The document discusses credit risk management practices at a bank. It provides details on the bank's credit portfolio as of 2017, with most loans going to corporate and SME business. It then covers key aspects of credit risk management, including defining credit risk, roles and responsibilities, the credit approval workflow, reasons why credits may go bad, the appraisal process, risk grading system, portfolio management practices, and early alert monitoring. Key metrics like non-performing loans, interest income savings from lower provisions, and incremental income from better risk management are also presented.

1. Credit Appraisal & Portfolio
Management of Corporate
Banking
Moazzem Hossain Shumon
Head of Underwriting,
Wholesale Banking Unit 2

2. Credit Portfolio as on 31/12/2017
Business Loans
Corporate
SME
Consumer
Total
82,327 m
77,865 m
41,439 m
201,632 m
mix
41%
39%
20.55%
100%
NPL
5.41%
2.50%
1.96%
3.58%

3. A simple example:
Total Loans : Tk. 201,632m
NPL (3.58%) : Tk. 7,212 m
Loss of int. Income (11%) : Tk. 793 m
Saving of provision (CL) : Tk. 5,083m
Incremental Income : Tk. 5,876m

4. What is Credit Risk
Risk arising from the uncertainty of an obligor’s
ability to perform its contractual obligation.
Credit Risk includes:
Default
Partial Default
Decline in credit standing/risk grade

5. Globally more than 50% of total risk elements in
banks and FIs are Credit Risk alone
Credit Losses have, historically, been the single
largest cause of bank failures.
– The Economist

6. Credit Risk Management
Credit Risk Management (CRM) means appraisal,
approval & monitoring of credit – both in micro and
macro aspects.
 If loan is repaid within the agreed time, it can be said that the credit
risk has been managed.
 Credit risk management is essential for efficient performance of the
credit function of financial institutions.

7. Role of Credit Risk Management Division
• Appraisement of Credit Proposals (Corporate, SME & Consumer) for
obtaining approval from Competent Authority
• According approval as per delegation
– Layer of approval authority
• Portfolio Management
Board
Managing Director
Head of CRM
Sub-delegated to other
CRM officials
Reporting Line
Managing
Director
Head of CRM
Consumer
Finance
Corporate
Risk
SME
Risk
CRO
DMD & CRO

8. CREDIT APPROVAL WORKFLOW
Business Units/Divisions
Credit proposal prepared by
relationship manager/ relationship
officer and submitted to CRM with
recommendation of respective
Business Unit Head and Division
Head
Credit Risk Management
Credit Proposals assessed by credit
officers and submit for approval /
decline as per delegation /
Recommendation.
Credit Proposal assessed by credit
officers and submits for review to
Credit Risk Management Committee
(CRMC) whose exposure is BDT 100
million & Above
Credit Risk Management Committee
Credit Proposal discussed and recommendation made.
Decline or advised to resubmit with
further information
Recommended for approval and placed to approval authority as per delegation
Board of Directors
Managing Director & CEO
or Other delegated
approver

9. Why a Credit goes Bad?
Pre approval stage
(controllable variance)
(A)
Wrong selection of borrower
Wrong selection of business
Long drawn appraisement &
approval process
Poor Appraisal Technique
Purpose not identified
Wrong Structuring of credit
Under / Over Financing
Mismatch of Asset
Poor judgment in Sectoral
volatility
Security base lending
Non availability of Projection

10. Why a Credit goes Bad?
Post approval stage
(controllable variance)
(B)
Poor monitoring & Recovery System
Improper / Incomplete loan documentation
Long drawn & ineffective legal procedure
Poor MIS

11. Why a Credit goes Bad?
Post approval stage
(uncontrollable variance)
(C)
Unfavorable investment climate
Economic Recession
Inconsistent & erratic govt. fiscal
policy
Existing credit culture promotes loan
default
A. Controllable, 60%
B. Controllable, 35%
C. Uncontrollable, 5%
Controllability Variance

12. Appraisal of Credit
Main Objective
Achieving excellence in Credit Risk Management
Remember!!!
No credit is absolutely risk free; risk is inherent in all credit.
Tools
(i) Identify risk (ii) Measure risk
(iii) Mitigate risk (iv) Test acceptability

13. Risk is properly identified & also their mitigates
Must ensure that :
There is a balance between risk & return
Fits with portfolio strategy
Complies with bank’s credit policies
Prevents a credit from going bad
Complies external regulatory environment
Appraisal of Credit

14. 
Is the borrower creditworthy?
3 Questions must be answered satisfactorily
in each credit application

Can the credit agreement be properly structured and documented
so that the bank and its depositors are adequately protected?

Can the bank perfect its claim against the assets or earnings of the
customer, so that, in the event of default, bank funds can be recovered?
Appraisal of Credit

15. Appraisal of Credit
1. Economy
2. Business
3. Customer
4. Group
5. Banker
6. Financial performance
7. Account performance
8. Justification of facility
9. Risk Grade (CRGM)
10. Environmental Risk Grade
11. Key Risk / Trigger Points
12. Security / Collateral
13. CIB report
14. Business Potential

16. Components of Credit Risk Management
Systems & Procedures:
 Credit Origination
 Credit Appraisal
 Pricing
 Large loan
 Structuring
 Policy breach
 Measuring Credit Risk (Internal Risk Rating)
 Delegation of authority
 Credit Administration (documentation, disbursement,
monitoring, repayment, etc)
 Credit risk monitoring & control (financial position & business
condition, conduct of account, loan covenants, collateral
valuation)
 Risk Review (at least once in a year)
 Problem Credit Management

17. Risk Grading
Tool : Score Card
Preparation of score card is a complex risk modeling & need validation
by statistical models &
minimum five years statistical data.
Current Market Practice
Central bank introduced a Score Card (8 point scale) & made it
mandatory for Financial Institutions as minimum practice.
Current Practice at BBL
BBL modified that to an 10(ten) point scale scorecard.

18. Grading Categories
Grading (Short Name) No. Score Review frequency
Superior (SUP) 1
 100% cash covered
 Government guarantee
 International Bank
guarantees
Annually
Very Good 2 85+ Annually
Good (GD) 3 80-84 Annually
Satisfactory 4 75-79 Annually
Acceptable (ACCPT) 5 70-74 Annually
Marginal/Watchlist MG/WL) 6 65-69 Half yearly
Special Mention (SM) 7 55-64 Quarterly
Sub standard (SS) 8 45-54 Quarterly
Doubtful (DF) 9 35-44 Quarterly
Bad & Loss (BL) 10 <35 Quarterly

19. Principal Risk Components:
Financial Risk (Weight: 50%)
Debt to equity (5%), Adjusted Gearing (5%), Liquidity (5%),
Profitability (15%), Coverage ratios (10%), Assets Turnover (5%),
Cash flow ratio (5%), Cash conversion cycle (5%) and Sales/Revenue
growth (5%).
Business/Industry Risk (Weight: 18%)
Size of Business (3%), Age of Business (3%), Benchmarking /Position
in the industry (3%), Business Outlook (3%), industry growth (3%)
and company diversification (3%).

20. Management Risk (Weight: 12%)
Management quality (3%), Experience (5%), Second line/Succession
(3%), Ownership Structure (3%).
Security Risk (Weight: 10%)
Security coverage (4%), Collateral coverage (4%), Support (2%)
Relationship Risk (Weight: 10%)
Account conduct (4%), Utilization of limit (2%),
Compliance of covenants/condition (2%), Rescheduling/Restructuring
of Loan/Create Force Loan (2%)
Principal Risk Components:

21. Risk Grading
Customer Risk Grading (CRG) provides a way to describe
and compare credit exposure quality regardless of the
nature, type, or location of the facility.
CRG helps to determine followings:
Appropriate loan structure
Facility amount
Pricing
Covenant & Conditions
Monitoring strategy
Decision for accepting/rejecting the application

22. Portfolio Management
1. Monitoring of Overdue loans
2. Portfolio Review
3. Movement of Weighted average Credit Risk Grading (WACRG)
4. Industry wise Exposure
5. Exit Account Review
6. Documentation Deferral Review
7. Early Alert Account Review
8. Stress Testing
9. External Credit Rating
10. Concentration Risk
11. NPL Management
12. Industry Paper
13. Portfolio MIS
14. Term Loan Review
15. Underutilized Limit

23. Early Alert & Monitoring
Deterioration in Industry & Competition
Position within the industry is rapidly eroding
Price war, product substitute can affect company P&L
Mature & declining industry, or in a cyclical downturn
Threats from new entrants
Major change in suppliers, buyers
Currency fluctuation

24. Early Alert & Monitoring
Deterioration in Ownership/Management
Changes in the key management positions
Death, retirement of key persons
Major shareholder retires from Board of Directors
Family feuds
Negative reports on key management
Change in succession plan

25. Early Alert & Monitoring
Deterioration in environmental issues
Changes in environmental policies
Changes in waste disposal policy
Litigation & compensation
Additional investment

26. Early Alert & Monitoring
Deterioration in social issues
Labor unrest/resentment
Unethical labor practice
Inadequate safety measures
Breach of social, religious norms

27. Early Alert & Monitoring
Deterioration in financial performance
Delay in submission, or submission of stale financials
Declining operating results
Increasing leverage relative to peer group/industry
Rapid acquisition of assets without financing plan
Inventory holding do not match with sales growth
Receivable days – slow collection, easy trade credit
Payable days – cash crisis, easy trade credit
Receivable days – discount, tough trade credit
Payable days – excess cash, tough trade credit

28. Early Alert & Monitoring
Deterioration in cash flows
Liquidity strain. Need additional loan/capital
Cash flow is unlikely to cover debt & expenses
Ability to reduce WC loan is limited/non existent
Diversion of fund in non core activities
Short term loan to finance fixed assets or vice versa

29. Early Alert & Monitoring
How to monitor deterioration
Monitor account operations regularly
Investigate any volatility in normal pattern
Surprise visit to customer
Quick action on adverse market info
Follow a standard monitoring process
Sales routing

30. Early Alert & Monitoring
Sources of information
Own reports & records
Customer contact
Customer’s financials
Analysis of industry trend
Peer group
Suppliers & Buyers
Credit Information Bureau

31. Symptoms of Early Alert Accounts
Industry &
Competition
Ownership/
Management
Balance Sheet Cashflow/Repaym
ent source
Performance Aging of
Account
EA 1 EA 2 EA 3 EA 4 EA 5 EA 6
Position within
the industry
rapidly
eroding
Price war or
product
substitutes
which may
dramatically
impact the
Company’s
P&L
Concerns over the
ability of
management to
effectively manage
existing operations,
and/or the business
expansion plans
Environmental risk:
Causing pollution or
destruction of the
natural environment
(land, water. Air,
natural habitats,
animal, and plant
species) either
through accidents or
deliberate actions
Delay in
submission,
stale financials
and/or
continued
weakness
and/or
deterioration
Operating
results are
deteriorating
and/or cash
conversion
cycle
deteriorating
Liquidity strain and
there is a need for
additional
borrowing or
capital
Cashflow is
unlikely to cover
both mandatory
debt service
(principal plus
interest) and other
business needs
(e.g. Capex)
Payment
Default:
Interest or
principal 15
days
overdue.
TOD 90 days
or more
which has
not been
regularized
via formal
limit and
security
documentati
on
Account
on EA for
6 months
or more

32. Portfolio Risk Management
Portfolio – pool of individual assets (pool of obligors)
Risk – Probability, that the borrower shall not repay
Example: You have four customer having loan of Tk. 100
each, and the analyst told you that the default chances
are:
Customer A: 2%
Customer B: 3%
Customer C: 0%
Customer D: 5%
Average Chance of Default: 2.5%

33. Portfolio Risk Management
You can reduce average chance of default (Portfolio Risk) by:
 Diversification among different industries
 Managing Correlation between industries
In economic downturn, all industries are not
effected at same momentum, even some do
better. On the other hand some industry do good
if some perform poor. Theoretically, managing
negative correlation reduce portfolio risk.

34. Credit Risk Appetite Statements
BBL shall not extend fund based facilities exceeding 15% of its
capital to any single obligor, which is also a central bank
regulation.
Single obligor lending cap
Minimum risk grade of a new customer shall be “ACCPT”
Minimum Risk Grade for new booking
Set your risk appetite – don’t follow blindly

35. Credit Risk Appetite Statements
BBL shall not take
exposure more
than 25% of its
total portfolio on
any
industry/business
segment
Sector wise exposure cap
Name of Industry Internal Cap
1 RMG 15.0%
2 Textile 17.0%
3 Food and allied industries 14.0%
4 Pharmaceutical industries 2.2%
5 Chemical, fertilizer, etc. 0.9%
6 Cement and ceramic industries 3.8%
7 Ship building industries 0.3%
8 Ship breaking industries 0.0%
9 Power and gas 4.6%
10 Other manufacturing industries 24.8%
11 Service Industries 17.0%
12 Others 0.0%
TOTAL 100%

36. Credit Risk Appetite Statements
Bank’s total term loan shall not exceed 45% of total lend-able
fund.
Product wise exposure cap
BBL incurred losses previously on the customer or the group
Excluded loan types/industries
Takeout of adversely classified loans from other banks, or where
current lender wishes to withdraw.

37. Credit Risk Appetite Statements
Excluded loan types/industries
Casinos & Gambling equipments
Defense equipments including lethal weaponry
Political organizations
Pornography goods / stores

38. Credit Risk Appetite Statements
Excluded loan types/industries
Trading of endanger species/ivory products
House of worship
Environmentally destructive or engaged in unethical conduct or
unethical labor practice
Business which could adversely affect bank’s reputation

39. Quality of credit is more important than exploiting new opportunities.
The principal management and/or shareholders must be free of any
doubt about their integrity.
The purpose of the loan should contain the basis of its repayment
Concluding thoughts – Credit Principles
Think First for the Bank
Bank should not finance that business where it lacks clear
understanding.

40. Strict adherence to the Banking Laws, Rules and Regulations of the
Govt. of Bangladesh.
Collateral security should not be a substitute for repayment.
If any borrower wants a quick answer, it is “NO”. The word ‘quick’
means lack of sufficient time for due diligence on any credit request.
Concluding thoughts – Credit Principles
Credit decision should not be made until receipt of all the relevant
facts
Assessing a company’s management quality is vital.

41. THANK YOU