Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited

Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 1

1.0 INTRODUCTION

Dhaka Bank Limited (DBL) is the leading private sector bank in Bangladesh offering

full range of Personal, Corporate, International Trade, Foreign Exchange, Lease Finance and

Capital Market Services. Dhaka Bank Limited is the preferred choice in banking for friendly

and personalized services, cutting edge technology, tailored solutions for business needs,

global reach in trade and commerce and high yield on investments, assuring Excellence in

Banking Services.

Dhaka Bank Limited is a scheduled bank that was incorporated under the Companies

Act 1994, started its operation on July 1995 with a target to play the vital role on the socio-

economic development of the country. Aiming at offering commercial banking service to the

customers’ door around the country. The bank has been successful in positioning itself as

progressive and dynamic financial institution in the country. This is now widely acclaimed by

the business community, from small entrepreneur to big merchant and conglomerates,

including top rated corporate and foreign investors, for modern and innovative ideas and

financial solution.

The objectives of DBL are be one of the best banks of Bangladesh, achieve excellence

in customer service next to none and superior to all competitors, cater to all differentiated

segments of Retail and Wholesale Customers, be a high quality distributor of product and

services and use state-of the art technology in all spheres of banking.

If the jobs are not organized considering their interrelationship and are not allocated

in a particular department it would be very difficult to control the system effectively. If the

departments are not fitted for the particular works there would be haphazard situation and the

performance of a particular department would not be measured. Dhaka Bank Limited has

does this work very well. Different departments of DBL are as follows: Human Resources

Division, Personal banking Division, Treasury Division, Operations Division, Computer and

Information Technology Division, Credit Division, Finance & Accounts Division, Financial

Institution Division, and Audit & Risk Management Division.

Dhaka Bank Limited recognizes that a productive and motivated work force is a

prerequisite to leadership with its customers, its shareholders and in the market it serves. This

paper addresses the internal control and compliance risks; and to compare the existing credit

policy of Dhaka Bank Limited.

2.0 CREDIT MANAGEMENT IN DHAKA BANK LIMITED

The word credit comes from the Latin word “Credo” meaning “I believe”. It is a

lender’s trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to


repay. In other words, credit is the ability to command goods or services of another in return

for promise to pay such goods or services at some specified time in the future. For a bank, it

is the main source of profit and on the other hand, the wrong use of credit would bring

disaster not only for the bank but also for the economy as a whole.

The objective of the credit management is to maximize the performing asset and the

minimization of the non-performing asset as well as ensuring the optimal point of loan and

advance and their efficient management. Credit management is a dynamic field where a

certain standard of long-range planning is needed to allocate the fund in diverse field and to

minimize the risk and maximizing the return on the invested fund. Continuous supervision,

monitoring and follow-up are highly required for ensuring the timely repayment and

minimizing the default. Actually the credit portfolio is not only constituted the bank’s asset

structure but also a vital factor of the bank’s success. The overall success in credit

management depends on the banks credit policy, portfolio of credit, monitoring, supervision

and follow-up of the loan and advance.

2.1 CREDIT POLICY OF DBL

One of the most important ways, a bank can make sure that its loan meet

organizational and regulatory standards and they are profitable is to establish a loan policy.

Such a policy gives loan management a specific guideline in making individual loans

decisions and in shaping the bank’s overall loan portfolio. In Dhaka Bank Limited there is

perhaps a credit policy but there is no credit written policy.

3.0 CREDIT PRINCIPLES

In the feature, credit principles include the general guidelines of providing credit by

branch manager or credit officer. In Dhaka Bank Limited they follow the following guideline

while giving loan and advance to the client.

Credit advancement shall focus on the development and enhancement of customer

relationship.

All credit extension must comply with the requirements of Bank’s Memorandum and

Article of Association, Banking Company’s Act, Bangladesh Bank’s instructions,

other rules and regulation as amended from time to time.

Loans and advances shall normally be financed from customer’s deposit and not out

of temporary funds or borrowing from other banks.

The bank shall provide suitable credit services for the markets in which it operates.

It should be provided to those customers who can make best use of them.


The conduct and administration of the loan portfolio should contribute with in defined

risk limitation for achievement of profitable growth and superior return on bank

capital.

Interest rate of various lending categories will depend on the level of risk and types of

security offered.

4.0 CREDIT EVALUATION PRINCIPLES

Some principles or standards of lending are maintained in approving loans in order to

keep credit risk to a minimum level as well as for successful banking business. The main

principles of lending are given below:

4.1 LIQUIDITY

Liquidity means the availability of bank funds on short notice. The liquidity of an

advance means it repayment on demand on due date or after a short notice. Therefore, the

banks must have to maintain sufficient liquidity to repay its depositors and trade off between

the liquidity and profitability is must.

4.2 SAFETY

Safety means the assurance of repayment of distributed loans. Bank is in business to

make money but safety should never be sacrificed for profitability, To ensure the safety of

loan. The borrower should be chosen carefully. He should be a person of good character &

capacity as well as bank must have to maintain eligible number of security from borrower.

4.3 PROFITABILITY

Banking is a business aiming at earning a good profit. The difference between the

interest received on advances and the interest paid on deposit constitutes a major portion of

the bank income, besides, foreign exchange business is also highly remunerative. The bank

will not enter into a transaction unless a fair return from it is assured.

4.4 INTENT

Banks sanction loans for productive purpose. No advances will be made by bank for

unproductive purposes though the borrower may be free from all risks.

4.5 SECURITY

The security offered for an advance is an insurance to fall bank upon in cases of need.

Security serves as a safety value for an unexpected emergency. Since risk factors are

involved, security coverage has to be taken before a lending.


4.6 NATIONAL INTEREST

Banking industry has significant role to play in the economic development of a

country. The bank would lend if the purpose of the advances can contribute more to the

overall economic development of the country.

4.7 PRE-DISBURSEMENT COMPLIANCE

When the credit proposal are approved the credit officer must have to be ensured that

the disbursement of the credit facilities must comply with the directions written in the

credit policy and circular made by time to time along with checking all the following

terms and conditions:

The officer of Loan Administration must collect the acceptance of the

customer’s of the terms and conditions on the duplicate copy of the sanctioned

advice.

They will thoroughly examine and ensure that the subject credit facility does

not contradict to any law, rules and regulation of the country.

Deed of the Mortgage and power of the Attorney to be drafted and executed

under the Supervision of the Bank’s Legal Advisor.

Lawyers certificate to the effect that all the legal formalities (Equitable/

Registered Mortgaged) has been properly created on the land and building in

favor of the bank & bank has acquired the effective title of the property.

Registered power of attorney has been collected from the borrower

(contractor) assigning the work order favoring the DBL and the power of

attorney has been registered with the work order given agency and they have

agreed that they will issue all the cheques favoring DBL.

The legal documents of the vehicle have been obtained.

Collection of the satisfaction certificate in respect of all the documents both

legal and banking from the lawyer.

Entry has been made in the Safe -in and Safe-out register and the documents

are preserved.

After being satisfied all the above terms and conditions the credit in-charge

will disburse the loan amount to the client.

4.8 DOCUMENTATION OF THE LOAN

Documentation is obtaining such agreement where all the terms and condition and

securities are written and signed by the borrower. It specifies rights and liabilities of both the

banker and the borrower. In documentation each type of advances requires a different set of


documents. It also differs with the nature of securities. The documents should be stamped

according to the stamp Act. There are no hard and fast rules of documentation and it varies

from bank to bank. Generally, the documents are taken in the case of a secured advance by

DBL:

i. Demand promissory note: Here the borrower promises to pay the loan as and when

demand by bank to repay the loan.

ii. Letter of arrangement.

iii. Letter of continuity.

iv. Letter of hypothecation of goods and capital machinery.

v. Stock report: This report is used for OD and CC. In this report, information about

the quality and quantity of goods hypothecated is furnished.

vi. Memorandum of deposit of title deed of property duly signed by the owners of the

property with resolution of Board of Directors of the company owning the landed.

vii. Personal guarantee of the owners of the property.

viii. Guarantee of all the directors of the company.

ix. Resolution of the board of directors to borrow fund to execute documents and

completes other formalities

x. Form no. XVII/XIX for filling charges with the register of joint stock companies

under relevant section.

xi. Letter of Revival

xii. Letter of lien for advance against FDR.

5.0 RESEARCH DESIGN

The research paper that has been prepared is exploratory in nature. This paper is on

the internal control and compliance risks; and to compare the existing credit policy of Dhaka

Bank Limited. In the context of this research we have reviewed the annual report of Dhaka

Bank Limited (DBL). Secondary data was used for the preparation of this research paper. The

secondary data sources are annual reports, manuals, and brochures of Dhaka Bank limited

and different publications of Bangladesh Bank. To identify the implementation, supervision,

monitoring and repayment practice- interview with the employee and extensive study of the

existing file was and practical case observation was done.

6.0 GUIDING PRINCIPLE OF CREDIT APPRAISAL OF DBL FOR CREDIT

OFFICER

To determine the worth of a client, the following conceptual exercises should be

undertaken. There are no fixed and set methods to perform credit marketing, and scope for


application of individual judgment/ perception always plays over set rules in such work. For

example, drop in revenue of a contractor may indicate the client’s failure to get work, or it

may be due to adaptation of policy to do higher margin quality jobs.

6.1 INDUSTRY INFORMATION

Gather and evaluate industry information, where the client is, which may be done in the

following aspects:

Determine the price behavior Of the product/ service of the client.

Records of prices can reveal trend, fluctuations through various lengths of time in short run/ long run. From the records it should be determined whether the Product/ Service has short term jump in demand and hence in price in the increase / decrease. The effect of such Short Term Increase /Decrease of demand on Sales Volume and Profitability Short Term has to be understood and measured, viz., fluctuation range, fluctuation cycle duration, vis-a-vis clients cost/ revenue, etc. Examples of such products would be Winter clothing, non-essential items like ice cream, fast food, cars, and other luxury items.

Substitutability of the product.

If the Product is easily substitutable, then price rise in Dhaka will influence customers to the other, often market tolerance for short run fluctuation for such product is very low. Example of this situation may be Paper for Plastic, tea for coffee, etc.

Diversity of source of procurement.

If there are very few sources of procurement, price fluctuations are often Wider. Example of this is seen in steel sheet trading.

Market pact to set price. It often happens to specialized trade centers, to either protect against unhealthy competition, or drive out competition, in which case pricing may be in stress. Existence of monopolist/ oligopolist as client's competitors may Signal problem.

Item for which taste changes very fast.

Such industry is susceptible quick change in taste, sharp competition, large investment. Examples could be toy industry, office furniture, fashion design Of clothing, etc.

The class of the country is important to note, when there is dependence on foreign countries for import/ export.

In poorer countries/ or in countries with unstable political environment, Pricing of procurement / sale is more sensitive to political turmoil, natural disasters (flood / storm / earth quake) in the short run for cars, non-essential foods like baby food (branded baby serial), etc.Basic food and clothing demand may not be dented much.Forei country's dependence of Aid /Grant / Investment may


influence certain industry such as building materials like cement rod, therefore scrap vessel, etc.Major construction like bridge over river, establishment of large scale production industry of items like fertilizer, car, etc. may influence purchase capacity of consumers, govt. etc.Some points to carefully watch in case of dependency on foreign market may be: (a) Currency fluctuation, (b) Festival Depression/ Boost in market demand, (c) Development of other country competition, (d) Government intervention in stock market, etc.

High dependency on technology, which may change suddenly. technology, which may in Dhaka country may not be as popular in another country), in which case

Examples could be computers/ electronics, unfamiliar brands (popular brand in Dhaka country may not be as popular in another country), in which case large pile up of inventory may result in pricing stress at the least.

Possible hazard Some industries are associated with risk of hazard, such as mining, asbestos plant, industrial boiler, pressurized gas filling, nuclear plant, isotope for medical industry, building construction, etc. Such industry may require lot of safety inspections, certifications, insurance etc., shortage of which may result in serious consequence, or heavy cost at the least.

Long Term Look Quality of a relationship account may deteriorate due to long run replacement of technology, in computer industry, printing industry, medicine plant, etc. Deep stage of business cycle, world depression, etc. may cause raise in expenditure. Demography, change in population of consumer group may influence business, examples may be education, cars, insurance, baby food, travel, Medicare, etc. Client in industry facing sun set may eventually become ill quality.

6.2 FINANCIAL STRENGTH

Accounts /Financial information should be evaluated in the following directions:

Accounting Policy. It should be marked as change of policy may effect on the profitability/ leverage, etc.


Auditor’s qualification.

Often qualifications are not clearly expressed which may have much impact on the financials.

Other bank’s limits/ out standings.

This should be determined and ensured that client made full disclosure.

Existence of other financing facilities is to be netted out from total finance requirements of the client, otherwise over financing; hence over-trading becomes a serious risk.

Modus operandi of the business

This has to be matched. Care should be exercised to distinguish between current and term requirements, permanent working capital requirement is often Dhakaously financed by short term loan, often client's intuition is taken for determining finance requirements, temporary / seasonal raise in requirement is often mistaken for regular requirement, or not at all accommodation. Such mistakes lead to financial mismanagement on the client's part as well as on the part of the financier.

7.0 STEPS INVOLVED IN CREDIT PROCESSING

7.1 APPLICATION FOR LOAN

Applicant applies for the loan in the prescribed form of bank. The purpose of this

forms is to eliminate the unwanted borrowers at the first sight and select those who have the

potential to utilize the credit and pay it back in due time.

7.2 GETTING CREDIT INFORMATION

Then the bank collects credit information about the borrower from the following

sources:

1. Personal Investigation.

2. Confidential report from other bank/ Head office/Branch/Chamber of commerce.

3. CIB report from central bank.

7.3 SCRUTINIZING AND INVESTIGATION

Bank then starts examination that whether the loan applied for is complying with its

credit policy. If comply, than it examines the documents submitted and the credit worthiness.


Credit worthiness analyses, i.e. Analyses of financial conditions of the loan applicant are very

important. Then bank goes for credit Risk Analysis (CRA) and spreadsheet analysis, which

are recently introduced by Bangladesh Bank. According to Bangladesh Bank rule, CRA and

SA is must for the loan exceeding Dhaka core.

If these two analyses reflect favorable condition and documents submitted for the loan

appears to be satisfactory then, bank goes for further action.

8.0 CREDIT RISK ANALYSIS: MODERN TECHNIQUE OF CREDIT APPRAISAL

The Financial Sector Reform Project (FSRP) has designed the credit risk analysis (CRA)

package, which provides a systematic procedure for analyzing and quantifying the potential

credit risk. The objective of CRA is to assess the credit risk in quantifiable manner and then

find out ways & means to cover the risk. Broadly CRA package divides the credit risk into

two categories:

1. Business risk.

2. Security risk.

8. 1 BUSINESS RISK

It refers to the risk that the business falls to generate sufficient cash flow to repay the

loan. Business risk is subdivided into two categories.

8.2 INDUSTRY RISK

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

supplies risk and sales risk.

8.3 SUPPLIES RISK

It indicates that the business suffers from external disruption to the supply of imputes.

Components of supplies risk are as raw material, Labor, power, machinery, equipment,

factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then

assessing the risk of disruption of supplies of each item.

8.4 SALES RISK

This refers to the risk that the business suffers from external disruption of sales. Sales

may be disrupted by changes to market size, increasing in competition, and change in the

regulation or due to the loss of single large customer. Sales risk is determined by analyzing

production or marketing system, industry situation, Government policy, and competitor

profile and companies strategies.

8.5 COMPANY RISK

This refers to the risk that the company fails for internal reasons. Company risk is

subdivided into company position risk and Management risks.


8.6 COMPANY POSITION RISK

Within an industry each and every company holds a position. This position is very

competitive. Due to the weakness in the company's position in the industry, a company is the

risk for failure. That means, company position risk is the risk of failure due to weakness in

the company’s position in the industry. It is subdivided into performance risk and resilience

risk.

8.7 PERFORMANCE RISK

This risk refers to the risk that the company’s position is so weak that it will be unable

to repay the loan even under Favor able external condition. Performance risk assessed by

SWOT (Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, and Cash

flow forecast analysis and credit report analysis (i.e. CIB repot from Bangladesh Bank).

8.8 RESILIENCE RISK

Resilience means to recover early injury, this refers to risk that the company falls due

to resilience to unexpected external conditions. The resilience of a company depends on its

leverage, liquidity and strength of connection of its owner or directors. The resilience risk is

determined by analyzing different financial ratio, flexibility of production process,

shareholders willingness to support the company if need arise and political and private

affiliation of owners and key personnel.

8.9 MANAGEMENT RISK

The management risk refers to the risk that the company fails due to management not

exploiting effectively the company’s position. Management risk is subdivided into

management competence risk and integrity risk.

8.10 MANAGEMENT COMPETENCE RISK

This refers to the risk that falls because the management is incompetent. The

competence of management depends upon their ability to manage the company's business

efficiently and effectively. The assessment of management competence depends on

management ability and management team work. Management ability is determined by

analyzing the ability of owner or board of the members first and then key personnel for

finance and operation. Management team work is determined by analyzing management

structure and its strength and weakness.

8.11 MANAGEMENT INTEGRITY RISK

This refers to the risk that the company fails to repay the loan amount due to lack of

management integrity. Management integrity is a combination of honesty and dependability.


Management integrity risk is determined by assessing management honesty, which requires

evaluating the reliability of information supplied and then management dependability.

8.12 SECURITY RISK

This sort of risk is associated with the realized value of the security, which may not

cover the exposure of loan. Exposure means principal plus outstanding interest. The security

risk is subdivided into two major heads i.e. security control risk and security cover risk.

9.0 CREDIT RISK MANAGEMENT GUIDELINES BY BANGLADESH BANK

The guidelines contained herein outline general principles that are designed to govern

the implementation of more detailed lending procedures and risk grading systems within

individual banks.

9.1 CREDIT GUIDELINES

All banks should have established Credit Policies (“Credit Guidelines”) that clearly

outline the senior management’s view of business development priorities and the terms and

conditions that should be adhered to in order for loans to be approved. The Credit Guidelines

should be updated at least annually to reflect changes in the economic outlook and the

evolution of the bank’s loan portfolio, and be distributed to all lending/marketing officers.

The Credit Guidelines should be approved by the Managing Director/CEO & Board of

Directors of the bank based on the endorsement of the bank’s Head of Credit Risk

Management and the Head of Corporate/Commercial Banking.

9.2 CREDIT ASSESSMENT

A thorough credit and risk assessment should be conducted prior to the granting of

loans, and at least annually thereafter for all facilities. The results of this assessment should

be presented in a Credit Application that originates from the relationship manager/account

officer (“RM”), and is approved by Credit Risk Management (CRM). The RM should be the

owner of the customer relationship, and must be held responsible to ensure the accuracy of

the entire credit application submitted for approval. RMs must be familiar with the bank’s

Credit Guidelines and should conduct due diligence on new borrowers, principals, and

guarantors. It is essential that RMs know their customers and conduct due diligence on new

borrowers, principals, and guarantors to ensure such parties are in fact who they represent

themselves to be. All banks should have established Know Your Customer (KYC) and

Money Laundering guidelines which should be adhered to at all times. Credit Applications

should summaries the results of the RMs risk assessment and include, as a minimum, the

following details:

Amount and type of loan(s) proposed.


Purpose of loans.

Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)

Security Arrangements.

In addition, the following risk areas should be addressed:

Borrower Analysis: The majority shareholders, management team and group or affiliate

companies should be assessed. Any issues regarding lack of management depth, complicated

ownership structures or intergroup transactions should be addressed, and risks mitigated.

Industry Analysis: The key risk factors of the borrower’s industry should be assessed. Any

issues regarding the borrower’s position in the industry, overall industry concerns or

competitive forces should be addressed and the strengths and weaknesses of the borrower

relative to its competition should be identified.

Supplier/Buyer Analysis: Any customer or supplier concentration should be addressed, as

these could have a significant impact on the future viability of the borrower.

Historical Financial Analysis: An analysis of a minimum of 3 years historical financial

statements of the borrower should be presented. Where reliance is placed on a corporate

guarantor, guarantor financial statements should also be analyzed. The analysis should

address the quality and sustainability of earnings, cash flow and the strength of the

borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be

analyzed.

Projected Financial Performance: Where term facilities are being proposed, a projection of

the borrower’s future financial performance should be provided, indicating an analysis of the

sufficiency of cash flow to service debt repayments. Loans should not be granted if projected

cash flow is insufficient to repay debts.

Account Conduct: For existing borrowers, the historic performance in meeting repayment

obligations (trade payments, cheques, interest and principal payments, etc) should be

assessed.

Adherence to Credit Guidelines: Credit Applications should clearly state whether or not the

proposed application is in compliance with the bank’s credit Guidelines. The Bank’s Head of

Credit or Managing Director/CEO should approve Credit Applications that do not adhere to

the bank’s credit Guidelines.

Mitigating Factors: Mitigating factors for risks identified in the credit assessment should be

identified. Possible risks include, but are not limited to: margin sustainability and/or

volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth,

acquisition or expansion; new business line/product expansion; management changes or


succession issues; customer or supplier concentrations; and lack of transparency or industry

issues.

Loan Structure: The amounts and tenors of financing proposed should be justified based on

the projected repayment ability and loan purpose. Excessive tenor or amount relative to

business needs increases the risk of fund diversion and may adversely impact the borrower’s

repayment ability.

Security: A current valuation of collateral should be obtained and the quality and priority of

security being proposed should be assessed. Loans should not be granted based solely on

security. Adequacy and the extent of the insurance coverage should be assessed.

Name Lending: Credit proposals should not be unduly influenced by an over reliance on the

sponsoring principal’s reputation, reported independent means, or their perceived willingness

to inject funds into various business enterprises in case of need. These situations should be

discouraged and treated with great caution. Rather, credit proposals and the granting of loans

should be based on sound fundamentals, supported by a thorough financial and risk analysis.

9.3 RISK GRADING

All Banks should adopt a credit risk grading system. The system should define the

risk profile of borrower’s to ensure that account management, structure and pricing are

commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset

quality, and as such, it is essential that grading is a robust process. All facilities should be

assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a

borrower and its facilities should be immediately changed. Borrower Risk Grades should be

clearly stated on Credit Applications. The following Risk Grade Matrix is provided as an

example. The more conservative risk grade (higher) should be applied if there is a difference

between the personal judgment and the Risk Grade Scorecard results.

10.0 APPROVAL AUTHORITY, SEGREGATION OF DUTIES & INTERNAL

AUDIT

10.1 APPROVAL AUTHORITY

The authority to sanction/approve loans must be clearly delegated to senior credit

executives by the Managing Director/CEO & Board based on the executive’s knowledge and

experience. Approval authority should be delegated to individual executives and not to

committees to ensure accountability in the approval process. The following guidelines should

apply in the approval/sanctioning of loans:


Credit approval authority must be delegated in writing from the MD/CEO & Board

(as appropriate), acknowledged by recipients, and records of all delegation retained in

CRM.

Delegated approval authorities must be reviewed annually by MD/CEO/Board.

The credit approval function should be separate from the marketing/relationship

management (RM) function.

The role of Credit Committee may be restricted to only review of proposals i.e.

recommendations or review of bank’s loan portfolios.

Approvals must be evidenced in writing, or by electronic signature. Approval records

must be kept on file with the Credit Applications.

All credit risks must be authorized by executives within the authority limit delegated

to them by the MD/CEO. The “pooling” or combining of authority limits should not

be permitted.

Credit approval should be centralized within the CRM function. Regional credit

centers may be established, however, all large loans must be approved by the Head of

Credit and Risk Management or Managing Director/CEO/Board or delegated Head

Office credit executive.

The aggregate exposure to any borrower or borrowing group must be used to

determine the approval authority required.

Any credit proposal that does not comply with Lending Guidelines, regardless of

amount, should be referred to Head Office for Approval

MD/Head of Credit Risk Management must approve and monitor any cross border

exposure risk.

Any breaches of lending authority should be reported to MD/CEO, Head of Internal

Control, and Head of CRM.

It is essential that executives charged with approving loans have the relevant training

and experience to carry out their responsibilities effectively. As a minimum,

approving executives should have:

At least 5 years experience working in corporate/commercial banking as a

relationship manager or account executive.

Training and experience in financial statement, cash flow and risk analysis.

A thorough working knowledge of Accounting.

A good understanding of the local industry/market dynamics.


Successfully completed an assessment test demonstrating adequate knowledge of the

following areas:

o Introduction of accrual accounting.

o Industry / Business Risk Analysis

o Borrowing Causes

o Financial reporting and full disclosure

o Financial Statement Analysis

o The Asset Conversion/Trade Cycle

o Cash Flow Analysis

o Projections

o Loan Structure and Documentation

o Loan Management.

A monthly summary of all new facilities approved, renewed, enhanced, and a list of

proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.

10.2 SEGREGATION OF DUTIES

Banks should aim to segregate the following lending functions:

- Credit Approval/Risk Management

- Relationship Management/Marketing

- Credit Administration

The purpose of the segregation is to improve the knowledge levels and expertise in

each department, to impose controls over the disbursement of authorized loan facilities and

obtain an objective and independent judgment of credit proposals.

10.3 INTERNAL AUDIT

Banks should have a segregated internal audit/control department charged with

conducting audits of all departments. Audits should be carried out annually, and should

ensure compliance with regulatory guidelines, internal procedures, Credit Guidelines and

Bangladesh Bank requirements.

11.0 CREDIT MONITORING, CREDIT RECOVERY PROCESS OF DHAKA BANK

LIMITED

11.1 CREDIT MONITORING

To minimize credit losses, monitoring procedures and systems should be in places

that provide an early indication of the deteriorating financial health of a borrower. At a

minimum, systems should be in place to report the following exceptions to relevant

executives in CRM and RM team:


Past due principal or interest payments, past due trade bills, account excesses, and

breach of loan covenants.

Loanterms and conditions are monitored, financial statements are received on a

regular basis, and any covenant breaches or exceptions are referred to CRM and the

RM team for timely follow-up.

Timely corrective action is taken to address findings of any internal, external or

regulator inspection/audit.

All borrower relationships/loan facilities are reviewed and approved through the

submission of a Credit Application at least annually.

Computer systems must be able to produce the above information for central/head office

as well as local review. Where automated systems are not available, a manual process should

have the capability to produce accurate exception reports.

11.2 EARLY ALERT PROCESS

An Early Alert Account is one that has risks or potential weaknesses of a material nature

requiring monitoring, supervision, or close attention by management. If these weaknesses are

left uncorrected, they may result in deterioration of the repayment prospects for the asset or in

the Bank’s credit position at some future date with a likely prospect of being downgraded to

CG 5 or worse (Impaired status), within the next twelve months.

Early identification, prompt reporting and proactive management of Early Alert Accounts

are prime credit responsibilities of all Relationship Managers and must be undertaken on a

continuous basis. An Early Alert report should be completed by the RM and sent to the

approving authority in CRM for any account that is showing signs of deterioration within

seven days from the identification of weaknesses. The Risk Grade should be updated as soon

as possible and no delay should be taken in referring problem accounts to the CRM

department for assistance in recovery.

Despite 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’s interest. The symptoms of early alert are by no

means exhaustive and hence, if there are other concerns, such as a breach of loan covenants

or adverse market rumors that warrant additional caution, an Early Alert report should be

raised.

Moreover, regular contact with customers will enhance the likelihood of developing

strategies mutually acceptable to both the customer and the Bank. Representation from the

Bank in such discussions should include the local legal adviser when appropriate.


An account may be reclassified as a Regular Account from Early Alert Account status

when the symptom, or symptoms, causing the Early Alert classification have been regularized

or no longer exist. The concurrence of the CRM approval authority is required for conversion

from Early Alert Account status to Regular Account status.

11.3 CREDIT RECOVERY

The Recovery Unit (RU) of CRM should directly manage accounts with sustained

deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT

accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and

Corporate Banking. Whenever an account is handed over from Relationship Management to

RU, a Handover /Downgrade Checklist should be completed.

The RU’s primary functions are:

Determine Account Action Plan/Recovery Strategy

Pursue all options to maximize recovery, including placing customers into

receivership or liquidation as appropriate.

Ensure adequate and timely loan loss provisions are made based on actual and

expected losses.

Regular review of grade 6 or worse accounts.

12.0 COMPLIANCE OF BANGLADESH BANK GUIDELINES BY DHAKA BANK

LIMITED

Comparing Dhaka Bank’s current credit risk management system with the Bangladesh

Bank best practices guideline we see that Dhaka Bank lacks some of the best practices in

banking industry which can be generated in the following way:

12.1CREDIT POLICIES/ LENDING GUIDELINE

In the above analysis we have seen that Dhaka Bank Limited has no written credit

policy though it follows some policy. As there is no written credit policy, branch managers

sometimes get confused whether to go with a project or not.

Thus Dhaka Bank Limited should have a credit guideline available in every branch so

that credit officers can take quick decision whether to accept or reject a project. The credit

guideline should include the following:

• Industry or business segment focus.

• Types of loan facilities

• Details of single borrower/ group limit

• Lending caps

• Discouraged business type


• Loan facility Parameters

• Cross Border risk

12.2 CREDIT ASSESSMENT & RISK GRADING

Though credit is properly assessed in DBL, but there is no risk grading system applied

here. It should adopt a credit risk grading system to ensure account management, structure

and pricing are commensurate with the risk involved.

12.3 APPROVAL AUTHORITY

In Bangladesh Bank’s guideline it is written that “Approval authority should be

delegated to individual executives and not to committees to ensure accountability in approval

process”. But in Dhaka Bank Limited we see that every credit goes to the board via credit

committee. As a result, wastage of time occurs and no one is held accountable for a bad loan.

12.4 SEGREGATION OF DUTIES

According to Bangladesh Bank Guideline Banks should aim to segregate the

following credit functions to improve the knowledge levels and expertise in each department:

- Credit Approval/ Risk Management

- Relationship Management/ Marketing

- Credit Administration

But in Dhaka Bank Limited there is no such depertmentation or segregation of duties.

In small branches of DBL only single loan officer do all the jobs like loan marketing, risk

assessing and credit administration.

12.5 INTERNAL AUDIT

Dhaka Bank limited has a segregated internal audit/ control department charged with

conducting audit of all departments as suggested by Bangladesh Bank guideline.

12.6 PREFERRED ORGANIZATIONAL STRUCTURE

Currently Dhaka Bank does not follow the preferred management structure as

suggested by Bangladesh Bank guideline. The key feature in the preferred management

structure is the segregation of Marketing/ Relationship function from approval/Risk

management/ Administration function.

12.7 APPROVAL PROCESS

According to Bangladesh Bank’s best practice guideline, ‘the recommending or

approving executives should take responsibility for and be held accountable for their

recommendations and approval’. The recommended delegated approval authority levels are

as follows:


Head of Credit/CRM Executives up to 15% of capital

Managing Director/ CEO Up to 25% of capital

EC/ Board All exceed 25% of capital

But in Dhaka Bank we see that every credit proposal goes to Executive committee i.e. board.

12.8 CREDIT ADMINISTRATION

The Bangladesh Bank guidelines suggest that Credit administration be strictly

segregated from relationship management/ marketing. As a result the possibility of controls

being compromised or issues not being highlighted at the appropriate level can be avoided.

The credit administration has the following functions:

• Disbursement

• Custodial duties

• Compliance requirement

In Dhaka Bank credit officers under supervision of Branch Credit In-charge or

Manager also carry out all the three functions of credit administration. But Credit Marketing

and administration is yet to be segregated.

12.9 CREDIT MONITORING

To minimize credit losses, monitoring procedures and systems should be in place that

provides an early indication of the deteriorating financial health of a borrower. Early

identification, prompt reporting and proactive management of Early Alert Accounts are prime

credit responsibilities of all relationship Managers. An early Alert Account is one that has

risks or potential weakness of a material nature requiring monitoring, supervision or close

attention by management.

In Dhaka Bank credit monitoring is also done by credit In charge or branch managers.

As a result Early Alert Accounts do not get that much attention as needed.

12.10 CREDIT RECOVERY

According to Bangladesh Bank guideline the recovery unit (RU) of CRM should

directly manage accounts with sustained deterioration. On a quarterly basis, a Classified Loan

review (CLR) should be prepared by the RU Account Manager to update the action/ recovery

plan, review and assess the adequacy of provisions, and modify as appropriate.

In Dhaka Bank the non-performing loan is very low (below 3%) and the recovery unit

is yet to be formed. But for personal loan program, Personal Banking Division has a recovery

unit.

12.11 INCENTIVE PROGRAM


The Bangladesh Bang guideline also encourages Banks to introduce incentive

programs for the Recovery Unit Account Managers to bring down the NON Performing

Loans (NPLs) Dhaka Bank Limited currently has no incentive program as it does not have

any Recovery Unit.

13.0 CONCLUSION AND RECOMMANDATION

The failure of commercial banks occurs mainly due to bad loans, which occurs due to

inefficient management of the loans and advances portfolio. Therefore any banks must be

extremely cautious about its credit portfolio and credit policy. So far Dhaka Bank Limited

has been able to manage its credit portfolio skillfully and kept the classified loan at a very

lower rate ---thanks go to the standard and stringent credit appraisal policy and practices of

the bank.

But all things around us are changing at an accelerating rate. Given the fast changing,

dynamic global economy and the increasing pressure of globalization, liberalization,

consolidation and disintermediation, it is essential that Dhaka bank Limited has a robust

credit risk management policies and procedures that are sensitive to these changes. To

improve the risk management culture further, Dhaka Bank Limited should adopt some of the

industry best practices that are not practiced currently. These are

Dhaka Bank should have a clear written credit guideline. The credit guideline should

include Industry and Business Segment Focus, Types of loan facilities, Single

Borrower and group limit, credit caps, Discouraged Business Types, Loan Facility

Parameters and Cross boarder Risk.

It should adopt a credit grading system all facilities should be assigned a risk grade.

And the borrowers risk grades should be clearly stated on credit application.

Approval authority should be delegated to individual executives rather than

Executive Committee/ Board to ensure accountability. This system will not only

ensure accountability of individual executives but also expedite the approval process.

All lending functions should be segregated in the following way

* Credit Approval / Risk Management

* Relationship Management / Marketing

* Credit Administration

The segregation of duties will improve the knowledge levels and expertise in each

department.


The organization structure should have to be changed to put in place the segregation

of the Marketing/ Relationship Management function from Approval / Risk

Management / Administration function.

The responsibilities of the key persons of the above function must also be clearly

specified.

An Early Alert Account system should be introduced to have adequate monitoring,

supervision or close attention by management.( An early Alert Account is one that

has risk and potential weaknesses of a material nature).

There should be a Recovery Unit to manage directly accounts with sustained

deterioration. To encourage Recovery Unit incentive program may also introduced.

REFERENCE

1. Annual Report of Dhaka Bank Limited.


2. Bangladesh Bank (2003), Annual Report.

3. Google Wikipedia.

4. www.google.com

5. www.yahoo.com

http://www.google.com/

Documents

Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited