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Internship Report On CREDIT RISK MANAGEMENT

PUBALI BANK LIMITED

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Internship report Credit Risk Management: On Pubali Bank Limited
S SU UB BM MI IT TT TE ED DT TO O

MD.RAIHANUL HASAN Assistant Professor of Accounting Department of Business Administration State University Bangladesh
SUBMITTED BY ATUNU ROY MBA 27th Batch ID:PG-02-27-11-007

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Declaration

I am Atunu Roy bearing ID:PG-02-27-11-007 a student of the Department of Business Administration (MBA Program) of State University of Bangladesh, hereby declare that the report entitled “Credit risk Management on Pubali Bank Limited” is prepared by me. I did not submit the report before for any degree, diploma or recognition.

I also declare that the report is prepared for academic purpose only.

……………………... Atunu Roy ID:PG-02-27-11-007 Batch: 27 Major in Finance Department of Business Administration State University of Bangladesh

bearing ID:PG-02-27-11-007 under the Department of Business Administration State University of Bangladesh. -------------------------The Supervisor Md. has completed the interns Report on the topic entitled ―Credit risk Management on Pubali Bank Limited‖ as a part of the requirement for obtaining MBA degree. Raihanul Hasan Department of Business Administration State University Bangladesh. I wish him every success in his future endeavor.4 Certificate This is to certify that Atunu Roy. student of MBA. .

which is a major part of our MBA program. I. bearing ID no-PG-02-27-11-007 hereby submit my Internship report paper Credit Risk Management on Pubali Bank Limited.5 Letter of Transmittal April 27. Raihanul Hasan Department of Business Administration State University Bangladesh Subject: Submission of Internship report on „Credit risk Management on Pubali Bank Limited Dear Sir. Sincerely ____________________ Atunu Roy ID-PG-02-27-11-007 Batch: 27 Major in Finance Department of Business Administration . Atunu Roy. This report focuses on the theoretical and practical aspects of credit risk management and tried to have an idea of the credit risk management process in Pubali Bank Limited through a descriptive analysis. I express my gratitude to you for letting me work on this topic and for your crafty guidance. 2013 Md. It was an interesting topic to work on and I have enjoyed the exploration phase for data collection as it has revealed a new area of knowledge.

Individual efforts alone can never contribute in totality to a successful completion of any venture. Assistant Professor of Business Administration . My gratitude and appreciate goes to the individuals who have made valuable contribution toward this report.6 State University Bangladesh Acknowledgement The greatest and deepest gratitude to supreme authority of the Universe the almighty who has enabled me to undertake and complete this report. . Without his guidance and support it could be very difficult for the successful completion of my Internship Report. Raihanul Hasan. State University Bangladesh. I also express my gratitude to the employees of “Credit risk Management on Pubali Bank Limited” who helped me a lot during the Internship Report. At the very outset. I would like to take the opportunity to express my heartiest gratitude to my supervisor Md.

4 Scope of the study 11 12 13 13 14 .1 Introduction 1.7 Table of Contents Chapter no: Topic Introduction Page No. 01 03 04 05 06 07-09 10 Page No Prefatory Declaration Certificate Letter of Transmittal Acknowledgement Table of Contents Executive Summary Topic Chapter 1: Introduction 1.3 Methodology of the study 1.2 Objectives of the study 1.

5 Limitations of the study 13 Chapter 2: Pubali Bank Limited.7.4 Deposits and advances 2.1 What is credit? 34 34 .7.5 Credit 27 27 28 29 29-31 31-32 33 Chapter 3 : Credit Risk ManagementA Theoretical Framework Part: A 3.4 Trade Finance 2.7 Divisional Operations in Pubali Bank Limited      2.2 Functions of a bank 2.1 Role of Banks in the modern Economy 2.7.3.1 General Banking 2.Organization 2.3.1 Corporate Vision and Mission 2.6 Branch Network 2.8 1.3.5 Merchant Banking 2.2 Products & Services 2.3 Resources & Facilities 16 17 17 19 19 20-23 23 23-26 26 26-27 2.7.3 Accounts 2.2 Cash 2.3Company Profile of Pubali Bank Limited    2.7.

6 Why manage credit risk? 3.8 Limits 34-35 3638 38-39 39-40 40 40 41-44 44 44-45 45-47 47-48 49-50 50-52 53 53-54 54-55 55-56 56-59 Part: B 3.2 Credit-approval/Sanction 3.9 3.9.9.9 Managing Problem Credits/Recovery Chapter 4: Findings and Recommendations 4.2 What is credit risk? 3.9.9.1 Findings 4.9.6 Monitoring and Control of Individual Credits 3.9.7 Monitoring the Overall Credit Portfolio (Stress Testing) 3.2 Recommendations 60 61 61 62-63 Chapter 5: Conclusion .3 What is credit risk management? 3.3 Credit Documentation 3.5 Prerequisites for Efficient Risk Management 3.4 PRISM Model of credit risk management 3.1 Credit Processing/Appraisal 3.9.9.7 Risk Strategy 3.4 Credit Administration 3.8 Classification of credit 3.9 Credit Risk Management Process          3.5 Disbursement 3.9.

It gives an idea about the objective. It also attempts to capture the procedures practiced in Pubali Bank Limited (PBL) in relation to credit handling. The report has been segregated into seven separate chapters for the convenience of the reader. Chapter 5 includes the findings and recommendations of the study. Primary aims of any financial services firm are collect and manage risks on behalf of their customers and make a profit for its shareholders. Chapter 4 is contains the discussion of the entire credit handing procedure focusing the credit management systems. 64-65 Executive Summary Financial services firms are in the business of accepting risk. The purpose of this report is to have an idea about the credit risk management procedure in Pubali Bank Limited and then to assess its effectiveness in connection with. It is arranged in a manner that will give the reader a sequential idea of credit handling process. This report is intended to assist the reader in detailed understanding the credit risk management process. It incorporates the discussion on different departments of the bank and the products and services offered by the PBL. The ongoing development of contemporary risk management methods and the increased use of innovative financial products have brought about substantial changes in the business environment faced by credit institutions today. Chapter 2 provides the theoretical framework of the credit risk management process. Chapter 1 is the introductory part. Chapter 3 deals with the organization part of the Pubali Bank Limited. scope and methodology of the report.10 Topic Bibliography Page No. .

CHAPTER 1: INTRODUCTION .11 Chapter 6 concludes the report. Appendices are enclosed at the end to help the reader to gain a detailed idea.

Credit risk can be defined as the risk of losses caused by the default of borrowers. diversification. Default occurs when a borrower can not meet his financial obligations. growth of off-balance sheet derivatives. syndicated loans. market risk and other risk. Credit risk is the oldest and important risk which banks exposure and important of credit risk and credit risk management are increasing with time because of some reasons like economic crises and stagnation. Credit risk can alternatively be defined as the risk that a borrower deteriorates in credit quality. Primary aims of any financial services firm are collect and manage risks on behalf of their customers and make a profit for its shareholders. enterprise risks can be broadly categorized as credit risk.1 Introduction Financial services firms are in the business of accepting risk. financial globalization and BIS risk-based capital requirements.12 1. This definition also includes the default of the borrower as the most extreme deterioration in credit quality. loan selling. company bankruptcies. . declining and volatile values of collateral. banks increasingly measure and manage the credit risk on a portfolio basis instead of on a loan-by-loan. But. operational risk. Credit risk is considered as a critical factor that needs to be managed by the banks and financial institutions. borrowing more easily of small firms. taking collateral. securitization and credit derivatives. infraction of rules in company accounting and audits. In the financial arena. We may define ‗Risks‘ as uncertainties resulting in adverse outcome. credit insurance. Credit risk is managed at both the transaction and portfolio levels. adverse in relation to planned objective or expectations. In credit risk management banks use various methods such as credit limits.

supervision and control of the credit risk exposure. the compensation for the risk is adequate and sufficient capital support is there to buffer the risks.13 Credit Risk Management process permits the banks to proactively manage loan portfolios in order to minimize losses and earn a satisfactory level of return for shareholders. After independence of Bangladesh in 1972 this Bank was nationalized as per policy of the Government and renamed as Pubali Bank. Supervision and Control) and Credit Recovery procedures. Pubali Bank has established its own credit policy which will guide them in achieving their target of maximum value addition through an efficient and effective credit risk management. transparency. . and motivation with the spirit and conviction to excel in both value and image. To analyze in detail the credit risk management process of the bank and to make recommendations if needed. matching mitigations. The purpose of credit risk management is to ensure that individuals taking the risk have full knowledge about it. ii) iii) To gain knowledge about the credit related operations and maintenance in this bank. precision. 1. Credit Assessment. In this respect. It includes detection.2 Objectives of the study The objectives of this study are as follows: i) To have a sound understanding of credit risk management system and procedure followed in the Pubali Bank Limited. the bank or financial institution is exposed to an approved risk limit. measurement. Credit Approval. The bank is pledge-bound to serve the customers and the community with utmost dedication. Credit Risk Management process includes Credit Investigation. Financial Analysis. Banks and Financial Institutions have high exposure to credit risk and Pubali Bank was initially emerged in the Banking scenario of the then East Pakistan as Eastern Mercantile Bank Limited at the initiative of some Bangalee entrepreneurs in the year 1959 under Bank Companies Act 1913 . The prime focus is on efficiency. Documentation. Monitoring ( Follow up. the risk related decisions are in line with the business strategies.

3. 1.1 Sample selection The organization to be discussed is Pubali Bank Limited.3 Data analysis The credit risk management data of Pubali Bank Limited will be analyzed in a descriptive manner.1 Primary Data The primary data are collected from all the departments of Pubali Bank Limited by interviewing personnel of the respective departments. the analysis and the explanation are the authors‘ own. Secondary Data The secondary data of the study are based on a review of existing brochures. 1. 1. documents and database of Pubali Bank Limited.3. v) To have a general idea about the credit risk management performance of this bank.2 Sources of data The study is conducted on the basis of both primary and secondary data.3.2. The heads of the departments or senior executives have been interviewed. The industry best practices are largely based on Bangladesh Bank manual.4 Scope of the study . guidelines and databases. 1. 1. All the departments and functional areas will be covered with more emphasis on credit division. Books and published articles on this topic have also been consulted. 1. However.2.14 iv) To focus on the credit risk grading system for analyzing the credit assessment procedure of Pubali Bank Limited.2.3. sources of data and method of data analysis. 1.3.3 Methodology of the study The methodology includes the sample selection.

Pubali Bank Limited should give much attention to this area and this study will attempt to analyze their efforts and draw a complete picture of their practices.15 The scope of the study is entire Pubali Bank Limited. 1. ii) The bank officials though helpful in every respect do not have much time to explain the internal procedures. Bank's reputation is a critical factor for its success and therefore modern banks must follow appropriate guidelines. people are becoming more aware about the management of their resources. Management of credit portfolio is one of the major operations of the banks. iii) Many operations relating to the credit extension run simultaneously by different credit officials and it is difficult to capture the sequence of any particular credit proposal. It is now very important to know the internal processes of the banks and financial institutions to make informed decisions regarding their integrity. 1. Therefore. a case study has been conducted on Pubali bank limited giving more emphasis on the credit side of the institution compared to the other sides. they have even more responsibility to manage their credit portfolio smoothly. People are taking loans to start different types of businesses. as a 1 st generation bank. This report is a descriptive study which tries to focus on the theories and practices of credit risk management in the context of the financial institutions in Bangladesh. The usage of banking service for any type of financial activities is increasing day by day.5 Limitations of the study The limitations of the study are as follows: i) The credit policies and manuals of PBL are of confidential nature and thus it is difficult to collect the necessary literature and documents within this short time.5 Justification of the study In recent days. As the banks do business by lending their depositors' money. . policies and relevant manuals regarding credit extension and recovery. It will not focus on the comparable credit practices of other banks. scope. In connection with this effort. ability and capacity.

Chapter 2 Pubali Bank Limited Organization . v) Borrowers do not often have the time to cooperate in the information gathering process.16 iv) A structured filing procedure is often neglected which also poses difficulty in understanding the sequential procedure.

1 Role of Banks in the modern Economy The prosperity of a country depends upon its economic activities. They provide both short-term and long-term credits. Agriculture. Of all the functions of modern bank. The whole economy of a country is linked up with its baking system. Like any other sphere of modern socio-economic activities. Without adequate banking facility these three cannot flourish.2 Functions of a bank The functions of the bank are now wide and diverse.0 Pubali Bank Limited: Organization 2. The customers come from all walks of life. lending is by far the most important. For a rapid economic growth a fully developed banking system can provide the necessary boost. from a small business to a multi-national corporation having its business activities all around the world. Commerce and Industry provide the bulk of a country‘s wealth.17 2. 2. banking is a powerful medium of bringing about socioeconomic changes of a developing country. The banks have to satisfy requirements of .

therefore. The banking can.R. Chowdhury.(L. become complex and requires specialized skills. industrial and agricultural growth and prosperity of the country. The banking business has. therefore. As a result different types of banks have come into existence to suit specific requirements.18 different customers belonging to different social groups. They function as a catalytic agent for bringing about economic.2004) . be convinced ―a sector of economy on the one hand and as a lubricant for the whole economy on the other‖.

Primary Co-operative Bank Societies Source: A Textbook on banker's loans and advances.Chowdhury .& Com. Central Co-operative Bank Ltd. Bangladesh Ltd.19 Bangladesh Bank (Central Bank of the country) Commercial Banks Specialized Banks and Credit Agencies Co-operative Banks Natonalised Banks Private Bank Foreign Banks Traditional Banks Islamic Banks Bangladesh Krishi Bank(BKB) Rajshahi Krishi Unnayan Bank (RAKUB) Bangladesh Shilpa Bank (BSB) Bangladesh Shilpa Rin Sangstha (BSRS) Bank of Small Ind. L.R. (BASIC) Grameen Bank Karmasangsthan Bank Ansar-VDP Unnayan Bank Bangladesh Samabaya Bank Ltd.

. Mission Statement     To constantly seek to better serve our Customers. 2. Subsequently due to changed circumstances this Bank was denationalized in the year 1983 as a private bank and renamed as Pubali Bank Limited.3 Company Profile of Pubali Bank Limited The Bank was initially emerged in the Banking scenario of the then East Pakistan as Eastern Mercantile Bank Limited at the initiative of some Bangle entrepreneurs in the year 1959 under Bank Companies Act 1913. The Government of the People's Republic of Bangladesh handed over all assets and liabilities of the then Pubali Bank to the Pubali Bank Limited.20 Figure 2. Since then Pubali Bank Limited has been rendering all sorts of Commercial Banking services as the largest bank in private sector through its branch network all over the country.3. enabling the Employees to perform to the very best of their abilities. After independence of Bangladesh in 1972 this Bank was nationalized as per policy of the Government and renamed as Pubali Bank.1 Corporate Vision and Mission Vision Statement Economic Advancement in Traditional Way. Be pro-active in fulfilling our Social Responsibilities To review all business lines regularly and develop the Best Practices in the industry Working environment to be supportive of Teamwork.1 Types of Banks 2.

The services include mainly the following:    Deposit services. shipping lines. including the following. ATM Services. schools. decades of banking experience with national / international banks at home and abroad. Retail Banking Bank limited offers individuals the best services.Mobile-Bankingetc. A State-Of-The-Art Technology Banking The Bank will provide a state-of-the-art technology banking such as Any Branch Banking. They are suitably equipped to meet customer expectations and are available at all times to provide a single-window customized and confidential service. Various types of financing to cater to the banking requirements of multinational clients. to provide complete customer satisfaction:      Deposit services. Institutional Banking Pubali Bank Limited will offer various services to foreign missions. Convertible Taka Accounts. NGOs and voluntary organizations.3.Home-Banking. colleges and universities. Convertible Taka Accounts. contractors.2 Products & Services Service of the Professional Personal The officers of Pubali Bank limited have to their credit. . Current Account in both Taka and major foreign currencies. Current Account in both Taka and major foreign currencies. Local and foreign currency remittances.21 2. airlines.Tele-Banking. consultants.

Investment advice. Investment Business Counseling. mergers. Project & Infrastructure Development Finance. Issuance of Import L/Cs. Commodity Finance. Advising and confirming Export L/Cs. Various types of financing to cater to the banking requirements of multinational clients. Merchant Banking Advisory Services The Bank will provide Merchant Bank advisory services. Syndicated Finance. evaluation of projects. Online Banking Pubali Bank limited offers 'Any branch' banking service (to limited scale) that facilitates its customers to deposit. Working Capital and other finances.  Bonds and Guarantees. which include:   Corporate Deposit Accounts. offer complete packages in areas of promotion of new companies. Some of the services are:      Trade Finance. liaise . take-over and acquisitions. Pubali Bank Limited provides comprehensive banking services to all types of commercial concerns. withdraw and transfer funds through the counters of any of its branches within the country.Bonds and Guarantees. Corporate Banking Pubali Bank Limited caters to the needs of the corporate clients and provides a comprehensive range of financial services. Linkage Finance. Commercial Banking Being a commercial bank. .22   Local and foreign currency remittances.

23 with the Government with regard to rules and regulations. Farm and Off-Farm Credits (Rural) Out of Bank's social commitment towards the population at the grass-root level. Credit To Women Entrepreneurs The Bank believes in 'Equal Opportunity Policy' and as such has been contemplating to introduce credit programmers for willing and talented women entrepreneurs. management of new issues including underwriting support etc. Islamic Banking Services Pubali Bank Limited will open Islamic Banking Window as first initiation to serve the customers who are interested in banking based on Islamic Shariah. Trust Fund Management etc. Seed Money for Self-Employment The educated young people with an aptitude for organizing enterprises will be provided with the seed money primarily for self-employment and subsequently will be given advisory services as well as required fund for expansion into a fast growing productive and employment generating venture. Mutual Fund Management. Capital Market Operation The Bank will also introduce capital market operation which will include Portfolio Management. . it will participate in farm and off-farm credit programmers in rural Bangladesh to bring in economic buoyancy in the periphery. facilitating financial ease in acquiring various day to day consumer products such as usable appliances and other items. Underwriting. Consumer Credit Facility The Bank offers a Consumer Credit Scheme. Investors Account.

4 Deposits and advances 2.357 officials of different levels participated in Human Resources Development Programs. the remaining employees are all skilled banking professionals with varying degrees of experience and exposure. recruited from the leading local and foreign banks.4. Act as referee for customers. Both the Board and Management stress on developing human resources.  2. Other Services   Remit funds from one place to another through DD. Interest on Securities and issue Pay Orders. 57 (fifty seven) courses covering different subjects were organized at the Bank‘s Training Institute where 1. The Bank has a strong focus on imparting training towards enhancement of the skills and competencies of the employees. In the year-2007 the bank had 5.1 Deposits Schemes . Conduct all kinds of foreign exchange business including issance of L/C.3. Dividends. BBTA and other national institute.24 Counter For Payment of Bills Dedicated counters are available at Pubali Bank Limited's branches to receive the payment of various utility bills.270 officers and employees. etc. Locker facility for safe keeping of valuables and documents. TT and MT etc. 2. Excepting for the new inductees. Traveller's Cheque etc   Collect Cheques. Besides these.3 Resources & Facilities Total full time regular employee strength had increased to 300 by the year-end. the bank utilized the training services rendered by other training institutions like BIBM. Bills.

corporate bodies. which earned customer appreciation. products are widely welcomed by small depositors. Online banking service has been extending to cover almost the entire network of branches to enhance delivery system and provide the necessary competitive edge.50 percent. However. The Bank continued to provide its service arms to facilitate the collection of various utility bills.57 million as at 31 December 2007. The cost of deposit declined but was within the range of 8. the Bank introduced savings schemes to attract small savers belonging to fixed low-income group. The Bank maintained sufficient balances with correspondents outside Bangladesh to facilitate prompt settlement of payments under Letter of Credits commitments. The funds are maintained to meet Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR) of the Bank. In addition to the conventional deposit forms like Current. The growth over previous year was 19. Savings. 6843. Due to increase in Deposits.15 percent. .40 million in 2006.25 Deposit of the Bank showed a continuous increase during the year and in 2007 stood at TK. 1101. Mix of deposits improved during the year.2 Cash and Balances with Banks and Financial Institutions Cash and Balances with Bangladesh Bank was TK. the rate of interest on various deposits was lowered during the last quarter of the year under review. Surplus funds after meeting the SLR and CRR were placed on short – term deposits with several commercial banks. The cost of scheme deposits was higher than the conventional deposits and had reduced the net interest income during the year. Due to affordable installment sizes and customer driven service. 4652.52 million as against Tk.10. the CRR and SLR of the bank have correspondingly increased and such requirement was properly and adequately maintained.16 billion. The growing customers‘ confidence in Pubali Bank helped the necessary broadening of customer range that spanned private individuals. The Bank also provides Locker Services for its depositors. 2. multinational concerns and financial institutions.4. Short-Term Deposits and Term Deposits. The Bank introduced various products/ schemes to attract the depositors. Outstanding in such accounts in Bangladesh was TK.

37.549.4. Construction etc. yarn & fabrics for the RMG industry. cement clinkers.55 percent.4.53 percent during the year under review. Planned and calculated thrust to finance the leading RMG units helped improve .00% per annum. motor vehicles. 5556. 19.35 billion as against Tk. Investment activities centered around meeting the Bank‘s SLR and were mostly in the form of Government Treasury Bills having varying dates of maturity. Bank‘s clientele comprised of corporate bodies engaged in such vital economic sectors as Trade Finance.5 Consumer Banking The Bank continued to offer loans under Consumer Credit Scheme to the fixed income group to enable borrowers to acquire consumer products such as household appliances.3 Investments Investments of the Bank were TK. 2. Steel-Re-Rolling. both in Urban and Rural areas. yield.58 million showing an increase of 11. tenor and collateral arrangements.16 percent over the previous year. total export business handled was Tk.17 million as at December 31.46 percent.6 Foreign Exchange and Foreign Trade Total import business handled during the year was Tk. Edible Oil. Ship Scrapping.26 2. exposure. mobile phone etc. 2. Textiles. vessels for scrapping.4 Loans and Advances The Bank‘s total Loans and Advances stood at TK. 2007 showing a growth of 25. the Bank is now better positioned to create and deliver new services and products to its retail customers. CPO & CDSO for edible oil processing and consumer items. The portfolio was further diversified to avoid any risk of industry concentration and remained in line with the Bank‘s credit norms to risk quality. The average yield on the bills was 7. 48. 2.32 billion of the previous year.91 billion indicating a growth of 12.4. 50. Cement. With the expansion of the branch network. Ready Made Garments. Transport. Main import items were industrial raw materials. On the other hand. office equipment. The growth was 29. Small Business Loan Scheme was developed for providing financial assistance to small business units at urban and rural areas who cannot offer tangible securities.4.

mainly LC payment sand negotiation of Export Bills.27 the Bank‘s performance in the export sector. Hence. The Bank has applied for Merchant Banking License to the Securities and Exchange Commission and Intends to introduce Merchant Banking functions in 2009. It is an avijat area. Dhaka.com BRIEF OF SATMOSJID ROAD BRANCH Satmosjid Road Branch situated at Dhanmondi. the Bank intends to start proper dealing operation in foreign currency as soon as possible. Pubali Bank Limited is the largest Commercial Bank in Private Sector in Bangladesh.6 Branch Network The Bank has established a wide network of branches in urban and rural areas totaling 419. At the initial stage the activities would center around issue Management.4. so the importance of the branch is vital.5 Merchant Banking Merchant Banking activity has lately gained popularity in our country. Special attention was given so that the Bank always remained within the open Position Limit prescribed by the Bangladesh Bank. . As a first step towards setting up a dedicated dealing room. Investments for SLR purposes and participation in tenders for purchase of government treasury bills were also performed by Treasury Department. 2. the Treasury Department is already connected to Reuters. It provides mass banking services to the customers through its branch network all over the country. Prudent dealing in foreign currency could improve the earnings of the Treasury Department. The satisfactory performances in Foreign Trade and Foreign Exchange sector helped the Bank to increases its fee-based income. Source: www. 2. The Bank‘s foreign currency dealings were supported by customer driven transactions. 2. Portfolio Management and Underwriting.pubalibangla.7 Treasury The Bank‘s Treasury function continued to concentrate on local money market operations which primarily include term placement of surplus fund and inter bank lending and borrowing at call.

3 Accounts 2. Cash credit.7. The customers are also satisfied having the quality service from the branch 2. in Pubali Bank Limited. All types of utility bills are taken here. Various types of loans and advances are given from here. car loan.4 Trade Finance 2. doctor‘s loan.7. STD. house building loan. PSP.7.7.5 Credit 2.28 All types of services what pubali bank ltd produces are given from the branch. Probashi loan and more other types of CLS are given from here.1 General Banking The General Banking division. FDR. SSP ETC. various types of deposit accounts like as saving account. The loan section of the branch is very active and qualified. For businessman the current account is very much useful. so classified loan is to the zero level in the branch.1 General Banking (GB) 2. The manager and other officials are prompt to satisfy the target given by management.7.2 Cash 2. The deposit and loans is satisfactory of the branch.7 Divisional Operations in Pubali Bank Limited The operations in Pubali Bank limited are carried out through 5 separate departments: 2. generally performs the following functions: a) Account opening b) Cheque book issue c) FDR issue d) FDR encashment e) Product issue and encashment f) Account transfer from one branch to another branch g) Pay order issue and encashment h) Fund transfer from one account to other account i) Inward Remittance .7.

2. the cash division performs an integral part of its banking operations. the cash division gives credit advice to other branches using Inter Branch Credit Advice (IBCA) and debit advice through Inter Branch Debit Advice (IBDA). At the time of payment.2 Cash Cash division is the center point of any bank. 'Clearing' seal is attached for cheques inside Dhaka and 'Collection' seal is attached for cheques outside Dhaka. 'cash received' and 'posted' seal is attached to the deposit slip. In Pubali Bank Limited. The cash division of a branch is connected to other branches through internet and thus it can receive and pay any cheque drawn by or drawn on any other branches. necessary postings are made in Micro Bank software. All the activities are also recorded in different registers. When payment is made from other branch accounts. The cash division also receives the outward clearing checks. IBDA and IBCA are treated as instruments.7. In this regard. At the time of receipt. the payer branch issues IBCA. The seals used here are 'cash paid'. If the check is for a big amount. The tellers in the cash division receive cash from the clients and gives necessary postings in the PIBS (Pubali Bank Integrated Banking Software).29 j) Outward Remittance k) Demand Draft (DD) issue l) Stop payment order m) Issue of solvency certificate n) Inward and outward clearing through the software 'PIBS' For every job. Related postings are made by the cash division in the Micro Bank software. the receiver branch issues IBDA. 'posted' and 'signature verified'. When payment is received for other branch. the tellers first verify the signatures and then make payment. then it has to be authorized by the cash in charge and branch in charge. . 'Crossing' seal is given for account pay cheques.

3 Accounts In Pubali Bank Limited. Weekly positions of all the branches are consolidated by the central accounts department and then sent to the Bangladesh Bank. Petty cash transactions and bills are also prepared and posted by the accounts division. Branch Level establishment. charges for depreciation on fixed assets and accrued interest. one copy to the Treasury and one copy is preserved in the office record. profit and Loss Account.4 Trade Finance Trade Finance division operates independently in the branches and it generally deals with the followings: a) Import L/C b) Export L/C c) Local & foreign Bills Purchased d) Remittance . These statements are disseminated in the network so that every branch can have access to its accounting information at the beginning of each working day. The accounts division prepares the daily and weekly position of the branch in triplicate using the General Ledger. the cash position has to be matched with the cash in hand balances. It has to prepare SBS-1 (monthly) and SBS-2 (quarterly) and these statements have to be sent to Bangladesh Bank.30 At the end of the day. At the month end. The accounts division performs other jobs also. One copy is sent to the Branch Manager. requisition and other personnel related activities are the responsibilities of the accounts division. 2. A 'Cash Position Reserve Sheet' is prepared and maintained by the cash in charge. Online accounts are tallied by checking the IBDA and IBCA. It has to tally the transaction journal with each voucher. Overdraft and Advances Position. accounts division prepares Profit Result Sheet for the month ended and Salary Sheet. Transaction journal. Full Balance position etc. The central IT department generates several important statements such as the General Ledger.7. the accounts related information is fully computer generated.7. 2.

Bank's Liability A/c Cr. Insurance cover note. After shipment. PAD Dr. an L/C is opened and an operational entry for L/C opening is passed in MicroBank. The authenticity and the content of the documents are checked and if the authority is satisfied. SWIFT charges A/c Cr. At this time. payment is made. If the bank is satisfied with all the documents. VAT Stamp Charges Cr. TIN etc. Interbranch Tk. basic queries about the IRC. The negotiating bank sends the documents to the issuing bank. IMP form for Bangladesh Bank reporting.31 a) Import L/C When a client comes to open an L/C. a PAD (Payment Against Document) loan is crested in the name of individual client and an operating entry is passed. the exporter submits the document to the negotiating bank. Margin A/c Commission A/c Cr. At the same time. VAT registration number. Customer's Liability A/c Dr. the bank charges for commission and other related things and pass an operational entry. A/c Profit on exchange trading Cr. Application Form. are made. Cr. . Request letter to open an L/C. Client C/D A/c Dr. Then the client presents such necessary documents as Pro-forma Invoice. Cr. Cr. L/C authorization form (Commercial or industrial) etc.

R. in favor of a supplier inside or outside the original beneficiary's country. 2. processing. a forced loan or a Loan Against Trust Receipt (LTR) is created. This facility my be extended in the form of Hypothecation of goods.5 Credit The credit division is also an independent division in Pubali Bank limited. interbranch A/c is credited because nostro accounts are maintained by the Head Office. Customer's Liability Cr. It has a certain limit and generally issued for not more than 180 days. Margin A/c Dr.32 Here. It is to be noted that PAD is created for only one month and if it is not adjusted within this period. Packing credit is essentially a short term advance with a fixed repayment date granted by the bank to an eligible exporter for the purpose of buying. the bank adjusts the PAD or LTR against the client's CD account and releases the documents.7. Bank's Liability Dr. Pledge or Export Trust Receipt. Another entry is passed here for reversal of liability. packing and shipping of the goods meant to be exported (L. manufacturing. When the client makes payment. It is allowed to an exporter only when he has obtained a foreign buyer's order. This division basically deals with the extension of credit to the worthy clients and thus to make a profit from the interest . A Back to Back L/C is essentially a secondary credit opened by a bank on behalf of the beneficiary of the original credit. b) Export L/C Pubali Bank Limited provides money to the borrowers in terms of Packing Credit and Back to Back L/C. Then the bill of entry must be obtained from the client and the amount of payment must be reported to the Bangladesh Bank. PAD Cr.Chowdhury 2004).

If the call report passes their initial scrutiny. It keeps record of the obtained documents using security document software. If the board approves of disbursement and the client fulfills all the necessary legal and procedural requirements. . It is then sent to the Head of Credit (HOC) and Head of Marketing (HOM). If satisfied. the branch is ordered to prepare a full fledged proposal. After disbursement. Necessary postings are made through Micro Bank software. It is also sent to the HOC HOM and Managing Director (MD). they enclose their recommendations and give positive nod to the branch to prepare a credit memorandum. The loan administration department ensures that all the guarantee and security arrangements are properly done and maintained. A call report includes basic information about the client as well as the financial and operational position and market reputation. The credit division arranges for different types of loans and high emphasis is given on Small and Medium Enterprises (SMEs). A sanction advice is prepared and provided to the client. When a client applies for certain amount of credit. The credit officers often visit the business premises of the client to have an idea about his/ her business conditions.33 charges. then only the loan is sanctioned. the credit division continuously monitors the client's business and loan repayment performance and takes necessary actions in case of non-repayment. At this time. client is requested to present different legal documents to the loan administration division. The report of these inspection visits are also enclosed in the call report. The bank invests the money of the depositors and thus the credit division has to be very cautious in terms of credit extension. It also issues bank guarantee in favor of the clients. There are Relationship Managers (RM) in the branches who have the responsibility to gather valued client where the bank can invest. the credit officers first assess the financial and operational viability of the client and prepare a call report.

34 Chapter 3: Credit Risk Management: A Theoretical Framework .

Risk is the element of uncertainty or possibility of loss that exist in any business transaction. and finance leases. including off-balance sheet transactions. It is an arrangement for deferred payment of a loan or purchase. Credit risk is the likelihood that a borrower or counter party will be unsuccessful to meet its obligation in accordance with agreed terms and conditions. But bank supervisors. Bank of Mauritius) 3. to a borrower. (Wikipedia dictionary) Credit means a provision of. and promoting sound risk management practices have become central elements of good supervisory practice.2 What is credit risk? Risk means the exposure to a chance of loss or damage. . Indeed. identifying. assessing.35 3. 3. overdrafts. Bank credit is a credit by which a person who has given the required security to a bank has liberty to draw to a certain extent agreed upon. funds or substitutes for funds. or commitment to provide. and the management of risk has accordingly become a core function within banks. such as the Bangladesh Bank. (Wikipedia dictionary) Credit risk means the risk of credit loss that results from the failure of a borrower to honor the borrower‘s credit obligation to the financial institution. credit refers to the loans and advances made by the bank to its customers or borrowers. (Guideline on credit risk management. bills purchased and discounted. (Guideline on credit risk management.0 Credit Risk Management: A Theoretical Framework Part: A Contemporary banking organizations are exposed to a diverse set of market and non-market risks.1 What is credit? In banking terminology. customers‘ lines of credit. Banks have invested in risk management for the good economic reason that their shareholders and creditors demand it. also have an obvious interest in promoting strong risk management at banking organizations because a safe and sound banking system is critical to economic growth and to the stability of financial markets.

36 Bank of Mauritius). Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms (Basel Committee on Banking Supervision. . 2000).

1: Flowchart of credit risk . L.R. (2002).. A Text Book on Banker's Advances.37 The constituent elements of credit risk can be viewed from the following flowchart: Credit risk What is the risk that the bank does not fully recover the loan? Business risk What is the risk that the business fails to generate sufficient cash to repay the loan? Security Risk What is the risk that the realized value of the security does not cover the exposure? Industry risk Company risk Control risk Cover risk Supplies risk Sales risk Position risk Management risk Performance risk Management competence risk Management integrity risk Source: Chowdhury. 2nd edition Figure 3.

Potential losses in the credit business can be divided into — expected losses and — unexpected losses (Credit Approval Process and Credit Risk Management.3. While the development of concepts for the assessment of market risks has shown considerable progress.3. Planning and management. Oesterreichische Nationalbank) Risk management is thus a continuous process to increase transparency and to manage risks. 3. Aggregation.3 What is credit risk management? Risk management contains 3.3. Measurement The consistent assessment of the three types of risks is an essential prerequisite for successful risk management. as well as monitoring of the risks arising in a bank's overall business.1.3. the methods to measure credit risks and operational risks are not as sophisticated yet due to the limited availability of historical data.3.3.4. 3.2005. Identification. Identification A bank's risks have to be identified before they can be measured and managed. Typically banks distinguish the following risk categories: — Credit risk — Market risk — Operational risk 3. 3.5.3. 3.3. Oesterreichische National bank) .1 Calculation of Credit risk Credit risk is calculated on the basis of possible losses from the credit portfolio.1. 3.38 3.2. 3. 2005.2. Measurement.2.3. (Guidelines on credit risk management.

In addition. thus ensuring an institution's capacity to bear these risks. 2005. (Credit Approval Process and Credit Risk Management. Oesterreichische National bank) 3.3. all expected cash flows. This applies to risks both within a risk category as well as across different risk categories. i. 3.5. the effectiveness of the measures implemented in risk controlling is measured. and new impulses are generated if necessary. Unexpected losses result from deviations in losses from the expected loss.39 Expected losses are derived from the borrower's expected probability of default and the predicted exposure at default less the recovery rate.4. Monitoring Risk monitoring is used to check whether the risks actually incurred lie within the prescribed limits. Planning and management Furthermore.3 Aggregation When aggregating risks. They have to be secured by the risk coverage. 2000) .3. (Basel Committee on Banking Supervision. risk management has the function of planning the bank's overall risk position and actively managing the risks based on these plans. The most commonly used management tools include: — Risk-adjusted pricing of individual loan transactions — Setting of risk limits for individual positions or portfolios — Use of guarantees and credit insurance — Securitization of risks — Buying and selling of assets 3. Unexpected losses are taken into account only indirectly via equity cost in the course of income planning and setting of credit conditions. it is important to take into account correlation effects which cause a bank's overall risk to differ from the sum of the individual risks. The expected losses should be accounted for in income planning and included as standard risk costs in the credit conditions. especially from the realization of collateral.3.e.

40 .

Oesterreichische National bank) 3. Repayment focuses .4 PRISM Model of credit risk management PRISM model is a contemporary model used in the credit risk management in modern world. 2005. Intention or loan purpose serves as the basis for repayment.2: Risk Management Source: (Credit Approval Process and Credit Risk Management. an acronym for – P = Perspective R = Repayment I = Intention S = Safeguards M = Management Management.41 Figure 3. a PRISM component. centers on what the borrower is all about. It is called PRISM. including history and prospects.

whereas new debt or equity injections provide external cash sources.5.2 Processes and organizational structures and 3. Furthermore. (Credit Approval Process and Credit Risk Management. .5 Prerequisites for Efficient Risk Management In order to implement efficient risk management. measured. measure the effect of management instruments on the bank's risk position. pulls other sections together: the deal's risks and rewards and the operating and financing strategies that are broad enough to have a positive impact on shareholder value while enabling the borrower to repay the loan (Morton Glantz 2004). sound and consistent 3. 3.1 Methods 3. Perspective.5.2 Processes and organizational structures Processes and organizational structures have to make sure that risks are measured in a timely manner that risk positions are always matched with the defined limits.5. 2005. it is necessary to determine how risk measurement can be combined with determining the limits. Internal safeguards originate from the quality and soundness of financial statements. and control these risks. Concerning the processes. Oesterreichische National bank) 3.42 on internal and external sources of cash. while collateral guarantees and covenants provide external safeguards. and that risk mitigation measures are taken in time if these limits are exceeded. risk controlling.1 Methods The methods used show how risks are captured.2 IT systems and an IT infrastructure are required for all five components of the control cycle. The organizational structure should ensure that those areas which cause risks are strictly separated from those areas which measure. 3. manage. and monitor the risk positions in terms of observing the defined limits and other requirements. In order to choose suitable management processes.5. and aggregated into a risk position for the bank as a whole. plan. as well as monitoring. Internal operations and asset sales produce internal cash. The final component. reporting processes have to be introduced. the methods should be used to determine the risk limits.5.

5. — as well as an automated warning mechanism prior to reaching critical risk limits. The risk strategy serves to establish an operational link between business orientation and risk-bearing capacity. bank-wide risk management requires the definition of a risk strategy which is derived from the bank's business policy and its risk-bearing capacity.6 Why manage credit risk? The reasons behind managing credit risks are as follows (Amitabh Bhargava. — The aggregation of information to obtain values relevant to risk controlling. The sales units contribute their perspective concerning market requirements and the possible implementation of the risk strategy. Among other things. The risk strategy in an operational sense should be prepared at least every year. and — The definition of operational indicators such as core business. The proposal for a risk strategy thus worked out will be presented to the executive board.43 3. 3. Risk strategy is defined as — The definition of a general framework such as principles to be followed in dealing with risks and the design of processes as well as technical-organizational structures.2004): a) Increase shareholder value — Value creation — Value preservation — Capital optimization b) Instill confidence in the market place c) Alleviate regulatory constraints and distortions thereof.7 Risk Strategy A successful. 3. and following their approval. 2005. Oesterreichische National bank) . It contains operational indicators which guide business decisions. with risk management and sales cooperating by balancing risk and sales strategies. and limits.3 IT systems and an IT infrastructure IT systems and an IT infrastructure are the basis for effective risk management. risk targets. the IT system should allow — The timely provision and administration of data. passed on to the supervisory board for their information. (Credit Approval Process and Credit Risk Management.

44 3. and the capital allocation method selected.1 Methods of Defining Limits The risk limits in the bank's individual business units are based on the bank's business orientation.8. It is intended to ensure that the risks can always be absorbed by the predefined coverage capital. The parameters should be combined using automated interfaces. — In order to guarantee effective risk management.8 Limits The definition of limits is necessary to curb the risks associated with bank's activities. When the limits are exceeded. — Employees should be able to understand how and why the indicators are determined and interpreted. This is intended to ensure acceptance of the data and the required measures. and control the limits.g. 3. A consistent limit management system should be installed to define. 2006) . This ensures that errors due to manual entry cannot occur during the data collection process. — The defined indicators should be used consistently throughout the bank. monitor. it is essential to monitor risks continuously and to initiate clear control processes in time. credit decision and credit portfolio management should be closely linked to limit monitoring. The data should be consistent with the indicators used in sales and risk controlling. (Bernanke. risks must be reduced by taking such steps as reducing exposures or using financial instruments. Therefore. e. Such a system has to meet the following requirements: — The parameters used to determine the risks and define the limits should be taken from existing systems. when limits are exceeded. its strategy.

(Bernanke. country.8.1 Product. (Bernanke. (Bernanke.8. They also define industry limits in order to avoid a concentration of risks in individual industries that are subject to a degree of risk depending on the business cycle. among other things.8. These limits allow banks to manage their maximum risks efficiently. as well as for project finance. country. business area. as it is easy to determine and monitor unsecured portions. and thus to be able to avoid losses as far as possible by withdrawing from certain exposures. Banks with an international focus can also define country limits in order to manage their risks arising from transactions in other regions.2.3 Limits on unsecured portions The definition of limits for unsecured portions restricts loans that are granted without the provision of collateral or which are collateralized only partly.45 3.2 Limit Structure The maximum risk limit is determined by the capital allocated to cover credit risks in the planning process.2.8. 2006) 3. there are further limit categories: 3.4 Individual customer limits 3. 2006) Besides the types of limits mentioned above.8. and industry limits 3.1 Product. .2. One important success factor in the effective use of limits for risk controlling purposes is that a unit or an employee has the appropriate responsibility for an organizational unit which is assigned a limit.2. business area. and industry limits Product limits can be defined. for loans to retail and corporate customers. This is the only way to ensure that compliance with the limits is monitored and suitable measures are taken.2 Risk class limits 3.2.8.8.8. 2006) 3. The bank's organizational structure has a significant impact on the way in which the limits are designed.3 Limits on unsecured portions 3.2. for real estate loans.2.2 Risk class limits Monitoring and limiting the concentration of exposures in certain risk classes is necessary to be able to detect a deterioration of the portfolio in time.

2004) Some banks check the compliance with the limits immediately during the credit approval process. In practice. Prior to the credit decision. It needs to be determined if compliance with the limits should be examined before or after the credit decision is taken. and is not a component of the individual loan decision. it is necessary to define how strictly these limits should be applied.2.4 Limit Monitoring and Procedures Used When Limits Are Exceeded The stipulated limits can have a direct impact on the credit approval. i. (Bernanke. the more likely they are to yield control impulses that can be taken into account already at the time of approval of individual loans. Such ex-post observation can result in a relatively high number of cases in which limits are exceeded. the rigidity of limits varies in terms of their impact on a bank's business activities. — In addition.8. 2001) 3.46 3. The main purpose for their application is the prevention of cluster risks in the credit portfolio. as otherwise the viability of the bank as a whole would be endangered. thus reducing the effectiveness of the limit stipulations. — Certain limits are defined rigidly and must never be exceeded. there are early warning indicators that indicate the risk of exceeding limits ahead of time. but that early warning indicators point out the risk of exceeding a rigid limit in time to make sure that appropriate countermeasures can be taken immediately (Burns and Stanley.8. In practice. after the credit approval based on the portfolio under review. 2006) 3. This differentiation ensures that control signals are sent out not only after the (rigid) limits has been exceeded.3 Rigidity of Limits In order to allow the use of limits to manage risks.e. (Amitabh Bhargava.4 Individual customer limits Limits for individual borrowers represent the most detailed level of risk controlling. The credit decision is taken based on the borrower's credit standing and any collateral.8. Bringing limit monitoring into play at this early stage is also referred to as ex- . The more precisely the limits are defined. compliance with the relevant limits is checked in case the credit is approved. this compliance is usually checked ex post. but independently of the portfolio risk.

Figure 3. Oesterreichische National bank) The limit utilization has to be documented in the credit risk report.2 Credit approval/sanction 3. Ex-ante monitoring is quite complex.9.1 Credit processing/appraisal 3.3 Credit documentation 3. This helps prevent the defined limits from being exceeded in the course of approving new loans.3 Responsibilities in case of excess over limit Source: (Credit Approval Process and Credit Risk Management.9. Processes and responsibilities concerning measures to be taken when limits are exceeded have to be defined clearly.4 Credit administration . Part: B 3. 2005.9.47 ante monitoring. The decision makers responsible have to be informed depending on the extent to which the limits are exceeded and the approach taken to remedy the situation.9.9 Credit Risk Management Process Credit risk management process should cover the entire credit cycle starting from the origination of the credit in a financial institution‘s books to the point the credit is extinguished from the books (Morton Glantz. It should provide for sound practices in: 3. 2002).

The next stage to credit screening is credit appraisal where the financial institution assesses the customer‘s ability to meet his obligations. 2002).6 Monitoring and control of individual credits 3. the criteria may include rejecting applications from blacklisted customers.48 3.9.5 Disbursement 3. It must be recognized that collateral and guarantees are merely instruments of risk mitigation.8 Credit classification and 3. which would act as a guide for their officers to determine the types of credit that are acceptable. Financial institutions should set out pre-qualification screening criteria. substitutes for a customer‘s ability to generate sufficient cash .9. by no means. In this connection.9 Managing problem credits/recovery 3.1 Credit Processing/Appraisal Credit processing is the stage where all required information on credit is gathered and applications are screened. Institutions should establish well designed credit appraisal criteria to ensure that facilities are granted only to creditworthy customers who can make repayments from reasonably determinable sources of cash flow on a timely basis (Morton Glantz.9. These criteria would help institutions avoid processing and screening applications that would be later rejected. all credits should be for legitimate purposes and adequate processes should be established to ensure that financial institutions are not used for fraudulent activities or activities that are prohibited by law or are of such nature that if permitted would contravene the provisions of law.9.9.7 Monitoring the overall credit portfolio (stress testing) 3. They are. Credit application forms should be sufficiently detailed to permit gathering of all information needed for credit assessment at the outset. Moreover. Financial institutions usually require collateral or guarantees in support of a credit in order to mitigate risk. collected.9. For instance. financial institutions should have a checklist to ensure that all required information is. in fact. Institutions must not expose themselves to reputational risk associated with granting credit to customers of questionable repute and integrity.

provide for acceptability of various forms of collateral. 2002). taking into account the requirements of the Bangladesh Bank guidelines dealing with the matter. and an assessment of the terms and conditions of the syndication. prudential working capital ratio. — the borrower‘s capacity to repay based on his business plan. . and contributions to such capital by the borrower itself. — risk profile of the borrower and the sensitivity of the applicable industry sector to economic fluctuations. The institution must carry out its own due diligence. in which case a credit report should be sought from them. their periodic valuation. Such a policy shall. a participating financial institution should have a policy to ensure that it does not place undue reliance on the credit risk analysis carried out by the lead underwriter. the appraisal criteria will focus on: — amount and purpose of facilities and sources of repayment. including credit risk analysis. In the case of loan syndication. — integrity and reputation of the applicant as well as his legal capacity to assume the credit obligation. Collateral and guarantees cannot obviate or minimize the need for a comprehensive assessment of the customer's ability to observe repayment schedule nor should they be allowed to compensate for insufficient information from the customer. Care should be taken that working capital financing is not based entirely on the existence of collateral or guarantees. if relevant. As a general rule. process for ensuring their continuing legal enforceability and realization value (Morton Glantz. and other institutions. past experience of working capital financing.49 flows to honor his contractual repayment obligations. among other things. Financial institutions must have a policy for valuing collateral. Such financing must be supported by a proper analysis of projected levels of sales and cost of sales. — performance of the borrower in any credit previously granted by the financial institution. and projected cash flows using different scenarios.

and — Management capacity of corporate customers (L.Chowdhury. — current and forecast operating environment of the borrower. — borrower‘s business expertise. with proper identification of individuals/committees involved.R. Depending on the nature and size of credit. taking into account the existence of any previous charges of other institutions on the collateral. Approval authorities will cover new credit approvals. — adequacy and enforceability of collateral or guarantees. Prudent credit practice requires that persons empowered with the credit approval authority should not also have the customer relationship responsibility.9. — physical inspection of the borrower‘s business premises as well as the facility that is the subject of the proposed financing. and changes in terms and conditions of previously approved credits. An accountability regime should be established for the decision-making process. particularly credit restructuring. in accordance with the Board‘s policy. Depending on the size of the financial institution. Approval authorities should be sanctioned by the board of directors. it should develop a corps of credit risk specialists who have high level expertise and experience and demonstrated judgment in assessing. — background information on shareholders. 2004). it would be prudent to require approval of two officers on a credit application. directors and beneficial owners for corporate customers. accompanied by a clear audit trail of decisions taken. .50 — cumulative exposure of the borrower to different institutions. approving and managing credit risk. renewals of existing credits. Some approval authorities will be reserved for the credit committee in view of the size and complexity of the credit transaction. Approval authorities of individuals should be commensurate to their positions within management ranks as well as their expertise. 3. The approval process should be based on a system of checks and balances. All this must be properly documented.2 Credit-approval/Sanction A financial institution must have in place written guidelines on the credit approval process and the approval authorities of individuals or committees as well as the basis of those decisions. all of which should be fully documented and recorded.

Oesterreichische National bank) .4: Credit Approval Process Source: (Credit Approval Process and Credit Risk Management. 2005.51 Figure 3.

The Bangladesh Bank will pay particular attention to the quality of files and the systems in place for their maintenance. signed loan agreements) in credit files while retaining the originals in more secure custody. The format of credit files must be standardized and files neatly maintained with an appropriate system of cross-indexing to facilitate review and follow up. If a subsidiary file is created. Institutions must ensure that contractual agreements with their borrowers are vetted by their legal advisers (L. A separate credit file should be maintained for each customer. The checklist should also include the identity of individual(s) and/or committee(s) involved in the decision-making process (Morton Glantz. Documentation establishes the relationship between the financial institution and the borrower and forms the basis for any legal action in a court of law. financial institutions should consider keeping only the copies of critical documents (i. facility letters. Financial institutions must establish policies on information to be documented at each stage of the credit cycle. impairment recognition. credit analysis.9. Credit applications must be documented regardless of their approval or rejection. The depth and detail of information from a customer will depend on the nature of the facility and his prior performance with the institution. credit monitoring. foreclosure of impaired loan and realization of security. it should be properly cross-indexed to the main credit file (L.52 3.R. . For security reasons. collateral valuation. including credit application. Financial institutions should maintain a checklist that can show that all their policies and procedures ranging from receiving the credit application to the disbursement of funds have been complied with.3 Credit Documentation Documentation is an essential part of the credit process and is required for each phase of the credit cycle.R..e.Chowdhury. those of legal value. Credit files should also be stored in fire-proof cabinets and should not be removed from the institution's premises.2004). All documentation should be available for examination by the Bangladesh Bank. credit approval. 2002).Chowdhury.2004).

.9.4 Credit Administration Financial institutions must ensure that their credit portfolio is properly administered. loan agreements are duly prepared. 2005.5: Credit documentation Source: (Credit Approval Process and Credit Risk Management. renewal notices are sent systematically and credit files are regularly updated. as a minimum. An institution may allocate its credit administration function to a separate department or to designated individuals in credit operations. depending on the size and complexity of its credit portfolio (Credit Risk Management: Industry Best Practices2005. cross-indexed. ensure that: — credit files are neatly organized. that is.53 Figure 3. and their removal from the premises is not permitted. Bangladesh Bank). A financial institution‘s credit administration function should. Oesterreichische National bank) 3.

54

— the borrower has registered the required insurance policy in favor of the bank and is regularly paying the premiums; — the borrower is making timely repayments of lease rents in respect of charged leasehold properties; — credit facilities are disbursed only after all the contractual terms and conditions have been met and all the required documents have been received; — collateral value is regularly monitored; — the borrower is making timely repayments on interest, principal and any agreed to fees and commissions; — information provided to management is both accurate and timely; — responsibilities within the financial institution are adequately segregated; — funds disbursed under the credit agreement are, in fact, used for the purpose for which they were granted; — ―back office‖ operations are properly controlled; — the established policies and procedures as well as relevant laws and regulations are complied with; and — on-site inspection visits of the borrower‘s business are regularly conducted and assessments documented (L.R.Chowdhury,2004).

55

Source: (Credit Risk Management: Industry Best Practices2005, Bangladesh Bank)

56

Figure 3.4: Functions of credit administration department 3.9.5 Disbursement Once the credit is approved, the customer should be advised of the terms and conditions of the credit by way of a letter of offer. The duplicate of this letter should be duly signed and returned to the institution by the customer. The facility disbursement process should start only upon receipt of this letter and should involve, inter alia, the completion of formalities regarding documentation, the registration of collateral, insurance cover in the institution‘s favour and the vetting of documents by a legal expert. Under no circumstances shall funds be released prior to compliance with pre-disbursement conditions and approval by the relevant authorities in the financial institution (L.R.Chowdhury,2004).

3.9.6 Monitoring and Control of Individual Credits To safeguard financial institutions against potential losses, problem facilities need to be identified early. A proper credit monitoring system will provide the basis for taking prompt corrective actions when warning signs point to a deterioration in the financial health of the borrower. Examples of such warning signs include unauthorized drawings, arrears in capital and interest and a deterioration in the borrower‘s operating environment (Morton Glantz, 2002). Financial institutions must have a system in place to formally review the status of the credit and the financial health of the borrower at least once a year. More frequent reviews (e.g at least quarterly) should be carried out of large credits, problem credits or when the operating environment of the customer is undergoing significant changes. In broad terms, the monitoring activity of the institution will ensure that: — funds advanced are used only for the purpose stated in the customer‘s credit application; — financial condition of a borrower is regularly tracked and management advised in a timely fashion; — borrowers are complying with contractual covenants; — collateral coverage is regularly assessed and related to the borrower‘s financial health; — the institution‘s internal risk ratings reflect the current condition of the customer; — contractual payment delinquencies are identified and emerging problem credits are classified on a timely basis; and — problem credits are promptly directed to management for remedial actions.

— details of customers' business plans. and — Unfavorable liquidity conditions. encompassing: — opinions from other financial institutions with whom the customer deals. Such stress analysis can reveal previously undetected areas of potential credit risk exposure that could arise in times of crisis (Morton Glantz. Bangladesh Bank). and — any relevant board resolutions for corporate customers. 3. 2002). — findings of site visits. in particular variances respecting projected cash flows and sales turnover (Credit Risk Management: Industry Best Practices2005. The results of this analysis should then be factored into the assessment of the adequacy of provisioning and capital of the institution. Possible scenarios that financial institutions should consider in carrying out stress testing include: — Significant economic or industry sector downturns. .7 Monitoring the Overall Credit Portfolio (Stress Testing) An important element of sound credit risk management is analyzing what could potentially go wrong with individual credits and the overall credit portfolio if conditions/environment in which borrowers operate change significantly. — Adverse market-risk events. — audited financial statements and latest management accounts. The borrower should be asked to explain any major variances in projections provided in support of his credit application and the actual performance. — financial budgets and cash flow projections.9. the above monitoring will include a review of up-to-date information on the borrower.57 More specifically.

6: Early Warning Systems Source: (Credit Approval Process and Credit Risk Management. Oesterreichische National bank) Financial institutions should have industry profiles in respect of all industries where they have significant exposures. Such profiles must be reviewed /updated every year. and credit impairment recognition and measurement policy. Each stress test should be followed by a contingency plan as regards recommended corrective actions. The results must serve as an important input into a review of credit risk management framework and setting limits and provisioning levels (Morton Glantz.58 Figure 3. 2002).8 Classification of credit It is required for the board of directors of a financial institution to ―establish credit risk management policy. Financial institutions must have in place the processes and controls to implement . 3. Senior management must regularly review the results of stress tests and contingency plans. documentation processes and information systems.‖ Credit classification process grades individual credits in terms of the expected degree of recoverability. the associated internal controls.9. 2005.

9.9 Managing Problem Credits/Recovery A financial institution‘s credit risk policy should clearly set out how problem credits are to be managed. while maintaining a high standard of service and retaining good relations with the customers. procedures and maintain effective liaison with other departments within the bank (Prudential regulations for consumer financing 2004. This is particularly important for any delinquent credits. monitoring the value of applicable collateral. The positioning of this responsibility in the credit department of an institution may depend on the size and complexity of credit operations. . scrutiny of legal documents. Bangladesh Bank). financial institutions must establish procedures for verifying periodically the net worth of the guarantor. restructuring of credit. before netting off the collateral‘s value against the outstanding amount of the credit for determining provision. including rehabilitation of the borrower. As to any guarantees given in support of credits. which will. It therefore becomes the duty of the Collection Department to minimize the outstanding delinquent receivable and credit losses.59 the board approved policies. Financial institutions should establish appropriate systems and controls to ensure that collateral continues to be legally valid and enforceable and its net realizable value is properly determined. establish appropriate systems and processes to identify credits with similar characteristics in order to assess the degree of their recoverability on a portfolio basis. that collection people are familiar with the computerized system. The monitoring unit will follow all aspects of the problem credit. in turn. Financial institutions must. assess credit impairment and ensuing provisioning on a credit portfolio basis. International Accounting Standard 39 requires that financial institutions shall. 3. be in accord with the proposed guideline. in addition to individual credit provisioning. therefore. It is therefore essential and critical. and dealing with receiver/manager until the recovery matters are finalized. The collection process for personal loans starts when the account holder has failed to meet one or more contractual payment (Installment). This procedure has been designed to enable the collection staff to systematically recover the dues and identify / prevent potential losses. They should have appropriate criteria for credit provisioning and write off.

When accounts are delinquent. 3.9. Collection also protects the assets of the bank.9.represent a financial risk to the institution.9. This can be achieved by identifying early signals of delinquency and thus minimizing losses.9. the account is considered in arrears or delinquent. the following aging classification is adopted: For all products other than credit cards .2 Identification and allocation of accounts When a customer fails to pay the minimum amount due or installment by the payment due date.60 3. 3. The goal of the collection process is to obtain payments promptly while minimizing collection expense and write-off costs as well as maintaining the customer‘s goodwill by a high standard of service. collection procedures are instituted to regularize the accounts without losing the customer‘s goodwill whilst ensuring that the bank‘s interests are protected.9. The customers who do not respond to collection efforts .9. The Collector‘s role is to collect so that the institution can keep the loan on its books and does not have to write-off / charge off.3 Collection Steps To identify and manage arrears.1 Collection objectives The collector‘s responsibility will commence from the time an account becomes delinquent until it is regularized by means of payment or closed with full payment amount collected. For this reason it is important that the collector should endeavor to resolve the account at the first time worked.

2: Credit recovery steps for credit card Days Past Due (DPD) X Collection Action   30-59    60-89  Letter reminding payment past due Soft call requesting payment Block card with ―decline‖ response Call insisting payment Letter advising account status (blocked) Block card with ―decline‖ response . Reference all above effort follows  Warning on legal action by next 15 days 60-89  Call up loan (Annexure VII)  Final Reminder & Serve legal notice  legal proceedings begin  Repossession starts 90 and above  Telephone calls/Legal proceedings continue  Collection effort continues by officer & agent  Letter to different banks/Association Source: (Prudential regulations for consumer financing 2004. 1 follows 2nd reminder letter + Single visit  3rd reminder letter (Annexure VI)  Group visit by team member  Follow up over phone  Letters to Guarantor.61 Table 3.1: Credit recovery steps Days Past Due (DPD) 1-14 15-29 30-44 45-59 Collection Action Letter. Employer. Follow up & Persuasion over phone (Annexure V) 1st Reminder letter & Sl. Bangladesh Bank) For credit cards: Table 3. No.

It provides support for both the financial institutions and the borrower.62       120-149       150+      Call insisting payment Letter advising a/c status (blocked) and threatening card cancellation if not regularized 90-119 Call insisting immediate payment Letter advising cancellation & surrender of card Hot-list & circulate within the merchants Employ recovery agent where appropriate Call threatening litigation Threatening letter to employer (for salaried only) Publish name & photograph in newspaper Personal visitation by recovery agent Set-off SCB Account(s). Bangladesh Bank) Legal actions could be taken on the basis of Artha Rin Adalat Ain 2003 which has been enacted to encourage speedy settlement of legal cases. . if any Serve legal notice where appropriate Bad debt allocation Account handed over to recovery agency Stop interest accrual Personal visitation by recovery agent Legal action Source: (Prudential regulations for consumer financing 2004.

63 Chapter 4: Findings and Recommendations .

It is difficult to locate the documents in a chronological and sequential manner. b) The credit sanction procedure should be made quicker since competition is very hard in today's business world. d) Filing is a very important component of proper documentation. b) Customer satisfaction level is quite good. c) Filing procedure is not maintained in a definite and clear manner. . e) Networking system in Pubali Bank Limited has to be improved. d) The credit sanction and disbursement procedure is quite lengthy. People do not want to wait for three to four weeks on an average to get a loan which is even protected by security.64 4. Informal conversation with some customers reveals that they approve the credit evaluation and management process of Pubali Bank Ltd. following recommendations are proposed: a) An uninterrupted network system has to be ensured. 4. though mentioned in the credit policy is not always maintained by the credit officials. It will save the officials from much hassle and will save time. Participative approach should be adopted to gain prompt and effective result. c) Decision making process can be made more decentralized. It has to be dealt with importance. A definite practice. Network gets disconnected several times a day which causes delays in the overall process and other operations of the bank. Systematic and timely monitoring and appropriate documentation are tried to be maintained.2 Recommendations In the light of the above findings.1 Findings The findings of this study are summarized below: a) The credit risk management process of Pubali Bank Limited is quite commendable.

65 Chapter 5: Conclusion .

it has become clear that credit risk management is a complex and ongoing process and therefore financial institutions must take a serious approach in addressing these issues. they follow an in-depth procedure in assessing the credit risk by using the credit risk grading techniques which provides them a solid ground in the time of any settlement.66 5. . Utmost importance should be given to the improvement of the networking system which is essential for modern banking environment and obviously for efficient and effective credit risk management process. as a responsible and reputed commercial bank. Pubali Bank has instituted a contemporary credit risk management system. From the discussion in this report.1 Conclusion Credit risk management is becoming more and more important in today's competitive business world. From the study. The tools for improving management of consumer credit risk have advanced considerably in recent years. However. It is all the more important in the context of Bangladesh. They have to be up to date in complying with all the required procedures and must employ competent people who have the ability to deal with these complex matters. it is evident that the bank is quite sincere in their approach to managing the consumer credit risk though there are rooms for improvement. They have to be more cautious in the recovery sector and preferential treatments to some big clients should also be stopped. Therefore.

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