Master of Business Administration

1. Md. Saiduzzaman Selim
MBA (Evening)
Introduction

2. Performance evaluation of Credit Risk
Management : A Case Study on State-
owned Commercial banks of Bangladesh
Presentation on

3. The study has been under-taken with the following objectives:
A. General Objectives
To fulfill the partial requirements for obtaining MBA degree from
the IBAIS University.
To review credit risk management policy and practice in SCBs in line
with the guidelines issued by Bangladesh Bank to find out potential
areas of improvement.
B. Specific Objectives
To assess the trend and magnitude of non-performing loans.
To find the causes of non-performing loans.
To analyze the impact of NPL on profitability.
To recommend for overcoming NPLs.
Objectives of The Study

4. FFD
Research Design: The qualitative and quantitative ways of descriptive research
method together have been followed to accomplish the Dissertation report. The time
preference of the study relates to the years of 1990-2014.
Methodology of the Study
Population and Sample size:
Banks Total
population
Sample size
Sonali 10 3
Agrani 15 3
Janata 10 3
Rupali 15 3
4 50 12
Data Collection Instruments: Sources of data
A. Primary
B. Secondary

5. A Non-performing loan is a loan that is in default or close to being in default. Many
loans become non-performing after being in default for 90 days.
According to IMF, definition of NPLs is “A loan is nonperforming when payments of
interest and principal are past due by 90 days or more, or at least 90 days of interest
payments have been capitalized, refinanced or delayed by agreement, or payments are
less than 90 days overdue, but there are other good reasons to doubt that payments
will be made in full”. Loan may also be Non- performing if it is used in a different way
than that for which it has been taken. According to the latest notice of the central
bank, only 'doubtful' and 'bad' categories are treated as default loans.
Non-performing loans are also called non-performing assets (NPA), which are loans,
classified by a bank or a financial institute, at the instruction of the regulatory
authority, on which repayments or interest payments are not being made on
scheduled time.
Trend and Magnitude of NPLs

6. The trend of non-performing loans in SCBs of Bangladesh:
We can divide the trend of non-performing loan in three sections are respectively
 The trend of non-performing loans before Liberation Period
 Growth and Spread of non-performing loans after liberation period
 Present status of non-performing loans culture in Bangladesh

7. Year NPL (%) Year NPL (%)
1990 27.59 1991 26.30
1992 31.86 1993 32.23
1994 32.12 1995 31.00
1996 32.55 1997 36.57
1998 40.38 1999 45.62
2000 38.56 2001 37.02
2002 33.73 2003 29.0
2004 25.3 2005 21.35
2005 21.35 2006 22.94
2007 29.90 2008 25.44
2009 21.38 2010 15.56
2011 11.27 2012 23.87
2013 28.76 2014 31.2 (around)
Magnitude of NPLs

9. Banks Non-performing Loans In Percentage of Total Loan as Sept-2013:
Comparison Between Types of Banks :
28.76 29.39 7.3 6.02
Source: BB : Loan Rescheduled for the four State Owned Commercial Banks (2011-2014).
Source: Bangladesh bank publications-2013

10. Credit risk is a serious threat to the performance of banks;
therefore various researchers have examined the impact of credit
risk on banks in varying dimensions. Credit risk is the risk or
potential of loss that may occur due to failure of borrower/
counterparty to meet the obligation on agreed terms and
conditions of financial contract. To strengthen the risk
management practices of banks, Bangladesh Bank issued
―Guidelines on Credit Risk Management (CRM) for Banks on the
basis of the first version of its kind, the Bank Company Act 1991
(Amended in 2013). Better credit risk management presents an
opportunity to greatly improve overall performance and secure a
competitive advantage. These guidelines provide broad-based
policy on the core principles for identifying, measuring, managing
and controlling credit risk in banks.
I have found that poor credit risk management practice by SCBs
that has made NPLs in high percentage where the 63% NPls of
total NPLs are from SCBs .
FINDINGS

11.  business are run by adolescents who have lack of business experience.
 For peoples who want to do business in generally after retirement from
state or private service.
 Political instability
 Boards of the Directors.
 Loans are given to the borrower without consideration of
 Rescheduling of loans is offered to the defaulters without any down
payment in some causes.
 Loan scams have been a big cause of non-performing loan in banks in recent
years.
 They do not follow the Bangladesh Bank guidelines fully and fairly.
 Lack of power of BB to control SCBs because of the ministry of finance .
Some causes are responsible for increasing NPLs of four state-owned banks:

12.  Anti-corruption Commission (ACC) Act- 2004, The Bank Companies Act-
1991and The Companies Act-1994 are the suitable laws to prevent the bank
fraudulence but their implementation is very rare.
 Lack of Monitoring
 Lack of human resource policy
 The practice of the purchase of loans of questionable quality from private
commercial banks (PCBs) under pressure from powerful quarters that
makes NPLs in SCBs.
 The Internal Control department which ought to be the most critically
important department of any bank is weak in the state-owned commercial
banks (SCBs).
Some causes are responsible for increasing NPLs of four state-owned banks:

13. I would like to say again that main causes of problem loans in those banks are:
 Allowing customer to intimidate
 Basing the lending decision on pressure from other parties
 Inadequate analysis of the borrower
 Inadequate analysis of financial statements
 Inadequate analysis of loan purpose, source of repayment, and excess cash
flow
 Improper loan structure—amount, source of repayment, timing of
repayment (terms)
 Improper collateralization
 Failure to properly identify entity bank is dealing with
So we can say that indirectly the credit risk management of SCBs is producing high
percentage of NPls that indicates the negative impact on performance of the banks :
 erosion of the capital.
 reduces current revenue.
 resulting high loss of provision.
 high cost of loan which causes low investment.
 decrease of economic growth.
 loan loss reserve to make up bad debt.
 Finally law profit.
FINDINGS

14. Capital deficit of SCBs (in BDT Billion)
Source: Bangladesh Bank

15. Comparison of SCBs ROA with others Bank

16. The recommendations for banks that may help the authority to
take effective remedial actions to overcome the NPLs and CRM
problems in at least acceptable level.
Sanctioning of loans should be on the basis of prudent banking
principles and some other considerations must be stopped.
Outright bribes
Putting an end to the practice of sanctioning loans under
pressure from powerful quarters .
Future lucrative employment in the borrower's company
Over valuation of properties and assets of the borrower which
are offered as collateral
The boards of directors of state-owned banks must consist of
honest personalities
A high-powered Credit Counseling Committee (CCC) headed by
the Credit Management Department should be formed in each of
the banks.
A team must visit the factory and office of the applicant.
Collection of Information about the applicant.

17.  Without meeting the credit risk grading and due diligence no new loan
should be sanctioned.
 Documentation should be completed in all respects by the legal
department before disbursement of the loan.
 A perfect and exquisite credit analysis should be made in all respects
about the applicant.
 Bankers will have to increase their negotiation skills to speed up loan
recovery
 Bangladesh Bank can impose strict rules of lending on all state-owned
banks.
 Bank officials must visit the client's office and factory regularly
 Analyzing the disbursement of loans of past, present and future.
 Banks should take high collateral.
 SCBs have to follow each and every guidelines of risk management of BB
to overcome the problem of NPLs within short period of time.

18. The default loan culture as a regular phenomenon must
not be accepted for an indefinite period of time. The
concerned authorities already have taken some actions by
the amendment of bank company act 1991 in 2013 to
come out from this regular problem.
The truth is that suggestions, thinking, recommendations
etc. will never work, unless and until all the interested
parties come up with a positive approach. Unexpected
political influence should be kicked out from the banks.