Credit is an amount of money available to be borrowed by an individual or a company and agreed to repay the lender at some day in future, generally with interest. Risk is nothing but possibility of losing assets through some activity i.e., banking credit activity, market activity, operational activity etc.Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore arises from the bank’s dealings with or lending to corporate, individuals, and other banks or financial institutions. If the probability of the loss is high, the credit risk involved is also high, and vice-versa

IntroductionIntroductionCREDIT RISKCREDIT RISK

Types of credit riskTypes of credit risk Credit default risk Concentration risk Country riskFactors affecting credit

risk Quantity of loans relative to assets or capital Rate of growth in the loan portfolio Composition of loan portfolio Degree of dependence on interest income and fee income from loans for profitabilityExistence of concentration in the loan portfolio Existence and level of exceptions to the credit policy Quality of support for collateral valuation Quality of loan documentationLevel and trend of non-performing loans Existence of rescheduled or restructured loans Quality of internal loan review and classification 1

Classification of Credit Risk for Financing a Project

CREDIT RISK COMPONENTS OF A PROJECT

Business/Industry Risk

Financial Risk

Technical Risk

Marketing Risk

Managerial & Relationship

RiskSecurity

Risk

I .Internal Rate Return (IRR)ii. Profitabilityiii. Return on equityiv. Return on investmentv. Net profit to salesvi. Expected growth Rate of the projectvii. Payback period

I. Sourcing and Timelinessii. Relation and Communication with suppliersiii. Power, fuel and Water Supplyiv. Building and Layoutv. Transportation Facilitiesvi. Engineering and Technical Facilityvii. Others

I. Size of Businessii. Age of Businessiii. Business Outlookiv. Industry Growthv. Market Competition

I. Size of potential marketii. Growth of demand iii. Supplyvi. Promotional Activityv. Demand Forecasting and Market Planning

I..Experienceii. Team workiii. Skill of the manager and the management teamiv. Account conductv. Time to achieve full capacity utilization

I. Security coverage (primary)ii. Collateral coverage (Property location)iii. Support (Guarantee)

GRADING CATEGORIES, SHORT NAME AND SCORESThe credit risk grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.

Grading In Short Score Grading In Short Score

Grade 1 - Superior (Low Risk)

SUP 100 Grade 5 - Special Mention SM 55-64

Grade 2 - Good (Satisfactory Risk)

GD 85+ Grade 6 – Substandard SS 45-54

Grade 3 - Acceptable (Fair Risk)

ACCPT 75-84 Grade 7 - Doubtful (non-performing)

DF 35-44

Grade 4 - Marginal (Watch list)

MG/WL 65-74 Grade 8 – Bad and Loss (non-performing)

BL <352

Decision Matrix of CRG

Pre-Sanction Stage Grading Status Post-Sanction Stage

(1) FeasibleSuperior

(1)PerformingGoodAcceptable

(2) Conditional/ ExceptionallyAcceptable

Marginal/ Watch list (2) Early Warning Account

(3) Not -Feasible

Special Mention

(3) Non-PerformingSub-standardDoubtfulBad/Loss

Risk assessment model of a project according to the Risk assessment model of a project according to the importance of risk profile, the following 5(Five)are importance of risk profile, the following 5(Five)are considered for corresponding principal risks considered for corresponding principal risks Principle Risk components WeightFinancial Risk 50%Business/Industry Risk 18%Management Risk 12%Relationship Risk 10%Security Risk 10%

Total 100%

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Bangladesh Bank Guidelines

Policy GuidelinesLending GuidelinesCredit Assessment & Risk GradingApproval AuthoritySegregation of DutiesInternal Audit

Preferred Organizational Structure

& Responsibilities

Procedural GuidelinesApproval ProcessCredit AdministrationCredit MonitoringCredit Recovery

Basic Credit Risk Management Framework

According to Bangladesh Bank Guidelines In ABL

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Board of Director

Risk Management Committee Executive Committee Audit Committee

MD&CEO

Credit Committee

HoCRM

Chief Risk Officer

Credit Committee-1President: DMD-1Member: GM (Dhaka Circle-2)Member: GM (Dhaka Circle-1)Member: GM (HRPDOD)Member: GM (ID & Khulna Circle)Member: GM (IT)Member: GM (Barisal Circle)Member: GM (Faridpur Circle)Member Secretary : DGM(CP&CRMD)

Credit Committee-2President: DMD-2Member: DMD-3Member: GM (Credit)Member: GM (CFO)Member: GM (Comilla Circle)Member: GM (ID & Khulna Circle)Member: GM (CP&CRMD)Member: GM (Shylhet Circle)Member: GM (Principle Branch)Member: GM (Chittagong Circle)Member: GM (Mymensingh Circle)Member Secretary : DGM(CP&RMD)

Credit Risk Management

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Early Identification of Deterioration in any CreditPrompt ReportingProactive MeasureTracking the loan account which is under risk or potential weaknessAssessment procedure and analysis techniquesFrequency of monitoringPeriodic examination of collaterals and credit covenantsFrequency of site visit

Credit Risk Management

Credit Risk Assessment Credit Risk MitigationCredit Risk Monitoring

Qualitative Aspects

Quantitative Aspects

External Credit Rating

Proper documentationKYCCollateralAccountabilityCredit requirementInsurance coverageSyndicated loansAdherence to policyFront OfficeMiddle OfficeBack OfficeSWOTSensitivityEnvironmentCIB

Tracking, monitoring and supervising risky and potentially weak loan accounts by dedicated teamAssigned person promptly reports to the delegated authority to take measureTo co-ordinate with higher management and field levelChalks out plans to recover classified loans including write-off loans by Recovery DivisionRisk-based pricingCovenantsCredit Insurance and credit derivativesTighteningDiversificationDeposit Insurance

Credit Risk Credit Risk Measuring Credit Concentration Risk Gini Coefficient(GC):

WhereG=Gini Coefficienti=Element serialy=value of elementn=total number of elements

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Credit Risk Credit Risk

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