Organizational Overview of Al-Arafah Islami Bank Ltd:

Al-Arafah Islami Bank Ltd. as the name implies a newly formed commercial bank in Bangladesh. It has been incorporated in Dhaka, Bangladesh as a public limited company and its Head Office of the Bank is located at 36, Dilkosha, C/A, Dhaka- 1000.

In the world of consumerism the business organization of the world strive for the consumers satisfaction as a number one business strategy whatever may be the product of the organization, either service or non service. Service is the product of bank. There is a saying that customer service starts rights right from the stairs of the bank building. The guard at the door is first person pep resents of the bank, receives a customer with wishes in smiling face.

 Historical Background of Al-Arafah Islami Bank Limited:

Al-Arafah Islami Bank Ltd. (AIBL) was incorporated on 18 June,1995 with authorized capital of Tk.1000 million (100 Crore) and paid up capital of Tk.10.12 Crore paid up by the Sponsors/Directors and Tk.10.12 Crore was offered to the public for subscribed portion of public issue of shares. The Bank was formally inaugurated on 27^th September, 2005 with

Dilkushal Branch (Principal Branch).The Management of  the Bank is vested in a Board of Directors consisting of 24 members including the Managing Director of the Bank. Among 24 Directors 2 (two) Directors came from the public shareholders. Managing Director is the chief executive of the Bank. There is a Shariah council of 7 (seven) members in Al-Arafah Islami Bank Ltd. to monitor the investments whether it invests in Shariah allowed sectors or not .Since its establishment, AIBL opened 5 branches in 1995, 5 in 1996,10 in 1997, 10 in 1998, 5 in 1999, 2 in 2000, 3 in 2001, 1 in 2005, & 5 in 2006 i.e. at the end of 2006.i,e at the end of 2010 the Bank branch reaches to78.Total number of employees of the Bank was 771 in 1995 and reached to 1711 in 2010 and during the short period of its activities the Bank has made remarkable progress in various activities. Since commencement of its activities on 18 June ,1995 the Bank has mobilized the deposit of Tk.6415.79 million and 16775.33 million at the end of the year 1999 and 2006. Foreign exchange business handled by the Bank during the year 1999 to 2006 were Tk.7859.72 million and 11314.18 million respectively and investment was Tk.3793.71 million and 17423.18 million at the end of the year 1999 and 2006 respectively. The bank earned a profit of Tk.31.70 million in the year 1999 compared to Tk.470.02 million (profit after tax and provision) in the year 2006. At present the authorized capital of this bank is TK5000 millions and paid up capital is taka 4677.28 millions.

Al-Arafah Islami Bank Ltd. was established not only to earn profit and to develop economy of the country but also it had an ultimate goal to get reward in the Heaven by banning interest in business. Since its commencement the Bank has been trying to achieve this goal. The Islam loving people specially who are not interested with interest, should help this Bank giving deposit and taking investment from this Bank.

2.03 Mission of Al-Arafah Islami Bank Limited:

By establishing  an interest free atmosphere in  day to day business transactions, the Promoters, Sponsors & Directors expect the Shafayat from our beloved Prophet Hadrat Muhammad (S) and the  ultimate emancipation in the Afterwards.

Vision of Al-Arafah Islami Bank Limited:

To establish an interest free transaction in the economy

2.05 Objectives of AIBL:

►To establish an interest free economy.

►To establish an modern banking system for all kinds of people

►To take part in the economic growth of the country.

►To eradicate the poverty and to do social services by establishing Schools, Madrashas, University, Hospitals, Public Library etc.

►Finally to achieve ultimate goal i.e. Nazat in Akhirat.

Auditors:

In terms of Article 149 of the Articles of Association of the Bank M/S Pinaki and Co. Chartered Accountants were re-appointed as external auditors for conducting the audit of accounts as 31^st December, 2000. The Auditor M/S Pinaki & Co. Chartered Accountants being eligible offered themselves for re-appointment for the year 2001. But now M/s Rahman Rahman Hoq becomes the auditor in the year 2005.

Training and Motivation:

Training and Motivation are utmost important to bring about positive change in the outlook of the manpower and to increase efficiency. Set of trained and efficient workforce is indispensable for any commercial bank and they are the fundamental strength of the bank.

Al-Arafah English Medium Madrasah:

Al-Arafah English Medium Madrasah has been established by the Al-Arafah Bank Foundation with a view to building next generation according to the ideals of peace and equality of Islam and to establishing banking and other aspects of life in the way

 Branches of AIBL:

AIBL started its working at 161, Motijheel C/A with a Branch named Motijheel Branch on 27^th September,1995 was the first & main Branch of AIBL and has been operating throughout the country. The Head Office of the Bank was situated at the same holding of Motijheel Branch since its establishment but from 11 January, 2007 it has started its working at its own premises 36, Dilkusha (6^th, 7^th, 8^th & 9^th floor), Dhaka-1000. The age of the Bank is only 15 years and during this short period of time, the Bank has established total 78 Branches over the country and made a smooth network inside the country. The number of Branches as Division wise is mentioned in the following table:

 Form of Organization:

►Board of Directors

►Executive Committee

►Audit Committee

►Management Committee

►Shariah council

Environment of Al- Arafa Islami Bank:

“Al- Arafa Islami Bank shall bear the mark of the Sunnah of our prophet Muhammad (S), of our faith and conviction, our values and attitudes towards life and that the entire environment of Al- Arafa Islami Bank shall be in conformity with Sunnah, simple in style, noble and rich in thought, but dynamic and far reaching in impact, exemplary in efficiency and service to the customers.”

 Mudaraba Terms Savings Deposit:
Deposit in monthly installment @Tk.300/-, Tk.500/-, Tk.1000/-Tk.1500/- & Tk.2000/- is obtained under the aforesaid scheme for a tenure of 5,8,10 and 12 years and the same is withdrawal with
profit at the end of the tenure.

 Monthly Profit based Term Deposit:
Under the above scheme, deposit of Tk. 1.00 lac and multiple thereof are accepted for a term of 5 (five) years and the bank gave profit thereon Tk. 885 per month per lac and proportionately on the rest amount of deposit under the category during the year under review. The aforesaid rate shall, however, be adjustable at the close of calendar year on finalization of accounts.

3.01.3 Monthly Haj Deposit:
Hajj deposit at monthly installment from 1 (one) year to 20(twenty) years are accepted under the above scheme to enable the account holder to perform Hajj out of the accumulated saving with profit.

Onetime Haj Deposit:
Under the above scheme, fixed amount of Hajj deposits are accepted from the clients for particular term and as per rules profit is accumulated thereon per year in this regard. As and when the fixed deposit is matured, Hajj expenses are defrayed by the same. Under the scheme, the guardians may also open Hajj account to enable their successors to perform Hajj. Highest amount of profit is paid in the above types of deposit by the bank.

 Savings Investment Deposit:
Deposit under the scheme is accepted by monthly installment and after expiry of the term, double amount of such savings is given as investment in feasible sectors by the bank as per choice of the depositors without any collateral security. Any one by saving under the scheme can take business venture on utilization the amount saved under the scheme as well as availing bank investment.

  Marriage Savings Deposit:

Fixed monthly installment for a particular period is to be deposited to defray the expenses of marriage and the bank allows double of saving or Tk.30,000/- which is higher as investment to procure ornaments, furniture, fixture etc., repayable in 24 monthly installment without any collateral security.

 Savings Bond Deposit:
Under this scheme the bank has introduced saving bonds for Tk. 10,000/-, Tk.25,000/- and Tk. 100,000/- for 3,5 and 8 years. After the completion of the tenure the depo

 Investment:

The Total investment of the bank stood at Tk.5079.21 million against Tk.3728.41 million during the corresponding period of last year. The percentage of increase is 36.23% as against 13.00% in banking sector. The bank extends investments to the clients under the following modes of investment under Islamic Shariah:

Bai-Murabaha or simply Murabaha:

The terms “Bai-Murabaha” have derived form Arabic words Bai and Ribhum. The word “Bai” means purchase and sale and the word ‘Ribhum’ means an agreed upon profit. So Bai-Murabaha means sale for an agreed upon profit. It may be defined as a contract between a Buyers and a Seller under which the seller sells certain specific goods permissible under Islamic Shariah and the word Law of the land to the Buyer at a cost plus and agreed upon profit payable today or on some date in the future in lump-sum or by installments. The profit may be either a fixed sum or based on a percentage of the price of the goods.

 Musharaka:

The word Musharaka is derived from the Arabic word Sharikah meaning partnership. Islamic jurists point out that the legality and permissibility of Musharakah is based on the injunctions of the Holy Qura’n, Sunnah and Ijma (consensus) of the scholars.

Musharaka transaction may be conducted in the following manner:

One, two or more entrepreneurs approach an Islamic Bank to request the financing required for a project. The bank, along with other partners, provides the necessary capital for the      project. All partners including the Bank have the right to participate in the project. The profit is distributed according to an agreed ratio. However, losses are shared in exactly the same proportion in which the different partners have provided the finance for the project.

 Mudarabah:

The term Mudarabah refers to a contract between two parties in which one party supplies capital to the other party for the purpose of engaging in a business activity with the understanding that any profits will be shared in a mutually agreed upon. Losses, on the other hand, are the sole responsibility of the provider of the capital. The first party provides capital and the other party provides the expertise with the purpose of earning lawful profit (approved by Islamic law) which will be shared in a mutually agreed upon proportion.

 Bai-Muajjal:

The term ‘Bai’ and ‘Muajjal’ are derived from the Arabic words ‘Bai’ and ‘Ajal’ where ‘Bai’ means purchase and sale and ‘Ajal’ means a fixed time or a fixed period. So Bai-Muajjal is a sale for which payment is made at a future fixed date or within a fixed period. In short, it is a sale on Credit. It is basically a contract between a buyer and seller under which the seller sells certain specific goods, permissible under Shariah and law of the country to the buyer at an agreed fixed price payable at a certain fixed future date in lump-sum or in fixed installments.

 Bai-Salam:

The term Bai-Salam is used to define a sale in which the buyer makes advance payment, but delivery is delayed until some time in the future. Usually the seller is an individual or business and the buyer is the bank.

 Procedure for Opening of Accounts:

Before opening of a currents or savings account, the following formalities must be completed by the customer:

ü  Submit application on the prescribed form.

ü  Furnishing photographs- 2 (Two) copies.

ü  Introduction by an account holder.

ü  Putting specimen signatures in the specimen card.

ü  Mandate, if necessary.

After fulfilling above formalities, opens an account for the client and provide the customer with a pay-in-slip book and a checkbook in case of savings account and currents account.

 Types of Deposit Accounts and Their Formalities:

Current Account

In this kind of account a customer can deposit his money and can write one or more check to withdraw their money. For doing this notice is not required. He can deposit it whenever he/ she wants to and also can withdraw it whenever he/ she wants to

In The Name of Individual:

The client has to fill up a light green account opening form. Terms and conditions are printed on the back of the form. The form contains the declaration clause, special instructions etc. two copies of passport size photograph duly attested by the introducer are affixed with the form.

In Joint Name:

In this type, the formality is same as individual account, but in the special instruction clause, either or ‘survivor’ or ‘former or survivor’ clause is marked.

Proprietorship:

In addition the customer has to submit the valid Trade License and Tax Paying Identification Number (TIN) along with the application.

Partnership:

In case of partnership account, the bank asks for,

A copy of the partnership agreement (Partnership Deed)

A letter signed by all the partners containing the following particulars.

The name and addresses of all partners

The nature of the firm’s business

The name of the partner authorized to operate the account in the name of the firm, including the authority to draw, endorse and accepting the bills and mortgage and sell the properties belonging to the firm.

Limited Company:

On having the desire to open an account from a limited company, an EXIM Bank Officer asks for the following documents:

Registration Certificate from the Registrar of Joint Stock of Companies

Certificate of Incorporation

Certificate of Commencement of Business

Memorandum of Association

Articles of Association

Copies of Annual Accounts

Copies of the Board’s resolution, which contains

a). The name of the persons who have been authorized to operate the bank account on behalf of the company.

b). The name of the persons who are authorized to execute documents with the bank on company’s behalf.

Societies, Clubs and Associations:

In case of these sorts of accounts Al-Arafah Islami Bank Ltd requires the following documents:

Registration Certificate Under the Societies Registration Act, 1962

Copies of Memorandum, Articles of Association

Resolution of the Managing Committee.

Power of Attorney to Borro

Non-government Organization (NGO):

The account opening procedure is same but in exception is that the Registration Certificate from the Social Welfare Department of Government must be enclosed with the application.

Joint Account in The Name of Minor:

A minor cannot open an account in his own name due to the incapacity to enter into a contract. He can open an account in Al-Arafah Islami Bank Ltd in Joint name of another person who will be guardian of him.

 Savings Bank Account:

This deposit is basically meant for small-scale savers. There is restriction on withdrawals in a month. Heavy withdrawals are permitted only against prior notice. Interest is paid on these types of accounts.

Short-term Deposit (STD):

In Short-term Deposit, the deposit should be kept for at least seven days to get interest. The interest offered for STD is less than that of savings deposit. In Al-Arafah Islami Bank Ltd various big companies, Organizations, Government Departments keep money in STD accounts. Frequent withdrawal is discouraged and requires prior notice.

Fixed Deposit:

They are also known as time liabilities or term deposits. These are deposits, which are made with the bank for a fixed period specified in advance. The bank need not maintain cash reserves against these deposits and therefore, the bank offers high are of interest on such deposits.

In Al-Arafah Islami Bank Ltd, fixed deposit account is opened in two forms- Midterm (MTD), which is less then one year & the other is Term Deposit, which is more than one year.

Opening of Fixed Deposit Account:

The depositor has to fill an application form where in he mentions the amount of deposit, the period for which deposit is to be made & the name/ names is which the fixed deposit receipt is to be issued. In case of a deposit in Joint name Al-Arafah Islami Bank Ltd. also takes the instructions regarding payment of money   maturity of the deposit. The banker also takes the instructions regarding payment of money on maturity of the deposit. The banker also takers the instructions regarding payment of money on maturity of the deposit. The banker also taker specimen signatures of the depositors.

A fixed deposit account is then issued to the depositor acknowledging receipt of the sum of money mentioned therein. It also contains the rate of interest & the date on which the deposit will fall due for payment.

Payment of Interest:

It is usually paid on maturity of the fixed deposit. Al-Arafah Islami Bank Ltd calculates interest at each maturity date and provision is made on that “Miscellaneous creditor expenditure payable accounts” is debited for the accrued interest.

 Cash:

The cash section of Al-Arafah Islami Bank Ltd deals with all types of negotiable instruments, cash and other instruments and treated as a sensitive section of the bank. It includes the vault that is used as the beyond this limit, the excess cash is then transferred to Bangladesh Bank. This section performs the following functions:

  Cash Packing:

After the banking hour cash is packed according to the denomination. Notes are counted and packed in bundles and stamped with initial.

  Allocation of Currency:

Before starting the Banking hour all tellers give requisition of money through “ Teller cash proof sheet”. The head Teller writes the number of the packet denomination wise in “Reserve sheet” at the end of the day, all the notes remained are recorded in the sheet.

Procedure for Opening of Accounts:

Before opening of a currents or savings account, the following formalities must be completed by the customer:

ü  Submit application on the prescribed form.

ü  Furnishing photographs- 2 (Two) copies.

ü  Introduction by an account holder.

ü  Putting specimen signatures in the specimen card.

ü  Mandate, if necessary.

After fulfilling above formalities, opens an account for the client and provide the customer with a pay-in-slip book and a checkbook in case of savings account and currents account.

Societies, Clubs and Associations:

In case of these sorts of accounts Al-Arafah Islami Bank Ltd requires the following documents:

Registration Certificate Under the Societies Registration Act, 1962

Copies of Memorandum, Articles of Association

Resolution of the Managing Committee.

Power of Attorney to Borro

Non-government Organization (NGO):

The account opening procedure is same but in exception is that the Registration Certificate from the Social Welfare Department of Government must be enclosed with the application.

Joint Account in The Name of Minor:

A minor cannot open an account in his own name due to the incapacity to enter into a contract. He can open an account in Al-Arafah Islami Bank Ltd in Joint name of another person who will be guardian of him.

 Savings Bank Account:

This deposit is basically meant for small-scale savers. There is restriction on withdrawals in a month. Heavy withdrawals are permitted only against prior notice. Interest is paid on these types of accounts.

Short-term Deposit (STD):

In Short-term Deposit, the deposit should be kept for at least seven days to get interest. The interest offered for STD is less than that of savings deposit. In Al-Arafah Islami Bank Ltd various big companies, Organizations, Government Departments keep money in STD accounts. Frequent withdrawal is discouraged and requires prior notice.

Fixed Deposit:

They are also known as time liabilities or term deposits. These are deposits, which are made with the bank for a fixed period specified in advance. The bank need not maintain cash reserves against these deposits and therefore, the bank offers high are of interest on such deposits.

In Al-Arafah Islami Bank Ltd, fixed deposit account is opened in two forms- Midterm (MTD), which is less then one year & the other is Term Deposit, which is more than one year.

The banker also taker specimen signatures of the depositors:

A fixed deposit account is then issued to the depositor acknowledging receipt of the sum of money mentioned therein. It also contains the rate of interest & the date on which the deposit will fall due for payment.

Payment of Interest:

It is usually paid on maturity of the fixed deposit. Al-Arafah Islami Bank Ltd calculates interest at each maturity date and provision is made on that “Miscellaneous creditor expenditure payable accounts” is debited for the accrued interest.

Encashment of F.D.R:

In case of premature FDR, Al-Arafah Islami Bank Ltd is not bound to accept surrender of the deposit before its maturity date. In order to deter such a tendency the interest on such a fixed deposit is made cut a certain percentage less a the agreed rate. Normally savings bank deposit interest rate is allowed.

Loss of FDR:

In case of a lost FDR, the customer is asked to record a GD (General Diary) in the nearest Police Station. After that the customer has to furnish an Indemnity Bond to Al-Arafah Islami Bank Ltd a duplicate FDR is then issued to the customer by the bank.

Renewal of F.R.D.:

In Al-Arafah Islami Bank Ltd, the instrument is automatically renewed within seven days after the date of its maturity if the customer does not come to en-cash the FDR. The period for renewal is determined as the previous one.

 Remittance:

Remittance can be done by telegraph transfer, mail transfer, traveler’s Cheque and drafts and Cheque. There are two steps of remittance:

• Inland Remittance:

By using ways we can do it. When one bank sends these T.T, M.T, T.C or Cheque to another bank than it will be called inland remittance. It is done within the country from one bank to another.

When a bank got this T.T, M.T, T.C and cheque from outside bank, which is not situated in the home country than it will be called foreign remittance. Using these methods also has done it.

Types of Remittance:

a)    Between banks and non-banks customers.

b)    Between banks in the same country.

c)    Between banks in the different centers.

d)    Between banks and central bank in the same country.

e)    Between central bank of different customers.

û  Administration/ Monitoring:

The administration of the loan process shall ensure, compliance with all laws and regulations at both local and global levels including bank policy as set out in this document and the Bank’s credit manual/circulars.

 Loan (General):

Short term and long term loans allowed to individual/ firms/ industries for a specific purpose but a definite period and generally repayable by installments fall under this head these types of lending are mainly allowed to accommodate financing under the categories.

a). Large and Medium Scale Industries.

b). Small and Cottage Industries. Very often term financing for agriculture and others are also included here.

House Building Loan (General):

Loans allowed to individual/enterprises construction of house (residential or commercial) fall under this type of advance. The amount is repayable by monthly installment within a specified period, advances are known as Loan (HBL‑GEN).

Introduction:

HouseBuilding loan is one of the common credit policies of banking sector. There was only one institution in our country, which is specified in HBFC, Bangladesh House Building Finance Corporation. Now days, besides this bank many commercial banks and Leasing Company provides house-building loan to the customers.

Interest rate:

Currently the interest rate is 16%. But it may changes from time to time depending on the market interest rate. From the customers point of view this changes have an adverse impact on the customers. Some times if they have to bear a higher interest on the principal amount which causes a great burden on them.

But from the bank’s point of view this is very good to maintain the markup. Because when the market interest rate raises 1% than they are getting 1% less markup. So for this clause of increasing interest rate they can have the same markup by increasing the

interest rate changing on the clients. So this is very effective for the Bank to maintain markup.

Disbursement Procedure:

The disbursement procedure or timing of disbursement depends on the client or the progress of work of the construction. The disbursement can be made two or three stages or more depending on the above conditions.

Mode of repayment:

The loan shall be adjusted by monthly installment basis. The repayment will start from 6(six) months of the date of first disbursement (it may change according to the terms and conditions of the agreement)

House Building Loan (Staff):

Loans allowed to the Bank employees for purchase/construction of house shall be known as Staff Loan (HBFC‑STAFF).

Other Loans to Staff:

Loans allowed to employees other than for HouseBuilding shall be grouped under head­ staff Loan (general).

Cash Credit (Hypo)

Advances allowed to individual/ firm for trading as well as wholesale 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 is allowed under the categories:0

“Commercial lending” when the customer is other than an industry and “Working Capital” when the customer is an industry.

Consumers Credit Scheme of Al-Arafah Islami Bank Ltd.

Introduction:

Consumer Credit Scheme is a major program of Al-Arafah Islami Bank Ltd. In CCS the bank  ngage an agent who works on behalf of the Bank. This agent performs all the works prior to the sanction of the CCS. They do the inspection and make all the documents necessary for CCS. For this purpose they get commission.

Clients :

The clients are Service Holders and Businessman. Service holders can be Government and Private. In case of Government officer, the client must be an officer in rank.

Products:

Electronic goods, cars, jeeps, microbuses, Mobile telephone, T&T telephone etc.

Profit Rate:

Down payment

Down payment is 20% of the CCS amount. It is considered as equity. The payment is 50% for vehicles.

Advance allowed for retirement of shipping documents w d release of goods imported through LIC falls under trust with the arrangement that sale proceeds should be deposited to liquidate the advances within a given period. This is also a temporary advance connected with import and known as post‑Import finance and falls under the category “Commercial Banking.

IBP (inland bill purchased):

Payment made through purchase of inland bills/cheques to meet urgent requirement of the customer falls under this type of credit facility. This temporary advance is adjustable from the proceeds of bill/ Cheques purchased for Collection. It falls under the category “Commercial Lending”.

Credit Administration

The principle elements of bank credit administration are as follows:

1. Credit approval.
2. Credit file maintenance.
3. Facility evidence maintenance.
4. Credit monitoring and review.

Credit Approval:

The primary factor determining the quality of the Bank’s credit portfolio is the ability of each borrower to honor, on a timely basis, all credit commitments made to the Bank. The authorizing credit personnel period to credit approval must accurately determine this.

The credit approval process shall be governed by the Bank Credit Policy framework, which can be summarized under the following:

Asstt. Vice President

The amount and scope of each Officer’s lending authority is a function of the amount and extent of authority required by the officer to carry out his /her responsibilities to the Bank and its clients ma prudent, effective and efficient manner.

  Definition of Investment:

Investment, transaction between two parties in which one ( the creditor or lender) supplies money, goods, services or securities in return for a  promised future payment by the other ( the debtor or borrower). Such Transaction normally includes the payment of interest to the lender. Investment may be extended by the public or private institutions to finance business activities, agricultural operation, consumer expenditures or government projects.

 Introduction of Investment:

Modern Investment management is extended through specialized financial institutions of which commercial banks are the oldest and most important. In present days of industrial economics, the banks are able to extend and increase the supply of Investment by the creation of Investment management for their loan customers. The lender must judge each loan he makes on the basis of the charter of the borrower (his intention to pay), (his capacity to pay), (based on his potential for earning) and his collateral pledged in case of default on the loan. The terms of Investment transactions may be publicly regulated to prevent abuses by customers and lenders as well as to channel Investment in to particular sectors of the economy.

Role of CIB in Bangladesh:

Due to irregular and insufficient flow of credit information in the banking system the proportion of classified loan in relation to total credit is very high. This proportion of classified loan operated a bad culture in the Banking sector. In order to eliminate the bad culture & to equip the banks with proper credit information for loan application processing, proposal for relation of CIB was put forward by different committee and organizations and it was established in 1992.

Functions of CIB:

i)         To standardize information flow on loans/credits within the Bangladesh Banking system.

ii)        To increase the speed & accuracy with which the credit information is made available to banker assessing credit role.

iii)       To combine the information gathered on classified loans with the information on newly sanctioned loans to the borrowers thereby making available on integrated information package.

iv)       To integrate the default loan information in the CIB its timely submission to the banks for loan application processing.

v)        To collect credit information on quarterly basis from banks.

 Credit Risk Grading:

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.

7.02 Use of Credit Risk Grading:

• As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated.
• 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.

7.03. Numbers & Short names of graders used in the CRG:

The proposed CRG scale consists of 8 categories with Short names and Numbers are provided as follows:

  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 of Loan Classification:

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.

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’.

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.

Note:

a)    Any change in classification criteria provided by the Bangladesh Bank shall supersede this grading system for classified accounts.

b)    An account may also be classified based on qualitative judgment in line with Bangladesh Bank guidelines.

c)    A particular bank may have classification criteria stricter than Bangladesh Bank guidelines.

a)     Evaluation of Security Risk:

Risk that the bank might be exposed due to poor quality or strength of the security in case of default.

b)     Evaluation of Relationship Risk:

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