credit risk management of national bank ltd

7/31/2019 credit risk management of national bank ltd.

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Chapter 01

Introduction

1.1 Origin of the report

1.2 Scope of the report

1.3 Objective of the study

1.3.1 General Objective

1.3.2 Specific Objective

1.4 Methodology and Sources of Information

1.4.1 Primary sources

1.4.2 Secondary Sources

1.5 Limitation of the study

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1.1 Origin of the report

As a requirement for the fulfillment of our BBA program in the business administration we have to

perform three months internship program. As a student of BBA I have gathered enough theoretical

knowledge and now want to put my potentiality in the practical field. The main objective of the

internship program is to have practical knowledge of the professional life and to relate the four

years theoretical learning to practical field.

1.2 Scope of the Report

The report covers two departments during the period in practical orientation and the area of

organizational overview, performance of the overview of Credit Risk Management, identification

of loans and advances, conclusion & recommendation.

1.3 Objective of the Study

1.3.1 General Objective:

The broad or general objective of the study is to learn and analyze the credit risk

management of NBL and the system the followed for credit assessment.

1.3.2 Specific Objective:

To know about the National Bank Limited

To learn about credit department of NBL

To gather information about credit risk and its management process

Analyze the credit assessment process

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All types of required data were not available that may be helpful to make this paper more

complete.

Chapter 02

Background of the National Bank Limited

2.1 Evolution of NBL

2.2 Corporate Information of NBL

2.3 Vision of NBL

2.4 Mission of NBL

2.5 Objectives of NBL

2.6 Business Goal

2.7 Line of Business of NBL

2.8 Hierarchy of NBL

2.9 Branches of NBL

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2.1 Evolution of National Bank Limited

Bangladesh economy has been experiencing a rapid growth since the 90s. Industrial and

agricultural development, international trade, inflow of expatriate Bangladeshi workers'

remittance local and foreign investments in construction, communication, power, food

processing and service enterprises ushered in an era of economic activities. Urbanization and

lifestyle changes concurrent with the economic development created a demand for banking

products and services to support the new initiatives as well as to canalize consumer investments

in a profitable manner. A group of highly acclaimed businessmen of the country grouped

together to responded to this need and established National Bank Limited in the year 1983.

National Bank Limited was established on 23rd March 1983 with authorized capital TK. 100

million and paid up capital of TK. 80 million was subscribed by the sponsors/directors and TK. 4

million was subscribed to the government. Remaining TK. 36 million has been fully subscribed

by the public. The management of the Bank is vested in a board of directors consisting of 21members including the managing director of the Bank. Managing directors is the chief executive

of the Bank. The Bank carries of deposits, investment of funds, financing of trades, businessmen,

industrialists, importers and exporters etc. The National Bank Limited opened new branches

eight during 1983, raising the total number branches 112 in 2009, total number of employees of

the Bank was 242 in 1983 and increased to 2239 in 2009, and during the short periods of its

operation the Bank has made notable progress in various activities.

NBL determined to bring back the long forgotten taste of banking services and flavors. NBL

want to serve each one promptly and with a sense of dedication and dignity. The then President

of the People's Republic of Bangladesh Justice Ahsanuddin Chowdhury in angulated the bank

formally on March 28, 1983 but the first branch at 48, Dilkusha Commercial Area, Dhaka started

commercial operation on March 23, 1983. The 2nd Branch was opened on 11th May 1983 at

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Khatungonj, Chittagong. At present; NBL has been carrying on business through its 112

branches spread all over the country. Besides, the Bank has drawing arrangement with 415

correspondents in 75 countries of the world as well as with 32 overseas Exchange Companies.

NBL was the first domestic bank to establish agency arrangement with the world famous

Western Union in order to facilitate quick and safe remittance of the valuable foreign exchanges

earned by the expatriate Bangladeshi nationals.

NBL was also the first among domestic banks to introduce international Master Card in

Bangladesh. In the meantime, NBL has also introduced the Visa Card and Power Card. The Bank

has in its use the latest information technology services of SWIFT and REUTERS.NBL has been

continuing its small credit programmed for disbursement of collateral free agricultural loans

among the poor farmers of Barindra area in Rajshahi district for improving their lot. Alongside

banking activities, NBL is actively involved in sports and games as well as in various Socio-

Cultural activities. The Bank established extensive drawing arrangement network with Banks and

Exchange Companies located in important countries of the world. Expatriates Bangladeshi wage

earners residing in those countries can now easily remit their hard-earned money to the country

with confidence, safety and speed. The number of workforce of NBL stood at 2239, which

include 1689 officers and executives and 550 staff. Now NBL is on line to establish trade and

communication with the NBL International banking companies of the world.

As a result NBL will be able to build a strong root in international banking horizon. Bank has

been drawing arrangement with well conversant money transfer service agency "Western

Union". It has a full time arrangement for speedy transfer of money all over the world.

Transparency and accountability of a financial institution is reflected in its Annual Report

containing its Balance Sheet and Profit & Loss Account. In recognition of this, NBL was

awarded Crest in 1999 and 2000, and Certificate of Appreciation by the Institute of Chartered

Accountants of Bangladesh.

With a strong sense in all business areas commercial banking, NBL could foresee tremendous

growth in home in homebound remittance form Bangladesh expatriates in USA and UK, Middle

East and different countries of the world. Consecutively NBL established a unique money

remittance system with Western Union of USA for inbound and outbound remittance. At present

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NBL is the only authorized agent for this unique service in Bangladesh. From the very beginning

NBL is playing a vital role in the private sector Banking.

National Bank Limited is one of the leading private commercial bank having a spread network of

112 branches across Bangladesh and plans to open few more branches to cover the important

commercial areas in Dhaka, Chittagong, Sylhet and other areas in 2009.

National Bank Limited has been licensed by the Government of Bangladesh as a Scheduled

commercial bank in the private sector in pursuance of the policy of liberalization of banking and

financial services and facilities in Bangladesh. In view of the above, the Bank within a period of

25 years of its operation achieved a remarkable success and met up capital adequacy requirement

of Bangladesh Bank.

National Bank Ltd is one of the leading banks which introduced first Credit Card in Bangladesh.

Our technology has been upgraded to manage the growth of the bank and meet the demands of

our customers. ATMs now allow customers to retrieve 24x7 hours cash withdrawals. National

Bank Limited is a customer oriented financial institution. It remains dedicated to meet up with

the ever growing expectations of the customer because at National Bank, customer is always at

the center.

National Bank Limited has its prosperous past, glorious present, prospective future and under

processing projects and activities. Established as the first private sector Bank fully owned by

Bangladeshi entrepreneurs, NBL has been flourishing as the largest private sector Bank with the

passage of time after facing many stress and strain. The member of the board of directors is

creative businessman and leading industrialist of the country. To keep pace with time and in

harmony with national and international economic activities and for rendering all modern

services, NBL, as financial branches with computer network in accordance with the competitive

commercial demand of time. Moreover, considering its forth-coming future the institution

automated all its infrastructure of the Bank has been rearranging. The expectation of all class

businessman, entrepreneurs and general public is much more to NBL. Keeping the target in mind

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NBL has taken preparation to open new branches by the year 2007. The emergence of National

Bank Limited in the private sector is an important event in the Banking arena of Bangladesh.

When the nation was in the grip of severe recession, Govt. took the farsighted decision to allow

in the private sector to revive the economy of the country. Several dynamic entrepreneurs came

forward for establishing a bank with a motto to revitalize the economy of the country. National

Bank Limited was born as the first hundred percent Bangladeshi owned Bank in the Private

sector from the very inception it is the firm determination of National Bank Limited to play a

vital role in the national economy.

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2.2 Corporate Information of NBL

Corporate Information

Incorporation of the Bank

15.03.1983

Certificate of commencement of Business 20.03.1983

Licensed issued by Bangladesh Bank 22.02.1983

Licensed issued by Bangladesh Bank foropening the First branch, Dilkusha Branch

22.03.1983

Formal Lunching of the Bank 23.031983

Commencement of Business of Dilkusha

Branch

23.031983

Listed with Dhaka Stock Exchange 20.12.1984

Publication of prospectus 30.12.1984

Date of first public subscription (IPO) 14.01.1985

Trading of shares in DSE 21.04.1985

Association with Gulf exchange Pte Ltd 26.11.1985

Signing in agreement with Western Union

Money Transfer

16.05.1993

Listed with Chittagong Stock exchange 06.11.1995

Trading of Shares in CSE 06.11.1995

Listed with CDBL 29.09.2004

Inauguration of Balaka Exchange Pte Ltd 08.07.2007

Registration Certificate as Stock Broker 24.10.2007

(Source: National Bank Limited annual Report, 2008)

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2.3 Vision of National Bank Limited

Ensuring highest standard of clientele services through best application of latest information

technology making due contribution to the national economy and establishing ourselves firmly at

home and abroad as a front ranking bank of the country are our cherished vision.

2.4 Mission of National Bank Limited

Efforts for expansion of our activities at home and abroad by adding new dimensions to our

banking services are being continued unabated. Alongside, we are also putting highest priority in

ensuring transparency, account ability, improved clientele service as well as to our commitment to

serve the society through which we want to get closer and closer to the people of all strata.

Winning an everlasting seat in the hearts of the people as a caring companion in uplifting the

national economic standard through continuous up gradation and diversification of our clientele

services in line with national and international requirements is the desired goal we want to reach.

2.5 Objectives of National Bank Limited

Bringing modern Banking facilities to the doorstep of general public through

diversification of Banking services, thereby arousing saving propensity among the

people.

Foreign a cordial, deep-rooted and firm banker-customer relationship by

dispensing prompt and improved clientele services.

Taking part in the development of the national economy through productive

deployment of the Banks resources as well as patronizing different social activities.

Connecting clients to modern banking practices by the best application of

improved information technology, so that they get encouraged to continue and feel proud

of banking with NBL.

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Ensuring highest use of the professional workforce through enhancement of their

aptitude and competence.

Responding to the need of the time by participating in syndicated large loan

financing with like-minded Banks of the country, thereby expanding the area of

investment of the Bank.

2.6 Business Goal

To patronize, sponsor and encourage games and sports, entertainment and other socio-economic

activities, alongside providing the best services to the clients.

2.7 Line of Business of NBL

Investment Banking (Capital Market Operation In DSE & CSE)

Lease Finance

Investment In Government & provide Security

International Trade Finance (Import, Export)

Foreign Exchange Dealing (Currency Dealing, Remittance)

Money Market Operations (Call Money Market)

Corporate Finance

Syndication

SME Banking

Personal Banking (Auto Loan, Vocational Loan, Personal Loan) Housing Finance

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Chairman

Asst. Officer

Computer Operator

Managing Director

Deputy Managing Director

Senior Executive Vice President

Executive Vice President

Senior Vice President

Vice President

Senior Asst. Vice President

Asst. Vice President

Senior Principle Officer

Principle Officer

Executive Senior Officer

Officer

Junior Officer

2.8 Hierarchy of NBL

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2.9 Branches of NBL

NBL which was started at Dilkusha Branch on March 23rd, 1983 was the first and major private

commercial Bank in Bangladesh operating throughout the country as well as the age of the Bank

is only 18 years. During this period it has established total 76 branches over the country and

made a smooth network inside the country as well as throughout the world. The number of

Branches as territory wise is mentioned in the table:

Area-wise BranchesDivision Area Number of BranchesDhaka Area 44

Chittagong Area 23

Rajshahi Area 16

Khulna Area 09

Selhet Area 16

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Chapter 03

Credit Policy Guidelines of NBL

3.1 Different Forms of Credit in NBL

3.2 Purposes of Loans and Advances

3.3 Focus on Various Lending Areas

3.4 Steps in Loan Processing

3.5 Flowchart Approval for process of Loans and Advances

3.6 Lending Caps

3.7 Rate of Interest

3.8 Security and Support against Loans & Advances

3.9 Mode of Disbursement

3.10 Mode of Adjustment

3.11 Validity of Loans & Advances

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03.1 Different Forms of Credit in NBL

Generally we find three types of loan:

The different types of loans and advances that NBL offers are as follows:

Secured Overdraft (SOD) Loan (general)

Loan against Trust Receipt (LTR) Bank Guarantee

Payment Against Document (PAD) Cash Credit (Pledge)

House Building Loan Cash Credit (Hypo)

House Building Loan (staff) Foreign Documentary Bill Purchase (FDBP)

Term Loan. Inland Documentary Bill Purchase (IDBP)

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Loans

Continuous

LoanTerm LoanDemand Loan


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03.1.1 Continuous loan:

In this mode of loan, within a fixed amount and fixed period of time, one can receive and deposit

money several time.

NBL provide different types of continuous loan:

Secured Over Draft- financial obligation

Cash credit- hypothecation

Cash credit- pledge

Secured Over Draft- General

03.1.2. Term Loan:

Here, the borrower will take the whole amount at a time and has to deposit/ repay loan within

specified time.

NBL provides different types of term loan:

Retail Banking Loan SME Loan

Any Purpose Loan Housing Loan

Education Loan Lease Financing Scheme Loan

03.3.3 Demand Loan:

The loans that become repayable on demand by the bank will be treated as Demand Loan. If any

contingent or other liabilities are turned to forced loan i.e. without any prior approval as regular

loan those too will be treated as Demand loan. Such as: LTR, PAD, FBP and FDBP and LDBP etc.

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3.2 Purposes of Loans and Advances

National Bank Limited has been offering wide range of credit facilities as under:

NAME PURPOSE

Cash Credit ( Hypo & Pledge) Business capital/ Working capital.

SOD (General) Against Financial organization

/works/supply orders.

SOD (Export) Payment of Accepted bills at maturity

before receipt of export proceeds.

Loan (General) Acquiring capital assets/purchasing

construction, finishing, expansion,

repair, renovation of House/Flat /Real

estate business etc

LCA(Loan against cash Assistance) Financing for the period of the L/Cobligations against receipt of documents.

LC(Local & Foreign) sight & on Deferred

payment basis For import/Local procurement of goods/

services.

PAD For making payment of the payment ofthe L/C obligations against receipt of

documents.

LTR Retirement of shipping documents

LIM Retirement of shipping documents

PC Meeting Financial requirement of the

exporter at pre-shipment stage againstExporter L/C.

LDBP/FDBP As post shipment finances against local/foreign export bills.

BTB L/C Import of raw/packing materials againstExporter L/C

Bank Guarantee Local/Foreign For submission of tendency/to obtain

and offer as security against work order,

supply order/ For Gas, Electricityconnection/against delivery of

goods/against release of goods, without

or against partial payments by customeretc.

National Bank will also finance any other activity under any credit nature, which will meet the

institution basic principles of safety, liquidity and spread, upholding, credit norms and complying

with the guidelines/ directives of the Central Bank/ regulatory body.

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3.3 Focus on Various Lending Areas

National Bank main focus on various lending/as will be as under:

Industry and Business Segment* Focus

i. Trading Business Grow

ii. Ready Made Garments Grow

iii. Textile (Yarn/Fabrics Manufacturing) Grow

iv. Chemicals/Toiletries Grow

v. Entertainment Grow

vi. Telecommunication/IT Grow

vii. Power Generation and Distribution Grow

viii. Energy (power/Fuel/Gas) Grow

ix. Electric Goods Grow

x. Services viz. GSA, Freight Forward,and Airlines.etc.

Grow

xi. Steel and Re-rolling Mills Grow

xii. Engineering and Construction Grow

xiii. Small Traders/SME Encourage

xiv. Agro-based industry/ Dairy products/Fishery/Tea/crop

Encourage

xv. Export Oriented Industries Encourage

xvi Pharmaceuticals Encourage

xvii Consumer loans(personal, auto, credit

card)

Encourage

xviii. Food and Allied( edible oil, flour etc) Maintain

xix. Ship scrapping Maintain

xx. Real Estate Maintain

xxi. Paper Maintain

xxii. Transport Discouraged

xxiii. Cold storage finance Discouraged

xxiv. Financing Cement Industries Discouraged

*The Industry and Business Segment Focus will be revised from time to time depending on

national requirement, market conditions, Cyclic of the economy, appetite for growth for each

sector, shift in Government Policy and National Bank, credit planning.

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3.4 Steps in Loan Processing

There are some stages the proposal has to come across. The steps are:

Request for Credit the client

Credit Application from filled up

Scrutinizing the documents

Analyzing the information

Preparing the proposal

Presenting of the proposal

Sanctioning of the credit

Informing the client, Implementation

Figure: Steps of processing Loan

3.5 Flowchart Approval for process of Loans and Advances

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Credit application processed by credit officers and

recommendation by Credit In charge of the branch

Branch Credit Committee

Branch Manager

Regional office

Regional officeCredit Committee

Regional Head

Head Office, Credit Division

Head Office Credit Committee

Deputy Managing Director (Credit)

Managing Director

Executive Committee(EC)

Figure: Approval Process of Loans & Advances

3.6 Lending Caps

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National Bank Limited is very much aware of over concentration of credit in particular area, which

may under some situation, create disaster for the bank. Keeping this in consideration and also the

overall business, trend, propose/potentials, risks& mitigate, pricing, owners stake in business,

business competitors involvement, safety, liquidity, security etc. NBL will be guided by the

following Lending caps generally:-

Sectors Caps %

Trade & Commerce 45%

SME 10%

Industry-working capital 10%

Project Finance Long Term 10%

Retail/Consumer (CCS) 10%

Agro Credit 5%

Work/ Supply order (contractual Finance) 5%

Others 5%

Total 100%

*The Caps will be revised from time to time depending on the market conditions, shift in

Government Policy and National Banks credit focus.

3.7 Rate of Interest

Rate of interest will be charged as per declared rate of the bank. Pricing will be basically risk

based. Higher price will be considered for riskier borrowers because of their higher risk involved.

Similarly lower price will be considered for prime clients on the basis of their low risk ( Low risk

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grade clients means where an obligor obtained higher aggregate score as per CRG score sheet or

100% cash covered or govt./international Top bank Guarantee). In fixing interest rate cost of fund

& the prevailing rate in the competing market shall also be considered. Concessional interest rates

to the deserving customers will be allowed within the declared interest rates band of the bank.

Commission/charges on credit facilities will be realized taking the competing scenario in the

banking market into account, involved risks in financing & overall policy of the bank.

NBL will be provided loans by the following interest rates generally:

Loans & Advances Interest Rates (%)

Cash Credit(CC) 18%

Secured Over Draft( SOD) 16%, normally, Interest rate is 2.5% above

from the instrument rate such as FDR,SS etc.

SME Loan 16%Housing loan 16%

Lease Financing Scheme Loan 16%

Retail Banking 14% (Officers)

20% (Non- officers)

Term Loan 16%

*The Interest Rates will be revised from time to time depending on the market conditions, shift in

Government Policy and National Banks credit focus.

3.8 Security and Support against Loans & Advances

The following types of securities are generally accepted:

Machineries of factory/ industry on hypothecation basis. Values of machineries are

checked.

Raw materials, work in process, finished goods, stock in trade on hypothecation and pledge

basis. Inventory is held in a warehouse/godown for financing against pledge under Banks

control. Value of Inventory is checked.

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Land and building of acceptable type and value, under registered mortgage.

Financial obligation after ascertainining its genuineness of issuance, ensuring marking of

lien of the lender bank on the instrument and obtaining confirmation from the issuing bank

that encashment including even before maturity date will be allowed to the lender bank on

request without referring to the instrument holder.

Bills receivable against work order/supply order duly assigned/supported by registered P.A

executed by the client favoring the bank, confirmed by the work entrusting authority that

the cheques/ bills against the work shall be issued in the name of the bank A/C of the

client.

Cars/ buses/water crafts/ vessels under hypothecation and joint registration.

Shipping documents as lien against LC.

Trust receipt (For LTR)

Export documents-under lien (for LDBP/FDBP).

Export LC/ Contact under lien (For LDBP/FDBP).

Packing credit letter. (For PC)

Personal guarantee/corporate guarantee/cross-corporate guarantee.

Post dated cheques.

1st/2nd charge/1st ranking pari passu charge on fixed and floating assets of the limited

companies financed.

Bank obtains authorization to debit clients account in order to keep policy in force.

Insurance:

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National Bank having insurable interest on a property/ an asset obtain insurance policy as per

norms against credit facilities extended in order to protect this banks interest. Insurance policy

shall be taken covering all possible risks. Branches shall ensure that insurance policy is current and

renewed on a timely basis. Insurance shall be obtained from a reputed company.

General/Special conditions/Covenants:

General/Special conditions/Covenants will be according to the nature of advances, security

arrangements, ownership pattern, and mode of acquisition, institutional norms / instructions, guide

lines of the central bank / regulatory authority.

3.9 Mode of Disbursement

In disbursing credit the bank ensures drawings for the purpose the loan has been sanctioned. Where

required visit of the business/site etc are suggested and all subsequent disbursement are made

conditional to full utilization of disbursed money in the preceding phase. In case of disbursement

of loan, money for acquisition of assets, payment is suggested after receipt of the asset by the

borrower.

3.10 Mode of Adjustment

For the borrower to exhibit capability to periodically adjust the drawings taken and as such to have

idea regarding the rationale for the continuation of the facility, adjustment mode is given. In term

of lending, where revolving transaction is not allowed, adherence to adjustment stipulation

(monthly, quarterly, half yearly or otherwise) is suggested to ensure recovery of the loan disbursed.

3.11 Validity of Loans & Advances

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Validity date for continuous credit is set at a period not exceeding 1 year. Short term loan mostly is

allowed for trade/commerce. This expiry date is virtually the date for adjustment/ review of the

facility, subject to periodical and satisfactory turnover of the limit. Conduct of the business during

the whole of validity period determines the fate of continuation of the facility for the next period.

Loans for short/ medium/long term are also sanctioned depending upon the requirement thereof

and also on cash flow generation, repayment capacity and over all lending feasibility. Such loans

are allowed for adjustment in installment.

Short term : Up to 12 months

Medium term : More than 12 months and up to 60 months

Long term : More than 60 months.

Chapter 04

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Credit Risk Management of NBL

4.1 Types of CRM

4.2 Mission and Vision of CRM

4.3 Major objectives of the CRM guidelines

4.4 Risk Management Process

4.5 Credit principles followed by NBL

4.6 Credit Evaluation of NBL

4.7Credit Risk assessment

4.8 Credit Information Bureau Report (CIB report)

4.9 Credit Assessment System

4.10 National Banks Risk Grading Framework

4.11 Credit Risk Grade Matrix

4.12 Different categories of Credit RiskGrading Credit

4.13 Risk Grading Review

4.1 Types of CRM

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In perspective of National Bank Limited risk is defined as the possibility of losses, financial or

else. Now a days risk management plays a vital role to reduce uncertainty of assets and or else.

The major area of risk the bank think is that Credit Risk, Liquidity Risk, Market Risk, Operation

Risk and Reputation Risk due to Money Laundering Risk. Market risks include Foreign exchange

risk, Interest rate risk and Equity risk.

Figure 01: Types of Risk Management of National Bank Limited

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4.2 Mission and Vision of Credit Risk Management

National Banks mission is to ensure quality services, establish and maintain modern and

electronic banking all financial activities with highly motivated and skilled personnel, maintaining

transparency, accountability & integrity and thereby ensure stable and sound financial operational

system.

National Bank Limited will:-

Extend credit facilities at competitive price with prudence & efficiency.

Offer wide range of products.

Encourage loans & advances to income generating activities and will thereby create

employment opportunity and improve standard of living of the common people. Loans and

advances for productive purpose which will alleviate poverty will be stressed upon.

Diversify lending activities, avoiding sectored concentration, ensuring geographical

dispersal.

Design its loan operations keeping social and economic factors in consideration.

Attach importance to consumer credit, Loans to small businessmen, Festival loan, Small

Loans for finishing and expansion of house, Personal loan for salaried persons and any

purpose loan.

Prefer lending which will be adequately secured with acceptable security. Borrowers stake

in any activity will be ensured.

Encourage syndicated financing in prospective/ profitable ventures.

Not incur any uncovered foreign exchange risk in lending fund.

Invest at reasonable lending rates.

Monitor End use of loans/ advances.

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Generally prefer short term lending promoting through lending small and medium

enterprises.

Constantly explore prospective and profitable investment areas in order to achieve

institutional and country objectives.

Extend of credit which should contribute within defined risk limitation to the banks

achievement of profitable growth and superior return on the Banks capital.

4.3 Major objectives of the CRM guidelines

The main objectives of the guidelines are as under:

To provide directional guidelines to all concerned to improve risk management culture &establish minimum standard for managing risks in credit operations.

To adopt an appropriate working method.

To keep legal aspects relating to loans and advances vivid.

To introduce and adopt uniform practice in working.

To make lending correct information based.

To identify proper lending correct area.

To analyze all aspects related to credit and ascertain viability of lending.

To make credit documentation exhaustive.

To ensure proper supervision, monitoring & follow up.

To ensure safe return of money lent, avoidance of credit loss and strengthen asset quality

and to protect banks interest.

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4.4 Risk Management Process

NBL's activities involve analysis, evaluation, acceptance and management of some risk or

combination of risks. Risk management is emphasized not only for regulatory purpose but also to

improve operational and financial performance of the Bank. The main objective of the risk

management is that the Bank takes well calculative business risks while safeguarding the Bank's

capital, its financial resources and profitability from various risks.

Risk Origination by Business Units

Credit Risk Operational

Risk

Market

Risk

Liquidity

Risk

Reputation

Risk

Risk Identification

Identify, Understand and Analyze Risks

Risk Assessment & Measurement

Quantify and Assess Risk Impact

Risk Control & Migration

Recommend Measures to Control & Migrate Risks

Risk Monitoring

Monitor and Report on Progress & Compliance

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Balance Risk against Return

Figure:Risk Management Process

In order to streamline risk control features in a more effective manner, National Bank Limited has

put in places all manuals as suggested in the core risk management guide lines of Bangladesh

Bank. To manage the risk, National Bank Limited takes some steps. They actively involve

analysis, evaluation, acceptance and management of some risk. Risk management is not only for

regular process but also improve financial performance of the Bank.

4.5 Credit Principles Followed by NBL

To achieve their goal for maximizing the stockholders value and protect the interest of the

depositors as well as to improve the quality of banks assets as fundamentally sound financial

institution, they will abide by but will not be limited to the following Credit Principles, which

should guide their behavior in their lending decisions:

Assessment of the customers character, integrity and willingness to repay will from basis

of lending.

Customer having capacity and ability to repay shall only be lent.

Possibility of default will be worked out before lending.

Credit will be extended in the areas risks of which can be sufficiently understood and

managed.

Independent Credit participation in the credit process shall be ensured.

Ethical behavior in all credit activities shall be ensured.

Be proactive in identifying, managing and communicating credit risk.

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Be diligent in ensuring that credit exposures and activities including processing function

complying with NBL requirements as well requirement of regulatory authority.

Risk and reward to be optimized.

Diversified Credit Portfolio to be built and maintained.

Credit will normally be financed from customers deposits and not out of short-term

temporary funds or borrowing from other banks.

The bank shall provide suitable credit services and products for the market in which it

operates.

Credit will be allowed in a manner which will in no way compromise with the Banksstandard of excellence and to customers who will not compromise such standards.

All credit extension must comply with the requirement of banking companies Act. 1991

and amendments thereof from time to time.

4.6 Credit Evaluation in NBL

National Bank will follow the following credit evaluation process:

Prevailing credit practices in the market.

Credit worthiness, background and track records of the borrower.

Financial standing of the borrower supported by financial statement and other documentary

evidences.

Legal jurisdiction and implication of applicable laws.

Effect of any applicable regulations and laws.

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Purpose of the loan/ facility.

Tenure of the loan/facility.

Viability of the business concern.

Cash flow analysis and also projections thereof.

Quality, value and adequacy of security, if available.

Risk taking capacity of the borrower.

Entrepreneurship and managerial capabilities of the borrower.

Reliability of the sources of repayment.

Volume of risk in relation to the risk taking capacity of the bank or company concern.

Profitability of the proposal to the bank or company concerned.

Credit Risk Grading

Yield from the facility

Market aspect

Total global exposure of the borrower

CIB status

4.7.1 Credit Risk Assessment

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4.7.1.1 Risk Assessment

The primary factor determining the quality of the Banks credit portfolio is the ability of each

borrower to honor, on timely basis, all credit commitments made to the Bank. This must be

accurately determined by the authorized Credit officers/Executives prior to approval. Therefore athorough credit risk assessment shall be conducted prior to the sanction of any credit facilities.

While assessing a credit proposal more emphasis shall be given on repayment potential of loans

out of funds generated from borrowers business (cash flow) instead of realization potential of

underlying securities. Credit risk assessment process in the Bank shall be considered by the

following the risk assessing areas:

4.7.1.2. Borrower Analysis:Full particulars of the proprietor, partners, Directors, etc to be examined, their management

capability to be ascertained. Overall performance and credit status of the allied concerns of the

client i.e. group will be assessed.

4.7.1.3. Industry analysis:

Before extending credit in an area, over all business conditions of that area/sector will be critically

examined, prospects and problems to be ascertained. Demand and supply of the concerned goods/

services, Demand and supply gap, contribution of the borrower in meeting the gap, strength and

weakness of the borrower & their competitors to be accurately assessed.

4.7.1.4. Supplier/Buyer Analysis:

Lending decision will be preceded by an intensive analysis on whether the borrower depends on a

single or a very few customer or gets the supply of the raw materials/dealing items from a single

suppler. Such sales and supply concentration will be given a very careful consideration.

4.7.1.5. Historical Financial Analysis:

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An analysis of a minimum of 3 years historical financial statements of the borrower shall be

presented.

4.7.1.6. Projected Financial Performance:

Where term facilities (tenor more than 1 year) are proposed, borrowers future/ projected financial

performance should be provided, indicating an analysis of the sufficiency of cash flow to service

debt repayments. Loans should be granted if projected cash flow is insufficient to repay debts.

4.7.1.7. Risk and Mitigating Factors

Risk inherent in a credit proposal shall have to be identified and appropriate justifying factorsshould be applied. These are to be summarized in the Credit Assessment Form. That has to identify

properly. If any risk factor is identified by the credit officer but that is actually not mitigating

factors. That will be make loss for the organization.

4.7.1.8. Collateral

Collateral offered against a credit facility shall properly be valued and verified by the concerned

relationship officer or Relationship Manager and revalued and re-verified annually in the

subsequent period(s). In addition to the valuation of the Relationship Officer, the same Collateral

must be valued and verified by an enlisted surveyor of the bank if the total credit facility to the

concerned customer exceeds Tk 25.00 lac. Any valuation of the collateral must be supported by the

photograph and side map, where applicable.

4. 7.1.9. Insurance Coverage

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Adequacy and extent of insurance coverage must be assessed in the credit Assessment Form.

Customer preference for not taking required insurance policy must be obtained from approved

insurer of the Bank.

4.7.1.10. Adherence to Policy

It should be clarified whether the customer is agreed to comply with the banks internal policy and

external regulatory requirements. Any deviation from the policy and other internal or external

requirement must be justified and mentioned as deviation in the Credit Assessment From.

4.7.1.11. Syndicated Loans

Proposal for syndicated loans shall be analyzed with respect to risk and return in the same manner

as directly sourced loans. In case of participation in a syndication deal, Bank will independently

assess the proposal and will not solely depend on the credit assessment of the lead Arranger.

.

4.8 Credit Information Bureau Report (CIB report):

One of the major risk reducing criteria for the bank is Credit Information Bureau Report. Bank can

easily know the total information of any customer from Credit Information Bureau.

Banks are requested to send the CIB if a customer want to avail more than 50 thousand taka. Every

Bank needs to submit their various statements like monthly statement, quarterly statement to

Bangladesh Bank. Bangladesh Bank gathers that credit information and make an individual code

name for every customer. They provide information about the limit, outstanding, disbursement

date, expiry date. If a customer applied for a Credit facility in any bank, the bank request to

Bangladesh Bank to sent CIB report to the Bank where bank can know the details of customer. If a

customer have loan facility more than 1.00 crore bank need to send monthly statement, if acustomer have loan facility less than 1.00 crore bank sent the statement quarterly.

4.9 Credit Assessment System

4.9.1. Credit Assessment System:

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Commercial banks and financial institutions intermediate between lenders and borrowers. These

financial intermediaries collect deposit and disburse it as loan and advance to the individual

people, business, commercial, industrial entity. The loan and advance should be given to them who

has the certain and predicted cash flow to repay the credit. If the credit officer fail to analyze the

clients viability of repaying the loan and the projects cash flow possibility of default may arise due

to the information. In sanctioning the loan, is the key to identify the borrowers ability, expertise,

efficiency, and industry analysis, business performance to ensure the recovery of the credit along

with the good supervision, monitoring and the relationship. The purpose of appraisal is to be sure

that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered

by adequate security.

4.9.2. Allocation of Authority:

To assure proper and orderly conduct of the banking operation, the board of directors empowered

the Managing Directors and executives of the bank to lend up-to certain under certain terms and

conditions at their discretion. Important point is that an officer will not be delegated certain power

on the basis of his position. In other words, an officer does not automatically get lending authority

by virtue of his corporate /functional title. Specified lending authority will be delegated by the

Managing Director to various Executives after taking into consideration his proven credit

judgment, Knowledge, and experience.

4.9.3. Approving Authority:

In National Bank Limited, the credit proposal goes through certain steps that are ordered in terms

of hierarchy. The board of directors is the ultimate authority and it delegates different power to the

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different committees. In National Bank Limited, there are following hierarchies in approving credit

facilities:

Figure: Approving Authority Sequence

4.9.3.1 Branch Credit Committee:

The branch credit department is maintained by the branch manager and the other members are

second man or manager operation, credit in-charge, and other members are nominated by the

branch manager and the credit officer who prepares the proposal calls them relation officer. As the

ultimate performance of the branch depends on the loan all of the members are give importance. If

the credit amount wanted is not under the sanctioning authority of the branch committee, it is sent

to the Head Office Credit Committee for approval.

4.9.3.2 Head Office Credit Department

After receiving the loan proposal from different branches, credit committee (HO) seats after certain

interval for analyzing the proposal. The credit officers review the proposal and look for what other

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information is needed to provide with it to present before the executive committee. Here they also

appraise the loan proposal in the same way the branch does. The HO credit committee is headed by

the Managing Directors of the bank and other members are selected by him. Mainly the HO credit

department is responsible for the following activities:

The committee evaluates the quality of the lending staff posted in the branch and take

appropriate steps to made them efficient and effective.

Ensuring that all the required information and documents are collected and are in order.

4.9.3.3 Executive Department

If the limit of the loan proposal exceeds the authority delegated to the HO credit committee, the

loan proposal is forwarded to the executive committee for sanction. Approving the credit facility as

delegated by the Board of Directors.

Supervising implementing the directives of the Board of Directors.

Reviewing of each extension of the credit approval by the HO credit committee or Managing

Director.

Communicate the result of all the above function to the Board of Directors .

4.9.3.4 Board of Directors

If the credit demand of the client crosses the delegated power of the executive committee, the

proposal is sent to the board of directors for approval. The Board of Directors has, in the NBL;

retain the following credit related responsibilities in their hand:

Delegating authority to approve and review credit

The board of directors will approve the credit for which authority is not delegated to anybody.

4.10. National Banks Risk Grading Framework

4.10.1 Basic Framework:

When providing credit facility to the customer, Bank undertakes many risks among which credit

risk is considered to be most important one. As such, an in-depth study should be conducted on the

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borrowers creditworthiness which will help the Bank to identify all possible risk underlying in a

particular credit transaction. A former evaluation of borrowers financial health and ability to repay

debt obligation is call credit rating which helps the bank to grade the customer. As such, it is also

called credit risk grading. And risk identified through credit rating/risk grading is quantified for

better understanding and takes appropriate technique. Besides, it helps the bank to charge

commensurate risk premium on a particular credit facility. Therefore, it is important to accurately

measure the risk in a transaction and grate the facility accordingly. As per recommendation of the

Financial Sector Reform Project, Bangladesh Bank made it mandatory for the bank to conduct a

Lending Risk Analysis in the prescribed format before sanction of a loan which is steel in force.

Later, Bangladesh Bank instructed all commercial Banks to develop its own credit risk grading

system vide its Guidelines on Credit Risk Management. In the said guideline, Bangladesh Bank

provide sample Risk Grading Model and advised Banks to design their own model in line with that

one.

4.10.2 NBLs Risk Grading Framework

All credit proposals must be supported by a comprehensive risk analysis. It is the absolute

responsibility of the originating officer to conduct comprehensive risk analysis and risk grading

score, risk grading etc in the proposal. He/she will also insure that all necessary

documents/proposal/ information in support of the proposed risk grading are with the proposal

before the facility request is sent to the competent approval authority.

4.11 Credit Risk Grade Matrix

As per instruction of Bangladesh Bank, National Bank has developed Risk Grading Scorecard

which will be used to find out rating of all credit facilities and/or customers of the bank except the

loans under Retail Credit Division. The score of the risk grading scorecard will be weighted one.

There are 10 (ten) rating criteria and separate parameters have been set to measure borrowers

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position against each criterion. After analyzing borrowers financials or other relevant documents,

the Relationship Officer will first find out the points the borrower earns against each criterion

based on the parameters set and then multiply the points obtained by the relevant risk weight which

will produce Weighted Score.

A snapshot of criteria and weight assigned to each criterion is as follows:

Sl.

No.

Criteria Weight

(%)

Name of the

Grade

Short

Name

Score

01 Leverage 15 Superior SUP 85+

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02 Liquidity 15 Good GD 75-84

03 Profitability 15 Acceptable ACCPT 65-74

04 Account

Control

5 Marginal/ MG/WL 55-64

05 Business

Outlook

10 Special

Mention

SM 45-55

06 Management/

Key Person

15 Substandard SS 45-54

07 Age of

Business

05 Doubtful DF 35-44

08 Size of

Business

05 Bad & Loss BL


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2. Good (GD)

Strong repayment capacity of the borrower.

The borrower has excellent liquidity and low leverage.

The company demonstrates consistency strong earnings and cash flow.

Borrower has well established, strong market share.

Very good management skill and expertise.

All security documentations are in place.

Credit facilities fully covered by the guarantee of a top tier local bank

Aggregate score of 85 or greater based on Risk Grade Score sheet.

3. Acceptable (ACCPT)

These borrowers are not strong as good grade borrowers, demonstrate earnings, cash flow

and have a good track record.

Borrowers have adequate liquidity, cash flow and earnings.

Credit in this grade is secured acceptable collateral (1st charge over

inventory/receivables/equipment/property).

Acceptable management.

Acceptable parent/sister company guarantee.

Aggregate score of 75-84 based on Risk Grade Score sheet.

4. Marginal/Watch list (MG/WL)

This grade warrants greater attention due to conditions affecting the borrower, the industry or

the economic environment.

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These borrowers have an above average risk due to strained liquidity, higher than normal

leverage, thin cash flow and/ or inconsistent earnings.

Weaker business credit and early warning signals of emerging business credit detected.

The borrower incurs a loss.

Loan repayment routinely falls past due.

Account conduct is poor, or other untoward factors are present.

Credit requires attention.


5. Special Mentioned (SM)

This grade has potential weakness that deserves managements close attention. If left

uncorrected, this weakness may result in a deterioration of the repayment prospects of the

borrower.

Severe management problems exist.

Facilities are downgraded to this grade if sustained deterioration in financial condition is noted

(consecutive losses, negative net worth, excessive leverage).

Bangladesh Bank criteria for Special Mentioned (SM) shall apply.


6. Sub Standard (SS)

Financial condition is weak and capacity or inclination to repay is in doubt.

These weaknesses jeopardize the full settlement of loans.

Bangladesh Bank criteria for Sub Standard (SS) shall apply.

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7. Doubtful (DF)

Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.

However, due to specifically identifiable pending factors, such as litigation, liquidation

procedures or capital injection, the asset yet is not classified as Bad & Loss.

Bangladesh Bank criteria for Doubtful Credit shall apply.

Aggregate score of 35-44 based on Risk Grade Score sheet

8. Bad and Loss (BL)

Credit of this grade has long outstanding with no progress in obtaining repayment or on the

verge of wind up/ liquidation.

Prospects of recovery are poor and legal options have been pursued.

Proceeds expected from the liquidation or realization of security may be awaited. The

continuance of the loan as a bankable asset is not warranted, and the anticipated loss should

have been provided for.

This classification reflects that it is not practical or desirable to defer writing off this basically

valueless asset even though partial recovery may be affected in the future. Bangladesh Bank

guidelines for timely write off of bad loans must be adhered to. Legal procedures/ suit initiated.

Bangladesh Bank criteria for bad and loss (BL) shall apply.

Aggregate score of less than 35 based on Risk Grade Score sheet.

4.13 Credit Risk Grading Review

Credit Risk Grading for each borrower should be assigned at the inception of lending and should

be periodically updated. Consistency and accuracy of the Risk Grade should be examined

periodically by the branch and Internal Control & Compliance Division while conducting inception

it must also be ensure that CRG has been properly done and periodically updated. Frequencies of

the review of the credit risk grading are mentioned below:

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Number Risk Grading Short Review frequency

(at least)

1 Superior SUP Annually

2 Good GD Annually

3 Acceptable ACCPT Annually

4 Marginal/ watch list MG/WL Half yearly

5 Special Mention SM Quarterly

6 Sub- standard SS Quarterly

7 Doubtful DF Quarterly

Bad & Loss BL Quarterly

Chapter 05

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Findings

5.1 Findings of the study

The rate of interest or product cost is set up by the Head Office. Interest rate has to be

within a limit for every bank which is notified by the Bangladesh Bank.

Pricing for the credit varies for depending on the risk level of credit facility. Risk level is

measure on some criteria like; CIB Report, CRG points, Personal Information. High risky

credit facility charged high interest. Price of Credit facility also set up by the Head Officecredit committee.

Credit allocation is set-up by the Head Office Credit committee. The Head of the Branch

can authorize credit up to Tk.20 Lac.

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Branch credit officer prepare the credit proposal containing details customer information.

Some big credit facilities recommended by the Head Office credit Committee which is

processed with fast monitoring and screening.

Sometimes clients and customers are moving here and there inside the bank premises. So it

hampers the smooth functioning and security system of the bank.

Quality development may help the bank to hold on the old customers and attract

potential customers.

The number of Brochure is not sufficient to supply information to the clients for

their query.

Chapter 06

Recommendation

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Conclusion

6.1 Recommendation

The process of sanctioning a loan is very time consuming. Management should give more

effort to reduce the time of processing a loan.

The main portion of profit comes from the foreign exchange and credit division, but there

are not enough employees on these departments to serve the clients. So number of

employees should be increased in these departments.

The management must be more careful of sanctioning that loans which are recommend by

powerful bodies. Because these loans sometimes become more risky.

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To reduce the credit risk the original documents of the client must be verified thoroughly.

The repayment capacity of loan of the client should be properly investigated to reduce the

default risk.

6.2 Conclusion

The National Banks philosophy - "A bank Performance for potential" has been precisely an

essence of the legend of success in Bangladesh. The bank has proved to be successful by offering

quality services to its customers in time. Most of employees of National Bank are very efficient

(with few exceptions); everyone knows their work very well and can perform efficiently to

produce the best output.

National Bank Limited has consistently remained focused on efficient customer service by

providing wide range of products and services. Their products and services are as diverse as the

market segment demand. Their customers group range from individuals, big corporate clients,

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NGOs to non residents. Financing to NGOs were done for extending microfinance to cover less

privileged people who are struggling to fight poverty. NBL also focus on its delivery platform, its

people and its brand to support the growth. Improvement in mix of deposit by developing more

retail savings products remained in their policy objectives. National Bank Limiteds core value to

remain socially responsible corporate citizen will remain integral part to its strategy and

communicating them to all stakeholders is intrinsic to the plan.

credit risk management of national bank ltd

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