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ORIGIN OF THE REPORT Credit risk is the primary financial risk in the banking system. Identifying and assessing credit risk is essentially a first step in managing it effectively. In 1993, Bangladesh Bank as suggested by Financial Sector Reform Project (FSRP) first introduced and directed to use Credit Risk Grading system in the Banking Sector of Bangladesh under the caption “Lending Risk Analysis (LRA)”. The Banking sector since then has changed a lot as credit culture has been shifting towards a more professional and standardized Credit Risk Management approach. Credit Risk Grading system is a dynamic process and various models are followed in different countries & different organizations for measuring credit risk. The risk grading system changes in line with business complexities. A more effective credit risk grading process needs to be introduced in the Banking Sector of Bangladesh to make the credit risk grading mechanism easier to implement. Keeping the above objective in mind, the Lending Risk Analysis Manual (under FSRP) of Bangladesh Bank has been amended, developed and re-produced in the name of “Credit Risk Grading Manual”. With the world moving towards Basle II the need to introduce a RGS for the industry is essential. In 2003, BB made the Core Risk Management Guidelines (CRMG) mandatory. The Credit Risk Grading Manual has taken into consideration the necessary changes required in order to correctly assess the credit risk environment in the Banking industry. This manual has also been able to address the limitations prevailed in the Lending Risk Analysis Manual. All Banks should adopt a credit risk grading system outlined in this manual. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process.

1.1 INTRODUCTION Credit risk grading is an important tool for credit risk management as it helps the Banks & financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch. The credit risk grading system is vital to take decisions both at the presanction stage as well as post-sanction stage. At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level. At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. Having considered the significance of credit risk grading, it becomes imperative for the banking system to carefully develop a credit risk grading model which meets the objective outlined above. The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank has been in practice for mandatory use by the Banks & financial institutions for loan size of BDT 1.00 corer and above. However, the LRA manual suffers from a lot of subjectivity, sometimes creating confusion to the lending Bankers in terms of selection of credit proposals on the basis of risk exposure. Meanwhile, in 2003 end Bangladesh Bank provided guidelines for credit risk management of Banks wherein it recommended, interlaid, the introduction of Risk Grade Score Card for risk assessment of credit proposals. Since the two credit risk models are presently in vogue, the Governing Board of Bangladesh Institute of Bank Management (BIBM) under the chairmanship of the Governor, Bangladesh Bank decided that an integrated Credit Risk Grading Model be developed incorporating the significant features of the above mentioned models with a view to render a need based simplified and user friendly model for application by the Banks and financial institutions in processing credit decisions and evaluating the magnitude of risk involved therein. Bangladesh Bank expects all commercial banks to have a well defined credit risk management system which delivers accurate and timely risk grading. This manual describes the elements of an effective internal process for grading credit risk. It also provides a comprehensive, but generic discussion of the objectives and general characteristics of effective credit risk grading system. In practice, a bankâ&#x20AC;&#x2122;s credit risk grading system should reflect the complexity of its lending activities and the overall level of risk involved.

1.2 OBJECTIVES OF THE STUDY: This study is aimed at providing me invaluable knowledge on current business trend in Bangladesh. Southeast bank ltd is one of the fast growing 2 nd generation bank in Bangladesh. I have been assigned to do my internship here. I have also been assigned with some objectives to be filled up during this internship program. The objectives of study are as following: • To collect information about Credit Risk Grading System • To analyze the data of different clients. • To learn about Credit Risk analysis • To identify strength and weakness of Credit Risk Grading system. • To gather comprehensive knowledge to measure risk grading.

1.3 METHODOLOGY OF THE STUDY: For smooth and accurate study every one have to follow some rules & regulation. The study impute were collected from two sources: (a) Primary sources (i) (ii) (iii) (iv) (v)

Practical desk work. Face to face conversation with the officer. Direct observations. Face to face conversation with the client. Data gathered from organization supervisor.

(b) Secondary sources (i) (ii) (iii) (iv) (v)

Annual Report Credit guideline of SEBL Daily diary (containing my activities of practical orientation in SEBL) maintained by me, Different books, Journals, Periodicals, News papers, Websites etc. Different circulars sent by Head Office and Bangladesh Bank.

1.4.1 Historical Background: The second generation bank of the Southeast Bank Limited (SEBL) is a scheduled Bank under private sector established under the ambit of bank Company Act, 1991 and incorporated as a Public Limited Company under Companies Act, 1994 on March 12, 1995. The Bank started commercial banking operations effective from May 25, 1995. During this short period of time the Bank had been successful to position itself as a progressive and dynamic financial institution in the country. The Bank had been widely accepted by the business community, from small entrepreneur to large traders and industrial conglomerates, including the top rated corporate borrowers for forward-looking business outlook and innovative financing solutions. Thus within this very short period of time it has been able to create an image for itself and has earned significant reputation in the country’s banking sector as a Bank with vision. Presently it has forty one branches in operation. The bank is managed by a team of efficient professionals. There prevails a positive organizational climate in the bank that generates feeling of dignity, trust, discipline and openness in the people and result in motivating them to post better result continuously in the bank. The Company Philosophy – “A Bank with Vision” has been preciously the soul of the legend of bank’s success. It has been growing faster as one of the leaders of the second generation banks in the private sector in respect of business and profitability as it is evident from the financial indicators as a pioneer banking institute in Bangladesh and contribute significantly to the national economy. Southeast Bank is today a synonym of quality banking products. It has a diverse array of carefully tailored product and services to cater to the needs of all customer segments. Today, Southeast Bank is one of the leading and most successful banking institutions in Bangladesh with a total assets base of TK. 68,544.71 million as on June 30, 2008. The credit rating of the bank for the June 30, 2008 was done by Credit Rating Agency of Bangladesh (CRAB). They have rated the bank A1 (pronounced single A one) (High safety) for the long term. Commercial Banks rated in this category are adjudged to be strong Banks. 1.4.2 Corporate Mission and Vision of Southeast Bank Limited Mission • High quality financial services with the help of latest technology. • Fast and accurate customer service. • Balanced growth strategy. • High standard business ethics. • Steady return on shareholder’s equity.++ • Innovative banking at a competitive price. • Deep commitment to the society and the growth of national economy. • Attract and retain quality human resource. Vision 4

To stand out as a pioneer banking institution in Bangladesh and contribute significantly to the national economy. 1.4.3 Organizational Structure The following hierarchy is the organizational hierarchy of SBL and it depicts the topbottom relationship: President and Managing Director (MD) Deputy Managing Director (DMD) Senior Executive Vice President (SEVP) Executive Vice President (EVP) Senior Vice President (SVP) Vice President (VP) First Vice President (FVP) Senior Assistant Vice President (SAVP) Assistant Vice President (AVP) Senior Principal Officer (SPO) Principal Officer (PO) Executive Officer (EO) Management Trainee (MT) Probationary Officer (PO) Senior Officer (SO) Officer (O) Junior Officer (JO) Trainee Junior Officer (TJO) Senior Officer (Computer) Officer (Computer) Junior Officer (Computer) Computer-Trainee Head Cashier Senior Officer (Cash) Officer (Cash) Junior Officer (Cash) Cashier-Trainee Messenger Bank Guard

1.4.4 Comparative financial position of Southeast Bank Limited

Highlights on the overall activities of the Bank on Juneâ&#x20AC;&#x2122; 2008

01.

Date of Incorporation

12th March, 1995

02.

Date of Commencement of Business

12th March, 1995

03.

Capital

Authorized

Tk. 3500.00 Million

Paid-up

Tk. 2852.19 Million

Total Capital

Tk. 6,724.37 Million

05.

Total Deposits

Tk. 59094.24 Million

06.

Total Assets

TK. 68544.71 Million

07.

Total Loan of Advances

Tk. 50715.26 Million

08.

Operating Profits

Tk. 2916.20 Million

09.

Loan as a % of Total Deposits

85.82%

10.

Profit After Tax and Provision

Tk. 479.78 Million

11.

Cost of Fund

9.53%

12.

Global Relations

598 Correspondents Worldwide

13.

Number of Employees

1116

14.

Percentage of Classified Loans against :

5.64%

Total Loans and Advance 15.

Provision kept against classified loan

Tk. 1,306.13 Million

16.

Return on Assets

0.70%

17.

Return on Investment

7.64%

18.

Number of Branches

19.

Earning & Net Income Per Share

16.82

20.

Name of the Chairman of SEBL

Mr. Alamgir Kabir, FCA

22.

It is a Publicly Traded Company

Share quoted daily in DSE & CSE

23.

Credit Card

Member of Master & VISA Card

24.

Banking Operation System

Both conventional & Islamic Shariah System

25.

Technology Used

Member of SWIFT Online Banking Computer System SWIFT: SEBDBDDHXXX E-mail: info@sebankbd.com

Website: www.sebankbd.com

Our Capital Structure Southeast Bank Limited is a highly capitalized Bank. Its Authorized Capital is Tk. 3500 million while its Paid up Capital is Tk. 2852.19 million as on 30th June, 2008. The total shareholders equity reached Tk. 67243.77 million as on 30th June, 2008. Capital of SEBL for the year 2001-2008 Total Capital of SEBL

In Mill. Tk.

8000 6000 4000 2000 0 2001

2002

2003

2004

2005

2006

2007 June,08

Year

Source: Annual Report June, 2008 Fig in million Tk.

Year

2001

2002

2003

2004

2005

2006

2007

June,08

Capital

757.20

970.96

1300.14

1649.4

2236.8

4940.92

6468.3

6724.37

1.4.5 Our preparedness for Basel-ll Guidelines prescribe under new capital Accord known as Basel-ll comprises the following components: • • •

Minimum Capital Requirement. Supervisory Review Process, and Market Discipline.

The prescribed guidelines are being implemented in the bank. The banks aim to create an environmental for risk management to identify and measure risk and report all important risk information distributing capital within the framework of Basel-ll. We always try to maintain a minimum level of capital to act cushion against unexpected losses arising from our investment. We are promoting safety and soundness in our financial system. Bangladesh Bank has taken a proactive approach in implementing Basel-ll for all banks in Bangladesh by January 1, 2009 and made credit rating mandatory for all Banks. The Credit Rating of Southeast Bank Ltd. Was done by Credit Rating Agency of Bangladesh (CRAB) and they rated the Bank A1 for the long term. In order to ensure gradual and smooth transition to Basel-ll, Bangladesh Bank asked the Banks in Bangladesh to maintain Capital adequacy ratio at minimum 10% with effect from January 01, 2008. We have since increased our Capital. Now, our Capital adequacy is 13% as on 31st December 2007.

Our Assets Asset of SEBL for the year 2000-2008

Total Asset of SEBL

In Mill. Tk.

80000 60000 40000 20000 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7J u n e , 0 8

Year

Source: Annual Report June, 2008 Fig in million Tk.

Year

2001

2002

Asset

14468.66

18882.48

2003

2004

23135.74 33744.96

2005

2006

2007

June,08

43294.81

53706.12

64370.69

68544.71

1.4.6 Main Operational Area As a commercial bank, Southeast Bank does all traditional banking business including the wide range of savings and credit scheme products, retail banking and ancillary services with the support of modern technology and professional excellence. The bank has launched according to market demand a number of financial products and services since its inception. Our journey towards greater operational success continues with increased energy and enthusiasm. Our product-basket encompasses real time On-line any Branch Banking, Islamic Banking, Partial Merchant Banking, Dual Currency Visa Credit Card, ATMs, Education loan scheme, Double Benefit scheme, Consumer loan, SMS Banking, Corporate Banking, Syndicate Loan, Monthly Saving Scheme, Monthly Income Scheme, Pension Saving Scheme, and Wage Earner Pension Scheme etc. And Bank finances the Individual, Small Business, Commercial, Textile, Garments, Chemical & Cements area. 1.4.7 Operational Result Alike preceding four years, Southeast Bank posted good growth in all areas of business operations. Our effort to push the Bank forward for future qualitative improvements will continue with added enthusiasm. The Bank achieved an operating profit of Tk. 1,495.36 million before necessary provision for advance and other assets and income tax during the first half-year ended on 30th June, 2008. Our total Deposits stood at Tk. 59,094.25 million while its total outstanding loans and advances were Tk. 50715.26 million as on 30th June, 2008. During the first six month of the year 2008, the bank handled foreign trade business of Tk.53,390.80 million (both import and export) and earning Net profit after provision and income tax for the period stood at Tk. 497.78 million. Our operational result given below:

Operation

Increase (Percentage)

Deposit Advance Import Export Bank guarantee Net profit

14% 21% 78% 65% 104% 14%

A. Deposit Schemes Bank has the following customer friendly deposit schemes: • • • • • • • •

Current Deposit Scheme (CD) Savings Deposit scheme (SB) Short Term Deposit Scheme (STD) Pension Savings Scheme (PSS) Education Savings Scheme (ESS) Monthly Savings Scheme (MSS) Double Benefit Deposit Scheme (SBDS) Fixed Deposits ( 1, 2, 3, 6 & 12 months )

Total Deposit of SEBL

In Mill. Tk.

60000 50000 40000 30000 20000 10000 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7J u n e , 0 8

Year

Source: Annual Report June, 2008 Fig in million Tk.

Year

2001

2002

2003 2004 2005 2006 2007 June,08 19618..8 Total Deposit 10570.25 15343.45 2 27930.84 38254.15 46056.18 55474.05 59094.25

Deposit Mix Current/ Al-wadeeah Current and other deposit

1.24% 5.51% 7.10% 6.19% 7.19%

Saving/ Mudaraba Savings Bank Deposit Short Term/ Mudaraba Short Term Deposit Fixed/ Mudaraba fixed Deposit or Term Deposit Fund under difference Deposit scheme

72.77%

Bills payable Accounts

B. Credit Schemes The loan portfolio of the Bank is well diversified and covers funding to a wide spectrum of business and industries including readymade garments, textile, edible oil, ship scrapping, steel & engineering, chemical, pharmaceuticals, cement, construction, healthcare, real-estate and loans under consumerâ&#x20AC;&#x2122;s credit schemes allowed to the middle-class people of the country for acquiring various household items. Loan Scheme

Lending Category

Lending Rate

Agricultural Scheme

Loan to primary producers and Loan to agricultural input traders and fertilizer dealers/distributors

11.50%

Commercial Lending

Jute Trading and Others Commercial Lending

15.00%

Working Capital

Jute and Other than Jute

13.00%

House Building Loan

Real Estate Developers and Individual/Housing Finance Co.

15.50% 15.00%

Other Loans

SME Others

16.50%, 15.50%

Small/Cottage Industry

Term Loan

15.00%

Finance To NBFIs

14.50%

Large/Medium Scale Industry

Term Loan

Post Import Finance

LIM/LTR

Loan against Export

Jute Goods Exports and Other Exports

13.25%

7.00% Fixed

Consumer Credit Scheme

16.00%

Credit Card

2.50% Per Month (fixed)

Note: 1. The Bank reserves the right to increase or decrease by 1.50% of the mid rate in each category. 11

2.Lending Rates against the Fixed Deposit will be fixed at minimum of 3.00%above the FDR rates, Issued by our Bank and this will not be applicable for others Banksâ&#x20AC;&#x2122; FDRs. Loan and Advance of SEBL for the year 2001-2008 Total Loan and Avance of SEBL 60000 In Mill. Tk.

50000 40000 30000 20000 10000 0

2001

2002

2003

2004

2005

2006

2007 June,08

Year

Source: Annual Report June, 2008 Fig in million Tk

Year

2001

2002

Advance

9178.03

2004

2005

2006

2007

June,08

22001.70

32551.09

41147.28

48164.60

50715.26

2003

1327.13

15541.50

Sector-wise allocation of Loans and Advances Agricultural, Fishing, Forestry and Dairy 14.68%

Textile, Garments, Chemical, Cement etc

4.71% 31.27%

Working Capital Finance Export Credit 0.04% 28.84%

Commercial Credit

20.40%

0.05%

Small and Cottage industries Miscellaneous

Source: Annual Report June, 2008

C. "Foreign Trade Business (Import & Export) Foreign Trade Business (Import & Export) of SEBL 70000 60000 In Mill. Tk.

50000 40000 30000 20000 10000 0 2001

2002

2003

2004 Year

Source: Annual Report June, 2008

2005

2006

2007

Fig in million Tk.

Year Foreign Trade Business

2001

2002

2004

2003

14862.42 15080.46 19304.15 26992.15

2005

2006

2007

42540.40

61000.73

67242.70

D. Business Guarantee Business Guarantee of SEBL 10000 In Mill. Tk.

8000 6000 4000 2000 0 2001

2002

2003

2004

2005

2006

2007

Year

Source: Annual Report June, 2008 Fig in million Tk

Year Business Guarantee

2001

2002

1854.50

2004

2005

2006

2007

4717.82

7975.00

8656.80

9008.32

2003

2502.48

3391.19

E. Net Profit Net Profit of SEBL 1500

In Mill. Tk.

1000 500 0 2001

2002

2003

2004

2005

2006

2007

June,08

Year

Source: Annual Report June, 2008 Fig in million Tk

Year

2001

Net Profit

270.74

2002 253.56

2003 256.06

2004

2005

2006

2007

June,08

294.69

374.20

909.88

1222.97

1495.36

F. Interest Income Fig in million Tk

Year Interest Income

2004

2005

2006

2007

June,08

2310.93

3568.20

5107.79

6408.96

3458.49

Interest Incom e of SEBL

In Mill. Tk.

8000 6000 4000 2000 0

2004

2005

2006

2007

June,08

Year

Source: Annual Report June, 2008

G. Interest Paid Interest Paid of SEBL 5000 In Mill. Tk.

4000 3000 2000 1000 0

2004

2005

2006

2007

June,08

Year

Source: Annual Report 2008 Fig in million Tk

Year Interest

2004 22001.70

2005 32551.09

2006 41147.28

2007 48164.60

June,08 50715.26

Paid

H. Inflow of foreign Remittance Wages earnersâ&#x20AC;&#x2122; remittance together with export proceeds exceeded the total import liability of the bank in 2007. Inflow of foreign Rem ittance 16,000

Millon Taka

14,000 13,480

12,000

11,040

10,000 8,000 6,000 4,000

3,507

2,000 0

654 2003

1,091 2004

2005

2006

2007

Source: Annual Report 2007 Fig in million Tk

Year Inflow of Foreign Remittance

2004 654.24

2005 1091.25

2006 3507.40

2007 13479.83

June,08 11040.17

1.4.8 Risk Management Risk Management is the key element for sound corporate governance of the Bank. With a recent addition in regulatory mandates and increasingly active participation of shareholders, the Bank has become increasingly concerned to identify areas of risks in the business, whether it is financial, operational, ICT or reputation risk. Southeast Bank identifies, measures, monitors and manages all risks of the Bank. Sophisticated risk management framework is being implemented to carry out efficient risk management exercises of the Bank including documenting and assessing risks, defining controls, managing assessments and audit, identifying issues, implementing recommendations and corrective plans. In accordance with Bangladesh Bank Guidance Notes, the Bank has established a risk framework that consists of six core factors, i.e. (i) Credit Risk (ii) Asset and Liability/Balance Sheet Risk (iii) Foreign Exchange Risk (iv) Internal Control and Compliance Risk (v) Money Laundering Risk and (vi) Information and Communication Technology Risk. The Bank has also identified the following four key infrastructure components for effective risk management programs: (i) Proactive Board of Directors and Senior Management’s Supervision, (ii) Adequate Policies and Procedures, (iii) Proper Risk-Measurement, Monitoring and Management Information Systems and (iv) Comprehensive Internal Controls. 1.4.9 SWOT Analysis SWOT is an important part for evaluating the company’s Strength, Weakness, Opportunity and Threats. It helps the organization to identify how to evaluate its performance and scan the micro environment. In the year 2008, Southeast Bank is celebrating 13 years of its success track record in Bangladesh. The Strength, Weakness, Opportunities & Threats of the bank are identified as follows: Strength (S) Southeast Bank is having the following strengths. • • • • • •

Transparent and quick decision-Making Efficient team of performers Satisfied customers Internal control Skilled risk management Diversification to perform business operation

Weaknesses (W) Southeast Bank Limited has the following weaknesses: • • • • • • •

Poor market share (deposit and lending share around 1.5% in the total industry). Low geographical coverage of service (only 43 branches at present) Lack of succession plan No research and development facilities for innovating new products. Long management hierarchy Absence of Total Quality Management (TQM) Concentration on Large Loan.

Opportunity (O) Southeast Bank Limited has the following opportunities: • • •

Further diversification of product Expansion of Branch network Attraction of more customers through sophisticated service quality.

.Threats (T) Southeast Bank Limited encounters the following threats: • • • • • • •

Increased competition in the banking sector Market pressure to lowering interest rate. Switching of the customers & employees to other banks or institute. Threat of Bank Loan default Globalization of banking business Change in banking regulation Political instability in the country.

1.5 Outlook for 2008 Southeast bank remains deeply committed to its vision of becoming a premier banking institution of Bangladesh and contribute significantly to the national economy. The Bank intends to embrace the best practices and technology. It provides first-class product, financial services and solution to its customers. The Bank is already in the process of choosing robust and integrated software to provide more value added services to them. The network of the bank will be increased by (twelve) more branches to reach 50 in 2008 subject to license from Bangladesh Bank. We shall continue to make significant investments for more talented and experienced people to help our customer realize their dreams. We shall continue to follow and improve good corporate governance practices, sound risk management policy, modern human resources policy and strictly maintain quality of our assets to elevate the bank gradually to the pinnacle to glory. We will make every effort to achieve Return on equity of more than 20%, operating profit of Tk.4,000 million in 2008, maintain required Capital Adequacy ratio and limit classified loan at a tolerable level. To create more value for shareholders, Customer, employees and the society. For obvious reasons, we look at the year 2008 with a

considerable optimism. However, as forward looking statements involve risk and uncertainties, it should be viewed accordingly.

Prepared By •

Dr. Sujit R. Saha, Professor & Director (Training), Bangladesh Institute of Bank Management

•

Mr. Sudhir Chandra Das, DGM, Financial Institutions Department, Bangladesh Bank

•

Mr. Niaz Habib, Deputy Managing Director, United Commercial Bank Limited

Reviewed By (Review Committee Members) •

Mr. Mir Abdur Rahim, General Manager, DBI-1, Co-ordinator

•

Mr. Niaz Habib, DMD, UCBL, Member of Focus Group, Member

•

Mr. Dawood Ahmed Sikder, DGM, ICD, Janata Bank, Member

•

Mrs. Johora Bebe, EVP & HOC, One Bank Ltd, Member

•

Mr. Khurram Khan, Senior Credit Officer, SCB, Member

•

Mr. Mian Quamrul Hasan Chowdhury, DD, DBI-1, Member of CRMG, Member

In January 2004, BIBM was instructed by Governor Bangladesh Bank to produce a Credit Risk Grading Manual (CRGM) based on the Core Risks Management Guidelines. BIBM constituted a Focus Group for this purpose. The CRGM was completed and submitted to BB (Bangladesh Bank) in Sept ’04. This was reviewed by a Industry Review Group (IRG) consisting of members from NCBs,. PCBs and FCBs involved specifically in the credit approval and corporate banking functions. The IRG met a number of times in august and September 2005 and

gave their recommendations. These were discussed and suitable amendments made in the Guidelines.

DEFINITION OF CREDIT RISK GRADING (CRG) •

The Credit Risk Grading (CRG) is a collective definition based on the prespecified scale and reflects the underlying credit-risk for a given exposure.

•

A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure. Credit Risk Grading is the basic module for developing a Credit Risk Management system.

•

FUNCTION OF CREDIT RISK GRADING Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.

USE OF CREDIT RISK GRADING The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole. •

•

As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis. Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.

THE CHAIN OF LENDING PROCESS Application

Sanction

Documentation

Disbursement

1. Application Applicant applies for the loan in the prescribed form of the bank describing the types and purpose of loan. 2. Sanction A. Collecting credit information about the applicant to determine the credit worthiness of the borrower. Sources of information

•

Personal Investigation, Confidential Office/Branch/Chamber of Commerce.

•

CIB (Central Information Bureau) report from Central Bank.

Report

from

other

bank,

Head

B. Evaluation of compliance with its lending policy. C. Evaluating the proposed security D. If loan amount exceeds 50 lac then bank goes for CRG Analysis. E. CRG is must for the loan exceeding one corer – as ordered by Bangladesh Bank. LRA has described at the end of this chapter. 3. Documentation a. Then bank prepare a loan proposal which contains terms and conditions of loan for approval of H.O. or Manager. b. Takes the necessary papers and signatures from borrower 4. Disbursement A loan Account is opened. Customer A/C-------------------------Dr. Respective Loan A/C ---------------Cr.

SECURITIES: To make the loan secured, charging sufficient security on the credit facilities is very important. The banker cannot afford to take the risk of non-recovery of the money lent. CB charges the following two types of security, Primary security: These are the security taken by the ownership of the items for which bank provides the facility. Collateral security: Collateral securities refer to the securities deposited by the third party to secure the advance for the borrower in narrow sense. In wider sense, it denotes any type of security on which the bank has a personal right of action on the debtor in respect of the advance. Modes of Charging Security: There are different modes of charging securities are exercised by the bank: 1. Pledge: Pledge is the bailment of the goods as security for payment of a debt or performance of a promise. A pledge may be in respect of goods including stocks and share as well as documents of title to goods such as railway receipt, bills of lading, dock warrants etc. duly endorsed in bank’s favor. 2. Hypothecation:

In case of hypothecation, the possession and the ownership of the goods both rest the borrower. The borrower to the banker creates an equitable charge on the security. The borrower does this by executing a document known as Agreement of Hypothecation in favor of the lending bank. 3. Lien: Lien is the right of the banker to retain the goods of the borrower until the loan is repaid. The bankers’ lien is general lien. A banker can retain all securities in his possession till all claims against the concern person are satisfied. 4. Mortgage: According to section (58) of the Transfer of Property Act, 1882 mortgage is the ‘’transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, existing or future debt or the performance of an engagement which may give rise to a pecuniary liability”. In this case the mortgagor does not transfer the ownership of the specific immovable property to the mortgagee, only transfers some of his rights as an owner. The banker exercises the equitable mortgage.

NUMBER AND SHORT NAME OF GRADES USED IN THE CRG •

The proposed CRG scale consists of 8 categories with Short names and Numbers are provided as follows: GRADING Superior Good Acceptable Marginal/Watch list Special Mention Sub standard Doubtful Bad & Loss

SHORT NAME SUP GD ACCPT MG/WL SM SS DF BL

NUMBER 1 2 3 4 5 6 7 8

CREDIT RISK GRADING DEFINITION A clear definition of the different categories of Credit Risk Grading is given as follows: •

Superior - (SUP) - 1 ⇒ Credit facilities, which are fully secured i.e. fully cash covered. ⇒ Credit facilities fully covered by government guarantee. ⇒ Credit facilities fully covered by the guarantee of a top tier international Bank.

•

Good - (GD) - 2 ⇒ Strong repayment capacity of the borrower ⇒ The borrower has excellent liquidity and low leverage.

•

⇒ The company demonstrates consistently strong earnings and cash flow. ⇒ Borrower has well established, strong market share. ⇒ Very good management skill & expertise. ⇒ All security documentation should be in place. ⇒ Credit facilities fully covered by the guarantee of a top tier local Bank. ⇒ Aggregate Score of 85 or greater based on the Risk Grade Score Sheet Acceptable - (ACCPT) - 3 ⇒ These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings. ⇒ Borrowers have adequate liquidity, cash flow and earnings. ⇒ Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property). ⇒ Acceptable management ⇒ Acceptable parent/sister company guarantee ⇒ Aggregate Score of 75-84 based on the Risk Grade Score Sheet

•

Marginal/Watch list - (MG/WL) - 4 ⇒ This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment. ⇒ These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. ⇒ Weaker business credit & early warning signals of emerging business credit detected. ⇒ The borrower incurs a loss ⇒ Loan repayments routinely fall past due ⇒ Account conduct is poor, or other untoward factors are present. ⇒ Credit requires attention ⇒ Aggregate Score of 65-74 based on the Risk Grade Score Sheet

•

Special Mention - (SM) - 5 ⇒ This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. ⇒ Severe management problems exist. ⇒ Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), ⇒ An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.

•

Substandard - (SS) – 6 ⇒ Financial condition is weak and capacity or inclination to repay is in doubt. ⇒ These weaknesses jeopardize the full settlement of loans. ⇒ Bangladesh Bank criteria for sub-standard credit shall apply. 21

⇒ An Aggregate Score of 45-54 based on the Risk Grade Score Sheet. •

Doubtful - (DF) – 7 ⇒ Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. ⇒ However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss. ⇒ Bangladesh Bank criteria for doubtful credit shall apply. ⇒ An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.

•

Bad & Loss - (BL) - 8 ⇒ Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation. ⇒ Prospect of recovery is poor and legal options have been pursued. ⇒ Proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for. ⇒ This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal procedures/suit initiated. ⇒ Bangladesh Bank criteria for bad & loss credit shall apply. ⇒ An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

REGULATORY DEFINITION ON GRADING OF CLASSIFIED ACCOUNTS Irrespective of credit score obtained by a particular obligor, grading of the classified names should be in line with Bangladesh Bank guidelines on classified accounts, which is extracted from “PRUDENTIAL REGULATIONS FOR BANKS: SELECTED ISSUES” (updated till August 07, 2005) by Bangladesh Bank are presently as follows: Basis for Loan Classification: •

Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment will be treated as irregular just from the following day of the expiry date. This loan will be classified as Sub-standard if it is kept irregular for 6 months or beyond but less than 9 months, as `Doubtful' if for 9 months or beyond but less than 12 months and as `Bad & Loss' if for 12 months or beyond.

•

Any Demand Loan will be considered as Sub-standard if it remains unpaid for 6 months or beyond but not less then 9 months from the date of claim by the bank or from the date of forced creation of the loan; likewise the loan will be

considered as ‘Doubtful' and ‘Bad & Loss’ if remains unpaid for 9 months or beyond but less then 12 months and for 12 months and beyond respectively. •

In case any instalment(s) or part of instalment(s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid instalment(s) will be termed as `defaulted instalments'.

In case of Fixed Term Loans, which are repayable within maximum 5 (five) years of time: time: If the amount of `defaulted instalments' is equal to or more than the amount of instalment(s) due within 6 months, the entire loan will be classified as ‘Sub-standard’. If the amount of 'defaulted instalment' is equal to or more than the amount of instalment(s) due within 12 months, the entire loan will be classified as ‘Doubtful’. If the amount of 'defaulted instalment' is equal to or more than the amount of instalment(s) due within 18 months, the entire loan will be classified as ‘Bad & Loss In case of Fixed Term Loans, which are repayable in more than 5 (five) years of time: □ If the amount of ‘defaulted instalment' is equal to or more than the amount of instalment(s) due within 12 months, the entire loan will be classified as 'Substandard.' □ If the amount of ‘defaulted instalment' is equal to or more than the amount of instalment(s) due within 18 months, the entire loan will be classified as 'Doubtful'. □ If the amount of 'defaulted instalment 'is equal to or more than the amount of instalment(s) due within 24 months, the entire loan will be classified as 'Bad & Loss'. Explanation: If any Fixed Term Loan is repayable at monthly instalment, the amount of instalment(s) due within 6 months will be equal to the amount of summation of 6 monthly instalments. Similarly, if repayable at quarterly instalment, the amount of instalment(s) due within 6 months will be equal to the amount of summation of 2 quarterly instalments.

HOW TO COMPUTE CREDIT RISK GRADING The following step-wise activities outline the detail process for arriving at credit risk grading.

Step I: Identify all the Principal Risk Components Credit risk for counterparty arises from an aggregation of the following: 1. Quantitative Factor:  Financial Risk 2. Qualitative Factor  Business/Industry Risk

 Management Risk  Security Risk  Relationship Risk Each of the above mentioned key risk areas require be evaluating and aggregating to arrive at an overall risk grading measure. a)

Evaluation of Financial Risk: Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow.

Evaluation of Business/Industry Risk: Risk that adverse industry situation or unfavorable business condition will impact borrowers’ capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share & poor industry growth.

Evaluation of Management Risk: Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work.

Evaluation of Security Risk: Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security & collateral, location of collateral and support.

Evaluation of Relationship Risk: These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship.

Step II: Allocate weightages to Principal Risk Components According to the importance of risk profile, the following weightages are proposed for corresponding principal risks.

Principal Risk Components:

    

Weight:

Financial Risk Business/Industry Risk Management Risk Security Risk Relationship Risk

50% 18% 12% 10% 10%

Show the Credit risk grading diagram below:

CREDIT RISK

Financial Risk

Leverage

Business/Industry Risk

Size of Business

Management Risk

Security Risk

Relationship Risk

Experience

Security Coverage

Account Conduct

Succession

Collateral Coverage

Utilization of Limit

Team Work

Support

Compliance of Covenants/Condition

Age of Business Liquidity Business Outlook Profitability Industry Growth Coverage

Personal Deposits Market Competition

Barriers to Business

Step III: Establish the Key Parameters Principal Risk Components:



Financial Risk ratio.



Business/Industry Risk Business Competition & Barriers

Key Parameters:

Leverage, Liquidity, Profitability & Coverage Size of Business, Age of Business, outlook, Industry growth, to Business

]]

 

Management Risk Security Risk Relationship Risk

Experience, Succession & Team Work. Security Coverage, Collateral Coverage and support. Account Conduct, Utilization of Limit, Compliance of covenants/conditions Personal Deposit.

Step IV: Assign weight ages to each of the key parameters. Principal Risk Components:



Financial Risk

Business/Industry Risk

Management Risk

Security Risk

Relationship Risk

Key Parameters:

Weight:

50%

⇒ ⇒ ⇒ ⇒

Leverage Liquidity Profitability Coverage

⇒ ⇒ ⇒ ⇒ ⇒ ⇒

Size of Business Age of Business Business Outlook Industry growth Market Competition Entry/Exit Barriers

15% 15% 15% 5% 18%

⇒ Experience ⇒ Succession ⇒ Team Work ⇒ Security coverage ⇒ Collateral coverage ⇒ Support

5% 3% 3% 3% 2% 2% 12% 5% 4% 3% 10% 4% 4% 2% 10% 5%

⇒ Account conduct ⇒ Utilization of limit ⇒ Compliance of covenants /condition 2%

â&#x2021;&#x2019; Personal deposit

Step V: Input data to arrive at the score on the key parameters. After the risk identification & weightage assignment process (as mentioned above), the next steps will be to input actual parameter in the score sheet to arrive at the scores corresponding to the actual parameters. This manual also provides a well programmed MS Excel based credit risk scoring sheet to arrive at a total score on each borrower. The excel program requires inputting data accurately in particular cells for input and will automatically calculate the risk grade for a particular borrower based on the total score obtained. The following steps are to be followed while using the MS Excel program. a) Open the MS XL file named, CRG_SCORE_SHEET b) The entire XL sheet named, CRG is protected except the particular cells to input data. c) Input data accurately in the cells which are BORDERED & are colored YELLOW.

d) Some input cells contain DROP DOWN LIST for some criteria corresponding to the Key Parameters. Click to the input cell and select the appropriate parameters from the DROP DOWN LIST as shown below.

All the cells provided for input must be filled in order to arrive at accurate risk grade.

We have also enclosed the MS Excel file named, CRG_Score_Sheet in CD ROM for use.

Step VI: Arrive at the Credit Risk Grading based on total score obtained. The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor. Number 1

Risk Grading Superior

Short Name SUP

2 3

Good Acceptable

GD ACCPT

4 5 6 7 8

Marginal/Watch list Special Mention Sub-standard Doubtful Bad & Loss

MG/WL SM SS DF BL

  

Score 100% cash covered Government guarantee International Bank guarantees 85+ 75-84 65-74 55-64 45-54 35-44 <35

CREDIT RISK GRADING PROCESS Credit Risk Grading should be completed by a Bank for all exposures (irrespective of amount) other than those covered under Consumer and Small Enterprises Financing Prudential Guidelines and also under The Short-Term Agricultural and Micro - Credit. 

For Superior Risk Grading (SUP-1) the score sheet is not applicable. This will be guided by the criterion mentioned for superior grade account i.e. 100% cash covered, covered by government & bank guarantee.



Credit risk grading matrix would be useful in analyzing credit proposal, new or renewal for regular limits or specific transactions, if basic information on a borrowing client to determine the degree of each factor is a) readily available, b) current, c) dependable, and d) parameters/risk factors are assessed judiciously and objectively. The Relationship Manager as per Data Collection Checklist as shown in Appendix-A should collect required information.



Relationship manager should ensure to correctly fill up the Limit Utilization Form as shown in Appendix-B in order to arrive at a realistic earning status for the borrower.



Risk factors are to be evaluated and weighted very carefully, on the basis of most up-to-date and reliable data and complete objectivity must be ensured to assign the correct grading. Actual parameter should be inputted in the Credit Risk Grading Score Sheet as shown in Appendix–C.



Credit risk grading exercise should be originated by Relationship Manager and should be an on-going and continuous process. Relationship Manager shall

complete the Credit Risk Grading Score Sheet and shall arrive at a risk grading in consultation with a Senior Relationship Manager and document it as per Credit Risk Grading Form as shown in Appendix-D, which shall then be concurred by the Credit Officer in consultation with a Senior Credit Officer. 

All credit proposals whether new, renewal or specific facility should consist of a) Data Collection Checklist, b) Limit Utilization Form c) Credit Risk Grading Score Sheet, and d) Credit Risk Grading Form.



The credit officers then would pass the approved Credit Risk Grading Form to Credit Administration Department and Corporate Banking/Line of Business/Recovery Unit for updating their MIS/record.



The appropriate approving authority through the same Credit Risk Grading Form shall approve any subsequent change/revision i.e. upgrade or downgrade in credit risk grade.

EARLY WARNING SIGNALS (EWS) Early Warning Signals (EWS) indicate risks or potential weaknesses of an exposure requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects in the Bank’s assets at some future date with a likely prospect of being downgraded to classified assets. Early identification, prompt reporting and proactive management of Early Warning Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis. Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Bank’s interest. The symptoms of early warning signals as mentioned below are by no means exhaustive and hence, if there are other concerns, such as a breach of loan covenants or adverse market rumors that warrant additional caution, a Credit Risk Grading Form (Appendix-D) should be presented. Irrespective of credit score obtained by any obligor as per the proposed risk grade score sheet, the grading of the account highlighted as Early Warning Signals (EWS) accounts shall have the following risk symptoms. a) Marginal/Watch list (MG/WL - 4): if –

 Any loan is past due/overdue for 60 days and above.  Frequent drop in security value or shortfall in drawing power exists. b) Special Mention (SM - 5): if –

 Any loan is past due/overdue for 90 days and above

 Major document deficiency prevails (such deficiencies include but not limited to; board resolution for borrowing not obtained, sanction letter not accepted by client, charges/hypothecation over assets favoring bank not filed with Registrar, Joint Stock Companies, mortgage not in place, guarantees not obtained, etc.)  A significant petition or claim is lodged against the borrower. The Credit Risk Grading Form of accounts having Early Warning Signals should be completed by the Relationship Manager and sent to the approving authority in Credit Risk Management Department. The Credit Risk Grade should be updated as soon as possible and no delay should be there in referring Early Warning Signal accounts or any problem accounts to the Credit Risk Management Department for their early involvement and assistance in recovery.

EXCEPTION TO CREDIT RISK GRADING  Head of Credit Risk Management may also downgrade/classify an account in the normal course of inspection of a Branch or during the periodic portfolio review. In such event, the Credit Risk Grading Form will then be filled up by Credit Risk Management Department and will be referred to Corporate Banking/Line of Business/Credit Administration Department/Recovery Unit for updating their MIS/records.  Recommendation for upgrading of an account has to be well justified by the recommending officers. Essentially complete removal of the reasons for downgrade should be the basis of any upgrading.  In case an account is rated marginal, special mention or unacceptable credit risk as per the risk grading score sheet, this may be substantiated and credit risk may be accepted if the exposure is additionally collateralized through cash collateral, good tangible collaterals and strong guarantees. These are exceptions and should be exceptionally approved by the appropriate approving authority.  Whenever required an independent assessment of the credit risk grading of an individual account may be conducted by the Head of Credit Risk Management or by the Internal Auditor documenting as to why the credit deteriorated and also pointing out the lapses.  If a Bank has its own well established risk grading system equivalent to the proposed credit risk grading or stricter, then they will have the option to continue with their own risk grading system.

CREDIT RISK GRADING REVIEW Credit Risk Grading for each borrower should be assigned at the inception of lending and should be periodically updated. Frequencies of the review of the credit risk grading are mentioned below; Number 1 2 3 4 5 6 7 8

Risk Grading Superior Good Acceptable Marginal/Watchlist Special Mention Sub-standard Doubtful Bad & Loss

Short SUP GD ACCPT MG/WL SM SS DF BL

Review frequency (at least) Annually Annually Annually Half yearly Quarterly Quarterly Quarterly Quarterly

MIS ON CREDIT RISK GRADING 

Bank should have comprehensive MIS reports on credit risk grading to evaluate entire credit portfolio of the Bank. Format of such MIS reports on credit risk grading has been presented in ⇒ ⇒ ⇒ ⇒



Credit Risk Grading Report (Consolidated) Credit Risk Grading Report (Branch Wise) Credit Risk Grading Report (Branch & Risk Grade Wise) Credit Risk Grading Report (Grade Wise Borrower List)

MIS reports as mentioned above should be prepared and circulated at least on a quarterly basis.

Credit Risk grading system is a dynamic process and various models are followed in different countries & different organization for measuring credit risk The goal of credit risk management is to maximize a bank's risk adjusted rate of return by maintaining credit risk exposure within acceptable levels. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization.

TYPE OF CREDIT RISK GRADING The main objectives of calculating the Credit Risk Grading to minimize risk. In our country all banks and financial institutes maintain and calculate The CRG in two ways 1. First to calculate CRG for manufacturing, Trading, Sole proprietorship, Real Estate and Individual. 2. Second to calculate CRG for NBFI (Non-Banking Financial Organization).

TOP TEN CLIENTS ϒ ϒ ϒ ϒ ϒ ϒ ϒ ϒ ϒ ϒ

Bashundhara Import & Export Limited. Islam Trading Consortium Limited. Rangs Industries Limited. Deshbandhu Sugar Mills Limited. Amber Cotton Mills Limited. Metro Spinning. Yeasmin Spinning. S. Alam Cold Rolled Steels Limited. Thai Poly Shawn BD Limited. Guamati Filling Station & Service. Southeast Bank limited, Principal Branch: Dhaka CRG Position on 15.07.2008 List of CRG

Marginal/ Watch list 14%

Good 8%

Acceptable e 78%

CASE-1 ( S.ALAM COLD ROLLED STEELS LIMITED) Analysis from Financial Statement: S. ALAM COLD ROLLED STEELS LIMITED Balance Sheet as on 30.09.2007 (as submitted by the client) Particulars

Details Amount in BDT

Total amount in BDT

Current Assets calculation Stock

2,465,526,662.00

Book Debt

879,296,451.00

Advance, deposit and Pre-payments

142,239,277.00

Cash and Bank Balances

21,451,930.00

Total Current Assets

3,508,514,320.00

Fixed Assets Calculation Tangible Fixed Assets Preliminary Fixed Assets Share Issue Expense

1,437,114,119.00 298,040.00 6,341,498.00

Total Fixed Assets

1,443,753,657.00

Current Liability Calculation Creditors and Accruals

684,666,844.00

Advance against sales

37,778,901.00

Short term Bank loan

2,390,974,361.00

Provision for workers profit participation fund Unclaimed Divident Current portion of term loan

6,144,665.00 3,973,500.00 107,248,800.00

Lease finance due within 01 year

11,829,052.00

Propsoed Divident

80,017,200.00

Deffered Income Tax

70,004,579.00

Total Current Liability

3,392,637,902.00

Loag term liability calculation Term Loan (secured)

788,289,421.00

Lease Finance (secured) Loan from Associated Companies (unsecured)

216,640,519.00

Long term Loan Total Loan Liability

1,004,929,940.00 Current & fixed liability

4,397,567,842.00

Share Holders Equity calculation share Capital Ratained Earnings Total shareholders equity TOTAL ASSETS

533,448,000.00 21,252,135.00 554,700,135.00 4,952,267,977.00

TOTAL LIABILITIES AND OWNERS EQUITY

4,952,267,977.00

Profit & Loss Account Net Sales

1,339,096,004.00

Less: Cost of goods sold

984,819,715.00

Gross Profit

354,276,289.00

Less: Operating expenses

34,226,135.00

Less: Financial Expenses

197,156,847.00

Less: WPPWF Less : Amortization of preliminary Expanses Less: Amortization of Share Issue Expanses Net profit before tax

6,144,665.00 149,020.00 2,113,833.00 114,485,789.00

Less: Provision for income tax

42,916,841.00

Profit after Tax

71,568,948.00

Calculation of EBITDA Profit after tax Add: provision for tax Add: Financial Expenses Add: Amortization Add: Depreciation EBITDA

71,568,948.00 42,916,841.00 197,156,847.00 2,262,853.00 59,547,892.00 373,453,381.00

Summery for Financial Risk Measurement as a part of CRG: 1. Total Liabilities 2. Shareholders Equity

4,397,567,842.00 554,700,135.00

3. Current Assets

3,508,514,320.00

4. Current Liabilities

3,392,637,902.00

5. EBITAD 6. Interest on debt 7. Sales

373,453,381.00 197,156,847.00 1,339,096,004.00

Debt-Equity Ratio

7.93

Current Ratio

1.03

Operating Profit Margin

27.89%

Interest Service Coverage Ratio

 Year of Establishment in 1996. (To get from proposal)  Business outlook is Favorable. His or her market condition is very well because sales, profit, productivity has remarkable growth.  He/she can’t enter/exit easily  To count the each Director experience  The scenario of private Ltd. Co. is good but may be opposite its public Ltd.  Security risk depends on Collateral coverage. And guarantee

1.89

CREDIT RISK GRADING SCORE SHEET

Reference No.: Borrower Group Name (if any) Branch: Industry/Sector Date of Financials Completed by Approved by Number 1 2 3 4 5 6 7 8

Criteria Weight A. Financial Risk 50% 1. Leverage: (15%) Debt Equity Ratio (×) - Times Total Liabilities to Tangible Net worth All calculations should be based on annual financial statements of the borrower (audited preferred)

2. Liquidity: (15%) Current Ratio (×) -Times Current Assets to Current Liabilities

3. Profitability: (15%) Operating Profit Margin (%)

Date: 16-Jul-08 S Alam Cold Rolled Steels Ltd. N/a Aggregate Score: 69 Principal Branch Manufacturing Risk Marginal/Watch List Grading: 30/09/2007 (Audited) Emran Ahmed, EO Mr. Giash Uddin Ahmed, SEVP & HoB Grading Short Score Superior Fully cash secured, secured by government guarantee/international SUP bank guarantee Good GD 85+ Acceptable ACCPT 75-84 Marginal/Watchlist MG/WL 65-74 Special Mention SM 55-64 Substandard SS 45-54 Doubtful DF 35-44 Bad/Loss BL <35

Score

Actual Parameter

Score Obtained

Less than 0.25× 0.26× to 0.35 x 0.36× to 0.50 x

15 14 13

7.93

0.51× to 0.75 x 0.76× to 1.25 x

12 11

1.26× to 2.00 x

2.01× to 2.50 x 2.51× to 2.75 x More than 2.75× Greater than 2.74× 2.50× to 2.74 x 2.00× to 2.49 x

8 7 0 15 14 13

1.03

1.50× to 1.99 x 1.10× to 1.49 x 0.90× to 1.09 x 0.80× to 0.89 x 0.70× to 0.79 x Less than 0.70× Greater than 25% 20% to 24%

12 11 10 8 7 0 15 14

27.89

Parameter

(Operating Profit/Sales) X 100

4. Coverage: (5%) Interest Coverage Ratio (×) Times Earning before interest & tax (EBIT) Interest on debt

15% to 19% 10% to 14% 7% to 9% 4% to 6% 1% to 3% Less than 1%

13 12 10 9 7 0

More than 2.00×

More than 1.51× Less than 2.00× More than 1.25× Less than 1.50× More than 1.00× Less than 1.24× Less than 1.00×

Total Score- Financial Risk B. Business/ Industry Risk 18% 1. Size of Business (in BDT crore) The size of the borrower's business measured by the most recent year's total sales. Preferably audited numbers. 2. Age of Business The number of years the borrower engaged in the primary line of business 3. Business Outlook Critical assessment of medium term prospects of industry, market share and economic factors. 4. Industry Growth

5. Market Competition

6. Entry/Exit Barriers

1.89

3 2 0 50

> 60.00

30.00 – 59.99 10.00 – 29.99

4 3

5.00 - 9.99

2.50 - 4.99

< 2.50 > 10 Years > 5 - 10 Years 2 - 5 Years

0 3 2 1

< 2 Years

Favorable Stable

3 2

Slightly Uncertain

Cause for Concern Strong (10%+) Good (>5% - 10%) Moderate (1%-5%) No Growth (<1%) Dominant Player Moderately Competitive Highly Competitive Difficult

0 3 2 1 0 2 1 0 2

133.90

Favorable

Strong (10%+)

Dominant Player

Difficult

Average Easy Total ScoreBusiness/Industry Risk C. Management Risk 12% 1. Experience

Quality of management based on total # of years of experience of the senior management in the Industry. 2. Second Line/ Succession

3. Team Work

More than 10 years in the related line of business

5â&#x20AC;&#x201C;10 years in the related line of business 1â&#x20AC;&#x201C;5 years in the related line of business No experience Ready Succession Succession within 1-2 years Succession within 2-3 years Succession in question Very Good Moderate Poor Regular Conflict

Total Score- Management Risk D. Security Risk 10% 1. Security Coverage (Primary)

2. Collateral Coverage (Property Location)

3. Support (Guarantee)

1 0 18

More than 10 years in the related line of business

Ready Succession

Very Good

2 0 4 3 2 0 3 2 1 0 12

Fully Pledged facilities/substantially cash covered / Reg. Mortg. for HBL

Registered Hypothecation (1st Charge/1st Pari passu Charge) 2nd charge/Inferior charge Simple hypothecation/Negative lien on assets No security Registered Mortgage on Municipal corporation/Prime Area property Registered Mortgage on Pourashava/Semi-Urban area property Equitable Mortgage or No property but Plant and Machinery as collateral Negative lien on collateral No collateral Personal Guarantee with high

Registered Hypothecation (1st Charge/1st Pari passu Charge)

No collateral

Personal Guarantee with

2 1 0 4

3 2 1 0 2

net worth or Strong Corporate Guarantee Personal Guarantees or Corporate Guarantee with average financial strength No support/guarantee Total Score- Security Risk E. Relationship Risk 10% 1. Account Conduct

2. Utilization of Limit (actual/projection) 3. Compliance of Covenants / Conditions 4. Personal Deposits

high net worth or Strong Corporate Guarantee 1 0 10

More than 3 years Accounts with faultless record

Less than 3 years Accounts with faultless record Accounts having satisfactory dealings with some late payments. Frequent Past dues & Irregular dealings in account More than 60% 40% - 60% Less than 40% Full Compliance Some Non-Compliance No Compliance Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits No depository relationship

Total Score- Relationship Risk Grand Total - All Risk

Accounts having satisfactory dealings with some late payments.

100.00%

Some Non-Compliance

No depository relationship

2 0 2 1 0 2 1 0 1

0 10

100

ď&#x192;&#x2DC; S Alam Cold Rolled Steels Ltd. obtains the CRG number total 69. and we finance this organization because their sales, profit, product quality, payment of installment and overall company image is well.

CASE-2 (FURNITEC INDUSTRIES LT D.) Furnitec Industries Limited Analysis from Financial Statement

4.FURNITEC INDUSTRIES LIMITED,DHAKA

FINANCIAL RISK 1.Leverage Liability Long Term Loan SEBL/PB Current Liability Bank Overdraft Provision for Tax Sundry Creditors Outstanding Loan Wages Staff Salary & Allowance Showroom & Office Rent Electricity Bill Telephone & Fax Bill Audit Fee Leagal Fee

2007

31,796,730 34,817,332 2,249,130 135,468

Total Liability

375,200 82,950 152,500 6,915 16,232 5,000 10,000 37,850,727 69,647,457

Total Equity

10,000,000 17,000,000 7,966,634 34,966,634

Equity Paid up Capital Share Money Deposit Profit & Loss A/C

Total Liability/Total Equity 2.Liquidity Current Assets Priliminary Expenses Advance Deposit & Pre-Payment Unallocated Revenue Expenditure Closing Stock Raw materials Finish Goods Bills Receivable Cash & Bank Balance Total Current Assets Current Liability Bank Overdraft Provision for Tax Sundry Creditors Outstanding Loan Wages Staff Salary & Allowance Showroom & Office Rent Electricity Bill Telephone & Fax Bill Audit Fee Leagal Fee

1.991826179

20,500 7,105,000 1,209,865 47,364,075 30,962,868 16,401,207 4,499,302 498,465 60,697,207 34,817,332 2,249,130 135,468 375,200 82,950 152,500 6,915 16,232 5,000 10,000

37,850,727 CA/CL

1.603594219

3.Profitability Net Profit Add:Bank Interest & Charge Add:Depreciation (Admin) Add:Depreciation (Factory) EBITAD Sales

5,622,825 4,185,383 27,708 4,900,083 14,735,999 48,875,325

(EBITAD/Sales)*100

30%

4.Coverage EBITAD Interest/Financial Charge

14,735,999 4,185,383

EBITAD/Interest

3.520824498

CREDIT RISK GRADING SCORE SHEET Reference No.: Borrower Group Name (if any) Branch: Industry/Sector Date of Financials Completed by Approved by Number 1 2 3 4 5 6 7 8 Criteria Weight A. Financial Risk 50% 1. Leverage: (15%) Debt Equity Ratio (×) - Times Total Liabilities to Tangible Net worth

Date: Furnitec Industries Ltd N/a Principal Branch Manufacturing,Trading 30-Jun-07 Sayeed Sikder, Internee Habibur Rahman Molla, SPO Grading Superior

24-Jul-08

Aggregate Score: Risk Grading:

Short

Good Acceptable Marginal/Watch list Special Mention Substandard Doubtful Bad/Loss

SUP GD ACCPT MG/WL SM SS DF BL

Parameter

Score

Less than 0.25× 0.26× to 0.35 x 0.36× to 0.50 x

15 14 13

0.51× to 0.75 x

Acceptable

Score Fully cash secured, secured by government guarantee/international bank guarantee 85+ 75-84 65-74 55-64 45-54 35-44 <35 Score Actual Parameter Obtained

1.99

All calculations should be based on annual financial statements of the borrower (audited preferred)

2. Liquidity: (15%) Current Ratio (×) -Times Current Assets to Current Liabilities

3. Profitability: (15%) Operating Profit Margin (%) (Operating Profit/Sales) X 100

4. Coverage: (5%) Interest Coverage Ratio (×) – Times Earning before interest & tax (EBIT) Interest on debt

0.76× to 1.25 x

1.26× to 2.00 x

2.01× to 2.50 x 2.51× to 2.75 x More than 2.75× Greater than 2.74× 2.50× to 2.74 x 2.00× to 2.49 x

8 7 0 15 14 13

1.50× to 1.99 x 1.10× to 1.49 x 0.90× to 1.09 x 0.80× to 0.89 x 0.70× to 0.79 x Less than 0.70× Greater than 25% 20% to 24% 15% to 19% 10% to 14% 7% to 9% 4% to 6% 1% to 3% Less than 1%

12 11 10 8 7 0 15 14 13 12 10 9 7 0

More than 2.00×

More than 1.51× Less than 2.00× More than 1.25× Less than 1.50× More than 1.00× Less than 1.24× Less than 1.00×

1.60

30%

3.50

3 2 0 50

> 60.00

30.00 – 59.99 10.00 – 29.99

4 3

5.00 - 9.99

2.50 - 4.99

< 2.50 > 10 Years

0 3

4.88

The number of years the borrower engaged in the primary line of business 3. Business Outlook Critical assesment of medium term prospects of industry, market share and economic factors. 4. Industry Growth

5. Market Competition

6. Entry/Exit Barriers

> 5 - 10 Years 2 - 5 Years

2 1

< 2 Years

Favorable Stable

3 2

Slightly Uncertain

Cause for Concern Strong (10%+) Good (>5% - 10%) Moderate (1%-5%) No Growth (<1%) Dominant Player Moderately Competitive Highly Competitive Difficult Average Easy

Total ScoreBusiness/Industry Risk C. Management Risk 12% 1. Experience Quality of management based on total # of years of experience of the senior management in the Industry. 2. Second Line/ Succession

3. Team Work

More than 10 years in the related line of business 5–10 years in the related line of business 1–5 years in the related line of business No experience Ready Succession Succession within 1-2 years Succession within 2-3 years Succession in question Very Good Moderate Poor Regular Conflict

Total Score- Management Risk D. Security Risk 10% 1. Security Coverage (Primary)

Fully Pledged facilities/substantially cash covered / Reg. Mortg. for HBL Registered Hypothecation

0 3 2 1 0 2 1 0 2 1 0 18

Stable

Good (>5% - 10%)

Moderately Competitive

Difficult

1–5 years in the related line of business

Ready Succession

Very Good

3 2 0 4 3 2 0 3 2 1 0 12

Registered Hypothecation (1st Charge/1st Pari passu Charge)

2. Collateral Coverage (Property Location)

3. Support (Guarantee)

Total Score- Security Risk E. Relationship Risk 10% 1. Account Conduct

2. Utilization of Limit (actual/projection) 3. Compliance of Covenants / Conditions 4. Personal Deposits

(1st Charge/1st Pari passu Charge) 2nd charge/Inferior charge Simple hypothecation/Negative lien on assets No security Registered Mortgage on Municipal corporation/Prime Area property Registered Mortgage on Pourashava/Semi-Urban area property Equitable Mortgage or No property but Plant and Machinery as collateral Negative lien on collateral No collateral Personal Guarantee with high net worth or Strong Corporate Guarantee Personal Guarantees or Corporate Guarantee with average financial strength No support/guarantee

2 1 0 4

Registered Mortgage on Pourashava/Semi-Urban area property

Personal Guarantee with high net worth or Strong Corporate Guarantee

3 2 1 0 2

1 0 10

More than 3 years Accounts with faultless record

Some Non-Compliance No Compliance Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits No depository relationship

1 0 1

Accounts having satisfactory dealings with some late payments.

80.00%

Full Compliance

No depository relationship

2 0 2 1 0 2

Total Score- Relationship Risk Grand Total - All Risk

â&#x20AC;˘

100

Furnitec Industries is a manufacturing and Trading Company. Their need minimum paid up Capital Tk.1 corer and Sales minimum Tk. 50-70 lac. But we consider about their Business.

CASE-3 ( THAI POLY SHAWN) THAI POLY SHAWN A.FINANCIAL RISK 1.Leverage Liability IPDC Loan South Bank Ltd (Term Loan) South Bank Ltd (Other) Current Liability Creditors for Expenses Sundry Creditors Bank Overdraft (SEBL) Total Liability Equity Paid up Capital Share money Deposit Profit And Loss A/C Tax Holyday Reserve

Total Liability/ Total Equity 2.Liquidity Currene Asset Cash in Hand Cash in Bank L/C Advance Security Deposit Stock and Stores Bank Guarantee Salary Advance Total Current Assets Current Liability Creditors for Expenses Sundry Creditors Bank Overdraft (SEBL)

2007

2006

6,606,812 2,498,656 49,456,284 58,561,752

9,394,486 7,527,884 53,052,999 69,975,369

2,877,112 3,004,300 4,981,699 10,863,111 69,424,863

2,535,871 1,165,850 5,175,977 8,877,698 78,853,067

5,600,000 18,252,264 1,486,755 998,635 26,337,654

5,600,000 18,252,264 975,398 657,731 25,485,393

2.63595471

3.094049482

52,226 5,196,757 593,907 354,640 46,385,202 124,150 180,998 52,887,880

48,334 6,777,948 290,311 354,640 51,127,541 61,365 125,164 58,785,303

2,877,112 3,004,300 4,981,699 10,863,111

2,535,871 1,165,850 5,175,977 8,877,698

CA/CL

4.86857586

6.621683121

3.Profitability Operation profit Net Profit Add: Depreciation Add: Financial Charge Interest on Term Loan (SEBL) Interest on Loan (IPDC) Interest on Short Term Loan(SEBL) Interest on SEBL C/C A/C Bank Charge & Commission EBITAD Sales

852,261 96,936 5,824,949 430,773 926,558 3,476,290 349,379 641,949 6,774,146 229,681,344

470,815 100,114 7,840,655 1,673,173 1,816,729 3,046,037 629,659 675,057 8,411,584 348,441,361

3.00%

2.41%

6,774,146 5,824,949

8,411,584 7,840,655

1.1629537

1.072816493

(EBITAD/Sales)*100 4.Coverage EBITD Interest/Financial Charge EBITD/ Interest

Date:

23-Sep-07

Thai Poly Shawn (BD) Ltd.

Aggregate Score: Principal Manufacturer of plastic based packages wrapping 31.08.2007 Md. Habibur Rahman Mollah Grading Superior

Short

Good Acceptable Marginal/Watchlist Special Mention Substandard Doubtful Bad/Loss

SUP GD ACCPT MG/WL SM SS DF BL

Parameter

Score

Acceptable

Score Fully cash secured, secured by government guarantee/international bank guarantee 85+ 75-84 65-74 55-64 45-54 35-44 <35

Actual Parameter

Score Obtained

50% 1. Leverage: (15%) Debt Equity Ratio (×) - Times Total Liabilities to Tangible Net worth All calculations should be based on annula financial statements of the borrower (audited preferred)

2. Liquidity: (15%) Current Ratio (×) -Times Current Assets to Current Liabilities

3. Profitability: (15%) Operating Profit Margin (%) (Operating Profit/Sales) X 100

4. Coverage: (5%) Interest Coverage Ratio (×) Times Earning before interest & tax (EBIT) Interest on debt

Less than 0.25× 0.26× to 0.35 x 0.36× to 0.50 x

15 14 13

0.51× to 0.75 x 0.76× to 1.25 x

12 11

1.26× to 2.00 x

2.01× to 2.50 x 2.51× to 2.75 x More than 2.75× Greater than 2.74× 2.50× to 2.74 x 2.00× to 2.49 x

8 7 0 15 14 13

1.50× to 1.99 x 1.10× to 1.49 x 0.90× to 1.09 x 0.80× to 0.89 x 0.70× to 0.79 x Less than 0.70× Greater than 25% 20% to 24% 15% to 19% 10% to 14% 7% to 9% 4% to 6% 1% to 3% Less than 1%

12 11 10 8 7 0 15 14 13 12 10 9 7 0

More than 2.00×

More than 1.51× Less than 2.00× More than 1.25× Less than 1.50× More than 1.00× Less than 1.24× Less than 1.00×

Total Score- Financial Risk B. Business/ Industry Risk 18% 1. Size of Business (in BDT crore) The size of the borrower's

2.46

4.87

3.00%

1.16

3 2 0 50

> 60.00

35.00

30.00 – 59.99 10.00 – 29.99

4 3

Sales position as per financial

business measured by the most recent year's total sales. Preferably audited numbers. 2. Age of Business The number of years the borrower engaged in the primary line of business 3. Business Outlook Critical assesment of medium term prospects of industry, market share and economic factors. 4. Industry Growth

5. Market Competition

6. Entry/Exit Barriers

5.00 - 9.99

2.50 - 4.99

< 2.50 > 10 Years > 5 - 10 Years 2 - 5 Years

0 3 2 1

< 2 Years

Favorable Stable

3 2

Slightly Uncertain

Cause for Concern Strong (10%+) Good (>5% - 10%) Moderate (1%-5%) No Growth (<1%) Dominant Player Moderately Competitive Highly Competitive Difficult Average Easy

3. Team Work

Total Score- Management Risk

More than 10 years in the related line of business 5â&#x20AC;&#x201C;10 years in the related line of business 1â&#x20AC;&#x201C;5 years in the related line of business No experience Ready Succession Succession within 1-2 years Succession within 2-3 years Succession in question Very Good Moderate Poor Regular Conflict

0 3 2 1 0 2 1 0 2 1 0 18

statement as of 31.08.07 is Tk.22.96 crore. We assume that sales position at the end of this year will be more than Tk.35.00 crore. Their last years sales was Tk.34.84 crore. 10

Favorable

Strong (10%+)

Dominant Player

Difficult

More than 10 years in the related line of business

Ready Succession

Very Good

3 2 0 4 3 2 0 3 2 1 0 12

D. Security Risk 10% 1. Security Coverage (Primary)

2. Collateral Coverage (Property Location)

3. Support (Guarantee)

Fully Pledged facilities/substantially cash covered / Reg. Mortg. for HBL Registered Hypothecation (1st Charge/1st Pari passu Charge) 2nd charge/Inferior charge

Simple hypothecation/Negative lien on assets No security Registered Mortgage on Municipal corporation/Prime Area property Registered Mortgage on Pourashava/Semi-Urban area property Equitable Mortgage or No property but Plant and Machinery as collateral Negative lien on collateral No collateral Personal Guarantee with high net worth or Strong Corporate Guarantee Personal Guarantees or Corporate Guarantee with average financial strength No support/guarantee

Total Score- Security Risk E. Relationship Risk 10% 1. Account Conduct

2. Utilization of Limit (actual/projection) 3. Compliance of Covenants /

Registered Hypothecation (1st Charge/1st Pari passu Charge)

No collateral

Personal Guarantee with high net worth or Strong Corporate Guarantee

3 2

0 4 3 2 1 0 2 1 0 10

More than 3 years Accounts with faultless record Less than 3 years Accounts with faultless record Accounts having satisfactory dealings with some late payments. Frequent Past dues & Irregular dealings in account More than 60% 40% - 60%

Less than 40% Full Compliance

0 2

More than 3 years Accounts with faultless record

>60%

Full Compliance

4 2 0 2 1

Conditions 4. Personal Deposits

Some Non-Compliance

No Compliance Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits No depository relationship

0 1

Total Score- Relationship Risk Grand Total - All Risk

Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits

0 10

100

Thus way I had calculated various types of clients CRG with financial statements and to gather practical experience.

FINDINGS There were some problems while I conducting the orientation program.

Lacking Of The Report •

Proprietorship, Private (Home) Limited companies are not interested to maintain their Balance Sheet and they have no accounts department or not healthy because they have no accountability. • Audit firm prepare their Balance sheet basis on favor them. Such as, Profitable organization----------- Show the Banks or Financial Institute, when needs funded. Loosing organization------------- Show the NBR (National Board Revenue), when they provide Tax. Actual or real B/S----------------- Prepares internally for own satisfaction • In particular area can not find out actual Business growth. Because, there have no institute to maintain or collect up to date data. • Small and Medium Entrepreneurs has minimum pain-up capital Tk.1 corer and sales or turnover 50 to 70 lac in a year but CRG manual show, sales must be increased which maximum Tk.60 corer and minimum Tk.2.50 corer. So, they can’t obtain good number. • Most of the time Private (Home) Limited company has no ready succession. This is uncertainty for the Banks. • Most of the banker marking the qualitative judgments depend on own opinion. • A particular business economic situation affected by the Political and natural situation. As a result, the main objectives of the CRG to minimized the risk, it will be quite destroy

Improvement Of The CRG Any Banks or financial institute can change or improve The CRG manual depends on their strategy. I am also discuss with the officer about the improve CRG manual and I think,

• • • •

Proprietorship, Private (Home) Limited companies must be provided Tax return certificate to banks or financial institutes for funded. NBR (National Board Revenue) should collect information about financial statement of the client from the Banks. To established an institute by state for collecting latest information. Strict regulations should be made to ensure transparency and accountability of activities the audit firms.

CONCLUSION I have focused and analyzed on Credit Risk Grading system of Southeast Bank Ltd. The Banking sector in any country plays an important role in economic activities. Bangladesh is no exception of that. As because it’s financial development and economic development are closely related. That is why the private commercial banks are playing significant role in this regard.

The Credit Risk Grading minimize this problem because include this methods provide a specific guideline about lending criteria. Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. Bangladesh Bank expects all commercial banks to have a well defined credit risk management system which delivers accurate and timely risk grading. This manual describes the elements of an effective internal process for grading credit risk. It also provides a comprehensive, but generic discussion of the objectives and general characteristics of effective credit risk grading system. In practice, a bank’s credit risk grading system should reflect the complexity of its lending activities and the overall level of risk involved.

BIBLIOGRAPHY • • • • • •

Annual report of SEBL. Half yearly statement of SEBI which published June2008. Several Booklets from the Banks. Several newsletters from the Banks. CRG operational manual. Banks web-sit.

APPENDIX-A (DATA COLLECTION CHECK LIST) DATA COLLECTION CHECK LIST ABC BANK LIMITED- Principal Branch DATA COLLECTION CHECK LIST Documents/items required for Credit Risk Grading

Require Obtained d? ? YES YES NO NO

Company accounts for at least 3 years

Bank statements for prior 12 months from previous bank (for new customer) Set of accounts for at least two competitors (if published)

Industry average figures (If available)

Financial projection required for: • Term loans; forecasts should be for the duration of the term loan. • New overdraft facilities-forecast should be for 12 months • Working capital estimation for new/renewal/enhancement of facility. Financial Spread Sheet (FSS)

Customer Limit Utilization Form

Current CIB Report of the Obligor

Organization chart

Biodata for –  All Directors –Other key executives  Head of operations/marketing

Copies of all reports on site visits made during the last 12 months.

Valuations of securities/collateral offered

Memorandum/articles of association/certificate of incorporation

Business plan/Project Feasibility Report (required for start up company) o

Receivables Aging

Client’s declaration of Stock/Inventory and Book Debts for the last 12 months

Trade License

TIN Certificate

APPENDIX-B (CREDIT RISK GRADING FROM) CREDIT RISK GRADING FORM Date: Borrower: Incorporated: Client Since: CIB date & status:

Branch: Legal Status: Business: Risk Existin New Grading g Next Grading Review Date: Grade Existin New Score g Credit Risk Grade Score Sheet Ref. No ----------------- & dated ---------------- enclosed. Facilities

Amount in â&#x20AC;&#x2DC;000 TK Limit Outstandin gs

Expiry/ Maturity

Days Past due

Interest Suspens e

Provision Held

SLC/PAD LTR ULC/Acceptance Overdraft Cash Credit Demand Loan Term Loan Guarantee Total Key Financials Period

FYE December 2001

FYE December 2002

Sales Net Profit Current Ratio (X) Leverage (X) Operating Profit/Sales (%) Interest Coverage (X) Query: Are we receiving Financials regularly? Monthly sales deposit receipt and adjustment by the Bank:

FYE December 2003

(For last 6 months.) Is client in business? What is happening to sister company cash flow? Do we have corporate guarantee? What is the risk grade of guarantor? Is loan documentation 100% OK? Are stock of client verified/When/What is the valuation? When last client/factory visit was made by RM and comment by RM? Is Registered Mortgage in place/ What is the value? Are all the approval conditions/covenants complied by borrower?

APPENDIX-C (CREDIT RISK GRADING SCORE SHEET) CREDIT RISK GRADING SCORE SHEET

Reference No:

Date:

Borrower: Group Name (if any): Branch: Industry/Sector: Date of Financials: Completed by: Approved by:

Aggregate Score: _________

Risk Grading:

_________

Number

Grading

Short

Score

Superior

SUP

2 3 4 5 6 7 8

Good Acceptable Marginal/Watchlist Special Mention Substandard Doubtful Bad & Loss

Fully cash secured, secured by Government/International Bank Guarantee 85+ 75-84 65-74 55-64 45-54 35-44 <35

Criteria A. Financial Risk

Weight 50%

GD ACCPT MG/WL SM SS DF BL

Score Parameter

Actual Score Paramete Obtained r

1. Leverage: (15%) Debt Equity Ratio (×) - Times Total Liabilities to Tangible Net worth All calculations should be based on annual financial statements of the borrower (audited preferred). 2. Liquidity: (15%) Current Ratio (×) - Times Current Assets to Current Liabilities

3. Profitability: (15%) Operating Profit Margin (%) Operating Profit ×100 Sales 4. Coverage: (5%) Interest Coverage Ratio (×)Times Earning Before Interest & Tax (EBIT)

Interest on debt

Less than 0.25× 0.26× to 0.35 x 0.36× to 0.50 x 0.51× to 0.75 x 0.76× to 1.25 x 1.26× to 2.00 x 2.01× to 2.50 x 2.51× to 2.75 x More than 2.75× Greater than 2.74× 2.50× to 2.74 x 2.00× to 2.49 x 1.50× to 1.99 x 1.10× to 1.49 x 0.90× to 1.09 x 0.80× to 0.89 x 0.70× to 0.79 x Less than 0.70× Greater than 25% 20% to 24% 15% to 19% 10% to 14% 7% to 9% 4% to 6% 1% to 3% Less than 1% More than 2.00× More than 1.51× Less than 2.00×  More than 1.25× Less than 1.50×  More than 1.00× Less than 1.24×  Less than 1.00×                            

Total Score–Financial Risk

Criteria Weight B. Business/Industry Risk 18% 1. Size of Business (Sales in BDT crore)

   The size of the borrower’s business  measured by the most recent year’s  total sales. Preferably based on  audited financial statements

15 14 13 12 11 10 8 7 0 15 14 13 12 11 10 8 7 0 15 14 13 12 10 9 7 0 5 4 3 2 0

Parameter > 60.00 30.00 – 59.99 10.00 – 29.99 5.00 - 9.99 2.50 - 4.99 < 2.50

Score 5 4 3 2 1 0

Actual Parameter

Score Obtained

Criteria 2. Age of Business

Weight

  The number of years the borrower  has been engaged in the primary line  of business. 3. Business Outlook   A critical assessment of the medium  term prospects of the borrower,  taking into account the industry, market share and economic factors. 4. Industry Growth    

> 10 years > 5Parameter - 10 years 2 - 5 years < 2 years

5. Market Competition

6. Entry/Exit Barriers

Favorable Stable Slightly Uncertain Cause for Concern

3 2 1 0

Strong (10%+) Good (>5% - 10%) Moderate (1% - 5%) No Growth (<1%)

3 2 1 0

  

Dominant Player Moderately Competitive Highly Competitive

2 1 0

  

Difficult Average Easy

Total Score-Business/Industry Risk

Criteria C. Management Risk

3 Score 2 1 0

Weight Parameter

12%

Score 5

2. Second Line/ Succession

4 3 2 0

 3. Team Work

Total Score-Management Risk

    

Ready Succession Succession within 1-2 years Succession within 2-3 years Succession in question Very Good Moderate Poor Regular Conflict

Score Obtained

2 1 0 18

1. Experience  More than 10 years in the (Management & Management Team) related line of business  5–10 years in the related The quality of management based line of business on the aggregate number of years  1–5 years in the related that the Senior Management Team line of business has been in the industry.  No experience  

Actual Parameter

3 2 0

3 2 1 0 12

Actual Score Paramete Obtained r

Criteria D. Security Risk

Weight 10%

1. Security Coverage (Primary)

2. Collateral Coverage (Property Location)

3. Support (Guarantee)

Score Parameter Fully pledged facilities/substantially cash covered/Reg. Mortg, for HBL  Registered Hypothecation (1st charge/1st Pari passu charge)  2nd Charge/Inferior charge  Simple hypothecation/negative lien on assets.  No security  Registered Mortgage on Municipal Corporation/Prime area property.  Registered Mortgage on Pourashava/semi-urban area property  Equitable Mortgage or No property but plant & machinery as collateral  Negative lien on collateral  No collateral  Personal guarantee with high net worth or Strong Corporate Guarantee  Personal Guarantees or Corporate Guarantee with average financial strength  No Support/Guarantee 

Total Score- Security Risk Criteria E. Relationship Risk 1. Account Conduct

Weight 10%

Parameter More than 3 (three) years accounts with faultless record  Less than 3 (three) years accounts with faultless record  Accounts having satisfactory dealings with some late payments  Frequent Past dues & Irregular dealings in account 

Actual Score Paramete Obtaine r d

4 3 2 1 0

4 3 2 1 0 2

1 0 10

Score 5 4 2 0

Actual Score Paramete Obtaine r d

Criteria 2. Utilization of Limit (actual/projection)

Weight

3. Compliance of Covenants / Conditions 4. Personal Deposits

Parameter More than 60%  40% - 60%  Less than 40%  Full Compliance  Some Non-Compliance  No Compliance

Personal accounts of the key business Sponsors/ Principals are The extent to which the bank maintained in the bank, with maintains a personal banking significant deposits relationship with the key business  No depository relationship sponsors/principals. Total Score-Relationship Risk Grand Total- All Risk 

2 Score 1 0 2 1 0 1

0 10 100

Actual Score Paramete Obtaine r d