Parag Main

8/13/2019 Parag Main

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Introduction

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

agricultural development, international trade, inflow of expatriate Bangladeshi worker

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

processing and service enterprises ushered in an era of economic activities. rbani!ation an

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

products and services to support the new initiatives as well as to channeli!e consuminvestments in a profitable manner. " group of highly acclaimed businessmen of the countr

grouped together to responded to this need and established #haka Bank $imited in the ye

%99&. ntil the late %90s, banks were highly regulated and protected entities with hardl

any competition among them. (ollapse of the Bretton )oods agreement put them in a ne

environment of increased competition, leading to gradual erosion of capital that started

alarm the regulators. #ealing with the problem on international level seemed to be the on

possible way of finding a proper solution without increasing competitive differenc

between banks from individual countries.

*ence, a special committee was set up under the auspices of the Bank for Internation

+ettlements BI+- in Basel. he (ommittee, initially known as the (ooke (ommittee anlater renamed the Basel (ommittee on Banking +upervision B(B+-, formed a proposal

which it suggested that a common framework for calculating the capital ade/uacy of bank

should be formed. his document, known as the %9 Basel (apital "ccord, became a hug

success after its adoption 1 it not only managed to level the playing field, but it also broug

national practices on capital ade/uacy of banks in line. In %9, the Basel (ommitte

published a set of minimal capital re/uirements for banks, known as the %9 Basel "ccor

hese were enforced by law in the 23%0 countries in %994, with 5apanese banks permitted a

extended transition period.

he %9 Basel "ccord focused primarily on credit risk. Bank assets were classified intfive risk buckets i.e. grouped under five categories according to credit risk carrying ris

weights of !ero, ten, twenty, fifty and one hundred per cent. "ssets were to be classified in

one of these risk buckets based on the parameters of counter3party sovereign, banks, publ

sector enterprises or others-, collateral e.g. mortgages of residential property- and maturit

2enerally, government debt was categori!ed at !ero percent, bank debt at twenty per cen

and other debt at one hundred per cent. 6ff3Balance +heet 6B+- exposures such


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performance guarantees and letters of credit were brought into the calculation of ris

weighted assets using the mechanism of variable credit conversion factor. Banks we

re/uired to hold capital e/ual to 7 of the risk3weighted value of assets.

+ince %9, this framework has been progressively introduced not only in member countri

but also in almost all other countries having active international banks. (lose on the heel o

the %998 amendment to the Basel I "ccord, In 5une %999 B(B+ issued a consultative paper

on ew (apital "de/uacy :ramework to replace the %9 "ccord. he new capit

framework consists of three pillars; minimum capital re/uirements, which seek to refine th

standardi!ed rules set forth in the %9 "ccord< supervisory review of an institution

internal assessment process and capital ade/uacy< and effective use of disclosure

strengthen market discipline as a complement to supervisory efforts.

he %9 Basel I "ccord has very limited risk sensitivity and lacks risk differentiatio

broad brush structure- for measuring credit risk which created some problems for credit ri

management. :or example, all corporations carry the same risk weight of %00 per cent. also gave rise to a significant gap between the regulatory measurement of the risk of a give

transaction and its actual economic risk. he most troubling side effect of the gap betwee

regulatory and actual economic risk has been the distortion of financial decision3makin

including large amounts of regulatory arbitrage, or investments made on the basis

regulatory constraints rather than genuine economic opportunities. he strict rule base

approach of the %9 accord has also been critici!ed for its =one si!e fits all prescription. addition, it lacked proper recognition of credit risk mitigants such as credit derivative

securiti!ation, and collaterals. he recent cases of frauds, acts of terrorism, hacking, hav

brought into focus the operational risk that the banks and financial institutions are expose

to.

Basel II is claimed by B(B+ to be an improved capital ade/uacy framework intended

foster a strong emphasis on risk management not only on credit risk management and t

encourage ongoing improvements in banks risk assessment capabilities. It also seeks provide a =level playing field for international competition and attempts to ensure that i

implementation maintains the aggregate regulatory capital re/uirements as obtaining und

the current accord. he new framework deliberately includes incentives for using mo

advanced and sophisticated approaches for risk measurement and attempts to align th

regulatory capital with internal risk measurements of banks sub>ect to supervisory revie

and market disclosure.Bangladesh Bank issued Basel II ?oad @ap in 400 in a BA?# (ircular Implementation

Basel II in Bangladesh started from 5anuary 4009. "ccording to the initial plan, Basel

implementation followed the specific approaches as initial steps with the parall

calculations starting from 5anuary 4009; (ompliance of Basel II in (redit ?isk @anageme

of #haka Bank $imited.


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)orking capitalis a term whose meaning has evolved. It is used in slightly different ways in different

contexts. "$@ was pioneered by financial institutions, but corporations now also apply "$@ techni/ues.

his article describes "$@ as a general concept, starting with more traditional usage. Increasingly,

managers of financial firms focused on asset-liability risk. he problem was not that the value of assets

might fall or that the value of liabilities might rise. It was that capital might be depleted by narrowing of th

difference between assets and liabilitiesthat the values of assets and liabilities might fail to move in

tandem. "sset3liability risk is a leveragedform of risk. he capital of most financial institutions is small

relative to the firm's assets or liabilities, so small percentage changes in assets or liabilities can translate int

large percentage changes in capital.

Financial Performance and Growth of Dhaka Bank Limited

#haka Bank $imited is high performing private commercial bank, which further

consolidated its position in the market in terms of /uality services to the customers and valu

addition for the shareholders. he Bank made healthy progress in all areas of business in

4009.

Assets"s of C% #ecember 4009, total asset of the Bank stood at k.. billion, an increase of 97

as against 400. he increase in asset was mainly driven by significant growth of customer

deposits. he growth of deposits was used for funding in loans and advances and holding o

securities for +$? +tatutory $i/uid ?eserves-.

(ash D Balances with Bangladesh Bank and its "gent;

he cash D balances with Bangladesh Bank and its agent registered CC7 growth as of C%

#ecember 4009. he growth of deposits increased the balances with Bangladesh Bank and

its agent for maintaining the (ash ?eserve ?e/uirement (??-, which was maintained

ade/uately.

Balances with 6ther Banks and :inancial Institution;

he Balances with other banks and financial institutions increased by 97 which was mainly

due to transfer of fund to current accounts of different banks for covering the payments

against Inward :oreign ?emittances to beneficiaries.
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Investment he Bank s investment during the year 4009 were mostly in long term

2overnment +ecurities which stood at k. ,880 million as against k. ,4C9 million makin

a growth of 407 over the last year. he 2overnment reasury Bonds purchased at higher

rate of interest to cover the increased +$? arising from the growth of deposit liabilities.

Loan Classification

$oans and "dvances

he Bank implemented the system of credit risk assessment and lending procedures by

stricter separation of responsibilities between risk assessment, lending decisions and

monitoring functions to improve the /uality and soundness of loan portfolio. he Bank

recorded a 87 growth in advances with a total loans and advances portfolio of k. &4,9%0

million at the end of #ecember 4009 compared to k. E9,89 million at the end of #ecemb

400.

Liabilities

otal liabilities of the Bank stood at k. 4,04 million as of C% #ecember, 4009 registerin

a growth of 7 over the last year. his has happened for increase of deposits fro

customers mainly and settlement of import payments against deferred and cash letter

credits.Borrowings from Banks, :inancial Institutions and "gents;

reasury #ivision resorted to borrowing from money market. he Bank registered

negative growth of C7 in borrowings from Banks, :inancial Institutions and "gents

against last year positions. he main reason of this negative growth was #B$ s borrowinfrom call money market was significantly reduced.

Deposits

(urrent and 6thers 97

+avings %07

+# &7

:#? 87

#A+F@#+ E7

Bills E7


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Deposit Mix

#eposits;

he deposit base of the Bank continued to registered a steady growth and stood at k.80,9%

million excluding call as of C% #ecember 4009 compared to k. &8,98 million of the

previous year registered a 7 growth. he growth was supporte by branch network and hig

standard products an service along with competitive interest rate provided to customers. h

customer group of the Bank was individual, corporation, B:I, 2overnment Bodies, 26,

"utonomous Bodies etc.

Income and xpenseInterest income has been increased by E7 from k. ,%% million in 400 to k. ,E88 in

4009. he growth of advance caused this growth of interest income. "verage yield on

advance was %E.C47 during 4009. Income from investments increased by C7 mainly due

to the income from five and ten years 2overnment Bonds at higher rate of interest which

was maintained for +$? purposes.

!peratin" Profit #s $et Profit

6perating Arofit

et Arofit after ax

he et Interest @argin I@-, which is derived by net interest income divided by averag

assets, were E.&87 in 4009 as compared to E.807 in 400. he decrease of et Intere

@argin was mainly because of increase of earning assets but lower rate of return from

advance which results the lower spread. et Interest Income increased by %E7 :?6@

4,844 million in 400 to k.4,90 million mainly due to increase of interest income for

both advances and investments.

Gxpenses

Interest expense increased by E7 in 4009, this rise is mainly attributable to the overa

increase in #eposit base of the bank. +alary and allowances increased by k. 8 millio

from 400 mainly due to recruitment of new Gmployees. 6ther overhead expenses increase

only by k. C million as compared to 400. Garning base in assests of the Bank remain


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unchanged in 4009, which was 7 in 400. he ratio indicates efficient utili!ation

resources to earn revenues.

(hapter C;

Aractical aspects-


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%&' (ample enterprise at a "lance

#haka Bank $imited, a second3generation private commercial bank also followed the

implementation plan as specified by the Bangladesh Bank. In the first pillar of Basel II

accord, identification and mitigation of credit risk is the forerunner. +o, this report tries to

unveil the current status of Basel II implementation in (redit ?isk @anagement in #haka

Bank $imited and the impact of it in banking operations.

%&) Findin"s and anal*sis+

Although it has evolved over time to reflect changing circumstances in the economyand markets, in its simplest form, asset/liability managemententails managing

assets and cash inflows to satisfy various obligations. It is a form of riskmanagement, whereby one endeavors to mitigate or hedge the risk of failing to mee

these obligations.Some practitioners prefer the phrase "surplus optimization" as better to eplain theneed to maimize assets available to meet increasingly comple liabilities.

Alternatively, surplus is known as net worth, or the difference between the marketvalue of assets and the present value of the liabilities and their relationship. !he

discipline is conducted from a longterm perspective that manages risks arising from

the interaction of assets and liabilities# as such, it is more strategic than tactical.

A monthly mortgage is a common eample of a liability that a consumer has to fundout of his or her current cash inflow. $ach month, the individual faces the task of

having sufficient assets to pay that mortgage. %inancial institutions have similarchallenges, but on a much more comple scale. %or eample, a pension planmust

satisfy contractually established benefit payments to retirees, while at the same time

sustain an asset base through prudent asset allocationand risk monitoring, from

which to generate these ongoing payments.

As you can assume, the liabilities of financial institutions can be &uite comple andvaried. !he challenge is to understand their characteristics and structure assets in
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such a way as to be able to satisfy them. !his may result in an asset allocation tha

would appear suboptimal 'if only assets were being considered(. Asset and liabilities

need to be thought of as intricately intertwined, rather than separate concepts. )ere

are some eamples of the asset/liability challenges of various financial institutionsand individuals.

A Banking ExampleAs financial intermediaries between the customer and the endeavor that it is looking

to fund, banks take in deposits on which they are obligated to pay interest 'liabilitiesand make loans on which they receive interest 'assets(. *esides loans,

securities portfolioscomprise the assets of banks. *anks need to manage interest

rate risk, which can lead to a mismatch of assets and liabilities. +olatile interest rateand the abolition of egulation -, which capped the rate banks could pay depositors

both had a hand in this problem.

A banks net interest margin the difference between the rate that it pays ondeposits and the rate that it receives on its assets 'loans and securities( is afunction of interest rate sensitivityand the volume and mi of assets and liabilities.

!o the etent that a bank borrows short term and lends long term, it has a mismatchthat it needs to address through restructuring of assets and liabilities or

using derivatives'swaps, swaptions, options and futures( to satisfy the latter.

Insurance Examples!here are of two types of insurance companies0 life and nonlife 'property andcasualty(. 1ife insurers often have to meet a known liability with unknown timing in

the form of a lump sum payout. 1ife insurers also offer annuities 'reverse life

insurance(, that may be life or nonlife contingent, guaranteed rate accounts '2I3s(and stable value funds.

,isk Mana"ement in Dhaka Bank Limited

?isk concerns the expected value of one or more results of one or more future events.

echnically, the value of those results may be positive or negative. *owever, general usage

tends focus only on potential harm that may arise from a future event, which may accrue

either from incurring a cost downside risk- or failing to attain any benefit upside risk-. ?is

management can be considered the identification, assessment, prioriti!ation of risks followe

by coordinated and economical application of resources to minimi!e, monitor and control

the probability andFor impact of unfortunate events or to maximi!e the reali!ation ofopportunities.

Core ,isks in Bankhe core risks involved in any banking operation are briefly described below;
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Asset Liabilit* Mana"ementhe "sset $iability @anagement is integral part of Bank @anagement. his risk is related t

the balance sheet gaps, interest rate gaps that can lead to under performance. o manage thi

risk #haka Bank $imited has a committee name "$(6 "sset $iability (ommittee- whichusually meet at least once a month to analysis, review and formulate strategy to manage the

balance sheet. @ain functions of this committee are identifying the balance sheet

management issues like balance sheet gap, interest rate gapFprofile, reviewing deposit3

pricing strategy and li/uidity contingency plan.

Forei"n xchan"e ,isk

odayHs financial institutions engage in activities starting from import, export and remittanc

to complex derivatives involving basic foreign exchange and money market to complex

structured products. "ll these re/uire high degree of expertise that is difficult to achieve inthe transaction originating departments and as such the expertise is housed in a separate

department. In #B$, this task is done by reasury #epartment. reasury department

watches over the flow of foreign exchange, it takes longFshort position of foreign currency t

mitigate the risk of depreciation of the hold currencies.

Internal Control and Compliance ,isk

Internal control is the process, affected by a companyHs board of directors, management and

other personnel, designed to provide reasonable assurance regarding the achievement ofob>ectives in the effectiveness and of operations, the reliability of financial reporting and

compliance with applicable laws, regulations, and internal policies. In #B$ the

responsibilities of internal control are to check the efficiency and effectiveness of activities

reliability, completeness and timeliness of financial and management information etc.

Mone* Launderin" ,isk

hough money laundering risk is relatively a old phenomenon, it got the organi!ed look

after the enactment of @oney $aundering "ct, 4009. his law barred some activities as leg

and if any bank is found to be involved in any kind of money laundering, the concernedofficial and the bank will be punished. "s, money laundering is very common in

Bangladesh, it poses a great risk for the banks. o mitigate this risk, #B$ employed a stron

J( now Jour (ustomer- policy, strong account monitoring policy etc.


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Credit ,isk

his is the most important risk of all as it involves the key asset /uality of any bank. (redit

?isk is defined as the risk of losses associated with the possibility that borrower will fail to

meet its obligations< in other words it is the risk that the borrower wonHt repay what is owed

@any banks have failed in the past because of poor management of credit risk. o

understand credit risk, it is important to know about the credit facilities. he next section

focuses on that.

-*pes of Credit Products

(redit may be classified with reference to elements of time, nature and provision base.

(lassification on the basis of time;6n the basis of elements of time, bank credit may be classified into three heads, vi!.

Continuous loans+

hese are the advances having no fixed repayment schedule but have a date at which it is

renewable on satisfactory performance of the clients. (ontinuous loan mainly includes

K(ash credit both hypothecation and pledgeK and K6verdraftK.

Demand loan+

In opening letter of credit $F(-, the clients have to provide the full $F( amount in foreign

exchange to the bank. o purchase this foreign exchange, bank extends demand loan to the

clients at stipulated margin. o specific repayment date is fixed. *owever, as soon as the

$F( documents arrive, the bank re/uests the clients to ad>ust their loan and to retire the $F(

documents. #emand loans mainly include LAayment against #ocuments,M K$oan against

imported merchandise $I@-K and K$etter of rust ?eceiptK.

erm loans;

hese are the advances made by the bank with a fixed repayment schedule. erms loansmainly include K(onsumer credit schemeK, K$ease financeK,K *ire purchaseK, and K+taff

loanK. he term loans are defined as follows;

N+hort term loan; p to %4 months.

N@edium term loan; @ore than %4 months D up to C8 months


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N$ong term loan; @ore than C8 months.

Classification on characteristics of financin"

6n characteristics of financing, the credit facilities of #haka Bank can be divided into two

categories, vi!.

:unded

hese products give the client the facility to use the money to fulfill its working capital nee

to cover temporary shortage of fund, to buy consumer durables etc. he facilities taken by

the client are reflected in the balance sheet of the bank as assets. @a>ority of the credit

product of the bank are of this type. "s this type represents the ma>or portion of credit

portfolio of a bank, risk of default, i.e. credit risk is very evident here. +o, the credit risk

management is basically managing funded facility of a bank.

$on.Fundedhese products give a third party the assurance that bank will pay in the event of failure of

repayment of its client. 2enerally it is used to import goods from abroad, to participate in

different tender etc. "s these facilities deal with guarantee and not money these are not

reflected in the balance sheet, they are reflected in the off3balance sheet. hese are called

contingent liability also.

-he followin" table examples of some funded and non.funded products are "i#en+

Table 2: Classification of credit based on Characteristics of financingFunded Non-Funded


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6verdraft

$oan

(onsumer (redit

$oan against rust

?eceipt

Aayment against

#ocuments

(ash (redit Aledge and

*ypothecation-

+taff $oan

erm $oan

Aacking (redit

$etter of (redit

Bank 2uarantee

Classification on Pro#ision Base

(redit facilities of Bank can be divided into four categories based on provision base of the

facilities, vi!.

nclassified

he loan account is performing satisfactorily in the terms of its installments and no overdue

is occurred. In this type one special type of classification is there which is called special

mention account. 2enerally, if an account is not repaying its due for three months

continuously, it is called special mention account +@"- and is reported to the central bank

which prevents the other banks to give the client fresh loan.

+ub3+tandard

his classification contains where irregularities have been occurred but such irregularities

are temporarily in nature. o fall in this class the loan and advance has to fulfill the

following factor given in able C. his kind of loan is monitored closely by the monitoring

division to make the loan regular.

-able /+ Criteria for (ub.(tandard Loan

Category of Credit Time overdue(irregularities)

+ub3standard

+3 "gri D @icro (redit C months D above but less than 8

months.

(ontinuous loan n3recovered for 3 months D above

but less than months from the date


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of the loan is claimed.

#emand $oan

:ixed erm loan Repayable within 5years: If the

overdue installment e/uals or

exceeds the amount repayablewithin months.

#oubtful

his classification contains where doubt exists on the full recovery of the loan and advance

along with a loss is anticipated but cannot be /uantifiable at this stage. @oreover if the state

of the loan accounts falls under the following criterion can be declared as doubtful loan and

advance.

-able 0+ Criteria for Doubtful Loan

Category of Credit Time overdue

(irregularities)

!oubtful

+3 "gri D @icro (redit 8 months D above but less than

%4 months.

(ontinuous loan n3recovered for months D

above but less than "2 months

from the date of the loan isclaimed.

#emand $oan



exceeds the amount repayable

within "2 months.

Repayable more than 5years: If the overdue installment e/uals or

exceeds the amount repayable within "# months.

Bad and $oss

" particular loan and advance fall in this class when it seems that this loan and advance is

not collectable or worthless even after all the security has been exhausted. In the following

table the criteria to be fulfilled to fall in this category are summari!ed;

Criteria for $ad and %oss


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Category of Credit Time overdue

(irregularities)

$ad and %oss

+3 "gri D @icro (redit ot recovered within more than

%4 months.(ontinuous loan n3recovered more than "2

months from the date of the loan

is claimed.

#emand $oan



exceeds the amount repayable

within "# months.

Repayable more than 5years: If the overdue installment e/uals or

exceeds the amount repayable within 2& months.

Credit ,isk Mana"ement in Dhaka Bank Limitedo manage credit risk, Bangladesh Bank prescribed a framework. he key elements of cred

risk management are;

N$ending 2uideline

N(redit "ssessment D ?isk 2rading

N"pproval "uthority

N+egregation of #uties

NInternal "udit

Lendin" "uidelines

$ending guidelines 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. his should be updated at least annually to reflect changes in the economic

outlook and the evolution of the bank s loan portfolio. It contains;

NIndustry D Business +egment :ocus; he lending guidelines in #B$ specifies some

particular industries like textile, knit garments, cement, power etc.


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Nypes of $oan :acilities; he guideline also specifies different kinds of loan that are

permitted to be disbursed. "s per #B$ lending guidelines, there are mainly two kinds of

loan, funded and non3funded. Gxamples of funded are working capital loan, term loan, etc.

6n the other hand, examples of non3funded facilities are $(, Bank 2uarantee etc.

N+ingle BorrowerF 2roup $imits; " single borrowerFgroup is permitted to get highest %&7

of the capital as funded facility and highest 407 of the capital as non3funded facility.

N$ending (aps; here is a specific industry sector exposure cap to avoid over

concentration in any one industry sector.

N#iscouraged Business ypes; In the lending guidelines of #B$, lending to some

industries is discouraged such as military weapon, highly leveraged transaction and finance

of speculative investment.

N$oan :acility Aarameters; "s per the lending guidelines, the parameters should be adopte

like, not granting facility when security position is inferior, proper valuation of security,

pledge of security etc.

N(ross Border ?isk; It is synonymous with political and sovereign risk. If any difficulty

arises from any political event, then a plan is there in place.

Credit Assessment 1 ,isk Gradin"

$ending is risky because loan /uality is affected by both internal and external factors.

Gxternal factors include changes in economy, national disasters like earth/uake, flood and

the regulation by the government. Internal factors affecting loan risk include management

errors, illegal manipulation by bank officials and weak or ineffective lending policies. he

risk of lending function is mainly controlled by 2overnment regulations and Internal polici

and procedures.

he risk is also controlled by creating and following written policies and procedures for

processing each credit re/uest. "t #B$, a thorough credit assessment and risk grading are

done prior to loan approval for minimi!ing risks maintaining Bangladesh Bank 2uidelines.


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Credit Assessment

" thorough credit and risk assessment is conducted prior to the granting of loans, and at lea

annually thereafter for all facilities. he results of this assessment are presented in a (redit

"pplication that originates from the relationship managerFaccount officer L?@M-, and isapproved by (redit ?isk @anagement (?@-. he ?@ is the owner of the customer

relationship, and is held responsible to ensure the accuracy of the entire credit application

submitted for approval. he ?@s are familiar with the bankHs $ending 2uidelines and

conduct due diligence on new borrowers, principals, and guarantor.

It is essential to ensure such parties are in fact who they represent themselves to be. he

bank has an established now Jour (ustomer J(- and @oney $aundering guidelines.

(redit "pplications summari!e the results of the ?@s risk assessment and include the

following details;

N"mount and type of loans- proposed

NAurpose of loans

N$oan +tructure enor, (ovenants, ?epayment +chedule, Interest-

N+ecurity "rrangements

In addition, the following risk areas are addressed;

Borrower "nalysisBorrower analysis is the most important step in providing loans to borrowers. nethical

attitudes, asymmetric information and manipulation of records by borrowers etc. create

complication in credit finance and as a conse/uence banks become burdened with unusual

amount of classified loans. +o, the borrower must be of good character, should be reliable,

responsible and resourceful, so that the return of loan is easier. :or that, the following

information is provided on the loan application;

N Borrower background or history including group information if the concern is part of

a group.

N he location of the borrowerHs office D factory and factory details like land area,

buildings, number of shifts per day, number of workers and officers, factory space an

sources of power D capacity, alternate source of power, source of machinery, etc.


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N If the borrower has applied for a loan for a new pro>ect, then initial cost of the pro>ec

its means of finance, its product mix D production capacity and its market

N otal export earnings of the group

N$ist of machinery for existing pro>ect

N Aarticulars of the Board of #irectors, and declaration of the ?elationship @anager

regarding personal net worth

N(orporate ob>ective or strategy

6nce a borrower re/uests for a loan, a #B$ official interviews the customer and find

out the credit needs. his interview is important because it enables the bank to assess

the borrowerHs character and sincerity of purpose. :or a new pro>ect, it also collectsinformation memorandum. :or business or mortgage loan, the #B$ makes a visit to

the customerHs location and assesses the condition of the property.

Industry "nalysis

he key risk factors of the borrower

+ industry is assessed. "ny issues regarding the borrower

+ position in the industry, overall industry concerns or competitive forces are

addressed and the strengths and weaknesses of the borrower relative to its competitio

are identified. (ritical success factors of the industry are also stated.

+upplierFBuyer "nalysis

Information regarding the borrowerHs suppliers and buyers are collected mainly who

they are. "ny customer or supplier concentration is addressed, as these have a

significant impact on the future viability of the borrower. "ny issues regarding the

market vulnerability are also addressed.

*istorical :inancial "nalysis

"n analysis of a minimum of three years historical financial statements of the

borrower is presented. )here reliance is placed on a corporate guarantor, the

guarantorHs financial statements are also analy!ed. he analysis addresses the /uality

and the sustainability of (ompliance of Basel II in (redit ?isk @anagement of #hakBank $imited. Garnings, cash flow and the strength of the borrowerHs balance sheet.

+pecifically, cash flow, leverage and profitability are analy!ed.

Aro>ected :inancial Aerformance

)here term facilities for more than one year are being proposed, a pro>ection of the

borrowerHs future financial performance is conducted, indicating an analysis of the


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sufficiency of cash flow to service debt repayments. $oans are not granted if pro>ecte

cash

sufficiency of cash flow to service debt repayments. $oans are not granted if pro>ecte

cash flow is insufficient to repay debts.

Account Conduct

:or existing borrowers, the historic performance in meeting repayment obligations

like tradepayments, checks, interest and principal payments, etc is assessed.

Aerformance with other banks like import performance, export performance, account

conduct and liability position is also noted. :or a comprehensive picture, the latest

(redit Information Bureau (IB- report of the central bank is summari!ed in this

module.

"dherence to $ending 2uidelines

he (redit "pplication clearly states whether or not the proposed application is incompliance with the bankHs $ending 2uidelines. he BankHs *ead of (redit or

@anaging #irectorF(G6 approves (redit "pplications that do not adhere tothe bank

$ending 2uidelines.

@itigating :actors

here might be some trigger points for the industry which poses serious risks. +o,

mitigating factors for those risks are identified. Aossible risks include, but are not

limited to; margin sustainability andFor volatility, high debt load leverageFgearing-,

overstocking or debtor issues< rapid growth, ac/uisition or expansion< new business

lineFproduct expansion< management changes or succession issues< customer or

supplier concentrations< and lack of transparency or industry issues. #etailed analysi

of risks and their mitigating factors are also analy!ed.

$oan +tructure

he amounts and tenors of financing proposed are >ustifiedbased on the pro>ected

repayment ability and loan purpose. Gxcessive tenor or amount relative to business


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needs increases the risk of fund diversion and may adversely impact the borrowerHs

repayment ability.

+ecurity

" current valuation of collateral is obtained and the /uality and priority of security

being proposed are assessed. $oans are not granted based solely on security.

"de/uacy and the extent of the insurance coverage are assessed. "ny protective

covenants or conditions are also advised in this module.

ame $ending

(redit proposals do not unduly rely on the sponsoring principalHs reputation, reported

independent means, or their perceived willingness to in>ect funds into various busine

enterprises in case of need. hese situations are discouraged and treated with great

caution. ?ather, credit proposals and the granting of loans are based on sound

fundamentals, supported by a thorough financial and risk analysis.

?isk 2rading

he bank has adopted a credit risk grading system. he system defines the risk profilof borrowerHs to ensure that account management, structure and pricing are

commensurate with the risk involved. ?isk grading is a key measurement of the

BankHs asset /uality, and as such, it is essential that grading is a robust process. "ll

facilities are assigned a risk grade. )here deterioration in risk is noted, the ?isk

2rade assigned to a borrower and its facilities should be immediately changed.

Borrower ?isk 2rades are clearly stated on (redit "pplications.

In the (?2 prescribed by the Bangladesh Bank a borrower was given scores

according to the key financial ratios and management of the borrowing company. h

process almost covers all the aspects of business operation related with extending

credit facilities. "fter giving score to each point the total score is calculated. " risk

rating system is there in place to rate the calculated total score. he risk rating system

has eight scoring slabs. he more score any company gets the better the risk grading

is. In brief the (?2 rating system is given below;

-able 2+ C,G (cores Band'isk 'ating rade cores

+uperior 3 $ow risk % O9&

2ood 3 +atisfactory

risk

4 O&

"cceptable 3 :air

?isk

C &3E

@arginal 3 )atch

$ist

E 8&3E

+pecial @ention & &&38E

+ubstandard 8 E&3&E


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#oubtful C&3EE

Bad and $oss PC&

Appro#al Authorit*

he authority to sanctionFapprove loans is clearly delegated to senior credit executives bythe @anaging #irectorF(G6 D Board based on the executive s knowledge and experience.he following guidelines are followed in the approvalFsanctioning of loans;

N(redit approval authority must be delegated in writing from the @#F(G6 D Board.

N#elegated approval authorities must be reviewed annually by @#F(G6FBoard.

Nhe credit approval function should be separate from the marketingFrelationship

management ?@- function.

Nhe role of (redit (ommittee may be restricted to only review of proposals i.e.

recommendations or review of bank s loan portfolios.

N"pprovals must be evidenced in writing, or by electronic signature. "pproval records

must be kept on file with the (redit "pplications.

N"ll credit risks must be authori!ed by executives within the authority limit delegated to

them by the @#F(G6. he LpoolingM or combining of authority limits should not be

permitted.

N(redit approval should be centrali!ed within the (?@ function. ?egional credit centers

may be established, however, all large loans must be approved by the *ead of (redit

and ?isk @anagement or @anaging #irectorF(G6FBoard or delegated *ead 6ffice

credit executive.

Nhe aggregate exposure to any borrower or borrowing group must be used to determine

the approval authority re/uired.

N"ny credit proposal that does not comply with $ending 2uidelines, regardless of

amount, should be referred to *ead 6ffice for "pproval

(e"re"ation of Duties


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"t #B$ the following lending functions are segregated to comply with the Bangladesh

Banks guidelines.

N(redit "pprovalF?isk @anagement

N?elationship @anagementF@arketing

Compliance of Basel II in Credit ,isk Mana"ement of Dhaka Bank Limited

N(redit "dministration

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

department, to impose controls over the disbursement of authori!ed loan facilities and obtai

an ob>ective and independent >udgment of credit proposals.

Internal Audit#B$ has an internal audit department which is responsible for auditing all departments. h

audits are done generally in annual basis. It takes the ?egulatory (ompliance, Internal

Arocedures, $ending 2uidelines and Bangladesh Bank ?e/uirements in view.

Credit Monitorin""t #B$ a separate credit monitoring unit is working at *6 level where the following is

monitored and necessary follow up is done with branches;

o Gxcess 6ver the $imits G6$-

o Aast #ue Arincipal or Interest

o Breach of $oan (ovenants

+pecial emphasis is given on the loans with classification status, like special mention

account, sub3standard, doubtful and bad and loss.

Credit ,isk Mana"ement and Basel accords(redit ?isk @anagement is a comprehensive package for protecting the Banks from risk of

failure as credit risk covers 907 of the total risk of any Bank. But, (?@ does not appear to

be the foolproof solution for credit risk. umerous Banks have been bankrupted though

there was a credit risk management system. "s banks gives loan to the client from the

depositors money, failure of bank harms the depositors directly. hough there is a credit


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management system is place in almost every bank of the world, there is no set standard for

(?@. (redit facilities were given to customers with no ability to repay. @alpractice, fraud

and other irregularities are also responsible for giving loan to defaulters. o solve this

problem and to insulate the depositors from losses the concept of capital ade/uacy has been

given birth to. (apital ade/uacy is defined as the minimum level of capital, which is

re/uired to protect a bank from portfolio losses. *owever, debate on the /uantum of

minimum level of capital seems to be never ending. hough different methods and

approaches were adopted in Compliance of Basel II in Credit Risk Management of Dhaka

Bank Limited. #ifferent points in time, they were insufficient to capture new dimensions an

magnitudes of risk emanated from the continuous innovations in the domestic and

international business. (onse/uently the %90s and 0s experienced many uncertainties and

volatilities that caused serious banking problems. he approach that a bank s capital shouldbe linked to afied ratio of its time and demand liabilities went under strong criticism on th

ground that bank s ma>or risk is derived from the riskiness of its assets. he Basel

(ommittee, based on this idea, designed (apital ?egulation in %9, which is known as theBasel "ccord I.

Basel IBasel I was an international accord to set minimum levels of capital for banks, buildin

societies and other deposit taking institutions. It was designed to create a level playing fie

for lenders from different countries and to ensure that lenders were sufficiently we

capitali!ed to protect depositors and the financial system.

wo fundamental ob>ectives of the "ccord were a- to strengthen the soundness and stabili

of the international banking system and b- to obtain a high degree of consistency in iapplication to banks in different countries with a view to diminishing an existing source

competitive ine/uality among international banks. o that end, the accord re/uires th

banks meet a minimum capital ratio that must be e/ual to at least percent of total risk

weighted assets.

hough at first only credit risk was incorporated, in %998 market risk was also incorporate

in this accord. Basel I implementation in Bangladesh started at %998. But the implementatio

was only in the credit risk section.

Criticism of Basel I*owever, the "ccord has been widely critici!ed for its failure to achieve the stated

ob>ectives. +ince it introduced risk3based capital re/uirement, which was adopted by many

developed and developing countries as well, it was expected that the "ccord would help to

strengthen financial system stability and reduce banking and financial crises. 6n the

contrary, banking crises again occurred in %990s even in some robust economies of Gast


23/25

"sia. he "ccord was also critici!ed for the inherent weaknesses in the model as detailed

below. ?odrigue! 4004- and others argue that the use of arbitrary risk categories and

arbitrary weights that bear no relation to default rates incorrectly assume that all assets

within one category are e/ually risky. :or example, a loan to a well3established company

such as Beximco Aharma or +/uare Aharmaceuticals is considered as risky as a loan to a ne

company established by a new entrepreneur. $oans made to companies in the non3trading

sector of the economy are considered as risky as loans made to companies in the trading

sector, even though the latter are usually less risky than the former. he risk assessment

methodology is flawed in the sense that it assumes a portfolio s total risk is e/ual to the sumof the risks of the individual assets in the portfolio. o account is taken of portfolio

management strategies, which can greatly reduce the overall risk of a portfolio, or of the si!

of a portfolio, which can greatly influence its total risk profile.

he accord gives preferential treatment to government securities, which are considered risk

free. he sovereign debt defaults of ?ussia in the summer of %99 and "rgentina in early

4004 demonstrated that government debt is not a risk free investment. 6ther criticismsinclude that the accord sets capital standards only for credit risk i.e., the risk of counterpart

failure-, but not for other types of risk such as operational risk and market risk.

(onse/uently, capital re/uirement was not reflective of economic risk. It has not provided

enough incentive for risk management, risk mitigation and innovation in risk management

such as arbitrage opportunities through securiti!ation.

)hen the "ccord was formali!ed, no consensus and consultation were taken from the

representatives of the developing nations. herefore, it is sometimes critici!ed as 6G(#

(lub3rule. @c#onough 4000- argues that as banks have developed innovative techni/ues

for managing and mitigating risk, credit risk now exists in more complicated, less

conventional forms than is recogni!ed by the %9 "ccord, thus rendering capital ratios, as

presently calculated, less useful to banking supervisors. he financial world has changed

dramatically over the past do!en years, to the point that the "ccord efficacy has eroded

considerably @c#onough, 4000-.

%&/ (wot Anal*sis

he swot analysis provides opportunities to examine the internal strengths and weaknesses

of the organi!ation. Both manufacturing and service oriented business organi!ations start to

possess some weakness as time elapse. he weaknesses of an organi!ation can be turned in

opportunities if recogni!ed on time. @oreover, overlooking any threat may result in loosing

valuable business opportunities. It also allows examining the opportunities as well as

potential threats. he +)6 analysis for #haka Bank is as follows;


24/25

(tren"th+ he Bank provides /uality service to the clients compared to its other contemporary

competitors.

Gxperienced bankers and corporate personal have formed the management of the

bank which formulates the core business strategies. +ome services of the bank are automated which attracts large number of clients. :or

instance, the bank provides "utomated eller @achine "@- services in several

locations.

he bank will very recently introduce on line banking which will enable it to automa

all of its operations. "t present, several banking functions are performed by

computers. he bank is also a member of +)I: +ociety for )orldwide Inter bank

:inancial elecommunication- "lliance "ccess which enables the bank to exchange

critical financial messages swiftly and cost effectively.

he bank has earned customer loyalty as organi!ational loyalty.

#haka Bank has already achieved a goodwill among the clients that helps it to retain

valuable clients.

3eakness+ #elegation of authority is centrali!ed which makes the employee to reali!e less

responsibility. hus, the employee morale is deteriorated.

he credit proposal evaluation process is lengthy. herefore, sometimes valuable clients are

lost and the bank becomes unable to meet targets.

o substantive use of "nnual (onfidential ?eport performance evaluation form of the

employee- to reward or to punish the employee. *ence the employee becomes ineffective.

he bank lacks aggressive advertising and promotional activities to get a broad geographica

coverage.

he bank has only a few "@ booths and not in proper places. +o, the scope of using "@

card is limited.

(omputer facility for all the officers is not available. @oreover, all the officers have no

computer knowledge.

he bank has no any research and development division.

!pportunit*+

he bank can introduce more innovative and modern customer services to better survive in

the competition. :or example, the bank can introduce credit cards and go for merchant

banking.

he bank can offer micro credit business for individual and small business.

he bank can diversify its portfolio by introducing new sector.


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@any branches can be opened to reach the BankHs services in remote locations.

he bank can recruit experienced, efficient and knowledgeable workforce as it offers

attractive compensation package and good working environment.

Threats:"* !issatisfied Customers:@ost of the companies are satisfied with the products offered b

!+,, $,Nbut the poor customer supportF service is creating a lot of dissatisfactio

among the customers, this can prove to be a serious problem as far as the market reputatio

of the bank is concerned and can be a ma>or threat in future business ac/uisition.

2* .ver im/roving nationali0ed banks:o compete with the private banks and governme

giving them a free hand to do so, it can prove to be serious threat for banks like !+,

$,N.

Documents

Parag Main