Credit and Loan Performance of Jamuna Bank

The main objectives of this report is to familiarize with Credit and Loan Performance of Jamuna Bank. Here focus on the concepts of credit and loan performance management, internal and external risk factors, guidelines and techniques used by the Jamuna Bank for identification, measurement and management of credit risks in handling various loan accounts  as well as loan portfolio. Other objectives are identify the strength and weakness of Jamuna Bank in credit and Loan Performance and suggest scopes of improvement in credit management.

Objectives of the Study

The main objectives of this study is to familiarize with the concepts of credit  management, internal and external risk factors, guidelines and techniques used by the Jamuna Bank for identification, measurement and management of credit risks in handling various loan accounts  as well as loan portfolio. The study has been undertaken with the following objectives:

• To have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management, financing in various sector and recovery, loan classification method and practices of Jamuna Bank Limited (JBL)
• To identify the strength and weakness of Jamuna Bank in credit management
• To compare the existing credit policy of Jamuna Bank limited with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh.
• To identify and suggest scopes of improvement in credit management of JBL.
• To get an overall idea about the performance of Jamuna Bank Ltd.

AN OVER VIEW OF JAMUNA BANK LIMITED

History of Jamuna Bank Limited

Jamuna Bank Limited (JBL) is Banking Company registered under the Companies Act, 1994. The Bank started its operation from 3rd June 2001, with an Authorized Capital and Paid-up Capital of Tk.1600.00 million and Tk.390.00 million respectively.

Jamuna Bank Limited, the only Bengali named new generation private commercial bank was established by a number of winning local entrepreneurs came up with an idea of creating a model banking institution with different outlook to offer the valued customers, a comprehensive range of financial services and innovative products for sustainable mutual growth and prosperity (Annual Report of Jamuna Bank limited, 2007).

Vision & Mission

Vision

The Jamuna Bank aim to provide financial services to meet customer expectations so that customers feel that they are always there when they need Banking service, and can refer them to their friends with confidence. They want to be a preferred bank of choice with a distinctive identity.  Stand steady in the teeth of advertises and ensure sound profitability in a bid to safeguard the optimum benefit of the shareholders.

• To build a sustainable and respectable financial institution.

• To be a leading Commercial Bank, with a social focus, assisting in the economic development of the country.

• The Profit of the bank used for the Socio-economic development of  Bangladesh (Annual Report of Jamuna Bank Limited, 2007).

Mission

The mission of the Jamuna Bank is to make banking easy for their customers by implementing one-stop service concept and provide innovative and attractive products & services through their technology and qualified human resources. They always look out to benefit the local community through supporting entrepreneurship, social responsibility and economic development of the country. The mission of the Jamuna Bank is as follows.

• Achieving sound and profitable growth in Assets & Liabilities, with focus to maintain non-performing assets at acceptable levels.
• To build long-lasting, credible and mutually dependable relationships with customers.
• Efficiently managing interest and operating costs.
• To excel in rendering superior customer service.
• To be the preferred employer among Banks in Bangladesh (Annual Report of Jamuna Bank Limited, 2007).

Types of Credit made By Jamuna Bank Limited

Modern banking operation touches almost every sphere of economic activity. The extension of bank credit is necessary for expansion of business operations. Bank credit is a catalyst bringing about economic about economic development. Without adequate finance there can be no growth or maintenance of a stable output. Bank lending is important to the economy, for it makes possible the financing of commercial and industrial activities of a nation. The credit facilities are generally allowed by the bank may be in two broad categories. They are as follows:

Funded Facilities

Funded facilities can also be divided into the following categories:

Term Loans

The term of loan is determined on the basis of gestation period of a project generation of income by the use of the loan. Such loans are provided for Farm Machinery, Dairy, Poultry, etc. It is categorized in three segments:

Over Draft (OD)

OD is some kind of advance. In this case, the customer can over draw from his/her current account. There is a limit of overdraw, which is set by the bank. A customer can with draw that much amount of money from their account. For this there is a interest charge on the over draw amount. This facility does not provide for every one, the bank will provide only those who will fulfill the requirement. It means that only real customer can get this kind of facility.

Cash Credit (Hypo)

It allows to individuals or firm for trading as well as whole-sale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It allowed under two categories:

1. Commercial Lending
2. Working Capital

Cash Credit (Pledge)

Financial accommodation to individual/firm for trading as well as whole sale purpose or to industries as working capital against pledge of goods primary security falls under this head of advance. It also a continuous credit and like the above allowed under the categories:

1. Commercial Lending
2. Working Capital

SOD (General)

Advance allowed to individual/firm against financial obligation (i.e. lien of FDR/PS/BSP etc.) and against assignment of work order for execution of contract works fall under this head. This advance is generally allowed for allowed for definite period and specific purpose. It is not a continuous credit.

SOD (Imports)

PAD

Payment made by the bank against lodgment of shipping documents of goods imported through L/C falls under this type head. It is an interim type of advance connected with import and is generally liquidated shortly against payments usually made by the party for retirements of documents for release of import goods from the customer authority. It falls under the category ‘Commercial Lending’.

LTR

Advances allowed for retirement of shipping documents and release of goods imported through L/C without effective control over the goods delivered to the customer fall under this head. The goods are handed over the importer under trust with arrangement that sales proceed should be deposited to liquidate the advances within a given period. This is also temporary advance connected with import that is known post-import finance under category ‘Commercial lending’.

IBP

Payment made through purchase of inlands bill to meet urgent requirements of customer fall under this type of credit facility. This temporary advance is adjusted from the proceeds of bills purchased for collection. It falls under the category ‘Commercial Lending’.

FDBP

Payment made to a party through purchase of foreign documentary bills fall under this head. This temporary advance is adjustable from the proceeds of negotiable shipping/export documents. It falls under category ‘Export Credit’.

LDBP

Payment made to a party through purchase of local documentary bills fall under this head. This temporary liability is adjustable from proceeds of the bill.

Bank Guarantee

The exporters pay of the imported goods on behalf of the importer through bank guarantee. If the exporter fails to make the fulfill payment at the moment the bank will take the liability and pay to the exporter. This type of guarantee is also needed to attend in any tender.

Micro Credit

Loan has given only to the Person for the purpose of Repairing and Reconstruction of dwelling Houses

HBL

House building Loan: A credit facility is available for the person having land property.

Non Funded Facilities

Non funded facilities are divided into the following categories:

Guarantee

A credit facility in contingent liabilities from extended by the banks to their clients for participation in development work, likes supplies goods and services.

Letter of Credit

A credit facility in contingent liabilities from provided to the clients by the banks for import/procurement of goods and services (Annual Report of Jamuna Bank Limited, 2007).

Credit Rating Report of JBL

CRISL assigns A- (A minus) to Jamuna Bank Limited in long term and St-3 rating for short term. It has been done on the basis of Bank’s good fundamentals such as good asset quality, good profitability, moderate growth rate, reasonable capital adequacy and diversified product lines. However the above factors are moderated, to some extent, by limited market share, high dependence on term loans and average risk management. Bank rated in this category are adjudged to offer adequate degree of safety for timely payment of financial obligations. This level of rating indicates a corporate entity with an adequate credit profile. Risk factors are more variable and greater in periods of economic stress than those rated in higher categories. The short term rating indicates good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although on going funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small (www. jamunabankltd.com).

Components of the Lending operations maintained by the Bank

Written Loan Policy

One of the most important ways a bank can make sure its loans meet regulatory standards and are profitable is to establish a written loan policy. Such a policy gives loan officers and the bank’s management specific guidelines in making individual loan decisions and in shaping the bank’s overall loan portfolio. The actual make up of a bank’s Loan portfolio should reflect what its loan policy says. Otherwise, the loan policy is not functioning effectively and should be either revised or more strongly enforced by senior management.

1. A goal statement for the bank’s loan portfolio (i.e., statement of the characteristics of a good loan portfolio for the bank in terms of types, maturities, sizes, and quality of loans)
2. Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve and what signatures are required).
3. Lines of responsibility in making assignments and reporting information within the loan department.
4. Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications.
5. The required documentation that is to accompany each loan application and what must be kept in the banks credit files (required financial statements, security agreements etc.).
6. Lines of authority within the bank, detailing who is responsible for maintaining and reviewing the banks credit files.
7. Guidelines for taking, evaluating, and perfecting loan collateral.
8. A presentation of policies and procedures for setting loan interest rates and fees and the terms     for repayment of loans.
9. A statement of quality standards applicable to all loans.
10. A statement of the preferred upper limit for total loans outstanding (i.e. the maximum ratio of total loans to total assets allowed).
11. A description of the bank’s principal trade area, from which most loans should come (Annual Report of Jamuna Bank Limited, 2007).

Appraisal of Credit Proposal

Any types of lending procedure starts with building up relationship with customer through account opening. Control of credit operations is done at branch and Corporate Office Level.

Step-One: Loan Application

Most bank loans to individuals arise from a direct request from a customer who approaches a member of the bank’s staff and asks to fill out a loan application. Business can requests, on the other hand, often arise from contacts the bank’s loan officers and sales representatives make as they solicit new accounts from firms operating in the banks market area. Sometimes loan officers will call on the same company for months before the customer finally agrees to give the bank a try by filling out a loan application.

A loan procedure starts with a loan application from a client who must have an account with the Bank. At first it starts form the branch. Branch receives application from client for a loan facility. In the application client mention what type of credit facility he/she wants form the Bank including his personal information and business information. Branch Manager or regarding Officer- in charge of credit department conducts the initial interview with the customer.

Once a customer decides to request a loan, an interview with a loan officer usually follows right away, giving the customer the opportunity to explain his or her credit needs. That interview is particularly important because it provides an opportunity for the bank’s loan officer to assess the customer’s character and sincerity of purpose.

Step-Two: Credit Investigation

After receiving the loan application form, sends a letter to Bangladesh Bank for obtaining a credit report of the customer from there. This report is called CIB (Credit information Bureau) report. This report is usually collected if the loan amount exceeds Tk. 50 thousands. The purpose of this report is to be informed that whether the borrower has taken loan from any other Bank or not; if ‘yes’ then whether these loans are classified or not.

Step-Three: Document Collection

If Bangladesh Bank sends positive CIB report on that particular borrower and if the Bank thinks that the prospective borrower will be a good one, then the Bank will scrutinize the documents. Required documents are;

• Incase of Corporate Client Financial documents of the company of last three to five years. If the company is new then projected financial data are required.
• Personal net worth of the borrower/Borrowers.
• In this stage, the Bank will look whether the documents are properly filled up and signed. Credit in charge of the relevant branch is responsible to know about the ins and outs of the client’s business through discussing with him.

Step-Four: Inspection

If a business or mortgage loan is applied for, a site visit is usually made by an officer of the bank to assess the customer’s location and the condition of the property and to ask clarifying questions. The loan officer may contact other creditors who have previously loaned money to this customer to see what their experience has been. Project for which the loan is applied is inspected by Bank officials. Project’s existence, distance from Bank office, viability, monitoring cost and other possibilities are also examined.

Step-Five: Evaluation of Credit

If all is favorable to this point, the customer is asked to submit several crucial documents the bank needs in order to fully evaluate the loan request, including complete financial statements and, in the case of a corporation, board of directors’ resolutions authorizing the negotiation of a loan with the bank. Once all documents are on file, the credit analysis division of the bank conducts a thorough financial analysis of them aimed at determining whether the customer has sufficient cash flows and backup assets to repay the loan. The credit analysis division then prepares a brief summary and recommendation, which goes to the loan committee for approval.

Any loan proposal needs to be evaluated on the Basis of financial information provided by the applicant. Credit Risk Grading (CRG) is a technique by which the risk of the loan is calculated. Banker must analyze CRG when loan application is above 1crore . Experienced people of Credit department in the branch  do this analysis. It is a ranking whose total score is 140. Among this score, 120 is for Total Business Risk and 20 for Total Security Risk.

In CRG, following aspects are analyzed:

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

Step-Six: Collateral Collection

If the loan committee approves the customer’s request, the loan officer or the credit committee will usually check on the property or other assets to be pledged as collateral in order to ensure that the bank has immediate access to the collateral or can acquire title to the property involved if the loan agreement is defaulted. This is often referred to as perfecting the bank’s claim to collateral. Once the loan officer and the bank’s loan committee are satisfied that both the loan and the proposed collateral are sound, the note and other documents that make up a loan agreement are prepared and are signed by all parties to the agreement, whether those are properly submitted – regular and up to date or else those documents will be asked to regularize by the client.

Step-Seven: Issuance of Sanction Letter to Client

If the proposal meets JBL’s lending criteria and is within the manager’s discretionary powers, the credit line disapproved. The manager and the sponsoring officer sign the credit line proposal and issue a sanction letter to client.

If the value of the credit line is above the branch managers’ limit then it is send to head office for final sanction with detailed information regarding clients, business or purpose of the loan, security papers.

Step-Eight: Review of Credit Proposal by Credit Committee

Head office processes the credit proposal and afterwards puts up a memorandum to credit committee. The credit committee reviews the credit proposal and accepts or rejects the proposal.

Step- Nine: Loan Approval

After approval by the Credit Committee head office gives an approval letter to the branch and branch gives a sanction letter. The client should accept sanction advice with seal which will prove his agreement with the terms and condition offered by the Bank.

Step-Ten: Collection of Charge Document

After the sanction advice, bank will collect necessary charge document. Charge documents vary on the basis of types of facility, types of collateral. Generally the following charge documents are required as per the nature of the loan.

1. P. Note (Demand Promissory Note)
2. GLCA (General Loan & Collateral Agreement)
3. Letter of Continuity
4. Letter of Lien – [In case of loan against any instruments or documents]
5. Continuing Guarantee
6. Letter of Hypothecation
7. Hypothecation of Debts & Assets
8. Counter Indemnity
9. Trust Receipt
10. Authority for Borrowing Limited Liability Company.

Step-Eleven: Loan Disbursement

Finally loan is disbursed and monitoring of loan starts as well .

Selection of Borrowers, Credit Investigation Including CIB

The division of the bank responsible for analyzing and recommendations on the fate of most loan applications is the credit department. Experience has shown that this department must satisfactorily answer three major questions regarding each loan application:

1. Is the borrower creditworthy? How do you know?
2. Can the loan agreement are adequately protected and the customer has a high probability of being able to service the loan without excessive strain?
3. 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 rapidly at low cost and with low risk?

Let’s look in turn at each of these three key issues in the “yes” or “no” decision a bank must make on every loan request (Annual Report of Jamuna Bank Limited, 2008).

Eligibility of Getting Loan: Whom the bank Grant Credit, Is the Borrower Creditworthy?

The question that must be dealt with before any other is whether or not the customer can service the loan-that is, pay out the credit when due, with a comfortable margin for error. This usually involves a detailed study of six aspects of the loan application- character, capacity, cash, collateral, conditions, and control. All must be satisfactory for the loan to be a good one from the lender’s point of view.

Character

The loan officer must be convinced that the customer has a well-defined purpose for requesting bank credit and a serious intention to repay. If the officer is not sure exactly why the customer is requesting a loan, this purpose must be clarified to the bank’s satisfaction.

Responsibility, truthfulness, serious purpose, and serious intention to repay all monies owed make up what a loan officer calls character.

Capacity

The loan officer must be sure that the customer requesting credit has the authority to request a loan and the legal standing to sign a binding loan agreement. This customer characteristic is known as the capacity to borrow money. For example, in most states a minor (e.g., under age 18 or 21) cannot legally be held responsible for a credit agreement; thus, the bank would have great difficulty collectors on such a loan.

Cash

This key feature of any loan application centers on the question: Does the borrower have the ability to generate enough cash, in the form of cash flow, to repay the loan? In general, borrowing customers have only three sources to draw upon to repay their loans: or (a) cash flows generated from sales or income, (b) the  sale or liquidation of assets, or (c) funds raised by issuing debt or equity securities. Any of these sources may provide sufficient cash to repay a bank loan.

Collateral 

In assessing the collateral aspect of a loan request, the loan officer must ask, does the borrower possess adequate net worth or own enough quality assets to provide adequate support for the loan? The loan officer is particularly sensitive to such features as the age, condition, and degree of specialization of the borrower’s assets.

Control 

The last factor in assessing a borrower’s creditworthy status is control which centers on such questions as whether changes in law and regulation could adversely affect the borrower and whether the loan request meets the bank’s and the regulatory authorities’ standards for loan quality.

Can the Loan Agreement Be Properly Structured and Documented?

The six Cs of credit aid the loan officer and bank credit analyst in answering the broad question: Is the borrower creditworthy? Once that question is answered, however, a second issue must be faced: Can the proposed loan agreement be structured and documented to satisfy the needs of both borrower and bank?

A properly structured loan agreement must also protect the bank and those it represents- principally its depositors and stockholders- by imposing certain restrictions (covenants) on the borrower’s activities then these activities could threaten the recovery of bank funds. The process of recovering the bank’s funds- when and where the bank can take action to get its funds returned-also must be carefully spelled out in a loan agreement.

Needs for Collateral

Most Borrowers at one time or another will be asked to pledge some of their assets or to personally guarantee the repayment of their loans. Getting a pledge of certain borrower assets as collateral behind a loan really serves two purposes for a lender. If the borrower cannot pay, the pledge of collateral gives the lender the right to seize and sell those assets designated as loan collateral, using the proceeds of the sale to cover what the borrower did not pay back. Secondly, collateralization of a loan gives the lender a psychological advantage over the borrower. The goal of a bank taking collateral is to precisely define which borrower assets are subject to seizure and sale and to document for all other creditors to see that the bank has a legal claim to those assets in the event of nonperformance on a loan (Jamuna Bank Credit Policy Manual, 2007).
Sources of Information about Loan Customers

The bank relies principally on outside information to assess the character, financial position, and collateral of a loan customer. Such an analysis begins with a review of information supplied by the borrower in the loan application. The bank may contact other lenders to determine their experiences with this customer. Were all scheduled payments in previous loan agreements made on time? Were deposit balances kept at high enough levels? How much was borrowed previously and how well were those earlier loans handled? Is there any evidence of slow or delinquent payments? Has the customer ever declared bankruptcy?

Sources of Information about the Loan customers

• Physical Investigations
• Customer financial statements
• Experience of other lenders with this customer
• Customer Annual Report
• Local or regional credit bureaus
• Local Newspapers
• Local chamber of commerce

Credit policy is the guideline for the bank’s credit division. It generally aims at firstly creating healthy loan assts to ensure good interest earnings for the bank, secondly ensuring ultimate safety through good selection of assets based on its sale ability and thirdly improving discipline on use of resources. It providing limit to total loan of a bank in relation to its deposit funds, limits of its exposure to different sectors, limits of risk assets on types of security, limits of loans to single borrower entity and limits of loan approval authority at different tiers is the single most important document of guidance to managers and executives of a bank (Jamuna Bank Credit Policy Manual, 2007).

Loan Structuring

Jamuna Bank is a new bank, it successfully run their business through a standard credit policy. From the very beginning, the initiator of the Bank decided not to encourage the defaulters to obtain credit from this esteem bank. On the other hand, they want to deal with limited customer who has established their business with integrity.  With this view, the board of directors and the higher executives of the Bank structured their credit policy, which covers the following important aspects:

1. Loan limits
2. Sectoral allocation of loan
3. Loan pricing
4. loan approval Authority
5. Restrictions of loans.
6. Loan Renewal and Follow-up.
7. Loan Classification & Provisioning (Annual Report of Jamuna Bank, 2007).

Loan Limits

As Bangladesh Bank requires the banks to keep 5% deposit in cash reserve ratio and 15% in investment against eligible securities towards statutory liquidity reserve, in the absence further guidelines Jamuna Bank can extend credit up to 80% of deposits. But in practice it invest 87.18% of deposit (Annual Report of Jamuna Bank, 2007).

Sectoral Allocation of Loans

After determining the total extendable limit of loan in the policy, it becomes essential for Jamuna Bank to fix limits of loans for disbursing the loans in the different sector to diversify the risk. Jamuna Bank. Jamuna Bank emphasis in the following sector to disbursement of their loan:

Loan Pricing

Another important aspect of credit policy is pricing of loans. Jamuna Bank’s management determine rate of interest through considering the cost of their allocated fund. Bank’s management proves their skill by determining their loan pricing which reflects on their high rate of profitability. Comparing to the newly established Bank’s, Jamuna Bank’s loan pricing is competitive.

Loan Approval Authority

At the initial stage, Concerned Branch manager has the Authority to consider whether the bank is going to give loan to the particular borrower. After submitting the proposal to the Head office, it is their responsibility to take the final decision to disburse the loan.

Restrictions of Loans

Jamuna Bank follows some restriction to disburse the loan according to the Bangladesh Bank’s rules and regulation. For example:

• Bank does not provide loan against security of its own share.

• Bank does not provide loan to a minor or a company where a minor is holding majority share.

• Bank does not make loans against accommodation bills.

• Bank does not approve loan in favor of customers who have unpaid loans with another bank with out no objection certificate from the later.

• Bank does not make loan to borrowers whose integrity is questionable.

• It is prohibited by Bangladesh Bank in 2005 not to provide loan to the members of Board of Directors of the respective Bank.

• Bank does not provide loan in the case when the business is located cross-boarder area.

• Bank does not allow any loan against illegal purpose (Jamuna Bank credit policy manual, 2007).

Monitoring and Follow Up of Loans and Advance

The objective of monitoring and follow up is to control end use of funds, to prevent diversion of fund to ensure that the borrower observes financial discipline. This is achieved through post sanction care, control and monitoring till the advance is fully repaid.

Follow up is exercised with the regard to the following aspects:

1. Terms of sanctions
2. Documentation
3. Disbursal
4. Operations in the account
5. Financial statements, up dating credit information
6. Inspection of security
7. Renewal of limit

Terms of sanctions vc

The borrower should be informed about the sanction of the proposal in writing, along with the terms of sanction, and acknowledgement from the borrower should be obtain. The sanction terms include:

• Amount of sanction with sub limits
• Margin
• Rate of interest
• Name of guarantors
• Repayment schedule
• Insurance
• Security
• Date of renewal
• Any other special terms and conditions (Jamuna Bank credit policy manual, 2007).

Documentation

• The borrowing power of the company is verified and necessary resolution regarding the borrowing is obtained from the company. No advance is made unless documentation is complete both with regard to the borrower as well as with regard to guarantor/s (Jamuna Bank credit policy manual, 2007).

Disbursal

• Disbursal of advance made in such a way that the end use of the funds as per the terms of sanction of the advance is ensures. For instance in case of term loans against machinery payment is made directly to the suppliers by means of pay order. No disburse is made in cash or otherwise (Jamuna Bank credit policy manual, 2007).

Operation in the Account

Once the advance has been disbursed, a watch is kept over operation in the account. A close scrutiny of the entries in the account will give information regarding the nature of the transactions, sales and purchase.

Here are some indicator which is closely enquire by the bank,

• Decline in the number of operation
• Frequent return of cheques issued by the borrower or failure in retiring bills drown on him
• Frequent return of cheque / bills is deposited by the borrower (Jamuna Bank credit policy manual, 2007).
• Withdrawal of large amounts in cash.

Recovery and Follow Up

If a borrower fails to make repayment of the dues, Jamuna Bank considers the following steps to recover the stuck up advances.

Exerting Moral Pressure

The Bankers visit the borrower’s place of business and find out the causes of non-payment of the bank’s dues. The banker may also request some influential of the area to exert pressure on the borrower to clear bank’s dues.

Notice: In case the borrower does not adjust the account as desired, the only course left open to the bank would be to sent a notice by registered post to the last known address of the borrower and the guarantor, if any, preferably through a lawyer (Jamuna Bank credit policy manual, 2007).

Loan Classifications and Provisioning

Loan classification is required to have a real picture of the loan and advances provided by the Bank. It helps to monitor and take appropriate decision regarding each loan account like other Banks, all types of loans of BA fall into following four scales:

1. Unclassified : Repayment is regular
2. Substandard: Repayment is stopped or irregular but has reasonable prospect of improvement.
3. Doubtful debt: Unlikely to be repaid but special collection efforts may result in partial recover.
4. Bad/Loss: very little chance of recovery.

Early Alert System of JBL

An early alert account is one that has risks or potential weakness of material nature requiring monitoring, supervision, or close attention by management, if these weakness are left uncorrected, they may result in deterioration of the repayment prospect for the asset or in the bank’s credit position at some future date. Early identification, prompt reporting and proactive management of early alert accounts are prime credit responsibilities of all relationship manager and be undertaken on a continuously basis.

Despite of 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 interest. Moreover, regular contact with the customer will enhance the like hood of developing strategies mutually acceptable to both the customer and the bank. An account may be reclassified as regular account from early alert account status when the symptom, symptoms causing the early alert classification have been regularized or no longer exist.

Early Warning System Department (EWSD)

JBL has a special department called EWSD who are responsible for all accounts classified in the bank’s portfolio. Actually they have work like CID officers. However EWSD’s responsibility will cover the areas of   :

1. Monitoring and controlling the classified accounts through monthly reporting and quarterly review.
2. Actively follow the borrowers for recovery.
3. Negotiate and reschedule the debts.
4. If the client don’t utilize the new offer than it is the EWSD’s responsibility to file suit against the client.

EWSD will also prepare a Consolidated Report of all bad loans written-off on a quarterly.

Early alert account

As a part of ongoing monitoring process, an account may be found to have some weakness which clearly indicates the symptom of nonpayment of loan. This type of account reported as early alert account.The purpose of introducing early alert account is as follows:

1. Detect the weakness of the client earlier
2. Ensure proper monitoring
3. Take appropriate measure at appropriate time
4. Maintain the health of the credit in all time good condition
5. Ensure timely repayment of loan
6. Finally prevent the loan from being stuck up and quality asset (Jamuna Bank, 2007).

Credit Recovery and NPL Account Management Legal and Non Legal Measure

The Jamuna Bank loan recovery policy aim to give details of the strategies to adopted for recovery of dues, period –wise targeted level of reduction in NPLs, norms for entering into compromised proposals involving sacrifice\ waiver, factors to be taken into account before considering the waiver

1. Repayment of Loans

Repayment of loan depends on income generating capacity of the borrowing concern. A unit not earning profit will not be able to repay the term loan. Therefore, it is necessary to fix the repayment schedule for term loan according to the income generating capacity of the unit.

2. Rehabilitation of Potentially Viable Unit

If a sick unit is potentially viable, necessary efforts are made to finalize the rehabilitation package without loss of time.

3. Acquisition of Sick Unit by Healthy Units

If a sick unit is acquired by a healthy unit, the outstanding loan amount of sick unit may be transferred to a healthy unit and entire loan amount may even be wiped off. Therefore, the bank encourage merger\ acquisition of sick units whenever they feel it may reduce the NPL s. bank’s may even help the sick unit to get suitable buyer.

4. Negotiation with the Borrower

A negotiation may be called as a compromise formula or amicable settlement in which the borrower agrees to pay a certain amount to the bank after getting certain concessions. Compromise proposal now a days being considered to be a very effective measure which in most of the cases work well instead of resorting to expensive recovery proceedings spread over a long period.

5. Follow -up for Recovery of NPLs, Stuck –up and Classified Loans and Advance

To keep a close follow up and monitoring, the recovery of the overdue and classified loans and advance, the head of the branches take serious initiative and make efforts involving the officer and staff of all level for recovery of the over due\ stuck-up and classified loans and advances. The head of branch create team and assign the follow up responsibility for specific client. The team members will call on the defaulting clients\ borrower and guarantors for following –up the recovery of the over due, classified loan and will submit call report on the progress of follow-up actions the developments as reported in the call report will reflected in the remarks column of past due statement submitted to the head office. The call report will be placed in the files of the respective client for review. The call report must be reviewed by the manager and sub manager jointly and should assess objectively the progress of recovery.

6. Calling Up the Advance & Filing of Civil Suits

If it is not possible to revive a unit or enter into a reasonable settlement with the borrower, it is better to recall the advance at an early stage instead of waiting for a long time which may result in deterioration of the security available. Further if it is not possible to sell the security under artho rin adalat or without obtaining any court’s order, civil suit may be filed against such borrower who is not likely to come to a reasonable settlement.

7. Settlement of Claim with ECGS

If ECGS covers are available, bank should submit the proposal for same with necessary details. Proper follow-up with Sadharan Bima Corporation is necessary for settlement of claims and reducing the NPLs to certain extent.

8. Special Mention Account

Before classification of loan, a period review and follow-up will have to be carried out and the loan account which is not being properly performed \serviced or have remained overdue \ expired for certain period will have to be treated special mentioned account. Interest earned on this account cannot be taken into income rather to be retained in the interest suspense account. Even provision @ 5.00% will have to be created against this account. The procedure laid down in the circular issued by the Bangladesh bank will have to be followed in transferring the loan account to special mentioned account.

9. Write -off the Out Standings

If all the efforts for recovery fail, bank may have to write off the advance. Such write-off should be done after exhausting all other remedies. In this regard specific guidelines already issued and to be issued by the Bangladesh bank will have to be followed (Jamuna Bank Credit Policy Manual, 2007).

Strength of Jamuna Bank in Credit Management

Every Bank’s has it’s own credit appraisal procedure. Jamuna Bank possesses a standard credit procedure. The strength of Jamuna Bank credit management practices are as follows:

• Jamuna Bank possesses a standard credit procedure
• From the existing credit condition we have seen that the Credit of Jamuna Bank is increase in 2007 than the 2006.
•  The upward tendency of the credit show increase in profit. That means the bank is able to investment money in the suitable sector.
• The bank gives priority of trade finance in loan approval. The bank also encourages Ready made Garments.
• The bank’s recovery of credit is satisfactory. Jamuna Bank Ltd. has a quite good credit approval process which brings 84% recovery of credit.
• The bank also follows Bangladesh Bank order in case of credit approval.
• For minimizing risk Bangladesh Bank introduced credit risk grading, the bank also follows this approach accurately.
• The bank does not provide loan to the person or business who is below acceptable. Jamuna Bank maintains a standardized framework for the approval of credit (Jamuna Bank, 2007).

Weakness of Jamuna Bank in Credit Management

It has observed that Jamuna Bank is not much different from other commercial bank of Bangladesh. It follows the same practice and procedure which is followed by its elders. But one thing should be mentioned new loan reformation have slightly changed the approval procedure. This Credit Risk Grading makes the procedure better than previous

•  But there exists a Some difference between Bank’s policy and practice in case of credit management
•  Small loans are neglected, which is another shortcomings of Jamuna Bank credit management approaches,
• Credit policy is not properly cared in practice.
• Credit deposit ratio is 87.18%, which shows JBL utilize large amount of its deposit in lending.
• Small loans are given without following CRG strictly.
• Directors’ reference in credit approval hampers the credit appraisal procedure.
• In crediting Jamuna Bank doesn’t have any proper sector wise planning.
• New and small entrepreneurs don’t get priority in having loan from the bank for the lack of strong guaranty (Jamuna Bank, 2007).

What should be Done to Improve the Credit Management Practices of Jamuna Bank?

• More training should be conducted for the bankers to improve their analytical ability and professional standard regarding the use of CRG and other tools and techniques in selecting the borrowers and analyzing the loan proposals.
• Authority should be delegated to the lower level with adequate measures for the necessary control and
• follow-up for making the lending decision and recovery
• One proper standard procedure should be developed for all types of clients and no interpersonal relationship should be involved in approve a loan
• Bank should fixed-up specific types of client strategy according to the different character of client.
• Interest income occupies the major part of the total earnings of a bank and bank’s profitability mainly depends on interest earning capacity, so bank should establish a research and development cell for the purpose of lending analysis and recovery of loans.

ROLE OF CREDIT RISK GRADING SYSTEM IN CREDIT MANAGEMENT AND RECOVERY

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 pre-sanction 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) system 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 crore and above. However, the LRA system 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, interalia, 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 system 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 (Jamuna Bank, 2009).

Definition of Credit Risk Grading (CRG)

• The Credit Risk Grading (CRG) is a collective definition based on the pre-specified 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 (www. What is.net.com).

Functions 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 (Jamuna Bank, 2008).

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 (Jamuna Bank, 2006).

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 are:

(A) Objective Criteria

• 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 installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid installment(s) will be termed as `defaulted installment (BB, 2006).

In case of Fixed Term Loans, which are Repayable within maximum 5 (five) years of time:

• If the amount of `defaulted installment’ is equal to or more than the amount of installment(s) due within 6 months, the entire loan will be classified as ‘Sub-standard’.
• If the amount of ‘defaulted installment’ is equal to or more than the amount of installment(s) due within 12 months, the entire loan will be classified as ‘Doubtful’.
• If the amount of ‘defaulted installment’ is equal to or more than the amount of installment(s) due within 18 months, the entire loan will be classified as ‘Bad & Loss’ (BB, 2006).

In case of Fixed Term Loans, which are Repayable in more than 5 (five) years of time:

• If the amount of ‘defaulted installment’ is equal to or more than the amount of installment(s) due within 12 months, the entire loan will be classified as ‘Sub-standard.’
• If the amount of ‘defaulted installment’ is equal to or more than the amount of installment(s) due within 18 months, the entire loan will be classified as ‘Doubtful’.
• If the amount of ‘defaulted installment ‘is equal to or more than the amount of installment(s) due within 24 months, the entire loan will be classified as ‘Bad & Loss’.

Explanation:  If any Fixed Term Loan is repayable at monthly installment, the amount of installment(s) due within 6 months will be equal to the amount of summation of 6 monthly instalments. Similarly, if repayable at quarterly installment, the amount of installment(s) due within 6 months will be equal to the amount of summation of 2 quarterly installments (BB, 2006).

 (B) Qualitative Judgment

If any uncertainty or doubt arises in respect of recovery of any Continuous Loan, Demand Loan or Fixed Term Loan, the same will have to be classified on the basis of qualitative judgment be it classifiable or not on the basis of objective criteria.

If any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities decreases or if the recovery

of the loan becomes uncertain due to any other unfavorable situation, the loan will have to be classified on the basis of qualitative judgment.

Besides, if any loan is illogically or repeatedly re-scheduled or the norms of re-scheduling are violated or instances of (propensity to) frequently exceeding the loan-limit are noticed or legal action is lodged for recovery of the loan or the loan is extended without the approval of the proper authority, it will have to be classified on the basis of qualitative judgment.

Despite the probability of any loan’s being affected due to the reasons stated above or for any other reasons, if there exists any hope for change of the existing condition by resorting to proper steps, the loan, on the basis of qualitative judgment, will be classified as ‘Sub-standard’. But even if after resorting to proper steps, there exists no certainty of total recovery of the loan, it will be classified as ‘Doubtful’ and even after exerting the all-out effort, there exists no chance of recovery, it will be classified as ‘ Bad & Loss’ on the basis of qualitative judgment.

The concerned bank will classify on the basis of qualitative judgment and can declassify the loans if qualitative improvement does occur.

But if any loan is classified by the Inspection Team of Bangladesh Bank, the same can be declassified with the approval of the Board of Directors of the bank. However, before placing such case to the Board, the CEO and concerned branch manager shall have to certify that the conditions for declassification have been fulfilled

Note:

1. Any change in classification criteria provided by the Bangladesh Bank shall supersede this grading system for classified accounts.
2. An account may also be classified based on qualitative judgment in line with Bangladesh Bank guidelines.
3. A particular bank may have classification criteria stricter than Bangladesh Bank guidelines (BB, 2006).

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.
• 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.
• Credit risk grading exercise should be originated by Relationship Manager and should be an on-going and continuous process.
• 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 (bangladesh-bank.org).

Exceptions 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 (bangladesh-bank.org).

Sectoral Concentration of Loan of Jamuna Bank Limited

The loan portfolio of the bank is well diversified. The management of the bank identifies privileged sectors each year after assessing the economic and industrial outlook and profitability factors. The loan composition of the bank reveals that trade finance consists of 29. 20%, House building loans 6.14%, loan against textile 6.09% while other loans & advances consists of 30. 00%  during Year 2007.

The bank’s loan portfolio of TK. 23,637 million during Year 2007 constituted mainly trade Finance (30. 11%), which is followed by RMG (11.19%) and agriculture (3.34%) and other manufacturing and service sectors. The sect oral loan portfolio reveals that JBL has high concentration on garments sector ( Annual Report of Jamuna Bank Limited , 2007) .

Large and Director Loan

As on December 31, 2007 large loan were held in 49 accounts amounting to Tk 10,276.50 million (both funded and Non funded). The net of which stood at Tk 7533.20 million amounting to 45.75% of total outstanding loans & advances YE 2007. The exposure was well below the ceiling applicable to JBL i.e 56.00% .Besides, as on December 31, 2007 there were 5 accounts exceeding TK 100 million aggregating to TK 648.01 million or 4.91% of total outstanding loans and advances. The advances provided to company directors and other officials amounted TK 94.40 million and TK 53.19 million during YE2007 and YE2006 respectively reflecting an increase of 77.47% in FY 2007 (Annual Report of Jamuna Bank Limited, 2006-2007.)

Rescheduled Loan

The amount of rescheduled loans and advances of Jamuna Bank Limited was TK 79.06 million (against 33 accounts) and TK 63.90 million (against 19 accounts) during YE2007 and YE2006 respectively. There are only 2 accounts which have been rescheduled for 2nd time and was declassified (TK 8.45 million). This amount of rescheduled loan was 0.60% and 0.66% of total loans and advances during YE2007 and YE2006 respectively. The bank’s recovery position was satisfactory which was TK 6.4 million and TK 5.27 million at YE2007 and YE2006 correspondingly (Annual Report of Jamuna Bank Limited,  2006-2007).

Off Balance Sheet Exposure

JBL’s Off Balance Sheet exposure is at acceptable level and within the parameter set by prudential guidelines of Bangladesh Bank. The Bank’s contingent liabilities to total assets with contra stood at 21.11% and 24.02% during YE2007 and YE2006 respectively whereas the same figures of peer average were 25.84% and 25.09% respectively. The Bank’s contingent liability is made up of 15.43% acceptances and endorsements, 56.58% irrevocable letter of credits and 11.98% letter of guarantee during the YE 2007 (Annual Report of Jamuna Bank Limited, 2006-2007).

Capital Adequacy

The capital adequacy ratio of JBL is above the peer average. The Bank’s risk weighted capital adequacy ratio stood at 12.66% and 10.66% at the end of year 2007, 2006 respectively against the minimum requirement of 9.00% fixed by Bangladesh Bank. The increase in capital adequacy ratio was mainly due to bank profit generation ability. During YE2007 total risk weighted assets of the bank stood at TK32573.19 million against TK.27170.45 million at YE2006 recording 8% growth. The internal capital generation ratio stood at 26.79% and 18.74% at YE2007 and YE2006 respectively compared to peer average of 24.92% and 22.45% during YE2006 and YE2005 respectively (Annual Report of Jamuna Bank Limited, 2006-2007).

Overall Findings

After analyzing the credit management practice of Jamuna Bank we find the followings:

• The asset quality of JBL was good and its size was in line with its peer. At YE2007, the Bank’s total asset size was TK. 32,573.19 million which was Tk. 27170.45 million at YE2006. The growth rate of total asset base was 19.88% which was almost 50% more than YE 2005. As on 31 December 2007 the total assets of JBL was mostly created through deposit collection (83.57%) and the rest of the volume was financed by borrowings (5.43%), other liabilities (2.70%) and stockholders equity (8.73%).

• Jamuna Bank possesses a standard credit procedure; from the existing credit condition we have seen that the Credit of Jamuna Bank is increase in 2007 than the 2006. Total loan of the Jamuna Bank has increase over the year, in Year 2007 it is 2367.61million TK and 18032.5 million tk in 2006 the rate of growth of loan and advance from the Year 2006 to Year 2007is 31%.
•  The upward tendency of the credit show increase in profit. In the year 2007 the operating profit stood 998.11 million which is 942.07 million in the year 2006. That means the bank is able to investment money in the suitable sector. The bank gives priority of trade finance in loan approval. The bank also encourages Ready made Garments.
• JBL’s NPL (Non-performing Loan) has increased to TK 1405.37 million as on December 31, 2007 from TK 885.97 million at YE2006. The high gross NPL ratio (5. 96%) of the bank sign of weakness in credit portfolio, which must be reduced to 1%.
• The bank’s recovery of credit is satisfactory. Jamuna Bank Ltd. has a quite good credit approval process which brings 84% recovery of credit.
• The bank also follows Bangladesh Bank order in case of credit approval.
• For minimizing risk Bangladesh Bank introduced credit risk grading, the bank also follows this approach accurately.
• The bank does not provide loan to the person or business who is below acceptable. Jamuna Bank maintains a standardized framework for the approval of credit.

There exists  some difference between Bank’s policy and practice in case of credit management at Jamuna Bank

•  Small loans are neglected, which is another shortcomings of Jamuna Bank credit management approaches,
• Credit policy is not properly cared in practice.
• Credit deposit ratio is 87.18%, which shows JBL utilize large amount of its deposit in lending.
• Small loans are given without following CRG strictly.
• Directors’ reference in credit approval hampers the credit appraisal procedure.
• In crediting Jamuna Bank doesn’t have any proper sector wise planning.
• New and small entrepreneurs don’t get priority in having loan from the bank for the lack of strong guaranty.

Recommendations

What should be done to improve the credit management practices of Jamuna Bank?

• More training should be conducted for the bankers to improve their analytical ability and professional standard regarding the use of CRG and other tools and techniques in selecting the borrowers and analyzing the loan proposals.

• Authority should be delegated to the lower level with adequate measures for the necessary control and follow-up for making the lending decision and recovery

• One proper standard procedure should be developed for all types of clients and no interpersonal relationship should be involved in approve a loan

• Bank should fixed-up specific types of client strategy according to the different character of client.
• Interest income occupies the major part of the total earnings of a bank and bank’s profitability mainly depends on interest earning capacity, so bank should establish a research and development cell for the purpose of lending analysis and recovery of loans.
• At first the Jamuna Bank should find out the way to Reduce its bad loan amount further, to improve is loan quality.

• If JBL assign score on specific loan criteria it will become easier for the approval officers to assess the loans. Scoring system will help to reduce bad applications automatically and the burden on approval officer will be reduced. On the other hand strength of a loan will be stemmed out from scoring system. However, the assessment procedure should remain same.

• Jamuna Bank should increase their loan investment because increase the loan investment will maximize the interest income of the Bank. So the investment, which will give the expected return, should be increased. And for that they should strictly follow the factors considering before sanction of any loan.
• If the loan and advance is large then the credit risk is also high because a chance of not getting the money back is higher in loan investment then the investment in securities. Because securities, plant, equipment can provide a certain return with very minimum risk. But default risk in loan investment is very high. So a bank, which has high amount of provision for loan losses, should not expand its loan portfolio without proper consideration of all the factor of loan sanctioning.
• They can diversify the loan portfolio in to the securities. And should give more emphasize in the foreign exchange and remittance services to maximize income.

In order to increase the profitability and reduce the credit risk, JBL should maintain a well-balanced portfolio. For example, instead of focusing on just corporate banking and high profile business loan and leasing, it should also give equal importance to retail banking. The more diversified the portfolio is the lesser the risk of losses.

Conclusion

CRG has now become an important and imperative tool for credit Risk management by helping the BFI & NBFI to understand various aspects of risk involved in different credit transactions. The system is vital to take decisions both at the pre-sanction and post sanction stage.

The success of CRG is largely depended on a symmetric information system. In a symmetrical information system available is more on less authentic. As such CRG derived from that information tends to be reliable. But in the context of Bangladesh where information furnished to Banks/NBFI’s are fabricated in most cases, the success of CRG is still some times in question. For example even large corporations trying to evade taxes prepare dummy financial statements and furnish it to CRG users.

The basic bareback in CRG is its overemphasis only on four rates which carry 50% risk weight age and selection of ratios. For instance debt equity ratio formula dose not fit to our company’s liability management. In practice most company have small figure as paid up capital and retained earning in the early years of incorporation. Finance is largely managed from director’s loan or sister Concern Company’s loan which is considered as debt portion in external claim. Thus 15 marks from 100, there remain only 85 marks and out of which it becomes difficult to get a acceptable credit decision.

However, CRG may not effective enough for loan recovery but despite some limitations CRG has given a platform from which Banks/ NBFI’s are trying to analyze various risk types that helps to take good credit decision and maintains acceptable discipline in credit portfolio. That is the main essence of CRG.