implementing early retirement scheme, supplementing working capital, repaying high cost debt.

d. Long-term Loans or Project Finance for new industrial/ infrastructure projects (suggested term over 5 years), Takeout Finance

e. Bridge Finance.

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

g. Securitisation and Derivative products.

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

i. Capital Market operations

j. Lease Financing

k. Priority Sector Advances

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

(ii) Transactional Products:

a. Bankers Acceptances

b. Documentary Credit

c. Forfaiting

d. Cash Management

e. Factoring

(iii) Asset Products:

a. Retail loan Products covered in Retail Loan Policy

b. Credit Cards & receivable financing there against

(iv) Financial Markets productsa. Foreign exchange Spot, forward and future contracts

b. Taka interest rate derivatives

c. Foreign exchange derivatives

d. Options

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

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

Short term

:Upto 12 months

Medium term :More than 12 and upto 36 months

Long Term

:More than 36 months

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

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

Prudential Exposure Limits6.1 General:

(i) The objective of the prudential exposure limits is to reduce credit concentration risk by maintaining a balanced and well-diversified credit portfolio.

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

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

3.1. Individual /group borrowers limits:

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

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

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

(ii) Investment exposure (including underwriting and similar commitment) and certain types of investment in companies.

Investment exposure includes investment in:

a. Shares and debentures (acquired via direct subscription, devolvement under underwriting, secondary market).

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

c. Commercial Papers

d. Exposure under Securitisation as per BB

(iii) All treasury related traded product' exposures, which are monitored on a credit equivalent basis as per the Current Exposure Method, prescribed by the BB.Capital Funds means the Banks Tier I plus Tier II capital as at the end of the last published balance sheet, as defined by BB under Capital Adequacy Standards.

6.2 Industry exposure limits:

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

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

(iii) BB has also prescribed certain other requirements/guidelines for extension of credit to Leasing/ Hire Purchase/ Factoring services, Bangladeshi Joint Ventures Abroad and certain other specified industries/ sectors (e.g. real estate). Check A few of these are mentioned in the Notes on the specific objects as annexure to the Credit Policy.

6.3 Unsecured exposures:

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

(ii) The RMC will review the unsecured exposures at every RMC meeting and provide guidance & advice to the CRMD on managing this exposure.

6.4 Exposure limits against shares/ bonds of companies:

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

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

(iii) Within the above regulatory ceiling, sub-limits for advances against shares/debentures/PUBLIC/GOVT SECTOR bonds are stipulated as follows:

a. Loans to individual borrower : Taka x million (securities held in physical form)

Taka x million (securities held in demat form)

Individuals will qualify under capital market exposure only if the end use of funds is investments.

b. Loans to Stock brokers: Suitable sub- limits may be fixed at the time of next review of the Credit Policy within the limit of xx% as above for all stockbrokers and also for each broking entity.

6.5 Maturity-wise exposure limits:

The RMC may consider prescribing maturity-wise exposure limits in consonance with the Banks Asset-Liability Management policy, e.g. for medium term loans for more than 3 years and for long term loans for more than 7 and 10 years6.6 Rating-wise exposure limits:

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

Regulatory restrictions on lending

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

(i) The Bank will not grant loans and advances for the following purposes:

a. To a company for buy-back of its shares/ securities (Sec. xxx of Companies Act)

b. For financing speculative or any arbitrage related transactions in the capital markets

(ii) The Bank will not ordinarily lend to NBFIs for the following activities:

a. Bills Discounted/Rediscounted by NBFIs, except for rediscounting of Bills towards sale of commercial vehicles (including LCV) and two/three wheeler vehicles, subject to the following:

The bills should be drawn by the manufacturer, on dealers only;

The bills should represent genuine sale transactions as may be ascertained from the chassis/engine number; and

Before rediscounting the bills, the Bank should satisfy itself about the bona fides and track record of NBFIs which have discounted the bills.

b. Investments of NBFIs both of current and long-term nature, in any company/entity by way of shares, debentures, etc. However, stock broking companies may be provided need-based credit against shares and debentures held by them as stock-in-trade in conformity with BB guidelines as applicable.

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

d. All types of loans and advances by NBFIs to their subsidiaries, group companies/entities

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

Credit Appraisal system

8.1 General principles:

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

a. Bankability of the Proposal: The first step in the appraisal process in any credit proposal is to ensure that there are no regulatory restrictions as regards the borrower, the security offered and the purpose of the loan and that the proposal conforms to the Banks Prudential Exposure norms and other credit policy guidelines.

b. Due Diligence: The RM would conduct due diligence and conduct in-depth analysis of the technical/ commercial/ economic/ financial/ managerial aspects of the applicants business/ project; industry conditions; applicants past track record/ standing in the industry and reputation in the market and other critical aspects of the proposal. For technical/ economic/ commercial viability, the help of external consultants may be sought, where necessary.c. Credit Need Assessment: This would involve determining the kind of credit facilities genuinely needed by the applicant and the limits for each of the facilities. d. Credit Rating: A preliminary credit rating would be recommended by the RM for each borrower / credit facility, as per the Banks Credit Rating (Risk Grading) model to reflect the credit risk involved in and determine the pricing of credit. e. Recommendations: The appraisal by the RM would cover both qualitative and quantitative aspects of the proposal. Qualitative appraisal would be based more on the evaluation and judgment of the appraiser/credit analyst, as compared to the quantitative appraisal, which would cover assessment of need based or turnover/ or cash budget, and would also reflect credit rating on the prescribed risk parameter. On completion of the appraisal process, the proposal would be submitted by the RM, in the prescribed appraisal format, along with reasoned and precise recommendations to the designated authorities for sanction.(ii) The credit proposal would be examined in depth by the sanctioning authorities, under the three initial system of sanction and the creditworthiness and assessment of credit requirement would be re-evaluated and determined having regard to Risk rating of the borrower and the credit facilities, would be sanctioned accordingly. The sanction would cover, inter-alia, pricing and terms and conditions specifically applicable to the facility (ies) sanctioned.

8.2 Term Loan/ Project Finance:

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

(i) Project Viability Evaluation: The techno-economic and commercial viability of the project in the industries where the Bank has domain knowledge/ expertise would be examined internally by the Bank. In other cases, assistance of suitable external consultants may be sought, as found necessary, depending on the size of the exposure and project complexity, etc. The appraisal report of Lead FIs may also be relied upon after internal scrutiny.

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

(i) Credit Need Assessment:

a. The over-riding principle of meeting the genuine working capital needs adequately for productive use would be applicable in all cases and the proposed limit would be within the prudential exposure norms set by the Bank. The working capital requirements would be assessed as per the guidelines, by

Cash budget method

Turnover Method Projected Balance Sheet Method

Maximum Permissible Bank Finance (MPBF) method

b. Under a consortium arrangement, the working capital assessment would be made by the Lead bank and circulated to the members. After discussions, the overall working capital limit would be finalized by the Lead bank. For such credit facilities, the Bank would also independently carry out appraisal and sanction its share of the agreed limit.

(ii) Delivery System of Bank Credit:

After determining the overall need-based credit limit, the following broad principles of credit delivery would be implemented for allocation of limit into cash credit and demand loan, in line with the BB guidelines:

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

b. In case of borrowers with working capital needs below Taka 100 million from the banking system, PBL would encourage the borrowers to avail the maximum working capital component in the form of demand loan. PBL may selectively offer a lower interest rate for the demand loan than for the cash credit in order to incentivise borrowers to increase the proportion of demand loan in the working capital finance availed.

c. PBL would determine the proper mix of demand loan and cash credit for the borrowers who are engaged in cyclical or seasonal business activities.

(iii) Financial Appraisal norms:

The following quantitative norms would generally be followed in the financial appraisal for working capital finance:

a. Liquidity Indicators: The Current Ratio (CR) and Net Working Capital (NWC) trends over a period of time have to be seen in conjunction, rather than in isolation The Current Ratio at benchmark level of 1.33 will be applicable. NWC is important as it provides margin cover available on the current assets beyond the current liabilities, which should be at benchmark level of 25%.

b. Financial Soundness Indicators: An indicative parameter to judge financial soundness of a borrower / project is to ascertain the ratio of total outside liabilities to tangible net worth (TOL/TNW ratio, or debt equity ratio-DER). TOL/TNW of 2:1 to 3:1 should be considered as acceptable, depending on the capital-intensive nature of the industry.

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

d. Credit Rating: Wherever external credit ratings are available, such ratings need to be factored in at the time of appraisal and review / renewal. For the standardized approach under Basel II for Credit Risk Management, an external credit rating is very relevant.

e. Capital Market: Where the applicants shares are listed on stock exchange, the share price movements of the borrowing company vis--vis those of the peers would also be examined and reckoned to assess the perceptions of the investors in the company and its growth prospects etc. These perceptions would serve as additional information in financial analysis.

f. Relationship Value Assessment: New Relationship: Where the Bank is entering into a new relationship with a borrower/ group, it is essential to assess the track record of the borrower as well as the group. Such assessment would include the records of their relationship with other banks, market share, promoters reputation and standing in the industry, business growth potential, prospects of ancillary business etc. Existing Relationship: In case of an existing relationship, apart from the aforesaid factors, the experience of the Bank with the borrower / group would be examined with reference to their accounts deposits, borrowal and others with various branches of the Bank or Nodal branch for the borrower/ group. Such evaluation would cover, interalia,the conduct of their account (s), value of the relationship, growth potential, export / foreign exchange earning potential, as also the growth prospects of the industries in which the borrower / group are operating.

Pricing Credit Facility

9.1 Credit Pricing:

Credit facilities to the customer are the prime source of the Banks income. More specifically, interest from loans accounts the lion share of the total revenue of the Bank. On the other hand, financial market of our country is apparently very competitive due to participation of 49 (forty nine) banks in our small financial market. As such, pricing is very crucial for business growth of the Bank. Prime Bank Limited has been fixing/refixing price of different credit facilities from time to time considering changes in the market condition.

9.2 Basis of Pricing:

Price of all credit facilities will be fixed based on the level of risk and type of security offered. Rate of interest will be the reflection of risk inherent in a particular transaction i.e. the higher the risk, the higher the rate of interest. Therefore, loan pricing will be directly correlated with the risk grade of the customer.

9.3 Type of Rate:

Usually, Bank will charge fixed interest rate which will be subject to changes by the Management. In this respect, all loan contracts will contain a provision to the effect that rate of interest is subject to changes by the Management. And, interest rate will be revised as and when a significant fluctuation occurs in the cost of fund of the Bank due to volatility of interest rate in the market. The Bank will charge floating interest only in SOD (EDF). In all other cases, fixed interest rate will be applied.

For fixed interest rate, the Board of Directors will fix a Band for a particular Sector/Industry/Product. Customers will be allowed a fixed rate within that band. Any deviation from the approved interest rate band will be mentioned in the Credit Assessment Form with proper justification. The Managing Director may sanction a credit facility at a rate within the Band. However, other executives will exercise their delegated authority to sanction credit facility at the highest rate of the approved Band.

9. 4 Revision of Rates:The Management of the Bank will continuously monitor interest rate situation in the market and discuss the same in the Asset Liability Management Committee (ALCO) meeting at least once in a month. As per decision of the Asset Liability Management Committee (ALCO), the Management of the Bank may approach the Board of Directors to revise rate of interest, commission, charges etc.

9.5 Prevailing Interest Rate:

Since last revision of interest rate of our Bank, a lot of changes have taken place in the banking sector. Specially, the cost of deposit is increasing day by day due to volatile money market. To match the increased cost of fund with the yield on advances, the lending rates of the Bank was lastly revised by the Executive Committee of the Board in its 359th meeting held on 10.05.2005. The revised lending rates of our Bank are as follows:

Sl. No.Nature of Loan/SectorInterest Rate Band

(p.a)Mid RateRemarks

1.Agricultural Credit12.00 to 13.00%12.50%-

2.Term Loan/Project Loan13.00 to 15.00%14.00%-

3.Working Capital Loan13.00 to 15.00%14.00%-

4.Pre-shipment Export Credit 7.00%--

5.Commercial Lending

(CC, LIM, LTR, IBP etc.)12.00 to 15.00%13.50%Effective rate of return should be minimum 13%

6.Small/Cottage and SME scheme13.00 to 15%14.00%-

7.Other Special Program

(Other than commercial) 13.00 to 15%14.00%-

8.Others13.00 to 15.00%14.00%-

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

Sl. No.Nature of Loan/SectorInterest Rate Band

(p.a)Mid RateRemarks

9.Loan against deposits (FDR, MBDR, CSS etc) maintained with our Bank 2.00 to 3.00% above the respective deposit rate--

10.Loan against deposits (FDR, MBDR, CSS etc) maintained with other Bank12.00 to 13.00%12.50%-

11.Loan against Share13.00 to 15.00%14.00%-

12.Housing Loan13.00 to 15.00%14.00%-

13.Consumer Credit Scheme13.50 to 15.00%14.25%-

14.Loan to NBFIs12.00 to 14.00%13.00%-

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

Credit approvalsThree Initial system for sanction/ approval:

a. The three initial system avoids credit approval based on the judgment of one functionary alone. It establishes line accountability for credit decisions and combines credit approval authorities and Discretionary Powers. Any credit exposure (fund-based and/or non-fund based and/or treasury related credit limits) would be assessed by the Relationship Manager and recommended by the Head of Corporate Banking (in the branch or Head Office) in the business group, who is designated as First Signature Authority.

b. The proposal would then be sanctioned/approved by at least two authorized Approvers as per the approval structure, one of whom must have the Discretionary Powers (DP) equal to or greater than the amount of the credit exposure recommended for sanction and the other must be a designated Credit Approver/Analyst or a Senior Credit Approver/Analyst from the CRMD.

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

Security (collateral) management

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

11.1 Security classification:

a. Primary Security

The security deposited by the borrower himself as cover for the loan is called the Primary security. In the banking it refers to be the asset, which has been bought with the help of bank finance.

b. Collateral Security

The term collateral security is used in two senses. In a narrow sense it refers to the securities deposited by the third party to secure advance for the borrower. In a wider sense, it denotes any type of security on which the creditor has a personal right of action on the debtor in respect of the advance.

11.2 Valuation and insurance of securities:

(i) The assets charged to the Bank would be valued in line with prevalent banking norms/ accounting standards/ practices. The Book Debts statement, submitted by the borrower, should be certified by a Chartered Accountant on a quarterly basis. The valuation method would be prescribed in the terms and conditions of the sanctioned facilities(ii) The assets charged to the Bank would be adequately insured against all applicable risks to protect the Banks securities. The Banks lien would be duly registered with the insurance companies and recorded in the respective insurance policies. The insurance policies would be renewed periodically, until the Banks charge subsists on the securities.11.3 Forms of charge:

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

11.4 Monitoring of the banks securities:

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

(ii) Monitoring values of security charged / collaterals too would be ensured, so that the valuation reflects the true values of the current assets / depreciated value of the fixed assets / changed cost of acquisition, whichever is lower. Periodic cross-verification of the valuation of plant and machinery, by approved valuer / engineer in consultation with CAD / Sanctioning Authority, would be ensured by the RM. Such valuation certificate should not be older than three two years old.

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

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

a. Pre-execution Process: It is aimed at ensuring that the documents cover the creation of valid security in favour of the Bank over the assets financed and cover all the credit facilities including quasi-credit facilities sanctioned.

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

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

12.1 Credit administration and monitoring

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

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

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

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

c. Post- disbursement supervision / follow - up:

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

a. Ensuring timely receipt of stocks/ assets statements at stipulated frequency and their critical scrutiny and calculating the drawing power in the accounts after reckoning the valuation, margins and liens.

b. Ensuring timely receipt of financial data from the borrower under the monthly/quarterly information system, their scrutiny to check end-use of bank funds activity level, profitability and liquidity etc. in the previous quarter and plans for the next quarter( as part of the loan covenants)

c. Conduct of the borrowers accounts with the Bank and taking corrective measures for irregularities, if any, and their prompt reporting for ratification to the specified authority. It would also be ensured that the drawings do not exceed the sanctioned limits or prudential norms, without the prior approval of the authorities concerned.

d. Ensuring compliance with covenants, including repayments of agreed sums by the borrower.

e. Half yearly review of the borrowers accounts.

(ii) On- site Supervision: It includes:

a. Visit to the borrowers factory at stipulated intervals for dialogue with the borrowers management on issues of mutual interest, checking the assets levels /accounts books and getting a feel of the activity level and general environment in the factory.

b. Gathering and documenting market reports on the borrowers credit standing / product acceptance etc.

c. Attending consortium meetings and dialogues with co- bankers regarding the borrowers accounts.(iii) The Bank would follow a closely monitored PDTS, the procedure for which is outlined in the CAD manual, to track loans, receipt of documents (primary, deferred etc.), financial covenants and the like.

Consortium/ syndicated/ multiple bank lending

13.1 Suggested approach:

As there are no BB guidelines at present for mandatory formation of a consortium or a syndicate for granting high value credit facilities to a borrower by more than one bank, PBL would be open to adopt the multiple bank lending irrespective of the amount of a credit proposal. However, the consortium/ syndicate approach for high value credit (beyond a limit as laid down by the Banks Board) for new or existing borrowers would be explored due to the following reasons, and if not found feasible, multiple lending method would be adopted:

(i) To help the Bank to adhere to the prudential exposure norms prescribed by BB for single / group borrower

(ii) To help Bank achieving its objective of dispersal of credit risk across borrowers/ borrower groups/ industries/ sectors etc.

(iii) To help the bank maintain the desired financial discipline on the borrower, which may not be possible in multiple lending system in which the borrower attempts to play one banker against the other.

(iv) To facilitate the Bank in building reciprocal business relationships with other banks.

13.2 Consortium approach:

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

(i) The Lead Bank (with the largest share of the advance) will conduct credit appraisal in consultation with the members of the consortium. The overall credit facilities/ limits from the banking system would be jointly fixed for the borrower, with individual shares of the members, which are later approved by the respective Boards of the banks.

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

(iii) The Lead Bank can make disbursement of the required credit to avoid delay and recovers the pro-rata share of the disbursed amount from other members (as participation certificate/s or bill of exchange basis).

(iv) The borrowers entire ancillary business (bills, letter of credit, foreign exchange, deposits etc.) will be shared pro rata between the member banks and suitable distribution method is evolved with consensus.

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

(vi) Monthly inspection of stocks will be carried out by an inspection team comprising the Lead Bank (permanent member) and one member by rotation.

13.3 Syndication lending method:

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

(ii) The Bank would endeavour to follow International practices for Syndicated lending. Some of the main features of such practices are:

a. Mandate to the Lead Manger by a borrower.

b. Information Memorandum containing all relevant financial data and credit appraisal, prepared by the Lead Bank, is circulated to the prospective lenders, soliciting their participation in the overall loan.

c. The Loan Agreement (containing all the terms of the loan vis--vis the borrower and rights and responsibilities of the Lead Bank, Agent Bank, participating banks, etc.) is signed by all the parties.

d. The drawdown of the loan takes place as per the agreed schedule.

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

Income recognition, asset classification and provisioning

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

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

(iii) The Banks loans portfolio would be classified in 4 categories of assets as per BB guidelines as follows:

a. Standard Assets: These are Performing assets (or Non- NPAs)

b. Non-Performing Assets (NPAs):

c. Sub-standard Assets: i.e. an asset which remains irregular/out of order /overdue for 90 days and is classified as NPA for a period of 12 months from the date of such classification.

d. Doubtful Assets: i.e. an NPA that remains Sub-standard Asset for a period of 12 months,

e. Loss Assets: i.e. Such loans whose realizable security drops to less than 50% of the value assessed by the Bank at the time of the last inspection, or to less than 10% of the outstanding in the account, would be classified as Loss Assets without passing through the various stages of assets classification.

(iv) In case of reschedulement, the asset would be reclassified as standard after satisfactory performance for a period of one year from the date the first payment falls due. If the performance is not satisfactory during such period of one year, the Bank would classify the account appropriately with reference to pre-restructuring payment schedule.

(v) In respect of advances to projects under implementation and facing time overrun, the Bank would treat the asset as standard for the period not exceeding two years beyond the date of completion of the project as envisaged at the time of initial financial closure. Such projects would be treated as sub-standard after the period of 2 years and the income would be recognized only on the basis of cash realization.

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

ClassificationProvisioning requirement

1. Standard assets0.25% of global loan portfolio

2. Sub-standard assets

Secured10%

Un-secured20%

3. Doubtful assets

To the extent not covered by realizable value of security100%

In respect of secured portion

i. Up to 1 year

ii. 1 to 3 years

iii. Beyond 3 years20%

30%

100%

4. Loss assets100%

Leased assets

5. Sub-standard assets

Secured10% of unrealized portion

Un-secured20% of unrealized portion

6. Doubtful assets

To the extent not covered by realizable value of security100%

In respect of secured portion

iv. Up to 1 year

v. 1 to 3 years

vi. Beyond 3 years20%

30%

100%

7. Loss assets100%

Provisions under special circumstances

8. Government guaranteed advancesNormal provisions if the guarantee is invoked and remains in default for 90 days.

9. Advances in terms of rehabilitation package approved by Term Lending (TL) institutions

Advances in terms of rehabilitation packageNormal provisions as per the classification

Additional facilities as per the package finalized by TL institutionsNo provisions for one year from date of disbursement

Credit facilities to SSI identified as sick and rehabilitation package prepared by PBL or under consortiumNo provisions for one year from date of disbursement

10. Amounts guaranteed by ECGC(Export Credit Guarantee Corporation) / DIGC (Deposit Insurance Guarantee Corporation / similar guarantees (as applicable)Provision only in respect of balance in excess of amounts guaranteed by such corporations

Non-Performing Assets (NPAs) Management

13.4 Objectives and general principles:

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

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

(iii) The overall NPA management policy is based on the following principles:

a. Early recognition, identification and reporting of the borrowal accounts in appropriate internally defined credit labels, in addition to the BB asset classification into four categories.

b. Documenting the primary causes (as distinguished from symptoms) of each of the problem loans and the attendant risks.

c. Taking preventive/ corrective steps to effectively mitigate the risk involved in the impaired accounts, with the concurrence/ approval of the designated sanctioning authorities.

d. Recovery of the Banks dues from the borrowers/ guarantors/ charged assets, or exercising exit option appropriately to minimize the loss to the Bank.

e. Provisioning for the expected loss from default by the borrower

f. Writing off partially or fully the Loss Assets against the provisions already made.

g. Documenting learning lessons from the typical NPA case studies, using them in the Credit training courses and circulating necessary guidelines for preventing their recurrence.

13.5 Early warning system (EWS):

In addition to mandatory BB guidelines on Credit Risk Management, to inculcate best practices as part of superior NPA management, the following approaches are suggested:

(i) The Bank will follow the EWS for early identification of problem loans, as it enables the Bank:

a. To take corrective measures before the position becomes irretrievable,

b. To minimize the risk of loss,

c. To improve the prospects of recovery in the event of possible default.

(ii) The symptoms of a decline in the borrowers business and financial position are evidenced from decreasing sales/ market share, prices, profit margins, liquidity indicators (current ratio, net working capital etc.), dividend on one hand and increasing unit costs, staff turnover rate, debtor provisions, short term debt etc. on the other hand, or a combination of both the trends. However, the primary causes of such decline in the borrowers business and financial position should be identified and appropriate corrective measures taken for mitigating the credit risk to the Bank.

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

a. Identifying and documenting the primary causes for the decline in the business/ financial position of the borrower,

b. Assessing realistically the borrowers ability to rectify the position within a time frame,

c. Labeling the borrowers account into one of the four internal categories, mentioned below, with the approval of the Head of Corporate Banking/SME Banking Group and CRMD.

13.6 Credit Labeling system:

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

(ii) The internal labeling categories will be as follows as a part of the Early Warning system:

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

b. Watch Category: This will include the accounts which show deteriorating trend in the borrowers operating/ net profits, operating loss or increased leverage in the preceding year and where it has not been possible to obtain current financial information from the borrower, industry specific problems, etc.

c. Monitoring Category: This category will signal that the account requires special attention due to specific developments after the sanction due to (a) Internal issues like incomplete documentation, absence of financial information, unsatisfactory credit discipline or, (b) External developments like merger, take-over, qualified auditors report, legal suit/s against the borrower.

d. Adversely Labeled Category: If the Banks payment is overdue for one month and normal repayment of the obligation is in doubt and there is high probability of at least some loss, such accounts will be classified in the category.

(iii) The accounts under Adversely Labeled category involve highest risk and would be monitored very closely by the RM concerned, who would submit a detailed review of the account at monthly frequency to Head Corporate Banking/SME Banking & CRMD along with regulatory and legal compliance status and recommendations on remedial strategy. The Watch and Monitoring Category accounts would also be reviewed by the concerned RM, who will submit review of the account at quarterly intervals to the Head Corporate Banking/SME Banking & CRMD along with recommendations. The RM would arrange for rectification of the deficiencies, if any, in the documentation and securities, in consultation with the Legal Department and Head Corporate Banking/SME Banking in all these three categories of accounts.

(iv) In the above three categories of accounts, additional credit facility or transaction (within the sanctioned limits) would be allowed, only after reckoning the risk factors involved, as also in tune with the remedial strategy decided, in line with the approved authority structure.

13.7 Rehabilitation and debt re-structuring:

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

a. Sacrifice from the borrower and other stake holders commensurate with the Banks sacrifice by way of concessionary package involving interest waivers, debt reschedulement etc. as per BB guidelines.

b. Strengthening of the security package, including personal guarantees of the promoters/ Group companies.

c. Appointment of the Banks nominee as Financial Controller and concurrent auditor to exercise the desired control over the cash flows and end-use of funds of the Company.

d. Appointment of suitable professionals on the Board of the Company to strengthen the management.

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

(iii) After the Unit is turned-around through the Banks rehabilitation programme and starts generating profits, the account would be upgraded to Standard Asset as per BB norm and the borrower would be asked to execute the re-compensation clause retrospectively in favour of the Bank.

(iv) RMC shall also be responsible based on specific recommendations by CRMD and Corporate Banking, for approving settlement/ compromise/ write-off/ up-gradation of NPA accounts, within the limits approved by the Board. 13.8 Exit option:

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

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

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

b. Encourage the borrower to adopt multiple banking, particularly when additional facility is required.

c. Gradually convert cash credit facility into bills purchase/ discounting facility or short-term demand loan with repayment programme.

d. Tighten terms of the facility, such as margin, collateral, cash budget system for drawings.

e. Settle for a compromise with the borrower.

f. Sell the asset to an Asset Reconstruction Company.

(ii) Non-problem accounts may also be candidates for exercising exit option by the Bank for reducing over-exposure to a Group/ industry or when the specific accounts are considered undesirable by the Bank e.g. due to inadequacy of risk-return yield. These options will be decided in terms of the approved authority structure.

13.9 Settlement/ compromise:

As a corollary to

Adversely labeled or Watch listed accounts considered fit for exit option and also old unresolved NPAs may be settled through compromise with the borrowers (including guarantors). One-time final settlement of dues would normally be preferred to a deferred settlement spread over an extended period of time.

BB guidelines on such Settlement/compromise, wherever applicable, would be followed. The amount and period of settlement (one-time/deferral period) would be negotiated with the borrower/ guarantor and who would normally be linked to the realizable value of the securities charged (their Net Present Value should be lower than the NPV of the settlement amount).

13.10 Legal action for recovery:

(i) Legal action against the borrowers/ guarantors would be initiated by the Bank generally as a last resort for recovery of its dues, when all the foregoing options have been exhausted or are not considered feasible. This is the last option because of the uncertain expense in terms of time (management time) and money involved. However, in cases of willful default, (e.g. diversion and siphoning of funds), fraud and malfeasance on the part of the borrower, legal action may be the first and only option for recovery, as any other option of recovery would not be appropriate. The names of such companies and their directors/ promoters would also be advised to BB for being listed in the Defaulters List published by BB. These companies and the Group companies, in which their directors are common, would be ineligible for finance from any bank/ FI as per BB guidelines.

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

13.11 Write- off:

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

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

(iii) Written-off accounts would be transferred to pro-forma accounts under collection outside the Banks balance sheet, for follow-up and possible recovery in course of time depending on an analysis of the costs and possibilities of recovery.

Credit risk management

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

13.12 General principles:

(i) One of the main objectives of the Banks credit policy is to build and maintain a sound and well-diversified credit portfolio. Credit Risk Management (CRM) is an important tool for achieving this objective, as it would help the Bank:

b. to take informed credit decisions based on an adequate assessment of the relevant factors involved in the credit risk,

c. to screen credit proposals and assume only such credit risk that is acceptable to the Bank as per the Credit Risk Assessment guidelines and

d. to ensure diversification of the credit portfolio, by avoiding concentration in credit exposures to individual/ group borrowers, industry/ sector etc. beyond the Banks/ BB prudential exposure norms and taking proactive and corrective action.

(ii) As per the BB guidelines on Credit Risk Management, every bank should have a credit risk policy document approved by the banks Board of Directors. The Banks policy on credit appraisal, approval, documentation, administration and monitoring (individual loans and credit portfolio), credit audit, management of non-performing assets including risk mitigation/ control have already been set out in the previous chapters of the Credit Policy. The Banks guidelines on Credit Risk Assessment (CRA) for exposures on direct obligors covering credit risk identification, measurement, grading/ aggregation, portfolio management and linkage of risk grading to credit pricing are laid down in this chapter. The guidelines on CRA for exposures on banks would be spelt out in the next chapter.

(iii) While formulating the Banks policy on Credit Risk Assessment for exposures on direct obligors and banks, the guidelines of BB have been duly considered.

Credit Risk Grading:

While providing credit facility to a customer, Bank undertakes many risks, among which credit risk is considered to be the most important one. As such, an in-depth study should be conducted on the borrowers creditworthiness which will help the bank to identify all possible risks underlying in a particular credit transaction. A formal evaluation of borrowers financial health and ability to repay debt obligation is called credit rating which helps the Bank to grade the concerned customer. As such, it is also called credit risk grading. And, risk identified through credit rating/risk grading is quantified for better understanding and taking appropriate mitigating technique. Besides, it helps the Bank to charge commensurate risk premium on a particular credit facility. Therefore, it is important to accurately measure the risks in a transaction and rate/grade the facility accordingly.

Basic Framework:

As per recommendation of the Financial Sector Reform Project (FSRP), Bangladesh Bank had made it mandatory for the Banks to conduct a Lending Risk Analysis (LRA) in the prescribed format before sanction of a loan. In line with BB guidelines on Credit Risk Management, dated October 2005, PBL has adopted the following approach for moving towards a Credit Risk Grading framework from Lending Risk Analysis (LRA) framework.

Later, Bangladesh Bank instructed all commercial Banks to develop its own credit risk grading system vide its Guidelines on Credit Risk Management. In the said Guideline, Bangladesh Bank provided a sample Risk Grading Model and advised Banks to design their own model in line with that one.

Prime Banks Risk Grading Framework:

All credit proposals must be supported by a comprehensive risk analysis. It will encompass the following three things: (a) Lending Risk Analysis (LRA), (b) Risk Grading Scorecard and (c) Risk Grading. No proposal can be put up for approval unless there has been a complete written analysis subject to the condition that LRA will be conducted where it is applicable as per Bangladesh Bank Guideline. It is the absolute responsibility of the proposal originating officer to conduct comprehensive risk analysis and affix its result e.g Risk Grading Score, Risk Grade etc in the proposal. He/she will also ensure that all necessary documents/papers/information in support of the proposed risk grading are annexed with the proposal before the facility request is sent to the competent approval authority.

Lending Risk Analysis (LRA):

Lending Risk Analysis (LRA) will be conducted for the credit facilities of Tk 50 lac or above in the prescribed form. The lending risk analysis tool concentrates on analysis of both the business risk and security risk. The important part of this analysis is the assessment of risk of failure to repay which deals with the overall lending risk composed of the business risks and security risks i.e (i) Suppliers risk, (ii) Sales risk, (iii) Performance risk, (iv) Resilience risk, (v) Management Competence Risk, (vi) Management Integrity Risk, (vii) Security Cover Risk and (viii) Security Control Risk. The overall matrix provides four kinds of lending risk for decision makers i.e. (i) Good, (ii) Acceptable, (iii) Marginal and (iv) Poor. Prime Bank will not approve any credit facility having overall risk at Marginal or Poor level without proper justification except for renewal of existing facilities under compelling circumstances.

Risk Grading Scorecard:

As per instruction of Bangladesh Bank, Prime Bank Limited has developed Risk Grading Scorecard which will be used to find out rating of all credit facilities and/or customers of the bank except the loans under Retail Credit Division. A copy of the Risk Grading Scorecard is enclosed in Annexure-4. The score of the risk grading scorecard will be weighted one. There are 10 (ten) rating criteria and separate parameters have been set to measure borrowers position against each criterion. After analyzing borrowers financials or other relevant documents, the Relationship Officer will first find out the points the borrower earns against each criterion based on the parameters set and then multiply the points obtained by the relevant risk weight which will produce Weighted Score. A snapshot of criteria and weight assigned to each criterion is as follows:

Sl. No.CriteriaWeight (%)

a)Gearing15

b)Liquidity10

c)Profitability15

d)Account Conduct10

e)Business Outlook10

f)Management/Key Person15

g)Age of Business5

h)Size of Business5

i)Personal Banking Relationship5

j)Security10

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

Risk Grading:

After preparation of Risk Grading Scorecard, concerned Relationship Officer will assign risk grade to the customer within the following Credit Risk Grading Model:

Risk GradeLetter

GradeNumeric

GradeDefinition

Superior Low RiskAAA1Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank. All security documentation are in place.

Risk GradeLetter

GradeNumeric

GradeDefinition

Good Satisfactory RiskAA2The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. All security documentation should be in place. Aggregate Score of 95 or greater based on the Risk Grade Scorecard.

Acceptable Fair RiskA3Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property). Borrowers should have adequate liquidity, cash flow and earnings. An Aggregate Score of 75-94 based on the Risk Grade Scorecard.

Loss

(non-performing)D8Assets 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.