Credit Approval and Monitoring Process of Bank Asia Limited

Bank Asia Limited is a third generation private bank in Bangladesh. After its inception in November 1999, the bank has been able to earn a good name in the industry for its high quality services. The bank’s non-performing assets account less than 5% of its total assets, which is one of the lowest in the industry. This is because the bank attaches highest importance to the management of risks.

Risk is inherent in all aspects of a commercial operation, however for banks and financial institution credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with the agreed terms. Credit risk, therefore arises from the bank’s dealings with or lending to corporate, individuals, and other banks and financial institutes.

Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. It is essential that banks have robust credit risk management policies and procedures that are sensitive and responsive to fast changing, dynamic global economy.

Executive Summary

To help banks to manage their credit risks more systematically, Bangladesh Bank came up with a directional guideline to the banking sector that will improve the risk management culture, establish minimum standard for segregation of duties and responsibilities. These guidelines were prepared and endorsed by senior credit executives from private sector, foreign and nationalized commercial banks operating in Bangladesh.

In this report a comprehensive analysis have been made to see if existing credit approval and monitoring policy of Bank Asia Limited complies with Bangladesh Bank’s best practices guidelines. To do that, I have organized the report in five sections. The first section obviously is the introductory part. The second section is organization part of the report, which gives an overall idea of Bank Asia Limited.

Details of credit management policy of Bank Asia Limited are furnished in section three, where Bank Asia’s existing credit management policy is critically analyzed. In Section four Bangladesh Bank’s policy guidelines are presented. Section five is the main section of this report where compliance of Bangladesh best practices guidelines by Bank Asia limited is shown. Analyzing both Bank Asia’s existing credit approval & monitoring policy and Bangladesh Bank’s guideline we see that Bank Asia lacks some best practices in the industry. Such as Bank Asia has a written lending guideline but it does not follow all the parameters mentioned there. Bank Asia is has recently started implement risk-grading system for its client base, which the policy guideline suggests. In Bank Asia limited we see that every proposal (other than fully secured loans, in some cases) goes to Executive i.e. Board for approval. As a result, accountability of individual executives in the approval process cannot be ensured. Most importantly, in small branches of Bank Asia Limited a single officer does all the lending functions like loan marketing (relationship management), risk management and credit administration under the supervision of credit In-charge or managers. In other words there is no segregation of duties that we see in the Bangladesh Bank’s policy guidelines.

Significance of the Study

Four years back Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four ‘Focus Groups’ were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinators to look into the practices of the best performing banks both at home and abroad. These focus groups identified and selected five core risk areas and produced a document that would be a basic risk management model for each of the five ‘core’ risk areas of banking. The five core risk areas are as follows-

a) Credit Risks;

b) Asset & Liability / Balance Sheet Risks;

c) Foreign Exchange Risks;

d) Internal Control & Compliance Risks; and

e) Money Laundering Risks.

Bangladesh Bank in one of it’s circular (BRPD Circular no.17) advised the commercial banks of Bangladesh to put in place an effective credit approval and monitoring system by December, 2003 based on the guidelines sent to them.

While doing internship in the Credit Department of Bank Asia Limited,Scotia Branch, and for preparing the report, I will try to make a comparative analysis of Credit Approval & Monitoring process of Bank Asia Limited existing credit policy following Bangladesh Bank’s suggested guidelines.

Objectives of the Study

The study has been undertaken with the following objectives:

To identify the factor affecting credit risk.
To evaluate the techniques for credit risk management used by Bank asia
To compare the existing credit approval and monitoring process of Bank Asia Limited with that of Bangladesh Bank guidelines.
To identify and suggest scopes of improvement of existing methods of loan approval, maintenance and monitoring in the credit division of Bank Asia Ltd.

Background of Bank Asia Limited

Bank Asia started its journey on the 27^th of November 1999 with the inauguration of the bank’s Corporate Office at the Rang’s Bhaban. By a great number of public responses has enabled the Bank to keep up the plan of expanding its network. The opening of the Principal Office was the big leap forward and successively the opening of Gulshan and Chittagong Branch expanded the horizon of Bank Asia to bring its services to the valued clients more effectively.

Within a very short period, the Bank has opened 2 more branches in Dhaka and 2 branches in Sylhet and Kishorganj. In February 2001 Bank Asia took over the Bangladesh operation of The Bank of Nova Scotia of Canada, the first acquisition of a foreign bank by a local bank in the history of Bangladesh. Later, Bank Asia took over the Bangladesh operation of Muslim Commercial Bank Limited (MCB) of Pakistan in January 2002. These courageous moves were possible for some visionary decision-makers and also dedicated team of professionals who are constantly putting all their best efforts to establish the bank as one of the leading concern in the industry.

Bank Asia has so far been highly successful in keeping its clientele satisfied with its high quality services, while continuing its expansion to reach more people around the whole nation. Bank Asia conducts all types of commercial banking activities. The core business of the bank comprises of import, export, working capital finance and corporate finance. The bank is also rendering Consumer loan, and services related to local and foreign remittances.

The “Consumer loan” scheme of the bank, which is designed to help the fixed income group in raising standard of living is competitively priced and has been widely appreciated by the customers. The Bank also has ATM services and very lucrative deposit schemes i.e. DG+, DB+, MB+ which have earned the Bank a name in the market. However, these products are temporarily suspended at present.

Capital Base

Authorized Capital: BDT 4450,000,000.

Paid up Capital: BDT 1395,000,000(as on December 31, 2007)

SWOT Analysis of Bank Asia Ltd.

Every organization is composed of some strengths and weaknesses, which are its internal factors. The opportunities and threats it encounters are external elements. The following will briefly list some of Bank Asia’s internal strengths and weaknesses, and external opportunities and threats, as I perceive from my experience.

Strengths

Quality

Bank Asia strives to endow its customers with appreciable quality in every service it provides. Customer satisfaction claims the highest priority, as it should be in any service-oriented organization.

Adaptability

Bank Asia draws its strength from the adaptability and dynamism it possesses. It has quickly adapted to world class standard in terms banking services. Bank Asia has also adopted state of the art technology to connect with the world for better communication to integrate facilities

Financial strength

Bank Asia is a financially sound company backed by the enormous resource base of the mother concern RANGS group. As a result customers feel comfortable and more secure while dealing with the bank.

Efficient management

All the levels of management are solely directed to maintain a culture for the betterment of the quality of the service and for developing a brand image in the market through the organization’s wide team approach and horizontal communication system.

State of the art technology

Bank Asia utilizes state-of-the-art technology to ensure consistent quality and operation. The evidence of that can be found in one of its branches, Banani that is equipped with Reuters and SWIFT. All these facilities will be introduced in every branch very shortly. Bank Asia Limited has also started using the Stelar Software since January 01, 2004

Human Resource Expertise

One of the key-contributing factors behind the success of Bank Asia is its HR who are highly trained and most competent in their own respective fields. Bank Asia provides its employees with training both in-house and out side job.

Logistics

Bank Asia is free from dependence from the ever-disruptive power supply. The company generates the required power through generator operating on diesel. Water generation at present is also done by deep tube wells on site and is abundant in quantity. Also support tools, like laser printers, photocopiers, microwave oven etc. that have become essential these days are available at arm’s length much to the convenience of the users.

First-Rate working environment

Bank Asia provides its workforce an excellent place to work in. The total complex has been centrally conditioned. The interior decoration has been done exquisitely with the blend of tasteful colors and artistic yet useful furniture that is comparable to any multinational bank.

Weaknesses

Limited workforce

Bank Asia has very limited human resources compared to its financial activities. There are not many people to perform most of the tasks. As a result many of the employees are burdened with extra workloads and works late hours without any overtime facilities. This might cause high employee dissatisfaction that will prove to be too costly to avoid.

Opportunities

Government support

Government of Bangladesh has rendered its full support to the banking sector for a sound financial status of the country, as it is becoming one of the vital sources of employment in the country now. Such government concern will facilitate and support the long-term vision for Bank Asia.

Evolution of e-banking

Emergence of e-banking will open more scope for Bank Asia to reach the clients not only in Bangladesh but also in the global area. It will also facilitate wide area network in between the buyer and the production unit of Bank Asia to smooth operation to meet the desired need with least deviation.

Threats

Mergers and acquisitions

The worldwide trend of mergers and acquisition in financial institutions is causing concentration in power in the industry and competitors are increasing in power in their respective areas.

Political instability

Unstable political situations cause great distraction in the otherwise smooth flow of business. Sudden hartals and other political programs sometimes present problems for the employees (esp. female employees) in commuting to and from the office. Political instability also promotes a weak law and order system leading to an increase in crime rate in the society. This might also be considered as a potential external threat for a financial institution.

Emergence of competitors

Due to existence of unfulfilled demand in financial sector, it is expected that more financial institutions will be introduced in the industry very shortly. And we have already seen such cases in our country that lots of new banks are coming in the scenario with new services, which signifies the faster rate of growth of competitors. Bank Asia should always be prepared to encounter more competition in the coming years.

Product and Services

The product and services that are currently available are given below:

Bank Asia Limited launched several financial products and services since its inception. Among them are Monthly Savings Scheme, Monthly Benefit Scheme, Special Savings Scheme, Consumer Credit Scheme, Small Loan Scheme, Rural Finance Scheme & E-cash ATM. All of these have received wide acceptance among the people.

Monthly Savings Scheme (DG+): The prime objective of this scheme is to encourage people to build up a habit of saving. In this scheme, one can save a fixed amount of money every month and receive substantial lump sum of money after three or five years.

Monthly Benefit Scheme (MB+): MB+ is a five (05) years scheme that lets depositors earn monthly benefit of TK. 1000 or its multiple by minimum initial deposit of TK. 100,000 or its multiple and after maturity depositors will get refund of his/her principle amount.

Special Savings Scheme (DB+): DB+ is a six (06) or ten (10) years scheme. The deposit doubles in 06 years and triples in 10 years.

Bonus Savings Scheme: A savings account with a minimum balance of TK. 50,000 will attract not only the usual savings interest but also a further 10% bonus on interest.

Personal Credit: Consumer loan is a relatively new field of collateral-free finance of the bank. People with fixed income can avail of these credit facilities to buy household goods, consumer items, buy car or to renovate/expand existing house, etc.

Credit Loan: If anyone is in possession of BSP (Bangladesh Sanchaya Patra), which will mature within the next 05 years, but he/she is in need of funds, the scheme can come to rescue.

Rural Development Scheme: Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through financing various income-generating activities. This scheme is operated through the rural branches of the Bank.

E-Cash Banking Facility: The E-cash card is an ATM card. It can be used as a combination of debit facility. The E-cash card network offers ball banking requirements without ever setting foot in a bank. It’s more than just an ATM service for quick cash withdrawals or account inquiries. E-cash card provides round the clock banking.

Modern Concept of Good Lending

Modern concept of lending presupposes a well-developed loan proposal/loan case/ project. This covers as many as six pertinent aspects like Managerial, Organizational, Technical, Marketing, Financial and Economic/Socio-economic. These are technically known as feasibility or viability study of a proposal/ loan case/ projects. By studying all these six aspects if a banker is satisfied about the viability of a loan proposal/loan case/ project, then the bank can finance i.e. grant for lending or otherwise not.

Financial Spread Sheet (FSS) and Lending Risk Analysis (LRA) are the new technique of assessing soundness of a loan proposal/project. With the help of FSS bank analyses the financial statements regarding a loan proposal/project. Credit decision is made by the bankers on the basis of FSS and LRA and it is a new and modern technique. In LRA bankers analyze eight risks such as supplies risk and sales risk which are Industry Risk, performance risk, resilience risk, management competence risk, management integrity risk which are under Company Risk and security control risk and security cover risk which are under Security Risk.

Modern approach thus is an integrated approach of lending by bank, which covers safety, liquidity, purpose, security, profitability etc.

Credit Policy of Bank Asia Limited

Credit policy is the guideline for the credit division which includes the terms and conditions of extending credit, which is followed by the credit division. It is prepared in accordance with the philosophy of the management. Sectors to be covered, steps to be followed, factors to be considered, limits to be maintained and all other relevant matters with expectations relating to the credit extension are clearly described here, which helps the credit division to perform their activities and also in taking the decisions.

Bank Asia (BA) makes loan only to reputable clients who are involved in legitimate business activities and whose income and wealth are derived from legitimate sources.
Bank Asia encourages lending to socially desirable, nationally important and financially viable sectors and will not lend to unproductive purpose or socially undesired projects.
At all times a policy of “Know Your Customer (KYC)” must be foremost in the credit applications process.
provide, and the credit approval package must contain, sufficient information on the borrower to approve the extension of credit. Satisfactory security and collateral is required as appropriate. BA’s main thrust is on case flow statement of the business rather than on collateral security.
BA discourages the client with relatively low or no founds of their own and with a relatively high ratio of borrowed to own founds tend to face liquidity problems, with adverse repercussions on their ability to service their obligations.

Global Credit Portfolio of BAL

“Credit Portfolio” means total investments by a bank segregated under the folios of different industries. Bank Asia Limited is operating within its own internal environment under skirt of external macro environment, consisting of elements like economic, political/legal, demographic, technological, social etc. The size of loan portfolio is determined by various priorities for bank’s fund. Besides, the prudent management of Bank Asia Limited has designated its portfolio considering the following factors under two broad categories.

External factors:

Sector based Attractiveness.
Government Regulation
Credit need of the area or community.

Internal factors:

Capital Position
Types of Loan
Deposit pattern
Skills and Expertise of Bank’s personnel
Credit policy of the bank.

Strategies of the Bank Asia Limited are as follows:

Invest in those sectors where yield/sector is growing over years.
Hold investment in those sectors where yield/sector is high but not growing.
Divest in those sectors where yield/sector is diminishing over years.

This is a new generation bank. It is committed to provide high quality financial services/products to contribute to the growth of GDP of the country through stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the educated youth, poverty alleviation, raising standard of living of limited income group and overall sustainable socio-economic development of the country.

Fixed Loans:

They represent an arrangement entered into between the borrower and the bank, whereby the borrower is granted a loan for a specified amount with an agreed period. A separate fixed loan account is opened, to which is debited the amount of the loan; the proceeds of the loan being credited to the borrower’s current or saving account, from which source repayments are debited on an installment basis under a standing instruction, either monthly, bi-monthly, quarterly, half-yearly, annually, or in one lump sum when the loan matures i.e., a bullet repayment.

Project Loans:

Fixed term loans are particularly appropriate for business customers who require finance on a long term basis for the development of their factories, for purchases of plant and machinery and other fixed assets as they are able to match the cost of the assets with the profits expected to be generated over the period. Such loans are invariably subject to the fundamental principle that the Bank’s funds go in last: this ensures the borrowers have sufficient resources to complete their project and there is no necessity for further resource to bank borrowings. In Hong Kong, construction loans are typical project financing activities.

Syndicated Loans:

There are circumstances when a bank’s regal lending limit to a particular borrowing group will be exceeded after taking on an additional project loan. In this instance, the bank will invite its correspondent banks to participate in the loan, with it acting as an arranger. Agent and/or Lender, whereby its relationship with customer could be fostered, and generous fee income (i.e., Arranger Fee, Agency Fee, Front-End Fee) could be earned to improve on its return on assets.

Steps Involved in Credit Processing

The credit appraisal process here at Bank Asia limited is a detailed and through one, complying to the central bank’s standards as well as analyzing all feasible sources of risk.

The credit division follows certain procedures to decide whether or not to allow the credit facilities demanded. The credit division maintains the tight control over credit reports and keeps the proper documentation and records in the files. In general following steps are followed for a standard credit procedure:

Application for Loan

For any type of credit facility relating to the working capital, trade finance, project finance and contract work, clients/borrower’s must fill an application form with following information: Name of firm/ company/ individual, Business address, Permanent address, Constitution/ Status (Proprietorship/ Partnership/ Public Limited Co./ Private Ltd. Co.), Date of establishment and place of incorporation, Background and business experience, Particulars of assets (Land/Building, Bank Deposit, Stock/Shares), Nature of the business, Statement of liabilities with Bank Asia and other banks, Financial statements for the last 3 years explaining the following terms, Capital Funds/ Net Worth (Paid up capital, Retained earnings, General reserve), Balance Sheet Statistics (Current assets, Fixed assets, Term liabilities, Capital/equity, Total liabilities).

For working capital finance clients/ borrowers must provide the following information (Annual production, Annual sales, Sources of raw materials, Cash flow statements).

Following factors are to be considered while submitting the loan application form to the bank:

Proposed debt/equity ratio

For processing and getting approval of the requested credit facility the client must provide the above information and should fully co- operate with the bank for further information as needed. The analyst should verify the information through both primary and secondary sources. While evaluating the project for approval the analyst should have adequate knowledge of the economic environment in which the project is to thrive. Such as information related to money, banking foreign exchange, reserves, production, price, national income, cost of living indices, govt. policies covering wages, taxation, tariff, import control, investment, marketability of product etc.

Projected financial statements

For all credit proposals, the borrowers should submit their financial statements including last 3(three) years profit and loss A/C and balance sheet-audited/ statement of affairs. When an individual borrower or guarantor applies for any credit facility, the submitted financial statements must be signed by competent authority and must contain legend to the signatory, the assets and liabilities and sources of income and items of expenses.

Here this discussion is like preliminary screening of the plant. So the credit officers need to be cautious about the facility the client is seeking and the available fund in the bank. More over most of the businesses in our country don’t have any standard form of accounting department and don’t have any audited statement. So the main task of the credit officers is to make a relationship with the client to find out the hidden income sources.

Scrutinizing the documents

In this step the bank collects and correlates the information about the client. After receiving the credit application form, the credit officer thoroughly checks the form and all the submitted documents. Here, the point of importance whether the documents are certified and or attested by the respective authority.

General check-whether the required documents are submitted authenticated.
Gross verification for identifying consistency.

Analyzing the information

Personal interview with the entrepreneur/management

When the client approaches for credit, the credit officer talks to him with a view to identifying whether the client has only need of seeking credit facility or not. The credit officer has to have deep analyzing power to find out the clue. The out come of a personal interview session is to have overall idea about the integrity, experience, and business sense of the borrower. Prompt and consistent information supply, willingness to supply information and other verbal and non-verbal clues can be of value to the credit officer in judging the client. If possible, a visit is made to the proposed/existing plant/factory.

Report from Bank Asia Limited

If the customer hold an account or is enjoying credit facility from the Bank Asia Limited, the statements of the accounts are collected for analyzing the performance of the existing facility, transaction summary of the accounts along with the integrity of the client.

Report from other banks

The client has to mention whether he has other liability in other bank in the name of the project and or in the name of the sister concern in the time applying for credit. From the given information the credit officer communicates with the respective authority of those banks with which the credit seeker has transaction to collect the information about few things:

Whether the client has taken any loan in the name of the proposed project or any other sister concern.
The amount outstanding and whether classified or not.
The payment behavior of the client.

All the collected information is kept confidential.

Report from Society

Sometimes the credit officer collects in formation on a client from other businessmen having relationship with Bank Asia. Informally the credit officer discusses about the project, the sponsor(s) and the prospects of the project with persons he thinks can provide him with information. Moreover, information about the sponsor is also collected from the socially important person like community representative and chamber representative. Contacting the client’s supplier can also be another way to verify the payment character of the client.

CIB Report

There is possibility that client conceals information about his/her company’s current liability and transaction with other banks. So to get the accurate information about the credibility of the customer the branch office collects CIB report through the head office. The CIB authority provides the relevant information about the client.

Management Competence or Capability Appraisal

The ability of the management to run the business smoothly and business background of the promoter and the sponsor directors and the management are crucial factors in determining the success or failure of any business operation. Capability of the borrower in running the business in highly emphasized in the time of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiency, effectively and profitability, proper investigation must be carried out in this regard. With this end in view Bank Asia collects the following information from the client:

Brief description of the director’s educational background & business background.
Brief profile of the management.
Business performance for the last three years as performance of the business implies the capability of the manager’s running the business.
Equity mobilization of the directors as it implies their risk-taking attitude.
Entrepreneurship skills.
Management’s experience in the business/businesses of similar nature.
Resilience or shock absorption.

If it is revealed that the directors are in the business for a long time and have operated the business well are said to have the capability to run the business.

Financial strength Analysis

Analyzing the financial position of the borrower is one of the most crucial jobs to perform before financing any business. It includes financial base analysis of the borrower/business, liability position analysis in terms of risk and return measures, and lending risk analysis in the specified format of Bangladesh Bank.

Liability Position Analysis

Facility from Bank Asia & other banks taken by the client must be provided while applying for credit facility. The credit officer looks for-Existing facility enjoying by the Client Company from the Bank Asia Limited and other banks, Existing facilities for the sister concerns (if applicable), Debt to Asset ratio, the amount outstanding are classified or not, Monthly installment payment or fixed charge coverage performance of the client and also look for the nature, limit, outstanding, overdue, CL status, security value of the credit facilities.

Financial Viability Analysis

In this part, NPV and IRR of the project are calculated, and breakeven analysis is also performed in terms of sales volume and capacity utilization. Payback period and modified IRR are also calculated if deemed necessary for the completeness of the analysis.

Evaluation/ Approval

An accurate appraisal of risk in any credit exposure is highly subjective matter involving quantitative and qualitative judgments, where Quantitative factors refer to the analysis of financial statement ratio and Qualitative factors refer to the assessment of management, industry position, customer/ supplier relations, account performance and reputation.

In evaluating any credit proposal, the analyst uses the following distinct and logical steps:

Evaluating the past performance of the borrowers.
Assessing the risk of failure by identifying factors in the borrowers present condition and past performances, which indicates likelihood of success to repay the loan.
Setting terms and conditions of credit facilities.
Forecasting the probable future condition of the borrower and deciding whether to accept or reject a loan proposal.

Documentation & Disbursement

Once credit proposal is approved, a sanction letter is issued to client conveying offer to the client-mentioning terms of sanction-type of facility, facility amount, repayment, security, interest rate & fees, positive and negative covenants, etc.

Apparently there are three parts of documentation, namely-

Obtaining instruments/ documents-charge documents, standard documents & other specified documents as specified in terms and conditions in sanction letter.
Stamping
Execution

Lending Risk Analysis (LRA): Modern Technique of Credit Appraisal

The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess the credit risk in quantifiable manner and then find out ways & means to cover the risk. However, some commercial banks employ LRA technique as a credit appraisal tool for evaluating credit proposals amounting to Tk. 5 million and above. Broadly LRA package divides the credit risk into two categories, namely ‑‑‑ Business risk and Security risk.

A detail interpretation of these risks and the procedure for evaluating the credit as follows:

Business risk

It refers to the risk that the business falls to generate sufficient cash flow to repay the loan. Business risk is subdivided into two categories.

Industry risk

The risk that the company fails to repay for the external reason. It is subdivide into supplies risk and sales risk.

Supplies risk

It indicates that the business suffers from external disruption to the supply of imputes. Components of supplies risk are as raw material, Labor, power, machinery, equipment, factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then assessing the risk of disruption of supplies of each item.

Sales risk

This refers to the risk that the business suffers from external disruption of sales. Sales may be disrupted by changes to market size, increasing in competition, change in the regulation or due to the loss of single large customer. Sales risk is determined by analyzing production or marketing system, industry situation, Government policy, and competitor profile and companies strategies.

Company risk

This refers to the risk that the company fails for internal reasons. Company risk is subdivided into company position risk and Management risks.

Company position risk

Within an industry each and every company holds a position. This position is very competitive. Due to the weakness in the company’s position in the industry, a company is the risk for failure. That means, company position risk is the risk of failure due to weakness in the companies position in the industry. It is subdivided into performance risk and resilience risk.

Performance risk

This risk refers to the risk that the company’s position is so weak that it will be unable to repay the loan even under Favor able external condition. Performance risk assessed by SWOT (Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, Cash flow forecast analysis and credit report analysis (i.e. CIB repot from Bangladesh Bank).

Resilience risk

Resilience means to recover early injury, this refers to risk that the company falls due to resilience to unexpected external conditions. The resilience of a company depends on its leverage, liquidity and strength of connection of its owner or directors. The resilience risk is determined by analyzing different financial ratio, flexibility of production process, shareholders willingness to support the company if need arise and political and private affiliation of owners and key personnel.

Management risk

The management risk refers to the risk that the company fails due to management not exploiting effectively the company’s position. Management risk is subdivided into management competence risk and integrity risk.

Management competence risk

This refers to the risk that falls because the management is incompetent. The competence of management depends upon their ability to manage the company’s business efficiently and effectively. The assessment of management competence depends on management ability and management team work. Management ability is determined by analyzing the ability of owner or board of the members first and then key personnel for finance and operation. Management team work is determined by analyzing management structure and its strength and weakness.

Management integrity risk

This refers to the risk that the company fails to repay the loan amount due to lack of management integrity. Management integrity is a combination of honesty and dependability. Management integrity risk is determined by assessing management honesty, which requires evaluating the reliability of information supplied and then management dependability.

Security risk

This sort of risk is associated with the realized value of the security, which may not cover the exposure of loan. Exposure means principal plus outstanding interest. The security risk is subdivided into two major heads i.e. security control risk and security cover risk.

Security control risk

This risk refers to the risk that the bank falls to realize the security because of bank’s control over the security offered by the borrower i.e. incomplete documents. The risk of failure to realize the security depends on the difficulty in obtaining favorable judgement and taking possession of security. For analyzing the security control risk the credit office is required to verify documentation to ensure security protection, documentation completeness, documentation integrity and proper insurance policy. He/she also conducts site visit to verify security existence. Assessment of security control risk requires analyzing the possibility of obtaining favorable judgement and analyzing the case with which the bank could take the possession and liquidate the securities.

Credit Assessment

A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.

It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summarize the results of the RMs risk assessment and include, as a minimum, the following details:

Amount and type of loan(s) proposed.
Purpose of loans.
Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
Security Arrangements

In addition, the following risk areas should be addressed

Borrower Analysis The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter group transactions should be addressed, and risks mitigated.

Industry Analysis The key risk factors of the borrower’s industry should be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified.

Supplier/Buyer Analysis Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower.

Historical Financial Analysis An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analysed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed.

Projected Financial Performance Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts

Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc) should be assessed.

Adherence to Lending Guidelines Credit Applications should clearly state whether or not the proposed application is in compliance with the bank’s Lending Guidelines. The Bank’s Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the bank’s Lending Guidelines.

Mitigating Factors Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues.

Loan Structure The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability.

Security A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed.

Name Lending Credit proposals should not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution.

Risk Grading

All Banks should adopt a credit risk grading system. The system should define the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications. The following Risk Grade Matrix is provided as an example.

The more conservative risk grade (higher) should be applied if there is a difference between the personal judgement and the Risk Grade Scorecard results. It is recognized that the banks may have more or less Risk Grades, however, monitoring standards and account management must be appropriate given the assigned Risk Grade:

Risk Rating Grade Definition

Superior – Low Risk (Grade 1) Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank. All security documentation should be in place.

Good – Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record.

Acceptable – Fair Risk (Grade3) Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property).

Marginal – Watch list (Grade 4) Grade 4 assets warrant 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. An Aggregate Score of 65-74 based on the Risk Grade Scorecard.

Special Mention (Grade 5) Grade 5 assets have 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. Full repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Scorecard.

Approval Authority

The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process. The following guidelines should apply in the approval/sanctioning of loans:

Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation retained in CRM.
Delegated approval authorities must be reviewed annually by MD/CEO/Board.
The credit approval function should be separate from the marketing/relationship management (RM) function.
The role of Credit Committee may be restricted to only review of proposals i.e. recommendations or review of bank’s loan portfolios.
Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications.

Segregation of Duties

Banks should aim to segregate the following lending functions:

Credit Approval/Risk Management
Relationship Management/Marketing
Credit Administration

The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgment of credit proposals.

Internal Audit

Banks should have a segregated internal audit/control department charged with conducting audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures, Lending Guidelines and Bangladesh Bank requirements.

RECOMMENDATIONS:

I had the practical exposure in Bank Asia Ltd. for just twelve weeks, with my little experience in the bank in comparison with vast and complex banking system, it is very difficult for me to recommend. I have observed some shortcomings regarding operational and other aspects of their banking. On the basis of my observation I would like to recommend the following recommendations-

Margin and commission on L/Cs varies form customer to customer. A customer is allowed to open a L/C even with nil margins. I think that the bank should review the customers’ behavior for a period of time and should develop a certain policy in this regard.

In case of Export L/Cs, the Government encourages the exporters by giving different facilities like tax-cuts. I think the bank should also think about such type of facilities to be given to the Exporters because Bangladeshi Exporters like Readymade garments Exporters are going to face a tuff situation in coming years from the exporters of other countries.

In case of Export L/Cs, sometimes customers insist to give their payments though their documents are found discrepant. In some cases, Bank has to give payment to these customers for different reasons. But it lessens the credibility of the Bank. I think the Bank should be as stricter as possible about giving payments against discrepant documents without hurting the customers.

In many cases, the foreign banks want confirmations from other foreign banks with which this bank has correspondence. This proves the poor financial condition of our country. Banks should try to improve this situation.

The bank should try to arrange more training programs for their officials. Quality training will help the officials to enrich them with more recent knowledge of International Trade Financing.

To communicate with the Negotiating Bank, Advising Bank. Reimbursing Bank the branch uses SWIFT. As well as these media the Bank could use the E-mail, which is cheaper and faster than those media.

Over burden of work and ill defined assignment unable the employee to discharge their duties in cool manner. It is also creates a hazardous situation in the work process. So all the employee should be assigned with proper and specific assignment.

Bank can introduce more advance MIS system to mobilize its day-to-day activities. It will help the employee to do their works more quickly and maintaining their quality of work.