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Report of Summit Power Ltd.
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Credit Risk Grading of Summit Power ltd
Chapter-01
Introduction on Report
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Credit Risk Grading of Summit Power ltd
1.1 Origin of the Report .
BBA academic program is the building up to the theoretical knowledge about
business administration which is the base of practical knowledge. For Example, in
our 7th semester we are experiencing about the credit management system of an
organization. Our course namely “Credit Management” introduces us how to
manage the credit of an organization. For being practical knowledge, we select
“Summit Power Limited”. And our key topic of study is “Performance
Evaluation and Credit Risk Management of Summit Power Limited.” It was
assigned to us by our course teacher, Md. Abdul Mannan. It was a challenge for us
to complete a report on such an important topic. But we have completed this report
successfully thanks to continuous supervision of our academic supervision Md.
Abdul Mannan.
1.2 Background of the study .
This report has been prepared based on Summit Power Ltd. All information is
secondary and collected from Internet, Brochures, annual report etc. Based on
this information ratio has been calculated. For the calculation of ratio has been
calculated to measure the current position of the Summit Power Ltd. At the same
time compare with the market performance.
1.3 Objective of the study .
The objective of the report is to provide a clear description of Summit Power Ltd. It also provides an exposure of practices of different activities of Summit Power Ltd. Observing the existing rules for Credit Risk management policy and fulfilling the partial requirement of BBA program is another objective of the report.
We have completed our report on Summit Power Ltd. And this report is about this organization. As one of the main objectives of report is to gather practical experience on credit risk management system, we have tried to put some of the experiences that we have learnt from our report.
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Credit Risk Grading of Summit Power ltd
1.3.1 Primary Objective:
Primary objective of this report is to measure and analyze the operational and financial
performance of Summit Power Ltd.
To analysis the pros and cons of the conventional ideas about credit
operation of Summit Power Ltd.
To have better orientation on credit management activities specially credit
policy and practices, credit appraisal, credit-processing steps, credit
management of Summit Power Ltd.
To analyze the credit risk management system of the Summit Power Ltd.
under the guideline of the Bangladesh Bank (BB).
To analyze the credit performance of SPL based on ratio analysis, SWOT
analysis, trend analysis and regression analysis.
1.3.2 The specific objectives of this report are –
To present an overview of Summit Power Ltd.
To appraise the performance of Summit Power Ltd.
To apprise financial performance of Summit Power Ltd.
To identify the problems of Summit Power Ltd.
To recommend/ remedial measures of the development of Summit Power
Ltd.
1. 4 Scope of the Report .
The scope of credit risk management is vast and wide. Basically, this report is
composed with two parts: Policy guideline and analysis. The policy guideline part
includes the general procedures and techniques of credit risk management and the
guideline imposed by the Bangladesh Bank. The analysis part includes how
actually the SPL follows and practices credit risk management system. Together
these statements give-
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Credit Risk Grading of Summit Power ltd
A proper and clear idea about the credit risk management techniques.
The practice of credit risk management by the commercial bank of
Bangladesh.
Whether the banks are success or not through using the credit risk
management techniques.
1.5 Source of information .
Information collected to furnish this report is both from primary and secondary in
nature. We collected primary information by direct conversation with the credit
officers. Sources of secondary information were Annual Report of SPL. We also
studied different books on Finance and Credit and searched through Internet for
more information.
1.6 Limitations of the Report .
In spite of having the wholehearted effort, there exits some limitations. The
limitations were:
Lack of in-depth knowledge and analytical ability for writing such report.
Inadequacy and lack of availability of required Current data and official
secrecy.
Limitation of time was a major constraint in making a complete study, due
to time limitation.
Lack of comprehension of the respondents was the major problem that
created a lot of confusion regarding verification of conceptual question.
As being students, it also created some problems as we were unable to
acquire hands-on-experience in all the departments, due to the organization’s
policy of maintaining secrecy and also because we did not get the opportunity in
all the departments.
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Credit Risk Grading of Summit Power ltd
1.7 Methodology .
For preparing the Report, the following methodology is adopted-
Populations and samples
Sources of data:
This Report is an exploratory and descriptive one in nature. Among primary and
secondary source most of the data has been collected from the secondary sources.
Primary sources of information:
1) Face to face conversation with the officials.
Secondary sources of information:
1) Credit Policy Manual of the Banks.
2) Prudential Guidelines on Credit Risk Management issued
by Bangladesh Bank.
3) Annual report of SPL.
4) www.bangladesh-bank.org/5) www.summitpower.org
Analysis:
The following analysis have been done to measure the credit performance of the
SPL-
Credit Risk Analysis following credit risk grading manual.
Ratio analysis,
SWOT analysis,
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Credit Risk Grading of Summit Power ltd
Chapter-2
An overview of Summit Power Ltd
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Credit Risk Grading of Summit Power ltd
2.1 Background of the Summit Power Ltd .
Summit Power Ltd. is the pioneer in the private sector power production field in
Bangladesh. Summit Power is the largest local Independent Power Producer. SPL is also
the first power generating company to be listed in the local stock exchanges.
Summit Power Limited (SPL), a company Summit Group, is the first Bangladeshi
Independent Power Producer (IPP) in Bangladesh and until now the only local company
in private electricity generation and supply business providing power to national grid.
SPL was incorporated in Bangladesh on March 30, 1997 as a Private Limited Company.
On June 7, 2004 the Company was converted to Public Limited Company under the
Companies Act 1994.
Summit Group is one of the leading investment and industrial business house in
Bangladesh. The major sectors in which the group is currently investing in include
power generation, port such as container freight station, tank terminal, shipping,
property development, construction, civil & hydro engineering & trading.
The sponsors of Summit group are interested in infrastructure sectors in
Bangladesh and abroad. This has led to the establishment of the first barge
mounted power plant in Bangladesh namely Khulna Power Co. Ltd, Liquefied
Petroleum Gas (LPG) plant in gas starved area at Mongla Bagerhat, 54 km long
gas pipeline of 30 inches diameter from Ashugonj to Hobiganj, Container Freight
Station in Chittagong etc. The company is also exploring energy markets in Sri
Lanka and Vietnam which have emerging energy sector open to investment.
Summit Power Limited has successfully established in the year 2001 three power
plants each with 11 MW capacities for sale of electricity to Rural Electrification
Board (REB) under build, own and operate basis at Savar, Narsingdi, and Comilla.
The company has already expanded its total generation capacity to 105 MW.
Summit Power Limited is going to implement another four power plants totaling a
capacity of 110 MW through its two subsidiary companies Summit Uttaranchol
Power Company Limited and Summit Purbanchol Power Company Limited.
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Credit Risk Grading of Summit Power ltd
2.2 At present Summit Power Ltd .
Local Summit Group and US General Electric (GE) signed an agreement on
Thursday with IDLC to receive $115 million from the World Bank’s Investment
Promotion Facilitation Fund to implement two 341-megawatt power projects in
Bibiyana.
On the same day, the two companies signed another deal with Janata Bank and
Industrial and Infrastructure Development Finance Company (IIDFC) to raise Tk
1,500 crore through zero-coupon bonds. This fund will be pumped into the
Meghnaghat dual fuel 335MW power project.
Summit was awarded the Bibiyana gas-fired projects and the Meghnaghat power
project about four months back. The Bibiyana projects will need $560 million (Tk
3,920 crore) and Meghnaghat Tk 2,100 crore investment.
The Thursday’s deal ensures a large part of financing for these three power
projects expected to begin production in early 2013 of the cheapest electricity
costing less than Tk 2 per kilowatt hour.
Summit Group Chairman Muhammed Aziz Khan said Janata Bank and IIDFC
would provide Summit with Tk 1,500 crore against a sanction of Tk 2,100 crore
financing. The remaining Tk 600 crore is deducted as advance interest for the next
four years.
“As infrastructure like this has long gestation periods, zero-coupon bonds enable
companies to implement these projects with an optimised cash flow.”
The bonds carry a 5 percent discount and 12 percent convertible to the shares of
Summit Meghnaghat Power Company at net asset value of the company.
Summit Power Ltd has recently become the lowest in yet two more power tenders,
Syedpur 100MW power plant and Shantahar 50MW power plant. Reports say the prime
minister signed the work award orders on January 21.
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Credit Risk Grading of Summit Power ltd
2.3 Mission .
To expand the company into a power generation capacity to the tune of 1000 MW,
which is 20% of the electricity requirement of Bangladesh. Summit Power
Limited’s motto: "Empowering Bangladesh, we can & we will."
2.4 Vision .
To provide quality and uninterrupted electricity to vast majority of rural Bangladesh for
their personal, social economic development.
2.5 Objective .
Generate and provide uninterrupted reasonably priced electricity to our
customers
Efficient utilization of capital, machines, material and human resources
Continuous improvement of customer satisfaction and resource
management
2.6 Projects .
(a) Ashulia Power Plant:
This project was set up to provide electricity for Dhaka Palli Bidyut Samity under 15-years Power Purchase Agreement (PPA) with Rural Electrification Board (REB). An implementation agreement has also been signed with the government of Bangladesh (GoB).
After signing expansion agreements with REB and GoB, Summit Power has increased this plant’s production capacity by 33.75 MW with the total output being 45 MW.
(b) Narsingdi Power Plant:
This project was set up to provide electricity for Narsingdi Palli Bidyut Samity under 15-years Power Purchase Agreement (PPA) with Rural Electrification Board (REB). An implementation agreement has also been signed with the government of Bangladesh (GoB).
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Credit Risk Grading of Summit Power ltd
After signing expansion agreements with REB and GoB, Summit power has increased
this plant’s production capacity by 24.30 MW with the total output being 35 MW.
(c) Comilla Power Plant:
This project was set up to provide electricity for Comilla Palli Bidyut Samity under 15-
years Power Purchase Agreement (PPA) with Rural Electrification Board (REB). An
implementation agreement has also been signed with the government of Bangladesh
(GoB).
After signing expansion agreements with REB and GoB, Summit power has increased
this plant’s production capacity by 13.50 MW with the total output being 25 MW.
Summit Uttaranchol Power Company Limited
(d) Ullapara Power Plant
This project was set up to provide electricity for Sirajganj Palli Bidyut Samity under 15-
years Power Purchase Agreement (PPA) with Rural Electrification Board (REB). An
implementation agreement has also been signed with the government of Bangladesh
(GoB).
The total output being 11 MW.
(e) Maona Power Plant
This project was set up to provide electricity for Maymensingh and Gazipur Palli Bidyut
Samity under 15-years Power Purchase Agreement (PPA) with Rural Electrification
Board (REB). An implementation agreement has also been signed with the government of
Bangladesh (GoB).
The total output being 33 MW.
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Credit Risk Grading of Summit Power ltd
(f) Jangalia Power Plant
This project was set up to provide electricity for Comilla Grid Substation under 15-years
Power Purchase Agreement (PPA) with Bangladesh Power Development Board (BPDB).
An implementation agreement has also been signed with the government of Bangladesh
(GoB)
The total output being 33 MW.
(g) Rupganj Power Plant
This project was set up to provide electricity for Narayanganj Palli Bidyut Samity under
15-years Power Purchase Agreement (PPA) with Rural Electrification Board (REB). An
implementation agreement has also been signed with the government of Bangladesh
(GoB).
The total output being 33 MW.
2.7 Board of Directors .
Chairman Mr. Muhammed Aziz Khan
Managing Director
Mr. Syed Ali Jowher Rizvi
Directors
Mrs. Anjuman Aziz Khan
Mrs. Sobera Ahmed Rizvi
Mr. Mohammad Latif Khan
Ms. Ayesha Aziz Khan
Mr. Syed Yasser Haider Rizvi
Ms. Adeeba Aziz Khan
Mr. Syed Nasser Haider Rizvi
Mr. Faisal Karim Khan
Ms. Azeeza Aziz Khan Alternate
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Credit Risk Grading of Summit Power ltd
2.8Management Committees : .
Audit CommitteeMr. Abbas Uddin Ahmed ChairmanMr. Tauhidul Islam, Managing Director MemberMs. Ayesha Aziz Khan, Director(Finance) MemberMr. A.N.M Tariqur Rashid, Executive Director(P&D) MemberMr. Mahmud Hasan FCMA, Financial Controller MemberExecutive CommitteeMr.Tauhidul Islam, Managing Director ChairmanMr. Md. Latif Khan, Director MemberMs. Ayesha Aziz Khan, Director (Finance) MemberDr. Mirza Khairuzzaman, Senior Executive Director MemberMr. A.N.M Tariqur Rashid, Executive Director(P&D) MemberMr. Mahmud Hasan FCMA, Financial Controller MemberPurchase CommitteeMr. Md. Latif Khan, Director ChairmanMr. Tauhidul Islam, Managing Director MemberMr. A.N.M Tariqur Rashid, Executive Director(P&D) MemberMr. Mahmud Hasan FCMA, Financial Controller MemberTechnical CommitteeMr. A.N.M Tariqur Rashid, Executive Director(O&M) ChairmanMr. Solaiman Patwary, General Manager (O&M) MemberMr. Abdus Sobhan, General Manager (P&D) MemberMd. Nazrul Islam Khan, Manager (E&I) MemberMr. A.K.M. Asadul Alam Siddique, Plant Manager MemberOperation &smp; Maintenance CommitteeMr. Faisal Karim Khan ChairmanMr. A.N.M Tariqur Rashid, Executive Director(O&M) MemberMr. Solaiman Patwary, General Manager (O&M) MemberMd. Nazrul Islam Khan, Manager (E&I) MemberIn charge of Plants Member
2.9 Senior Executives : .
Dr. Mirza Khairuzzaman, Senior Executive DirectorA.N.M. Tariqur Rashid, Executive Director
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Credit Risk Grading of Summit Power ltd
Md. Solaiman Patwary, General Manager (Operation & Maintenance)Md. Abdus Sobhan, General Manager (Planning & Development)Mahmud Hasan FCMA, Financial Controller & Company SecretaryMd. Nazrul Islam Khan, Manager (Electrical & Instrumentation)Mr. A.K.M. Asadul Alam Siddique, Plant Manager, Comilla Power PlantCommander M Emdadul Haque, (E), psc, BN (Retd)Md. Sirajul Islam, Plant Manager,Narshingdi Power plantMd. Nazmul Hasan, Plant Manager, Rupganj Power PlantMd. Fazle Elahi Khan, Plant Manager, Jangalia Power Plant
2.10 Success Milestones : .
Incorporation of the company March 30, 1997
Signing of Project Agreements With REB & GOBFebruary 10,
2000
Commercial operation at SavarFebruary 8,
2001
Commercial operation at Madhabdi April 1, 2001
Commercial operation at Comilla June 08,2001
Conversion from Private to Public June 07, 2004
Appointment of Issue ManagerJanuary 13,
2005
Credit Rating by CRISL March 29, 2005
Agreement with CDBL June 19,2005
Approval of Prospectus from SEC June 25, 2005
Signing of Project Agreements for expansion at Madhabdi and Comilla
with REB & GOBJune 28, 2005
Publication of Prospectus June 28, 2005
Subscription Opens August 27, 2005
Allotment of IPO sharesOctober 03,
2005
Listing with CSEOctober 23,
2005
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Credit Risk Grading of Summit Power ltd
Listing with DSENovember
10,2005
First Trading in Stock ExchangesNovember 15,
2005
Signing of Project Agreements for expansion at Savar with REB & GOB March 20, 2006
Commercial operation at Comilla expansion projectNovember 15,
2006
Commercial operation at Madhabdi expansion projectDecember 16,
2006
Incorporation of the Summit Purbanchol Power Company Limited (99%
subsidiary of Summit Power Limited)
August 15,
2007
Incorporation of the Summit Uttaranchol Power Company Limited (99%
subsidiary of Summit Power Limited)
August 15,
2007
Increase the Authorized Share Capital of the Company (SPL) through
EGM for issuance of Rights Share at the ratio of 5:4
September 29,
2007
Signing of Project Agreements with REB, BPDB 7 GOB to implement
total 110 MW power plants (04 nos) through its two subsidiary
companies.
October 11,
2007
Commercial Operation at Savar expansion projectDecember 04,
2007
2.11 Financial Highlights: .
Capital and Reserves :
Basic Information Of current Year:
Authorized Capital in BDT (mn) : 10000.0
Paid-up Capital in BDT (mn) : 3034.0
Reserve & Surplus in BDT (mn) : 1184.17
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Credit Risk Grading of Summit Power ltd
Capital structure
71%
21%
8%
Authorized Capital inBDT* (mn)
Paid-up Capital in BDT*(mn)
Reserve & Surplus inBDT* (mn)
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Credit Risk Grading of Summit Power ltd
Assets, Liabilities and Owener’s Equity:
Position of SPL in Accounting period 2009-10
Turnover:
SPL has a upword turnover history over the last five year. It indicates this company is operated with smothness.
Financial position
2223.94, 10%
698.52, 3%
5756, 25%
4352.97, 19%
10121.06, 43%
total assets
total liability
paid up capital
net profit
shareholder equity
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Credit Risk Grading of Summit Power ltd
Assests:
SPL strategically go ahead with a conception of increasing the total assets of it. The following table and graph show it clearly.
Year 2009 2008 2007 2006 2005
Current Assents 1174 642.55 478.59 253.79 385.63Total Assents 10121.1 6707.12 4097.69 2782.7 1588.23
Current Assets & Cureent Liabilities:
Every Organization needs to overlock on the position of current assets and cureent liabilities since it shows the effienciency of a company. Standard level of current assets and current liabilities ratio is 2:1. SPL showed over the last five year less current assets considering current liabities. The relevent information are:
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Credit Risk Grading of Summit Power ltd
Year 2005 2006 2007 2008 2009
Current Assets 385.63 253.79 478.59 642.55 1174
Current Liabilities 205.48 644.39 886.29 736.58 1326
Gross Profit & Net Profit:
Over the last five years SPL is showing a unword rising of profitability which is shown in the following table and graph.
Year 2009 2008 2007 2006 2005
Gross Profit 1510.03 945.86 586.62 310.16 283.89
Net Profit 698.52 460.21 268.1 175.1 174.21
Gross Profit Ratio:SPL showed a mixed performance for gross profit ratio. It shows performance over the capital. Following table and graph shows it clearly.
Year 2009 2008 2007 2006 2005
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Credit Risk Grading of Summit Power ltd
Gross Profit ratio (%) 52.98 54.43 51.07 53.08 54.49
Net Profit Ratio:As like gross profit ratio, Net Profit Ratio also important since it show how much
money is expanded for maintainance of an organization. SPL also showed around
a flat level performance on it.
Year 2009 2008 2007 2006 2005
Net Profit Ratio (%) 24.59 26.48 23.34 29.96 33.43
Return of Total Assets:
Net Profit Ratio
05
10152025303540
2009 2008 2007 2006 2005
Year
Taka (mn) Net Profit Ratio (%)
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Credit Risk Grading of Summit Power ltd
Return on total assets shows how effectively an organization works with its assets. In this
consideration SPL is not successful. Since over the last five years it is declining the
Return on total assests. The details are given below:
Year 2009 2008 2007 2006 2005
Return on total
Assets (%) 6.9 6.86 6.54 6.29 10.97
Earning Per Share:EPS is a key elements of showing the performance to a company or earning per share. SPL showed around a flat rate of earning over the last five years. The following table and graph show it clearly.Year 2009 2008 2007 2006 2005
Earning per share (Taka) 31.41 25.71 31.25 25.66 37.33
Return on total Assets
0
2
4
6
8
10
12
2009 2008 2007 2006 2005
Year
Taka (mn) Return on total Assets(%)
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Credit Risk Grading of Summit Power ltd
Price Earning Ratio:P/E ratio over the last five years was in upward movement of SPL. P/E Ratio is a very important element in investing of investor. It indicates the efficient performance of company.
Year 2005 2006 2007 2008 2009Price Earning Ratio (P/E) 9.46 20.64 46.65 46.69 48.04
Earning per share
05
10152025303540
2009 2008 2007 2006 2005
Year
Taka (mn
)
Earning per share (Taka)
Price Earning Ratio (P/E)
0
10
20
30
40
50
60
2005 2006 2007 2008 2009
Year
P/E (tk) Price Earning Ratio(P/E)
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Credit Risk Grading of Summit Power ltd
2.12 Financial Position At a glance:
Financial Position of SPL for fiver years show how it is smoothly operated and
continuoue its business actibities, Relevent financial information are given below:
Operating data (Take in million) 2009 2008 2007 2006 2005Operating Expenses 1339.84 791.93 1148.77 584.35 521.04Turnover 2849.87 1737.79 562.15 274.19 237.15Gross Profit 1510.03 945.86 586.62 310.16 283.89General & Admin Expenses 258.41 176.71 134.80 102.83 73.76Interest & Financial Charges 558.91 327.45 189.39 46.76 48.05Net Profit 698.52 460.21 268.10 175.10 174.21
Balance Sheet data (Taka in million)
2009 2008 2007 2006 2005
Paid up Capital 2223.94 1853.28 858.00 715.00 650.00Shareholders Equity 4352.97 3654.44 1412.13 1154.49 1044.38Total Debt 4430.00 2306.00 2268.12 1494.80 512.29Current Assets 1174.00 642.55 478.59 253.79 385.63Current Liabilities 1326.00 736.58 886.29 644.39 205.48Total Assets 10121.06 6707.12 4097.69 2782.70 1588.23Total Liabilities 5756.00 3042.97 2685.56 1628.21 543.85Financial ratios 2009 2008 2007 2006 2005Gross Profit ratio (%) 52.98 54.43 51.07 53.08 54.49Net Profit Ratio (%) 24.59 26.48 23.34 29.96 33.43Return on total Assets (%) 6.90 6.86 06.54 06.29 10.97Debt Equity ratio 56:44 45:55 62:38 56:44 33:67Others data 2009 2008 2007 2006 2005Earning per share (Taka) 31.41 25.71 31.25 25.66 37.33Dividend (%) 25.00 20.00 20.00 20.00 20.00Total no. of shares outstanding 222,39,360 1,85,32,800 85,80,000 71,50,000 65,00,000Weighted average no. of shares outstanding 222,39,360 1,78,97,346
79,84,167 68,25,000 46,66,667
Total no. of sponsors shares under lock in 43,91,683 43,91,683
45,00,000 45,00,000 45,00,000
Total no, of free float shares 178,47,677 1,41,41,117 40,80,000 20,00,000 26,50,000
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Credit Risk Grading of Summit Power ltd
Chapter 3
An overview of Credit Management
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Credit Risk Grading of Summit Power ltd
3.1 Overview : .
Credit is the heart of bank.The success and failure of bank depends largely on
efficient handling of their fund.In the past i.e.70 to 80 years ago credit was simple
because at that time lenders personally knew the borrowers.As commerce and
industry grew, the activities of credit management have changed. In the past, credit
management was only concerned about the protection of lenders’ own funds but in
the modern banking lenders are not concerned about the protection of their own
funds but also concerned with the future of the industry which borrowers own and
the protection of borrowers’ fund.In credit management , a credit officer has to do
a lot of works. For deciding to grant credit, he has to apply his common sense.
Commonsense like, what he has to ensure the safety if ha wants to invests his own
fund. For investing own funds one has to ensure the (1) Safety of his own money;
(2) recovery of his own money; and (3) actual help to others in time of need
(Srinivasa 1986,1).
Like own funds, in making granting decision , a credit officer should satisfy
himself/herself about the safety , recovery of his funds, and needs of the
borrowers. In granting decision, a credit officer should be careful because a little
bit of unconsciousness and ignorance can lead to heavy losses to the bank. This
knowledge of lending cannot be taught nor learnt by reading a expertise book but
by ones own experience and commonsense and helping attitude (Srinivasa
1986,2).
3.2 Definition of Credit : .
Encyclopedia of Banking and Finance describes the origin and defines credit as.
Credit derived from Latin word “credo” means “I believe”, and usually define as the ability to buy with a promise to pay, or the ability to obtain title to, and receive goods for enjoyment in the present although payment is deferred to a future date.
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Credit Risk Grading of Summit Power ltd
Credit is the provision of financial accommodation to a person, in return for
a promise to repay it at some future date. It may be extended as cash, or supply of
goods or services. The former type of credit is called lender credit and later is
referred as vendor credit is, it enables a person to spend in excess of his/her actual
means in present.
3.3 Credit Management : .
In the simplest form, management is the process of getting things done by others. In
the broader concept, management involves various systematic plan and actions to
achieve the goal of the organization. Credit management is the process of
accomplishing various tasks relating to deciding grant or not granting credit to
others, determination of terms and conditions, proper documentation, frequent
monitoring and reviewing the performance of borrowers and taking necessary
steps to ensure smooth recovery of credit which ensure profit maximization of the
bank.
Bank in the developing countries often do not have a well developed credit
management process and the main deficiencies of this are :
The absence of written policies.The absence of portfolio concentration limits excessive centralization or decentralization of landing authority.Poor industry analysis.A cursory financial analysis of borrowers.An excessive reliance on collateral.Infrequent customer contact.The inadequate checks and balance in the credit process.Absence of loan supervision.A failure to improve collateral position as credit deteriorates.Poor control on loan documentation.Excessive overdraft lending.Incomplete credit files.The absence of asset classification and loan loss provisioning standards, and
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Credit Risk Grading of Summit Power ltd
A failure to control and audit the credit process effectively (Diana and Clayton 1997, 32).
3.4 Steps in credit management : .
Credit management task starts from making strategic targets for credit markets and
end with recovery of credit. Broadly credit management involves the following
main steps :
First, one must determine priority sectors he/she is interested to lend and
prohibited sectors he/she is not interested to lend (Credit policy formulation),
Second, one must determine which borrowers are likely to pay their debt
(Credit investigation and analysis).
Third, one must decide how much credit he/she is prepare to extend in each
borrower (Credit approval).
Fourth, he/she must decide what evidence he/she need of indebtedness
(Documentation.
Fifth, after ha/she has granted credit, he/she has the problem of collecting the
money when its becomes due. How does he/she keep track of payments ?
(Monitoring, review, and loan recovery).
By analyzing the above steps, the study identifies the following steps in
credit management :
Strategic plan for target credit markets.Credit policy formulation.Client request/relationship marketing.Loan interviewing.Credit investigation.Credit analysis.Preparation of credit analysis report/preparation of proposal.Loan sanction, loan structuring, loan negotiation.Loan documentation.Loan disbursement.Loan monitoring/review.Problem loan identification and resolution andLoan recovery.
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Credit Risk Grading of Summit Power ltd
3.5 Changing status & Qualification of Credit Management (Evolution of credit management)
The major factor contributing to the changing status and qualifications for credit
management has been the rapid and tremendous growth of industry and
commerce. When business was mostly under the control of a sole proprietor and
relatively small in size, the approval of credit was simple and personal matter.50 to
70 years ago, it was customary that lenders were to visits market once or twice in a
year. At that time borrowers were personally known to lenders, the size of
business was small and for a number of years bookkeepers were in controls of the
credit management task. With the pace of development of commerce, the personal
relationship was lost and some other basis was needed to manage commerce
credit. It was logical that the task should fall on someone within the company. As
commerce and industry grew, it becomes apparent that the work of “bookkeeper –
credit man” would have to dividend. Parallel to the commercial and industrial
developments of the last couple of centuries a high degree of administrative
efficiency has been attained through better organization and specialization. With
the organization of the national association of credit management in U.S.A in
1896 and several other developments supported the significance of professional
credit management. Improved source of credit information; better accounting
methods, redefinition of the techniques of financial statement analysis recognized
the professional character of credit work. Significant relationships of credit to
business finance , production , marketing and financial operations of the business
sought out credit work as group and need an increased number of highly qualified
people. The complexity of modern day business and the need for specialization
created this condition, and it fostered the status held by today’s credit managers.
Now credit management has moved up to the status of an established business
group, with prerogatives, responsibilities, standards and ethics.
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Credit Risk Grading of Summit Power ltd
3.6 Components of a Standard Credit Policy .
Gupta (1995) recommended thirteen aspects for a good lending policy. The
aspects are-
1.Corporate mission statement2. Analysis of the present credit portfolio3. Board objectives of the policy4. Preffered area of lending 5. Discouraged area of lending6. Strategies to achieve the above objectives7. Exposure limits8. Liquid gap analysis9. Spread Management10. Credit expansion policy11. Combating the growing menace of NPA’s12. Industry wise specialization and13. Pricing strategy.
In addition to the above components, credit policy may contain:
1. Specification of the lending authority given to each loan officer and loan
committee (measuring the maximum amount and types of loan that each
person and committee can approve and what signatures are required)
2. Credit granting Process.
3. Lines of responsibility in making assignments and reporting information
within the loan department.
4. Operating procedures for soliciting, reviewing, evaluating and making
decision on customer loan applications.
5. Lines of authority within the bank, detailing who is responsible for
maintaining and reviewing the bank’s credit files, and
6. A discussion of the preferred procedures for detecting, analyzing, and
working out problem loan situation.
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Credit Risk Grading of Summit Power ltd
3.7 Flow Chart Of Credit Management : .
From scholarly literature, the study develops the following flow chart of credit management
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Credit negotiation (Tenor, Pricing, Repayment, Security and others
Credit analysis report
Credit analysis, purpose, business, Management figure, Credit rating
Credit investigation
Documentation
Credit structuring, Pricing, Repayment
Internal Audit
Flow chart of CM
Strategic plan for target market
Initiation, Client request, Relationship marketing
Credit approval
Credit monitoring and review
Credit policy formulation
Client interview
Credit disbursement
Handling problem credit
Recovery of credit
Credit Risk Grading of Summit Power ltd
Chapter 4
Credit Risk Management- A Brief Discussion
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Credit Risk Grading of Summit Power ltd
4.1 Credit risk management :
Credit risk is the uncertainty in a counterparty's (also called an obligor's or credit's)
ability to meet its obligations. The goal of credit risk management is to maximize a bank's
risk-adjusted rate of return by maintaining credit risk exposure within acceptable
parameters. Banks need to manage the credit risk inherent in the entire portfolio as well
as the risk in individual credits or transactions. Banks should also consider the
relationships between credit risk and other risks. The effective management of credit risk
is a critical component of a comprehensive approach to risk management and essential to
the long-term success of any banking organization.
Because there are many types of counterparties--from individuals to sovereign
governments-and many different types of obligations--Institutions manage it in different
ways. In assessing credit risk from a single counterparty, an institution must consider
three issues:
Default probability:
What is the likelihood that the counterparty will default on its obligation either over the
life of the obligation or over some specified horizon, such as a year? Calculated for a
one-year horizon, this may be called the expected default frequency.
Credit exposure:
In the event of a default, how large will the outstanding obligation be when the default
occurs?
Recovery rate:
In the event of a default, what fraction of the exposure may be recovered through
bankruptcy proceedings or some other form of settlement? When we speak of the credit
quality of an obligation, this refers generally to the counterparty's ability to perform on
that obligation. This encompasses both the obligation's default probability and anticipated
recovery rate.
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Credit Risk Grading of Summit Power ltd
4.2 Principles of Credit risk management:
While financial institutions have faced difficulties over the years for a multitude
of reasons, the major cause of serious banking problems continues to be directly related
to lax credit standards for borrowers and counterparties, poor portfolio risk management,
or a lack of attention to changes in economic or other circumstances that can lead to a
deterioration in the credit standing of a bank's counterparties.
Banks need to manage the credit risk inherent in the entire portfolio as well as the
risk in individual credits or transactions. Banks should also consider the relationships
between credit risk and other risks.
A prudent Banker should always adhere to the following general principles of
lending funds to his customers.
Background, Character and ability of the borrowers
Purpose of the facility,
Term of facility,
Safety,
Security,
Profitability,
Source of repayment,
Diversity.
Since exposure to credit risk continues to be the leading source of problems in banks world-wide, banks and their supervisors should be able to draw useful lessons from past experiences. Banks should now have a keen awareness of the need to identify, measure, monitor and control credit risk. While the exact approach chosen by individual supervisors will depend on a host of factors, including their on-site and off-site supervisory techniques and the degree to which external auditors are also used in the supervisory function. A further particular instance of credit risk relates to the process of settling financial transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the principal amount of the transaction. Even if one party is simply late in settling, then the other party may incur a loss relating to missed investment opportunities. Settlement risk thus includes elements of liquidity, market, operational and reputational risk as well as credit risk.
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Credit Risk Grading of Summit Power ltd
4.3 Internal and external risk factors of credit risk:
The landing risk is to be primarily calculated from two angles, namely, Business risk and security risk. The Business risk is again divided under two categories of risk, i.e., industrial risk and company risk, which again divided into six categories.
A form has been designed by the FSRP to help assessment of these risks. The form and a short description is given below
Credit Risk
Business Risk Security Risk
Industry Risk Company Risk Security Control Security covers
Risk Risk
Supply Risk Sales Risks
Company Position Risk Management Risk
Performance Risk Resilience Risk
Management Competency Management Integrity
Chart No-1: Flow chart of different Credit Risk
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Credit Risk Grading of Summit Power ltd
Tools used in Credit risk management
Some tools used in credit risk management, like credit analysis, credit exposure, loan
classification. These are describes below:
4.4 Credit analysis:
Credit analysis refers to the default risk analysis in which a loan officer attempts to
evaluate a borrower’s ability and willingness to repay. Generally through credit analysis
the loan officer analyze all available information to determine whether the loan meets the
bank’s risk-return objectives. To analyze credit three techniques are used:
Qualitative analysis,
Quantitative analysis and
Credit Risk Grading.
(i) Qualitative Analysis
In the qualitative analysis the bank usually analyze the 5 C’s of the customer
a) Character:
The loan officer must be convinced that the customer has a well-defined purpose for
requesting bank credit and a serious intention to repay. If the officer is not sure exactly
why the customer is requesting a loan, this purpose must be clarified to the bank’s
satisfaction. To determine the character of the borrower, banker must investigate the
following:
Customer’s past payment records.
Experience of other lenders with the customer.
Purpose of loan.
Customer’s track record in forecasting business or personal income.
Credit Rating
a) Capacity:
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Credit Risk Grading of Summit Power ltd
The loan officer must be sure that the customer requesting credit has the authority to
request a loan and the legal standing to sign a binding loan agreement. Therefore the bank
needs the following information:
Identify of customer and guarantors.
Description of history, legal structure, owners, nature of operation, products and
principal customers and suppliers for a business of the borrowers.
Copies of resolution, partnership agreements, and other legal document
a) Cash:
Here the loan officers analyze that whether they have ability to generate enough cash, in
the form of cash flow, to repay the loan or not.
b) Conditions:
The loan officer and credit analyst must be aware of recent trends in the borrower’s line
of work or industry and how changing economic conditions might affect the loan. To
assess the situation the following points should be taken into consideration:
Customer’s current position industry and expected market share.
Customer’s performance vis-à-vis comparable firms in the same nature of
business or industry.
Sensitivity of customer and industry to business cycles and changes in technology.
Labor market condition of customer’s product, impact of inflation on the industry.
Long run industry or job outlook.
Regulations, political and environmental factors affecting the customer and / or
his / her job, business and industry.
a) Collateral:
In assessing the collateral aspect of a loan request, the loan officer must ask, does the
borrower possess adequate net worth or own enough quality assets to provide adequate
support for the loan? The loan officer is particularly sensitive to such features as the age,
condition, and degree of specialization of the borrower’s assets. Bank has to consider:
Ownership of assets, Vulnerability of assets to obsolete
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Liquidation and degree in specialization of value of assets
Liens, encumbrances and restrictions against property held
Leases and mortgages issued against property and equipment
Guarantees and warranties issued to others
Bank’s relative position as creditors in placing a claim against borrower’s assets
(i) Quantitative Analysis
Using Quantitative analysis refers to the analysis of financial statement ratios to know the
past performance of a company. Some of the key ratios which serve as a tool for financial
analysis are classified as 1) Financial Ratio 2) Turnover Ratio 3) Profitability Ratio
Financial Ratio
Financial ratios indicate about the financial position of the company. A company is
deemed to be financially sound if it is in a position to carry on its business smoothly and
meet its obligations-both long-term as well as short term-without strain. Some of the
important financial ratios are: Fixed Asset Ratio, Current Ratio, Quick Ratio, Debt Equity
Ratio etc.
Turnover Ratio
The turnover ratios indicate the efficiency with which the capital employed is rotated.
They are also known as Activity or efficiency ratio. The overall profitability of the
business depends on the turnover i.e. the speed at which the capital employed in the
business rotates. The higher the rate of rotation, the greater the profitability. Some
important turnover ratios are: Fixed Assets Turnover Ratio, Working Capital Turnover
ratio etc.
Profitability Ratio
Profitability is an indication of the efficiency with which the operations of the business
are carried on. Poor operational performance may indicate poor sales and hence poor
profits. Bankers look at the profitability ratio as an indicator whether or not the
firm/company earns substantially more than it pays interest for the use of borrowed funds
and whether the ultimate repayment of their debt appears reasonably certain. The
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Credit Risk Grading of Summit Power ltd
important profitability ratios are: Overall Profitability Ratio, Gross Profit Ratio, Net
Profit Ratio etc.
(ii) Credit Risk Grading
Credit risk grading is an important part of credit analysis for credit risk management as it
helps the banks & financial institutions to understand various dimensions of risk involved
in different credit transactions. The aggregation of such grading across the borrowers,
activities and the lines of business can provide better assessment of the quality of credit
portfolio of a bank or a branch. At the pre-sanction stage, credit grading helps the
sanctioning authority to decide whether to lend or not to lend, what should be the loan
price, what should be the extent of exposure, what should be the appropriate credit
facility, what are the various facilities, what are the various risk mitigation tools to put a
cap on the risk level. At the post-sanction stage, the bank can decide about the depth of
the review or renewal, frequency of review, periodicity of the grading, and other
precautions to be taken.
4.5 Benefit of credit risk management:
Maximize the value of your risk-management activities. Effective credit portfolio
management is critical to the financial health of any company. This means setting the
right credit amount and terms at account origination and, on revolving lines of credit,
determining the right credit-line adjustments to profitably grow and retain existing
customers.
1. Gain a competitive advantage
2. Maximize the portfolio profitability
3. Make appropriate risk-reward decisions
4. Gain more control and insight
5. Manage existing customers
6. Maximize collections effectiveness
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Credit Risk Grading of Summit Power ltd
4.6 Basel Accord II Implementation in the Bangladesh Banking Sector:
Like many developing countries, implementation of Basel II is a challenging issue for
banking sector of Bangladesh. Smooth transition to Basel II requires implementation of
Basel Core Principles (BCPs) and the introduction of related risk management practices.
In a recent self-assessment study by Bangladesh Bank shows that Bangladesh is largely
compliant of BCPs. BB has also introduced risk management practices in the banking
sector since October 2003 focusing on 5(five) core risk areas such as credit risk, asset and
liability/balance sheet risk, foreign exchange risk, internal control and compliance risk
and money laundering risk. This provides a basic foundation for implementation of the
New Accord. However, the Accord is complex, requires good understanding of risk
modeling, validation and a wide historical data base. Other challenges include human
resources capacity building both in the central bank as well as in commercial banks.
Since the Accord will affect different banks in varying degrees.
If a bank's loan portfolio is allowed to be rated by external agencies such as credit rating
agencies, cautious steps need to be adapted. Good corporate governance in rating
agencies needs to be ensured to avoid cherry-picking. Since the New Accord will cause
substantial change in inspection methodology, supervisory departments of BB require
upgrading and strengthening their human resources capacity so as to avoid supervisory
lapses and shoulder their responsibilities in a professionally competent manner.
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Credit Risk Grading of Summit Power ltd
Chapter- 5
Credit assessment and risk grading
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Credit Risk Grading of Summit Power ltd
5.1 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). 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:
o Amount and type of loan(s) proposed.
o Purpose of loans.
o Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
o Security Arrangements.
5.2 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.
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Credit Risk Grading of Summit Power ltd
5.3 Credit Risk Grading Definition:
A clear definition of the different categories of Credit Risk Grading is given as follows:
Superior - (SUP) - 1
Credit facilities, which are fully secured i.e. fully cash covered.
Credit facilities fully covered by government guarantee.
Credit facilities fully covered by the guarantee of a top tier international Bank.
Good - (GD) - 2
Strong repayment capacity of the borrower.
The borrower has excellent liquidity and low leverage.
The company demonstrates consistently strong earnings and cash flow.
Borrower has well established, strong market share.
Very good management skill & expertise.
All security documentation should be in place.
Credit facilities fully covered by the guarantee of a top tier local Bank.
Aggregate Score of 85 or greater based on the Risk Grade Score Sheet.
Acceptable - (ACCPT) - 3
These borrowers are not as strong as GOOD Grade borrowers, but still
demonstrate consistent earnings, cash flow and have a good track record.
Borrowers have adequate liquidity, cash flow and earnings.
Credit in this grade would normally be secured by acceptable collateral (1st
charge over inventory / receivables / equipment / property).
Acceptable management.
Acceptable parent/sister company guarantee.
Aggregate Score of 75-84 based on the Risk Grade Score Sheet.
Marginal/Watch list - (MG/WL) - 4
This grade warrants greater attention due to conditions affecting the borrower, the
industry or the economic environment.
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Credit Risk Grading of Summit Power ltd
These borrowers have an above average risk due to strained liquidity, higher than
normal leverage, thin cash flow and/or inconsistent earnings.
Weaker business credit & early warning signals of emerging business credit
detected.
The borrower incurs a loss.
Loan repayments routinely fall past due.
Account conduct is poor, or other untoward factors are present.
Credit requires attention.
Aggregate Score of 65-74 based on the Risk Grade Score Sheet.
Special Mention - (SM) - 5
This grade has potential weaknesses that deserve management’s close attention.
If left uncorrected, these weaknesses may result in a deterioration of the repayment
prospects of the borrower.
Severe management problems exist.
Facilities should be downgraded to this grade if sustained deterioration in
financial condition is noted (consecutive losses, negative net worth, excessive leverage),
An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.
Substandard - (SS) - 6
Financial condition is weak and capacity or inclination to repay is in doubt.
These weaknesses jeopardize the full settlement of loans.
Bangladesh Bank criteria for sub-standard credit shall apply.
An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.
Doubtful - (DF) - 7
Full repayment of principal and interest is unlikely and the possibility of loss is
extremely high.
However, due to specifically identifiable pending factors, such as litigation,
liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.
Bangladesh Bank criteria for doubtful credit shall apply.
An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.
Bad & Loss - (BL) - 8
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Credit Risk Grading of Summit Power ltd
Credit of this grade has long outstanding with no progress in obtaining repayment
or on the verge of wind up/liquidation.
Prospect of recovery is poor and legal options have been pursued.
Proceeds expected from the liquidation or realization of security may be awaited.
The continuance of the loan as a bankable asset is not warranted, and the anticipated loss
should have been provided for.
This classification reflects that it is not practical or desirable to defer writing off
this basically valueless asset even though partial recovery may be affected in the future.
Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal
procedures/suit initiated.
Bangladesh Bank criteria for bad & loss credit shall apply.
An Aggregate Score of less than 35 based on the Risk Grade Score Card.
At least top twenty-five clients/obligors of the Bank may preferably be rated by an
outside credit rating agency.
5.4 How to Compute Credit Risk Grading:
The following step-wise activities outline the detail process for arriving at credit risk
grading.
Step I: Identify all the Principal Risk Components
Credit risk for counterparts arises from an aggregation of the following:
Financial Risk
Business/Industry Risk
Management Risk
Security Risk
Relationship Risk
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Credit Risk Grading of Summit Power ltd
Step II: Allocate weights to Principal Risk Components
According to the importance of risk profile, the following weights are proposed for
corresponding principal risks.
Principal Risk Components: Weight:
Financial Risk 50%
Business/Industry Risk 18%
Management Risk 12%
Security Risk 10%
Relationship Risk 10%
Step III : Establish the Key Parameters
Principal Risk Components Key Parameters:
Financial Risk Leverage, Liquidity, Profitability & Coverage
ratio
Business/Industry Risk Size of Business, Age of Business, Business
Outlook, Industry Growth, Competition &
Barriers to Business.
Management Risk Experience, Succession & Team Work.
Security Risk Security Coverage, Collateral Coverage and
Support.
Relationship Risk Account Conduct, Utilization of Limit,
Compliance of covenants/conditions &
Personal Deposit.
Table 7: Establishing key parameter in credit risk grading
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Credit Risk Grading of Summit Power ltd
Principal Risk Components: Key Parameters:
Weight:
Financial Risk 50% Leverage 15% Liquidity 15% Profitability 15% Coverage 5%
Business/Industry Risk 18% Size of Business 5% Age of Business 3% Business Outlook 3% Industry growth 3% Market Competition 2% Entry/Exit Barriers 2%
Management Risk 12% Experience 5% Succession 4% Team Work 3%
Security Risk 10% Security coverage 4% Collateral coverage 4% Support 2%
Relationship Risk 10% Account conduct 5% Utilization of limit 2% Compliance of covenants
/condition 2% Personal deposit 1%
After the risk has been identified & weights assignment process (as mentioned above),
the next steps will be to input actual parameter in the score sheet to arrive at the scores
corresponding to the actual parameters.
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Step IV Assign weightages to each of the key parameters.
Credit Risk Grading of Summit Power ltd
Step V: Arrive at the Credit Risk Grading based on total score obtained
The following is the proposed Credit Risk Grade matrix based on the total score obtained by an
obligor.
Number Risk Grading Short Name Score
1 Superior SUP 100% cash covered Government guarantee International Bank guarantees
2 Good GD 85+
3 Acceptable ACCPT 75-84
4 Marginal/Watch list MG/WL 65-74
5 Special Mention SM 55-64
6 Sub-standard SS 45-547 Doubtful DF 35-44
8 Bad & Loss BL <35
Table 8: Credit Risk Grading matrix
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5.5 CREDIT RISK GRADING SCORE SHEET:
Reference No: Date:
Borrower: Aggregate Score: _________
Risk Grading: _________
Group Name (if any):Branch:Industry/Sector:Date of Financials:Completed by:Approved by:
Number Grading Short Score
1 Superior SUP Fully cash secured, secured by Government/International
Bank Guarantee2 Good GD 85+3 Acceptable ACCPT 75-84
4 Marginal/Watch list MG/WL 65-745 Special Mention SM 55-646 Substandard SS 45-547 Doubtful DF 35-448 Bad & Loss BL <35
Criteria WeightParameter
Score Actual Paramete
r
Score ObtainedA. Financial
Risk50%
1. Leverage: (15%) Debt Equity Ratio (×) - TimesTotal Liabilities to Tangible Net worth
All calculations should be based on annual financial statements of the borrower (audited preferred).
Less than 0.25× 0.26× to 0.35 x 0.36× to 0.50 x 0.51× to 0.75 x 0.76× to 1.25 x 1.26× to 2.00 x 2.01× to 2.50 x 2.51× to 2.75 x More than 2.75×
151413121110870
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Credit Risk Grading of Summit Power ltd
2. Liquidity: (15%)
Current Ratio (×) - Times Current Assets to Current Liabilities
Greater than 2.74× 2.50× to 2.74 x 2.00× to 2.49 x 1.50× to 1.99 x 1.10× to 1.49 x 0.90× to 1.09 x 0.80× to 0.89 x 0.70× to 0.79 x Less than 0.70×
151413121110870
3. Profitability: (15%) Operating Profit Margin (%) Operating Profit ×100 Sales
Greater than 25% 20% to 24% 15% to 19% 10% to 14% 7% to 9% 4% to 6% 1% to 3% Less than 1%
1514131210970
4. Coverage: (5%) Interest Coverage Ratio (×)-Times
Earning Before Interest & Tax (EBIT)Interest on debt
More than 2.00× More than 1.51× Less
than 2.00× More than 1.25× Less
than 1.50× More than 1.00× Less
than 1.24× Less than 1.00×
54320
Total Score–Financial Risk 50
Criteria Weight Parameter
Score Actual Paramete
r
Score ObtainedB. Business/Industry
Risk 18%1. Size of Business (Sales in BDT crore)
The size of the borrower’s business measured by the most recent year’s total sales. Preferably based on audited financial statements
> 60.00 30.00 – 59.99 10.00 – 29.99 5.00 - 9.99 2.50 - 4.99 < 2.50
543210
2. Age of Business
The number of years the borrower has been engaged in the primary line of business.
> 10 years > 5 - 10 years 2 - 5 years < 2 years
3210
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Credit Risk Grading of Summit Power ltd
Criteria Weight
ParameterScore Actual
Parameter
Score Obtained
3. Business Outlook
A critical assessment of the medium term prospects of the borrower, taking into account the industry, market share and economic factors.
Favorable Stable Slightly Uncertain Cause for Concern
3210
4. Industry Growth Strong (10%+) Good (>5% - 10%) Moderate (1% - 5%) No Growth (<1%)
3210
5. Market Competition Dominant Player Moderately
Competitive Highly Competitive
210
6. Entry/Exit Barriers Difficult Average Easy
210
Total Score-Business/Industry Risk 18
CriteriaWeig
ht ParameterScore
Actual Paramet
er
ScoreObtaine
d C. Management Risk 12%
1. Experience(Management & Management Team)
The quality of management based on the aggregate number of years that the Senior Management Team has been in the industry.
More than 10 years in the related line of business
5–10 years in the related line of business
1–5 years in the related line of business
No experience
5
3
2
0
2. Second Line/ Succession Ready Succession Succession within 1-2
years Succession within 2-3
years Succession in question
4320
3. Team Work Very Good Moderate Poor Regular Conflict
3210
Total Score-Management Risk
12
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Credit Risk Grading of Summit Power ltd
CriteriaWeight
Parameter
Score
Actual Paramet
er
Score Obtain
edD. Security Risk 10%
1. Security Coverage (Primary)
Fully pledged facilities/substantially cash covered/Reg. Mortg, for HBL
Registered Hypothecation
(1st charge/1st Pari passu charge) 2nd Charge/Inferior
charge Simple
hypothecation/negative lien on assets.
No security
4
3
21
0
2. Collateral Coverage (Property Location)
Registered Mortgage on Municipal Corporation/Prime area property.
Registered Mortgage on Pourashava/semi-urban area property
Equitable Mortgage or No property but plant & machinery as collateral
Negative lien on collateral
No collateral
4
3
2
10
3. Support (Guarantee) Personal guarantee with high net worth or Strong Corporate Guarantee
Personal Guarantees or Corporate Guarantee with average financial strength
No Support/Guarantee
2
1
0Total Score- Security Risk 10
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Credit Risk Grading of Summit Power ltd
Criteria WeightParameter
Score
Actual Paramet
er
Score Obtain
edE. Relationship
Risk10%
1. Account Conduct More than 3 (three) years accounts with faultless record
Less than 3 (three) years accounts with faultless record
Accounts having satisfactory dealings with some late payments
Frequent Past dues & Irregular dealings in account
5
4
2
0
2. Utilization of Limit (actual/projection)
More than 60% 40% - 60% Less than 40%
210
3. Compliance of Covenants / Conditions
Full Compliance Some Non-Compliance No Compliance
210
4. Personal Deposits
The extent to which the bank maintains a personal banking relationship with the key business sponsors/principals.
Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits
No depository relationship
1
0
Total Score-Relationship Risk
10
Grand Total- All Risk 100
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Credit Risk Grading of Summit Power ltd
Chapter-6
Performance Evaluation of Summit Power Ltd.
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Credit Risk Grading of Summit Power ltd
The overall performance of SPL is in line with the first generation of electricity
company. Besides, the SPL has been facing decline trend in some of the
performance parameters compared to its previous performance up to 30th June
2009.However, some of the parameters has again shown upward trend in 31st
August 2008 performance. The overall Performance of the SPL is analyzed below:
6.1 CREDIT RISK GRADING SCORE SHEET Of SUMMIT
POWER Ltd as the financial performance 2009-2010:
Reference No: Date:
Borrower: Summit Power LtdAggregate Score: ______85___
Risk Grading: ___Good______
Group Name (if any):Branch:Industry/Sector: Power and ElectricityDate of Financials: 2009-2010Completed by:Approved by:
Number Grading Short Score
1 Superior SUP Fully cash secured, secured by Government/International
Bank Guarantee2 Good GD 85+3 Acceptable ACCPT 75-84
4 Marginal/Watch list MG/WL 65-745 Special Mention SM 55-646 Substandard SS 45-547 Doubtful DF 35-448 Bad & Loss BL <35
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Credit Risk Grading of Summit Power ltd
Criteria WeightParameter
Score Actual Paramete
r
Score ObtainedA. Financial
Risk50%
1. Leverage: (15%) Debt Equity Ratio (×) - TimesTotal Liabilities to Tangible Net worth
All calculations should be based on annual financial statements of the borrower (audited preferred).
Less than 0.25× 0.26× to 0.35 x 0.36× to 0.50 x 0.51× to 0.75 x 0.76× to 1.25 x 1.26× to 2.00 x 2.01× to 2.50 x 2.51× to 2.75 x More than 2.75×
151413121110870
1.27 10
2. Liquidity: (15%)
Current Ratio (×) - Times Current Assets to Current Liabilities
Greater than 2.74× 2.50× to 2.74 x 2.00× to 2.49 x 1.50× to 1.99 x 1.10× to 1.49 x 0.90× to 1.09 x 0.80× to 0.89 x 0.70× to 0.79 x Less than 0.70×
151413121110870
0.89 8
3. Profitability: (15%) Operating Profit Margin (%) Operating Profit ×100 Sales
Greater than 25% 20% to 24% 15% to 19% 10% to 14% 7% to 9% 4% to 6% 1% to 3% Less than 1%
1514131210970
25% 15
4. Coverage: (5%) Interest Coverage Ratio (×)-Times
Earning Before Interest & Tax (EBIT)Interest on debt
More than 2.00× More than 1.51× Less
than 2.00× More than 1.25× Less
than 1.50× More than 1.00× Less
than 1.24× Less than 1.00×
54320
3 5
Total Score–Financial Risk 50 38
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Credit Risk Grading of Summit Power ltd
Criteria Weight Parameter
Score Actual Paramete
r
Score ObtainedB. Business/Industry
Risk 18%1. Size of Business (Sales in BDT crore)
The size of the borrower’s business measured by the most recent year’s total sales. Preferably based on audited financial statements
> 60.00 30.00 – 59.99 10.00 – 29.99 5.00 - 9.99 2.50 - 4.99 < 2.50
543210
169 5
2. Age of Business
The number of years the borrower has been engaged in the primary line of business.
> 10 years > 5 - 10 years 2 - 5 years < 2 years
3210
13 3
3. Business Outlook
A critical assessment of the medium term prospects of the borrower, taking into account the industry, market share and economic factors.
Favorable Stable Slightly Uncertain Cause for Concern
3210
Favorable 3
4. Industry Growth Strong (10%+) Good (>5% - 10%) Moderate (1% - 5%) No Growth (<1%)
3210
20% 3
5. Market Competition Dominant Player Moderately
Competitive Highly Competitive
210
Dominant Player
2
6. Entry/Exit Barriers Difficult Average Easy
210
Difficult 2
Total Score-Business/Industry Risk
18 18
CriteriaWeig
htParameter
ScoreScore
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Credit Risk Grading of Summit Power ltd
Actual Paramet
er
Obtained
C. Management Risk
1. Experience(Management & Management Team)
The quality of management based on the aggregate number of years that the Senior Management Team has been in the industry.
More than 10 years in the related line of business
5–10 years in the related line of business
1–5 years in the related line of business
No experience
5
3
2
0
13 5
2. Second Line/ Succession Ready Succession Succession within 1-2
years Succession within 2-3
years Succession in question
4320
Ready Successi
on
4
3. Team Work Very Good Moderate Poor Regular Conflict
3210
Very Good
3
Total Score-Management Risk
12 12
CriteriaWeight
Parameter
Score
Actual Paramet
er
Score Obtain
edD. Security Risk 10%
1. Security Coverage (Primary)
Fully pledged facilities/substantially cash covered/Reg. Mortg, for HBL
Registered Hypothecation
(1st charge/1st Pari passu charge) 2nd Charge/Inferior
charge Simple
hypothecation/negative lien on assets.
No security
4
3
21
0
Reg. Mortg, for
HBL
4
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Credit Risk Grading of Summit Power ltd
CriteriaWeight
Parameter
Score
Actual Paramet
er
Score Obtain
ed
2. Collateral Coverage (Property Location)
Registered Mortgage on Municipal Corporation/Prime area property.
Registered Mortgage on Pourashava/semi-urban area property
Equitable Mortgage or No property but plant & machinery as collateral
Negative lien on collateral
No collateral
4
3
2
10
Plant & machiner
y as collateral
1
3. Support (Guarantee) Personal guarantee with high net worth or Strong Corporate Guarantee
Personal Guarantees or Corporate Guarantee with average financial strength
No Support/Guarantee
2
1
0
Personel guarante
e whith high net worth or
strong Corporate Gurrante
e
2
Total Score- Security Risk 10 7
Criteria WeightParameter
Score
Actual Paramet
er
Score Obtain
edE. Relationship
Risk10%
1. Account Conduct More than 3 (three) years accounts with faultless record
Less than 3 (three) years accounts with faultless record
Accounts having satisfactory dealings with some late payments
Frequent Past dues & Irregular dealings in account
5
4
2
0
More than 3 years
accounts with
faultless record
5
2. Utilization of Limit (actual/projection)
More than 60% 40% - 60% Less than 40%
210
>60% 2
3. Compliance of Covenants / Conditions
Full Compliance Some Non-Compliance No Compliance
210
Full Complianc
e
2
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Credit Risk Grading of Summit Power ltd
Criteria Weight
ParameterScor
e
Actual Paramet
er
Score Obtain
ed
4. Personal Deposits
The extent to which the bank maintains a personal banking relationship with the key business sponsors/principals.
Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits
No depository relationship
1
0
Personal accounts
of the key
business sponsors
1
Total Score-Relationship Risk
10 10
Grand Total- All Risk 100 85
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Credit Risk Grading of Summit Power ltd
6.2 SWOT Analysis
SWOT analysis is a basic, straightforward model that provides direction and serves as a
basis for the development of marketing plans. It accomplishes this by assessing an
organizations strengths (what an organization can do) and weaknesses (what an
organization cannot do) in addition to opportunities (potential favorable conditions for an
organization) and threats (potential unfavorable conditions for an organization). SWOT
analysis is an important step in planning and its value is often underestimated despite the
simplicity in creation
The following will briefly introduce the SUMMIT POWER’S internal strengths and
weaknesses, and external opportunities and threats as explored in the past few years.
Strength
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Summit Power is the largest local Independent Power Producer.
Satisfactory and superior asset and service quality.
Good internal capital generation.
Diversified product lines.
Experienced, expert and efficient management team especially in
credit department.
Quality risk assessment tools.Strong policy and guideline
Reputation in Stock market
Environmental stewardship 13
Strong financial performance
Strong market position
Credit Risk Grading of Summit Power ltd
Weaknesses
Opportunities
Threat
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Moderate MIS
Moderate corporate
unable to fulfill the demand of power
Weak Liquidity Position
Dependence On Purchased Power
Limited Hydroelectric Generation
Dependency on Coal
Creation of brand image
New product innovation
Government support
Efficient utilization of capital, machines, material and human resources
Summit power is interested in infrastructure sectors in Bangladesh
Focus on Renewable Energy
Implementation of New Technologies 14
Increasing Demand for Electricity
Increased Market competition
Regulatory Obligations
Legal Proceedings
Seasonal Variations and Climate
Conditions
Economic Slowdown in Bangladesh
Credit Risk Grading of Summit Power ltd
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Credit Risk Grading of Summit Power ltd
Chapter-7
Findings & Conclusion
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Credit Risk Grading of Summit Power ltd
7.1 Findings .
By analyzing the credit risk and their performance in last financial year the
following Findings have been found.
According to the credit risk grading score, SPL achieved 85 out of 100 which
indicate a sound business operation in current financial year.
As per Credit Risk Grade, SPL is categorized in group of Good.
SPL is one of the leading companies in Electricity & Power sector.
The annual turnover of SPL is around increased by double.
Paid up capital is increased by 400 million of SPL. So it is a good point to
consider as increasing growth of SPL.
The current ratio of SPL in financial year is 0.89. It indicates a less amount of
current assets considering the Ideal ratio.
They are very much strong in capital adequacy and asset quality, but their
liquidity management was not good in the last five years.
The profitability ratio indicates that in last five years SPL’s profitability
condition was good.
The credit policy of SPL is very restrictive and defensive. As a result, its loan
management is very constructive.
The expansion of business activity in current years indicates the successive
period of this is continuing.
In last five years the maximum portion of total income of SPL comes from the
selling the power and electricity which is very demanded commodity for the
public concern.
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Credit Risk Grading of Summit Power ltd
7.2 Recommendation .
At first the SPL should find out the way to Reduce its bad loan amount further,
to improve is loan performance quality.
SPL holds huge reserves and fund that are not utilized. As a result, huge
opportunity cost is incurred by SPL. So, it should be utilized more its reverse
money in productive sector.
SPL should give more emphasize on liquidity management in a balanced way.
SPL’s training programs can encourage their trainees to seek additional
education including computer classes, accounting, MBA programs and foreign
language instruction. So the training should be fully fledged.
Due to the unwanted increase of the oil price the world economy as well as
Bangladesh economy is facing a big challenging situation. So the SPL is
recommended to very careful to sanction further new plants and power
stations.
An industry wise integrated Credit Risk Grading system should be developed.
So that risk can measure for different industry of business.
Power sector is a large plant and long projected activities so it moves by a team
effort. So, strong co-ordination with the related divisions and departments is
very important
SPL is a leading company in Bangladesh for power sector, and there have a lot
of chances for expanding business in this sector. Bangladesh Government also
facilitates more in this sector for improving the power sector. So, it can a good
chance for SPL for optimizing its business.
The above recommendations will be advantageous for the commercial banks if
these are attained in case of credit risk management. As a result nonperforming
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Credit Risk Grading of Summit Power ltd
loan will be reduced as well as the financing will steer the wheel strongly in the
economy of Bangladesh.
7.3
Conclusion .
Credit risk management practices in Bangladesh are not well developed. Now
NCBs & PCB have significant amount of Bad loans and non performing loan.
Even though Bangladesh Bank have taken various steps to minimize credit risk in
NCBs and PCBs. The Lending Risk Analysis (LRA) manual introduced in 1993 by
the Bangladesh Bank has been in practice for mandatory use by the Banks &
financial institutions for loan size of BDT 1.00 crore and above. However, the
LRA manual suffers from a lot of subjectivity, sometimes creating confusion to the
lending Bankers in terms of selection of credit proposals on the basis of risk
exposure. Meanwhile, in 2003 end Bangladesh Bank provided guidelines for credit
risk management of Banks wherein it recommended, the introduction of Risk
Grade Score Card for risk assessment of credit proposals. Since the two credit risk
models are presently in vogue, the Governing Board of Bangladesh Institute of
Bank Management (BIBM) under the chairmanship of the Governor, Bangladesh
Bank decided that an integrated Credit Risk Grading Model be developed
incorporating the significant features of the above mentioned models with a view
to render a need based simplified and user friendly model for application by the
Banks and financial institutions in processing credit decisions and evaluating the
magnitude of risk involved therein. further the most important guidelines on
“Managing Core Risk in Banking” developed by the focus group under the
auspices of Bangladesh bank already implemented within the given deadline, have
made new dimension in the whole banking arena. Following implementation of
guidelines on credit risk management, entire credit operation has been streamlined
with maintaining separate demarcation among the department under credit risk
management.
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Credit Risk Grading of Summit Power ltd
Bibliography
1. Annual Report- 2005, 2006, 2007, 2008, 2009 of The SPL.
2. SPL website: http://www.summitpower.org
3. Summit group: www.summitgroupbd.com
4. Research Methodology, By-Richard Daniel & John Morgan, Published in USA,
2005 By International Research Institute of Minnesota.
5. Prudential guidelines of credit risk management.
6. Managing core risks in Banking : Credit Risk Management-Published by:
Bangladesh Bank-2005
7. Bangladesh Bank circular and guidelines-BRPD Circular No.18 dated 11.12.2008
8. Credit Risk Grading Manual_ Introduced by Bangladesh Bank, November 2005
9. Annual Term paper of Bangladesh Bank-2007
10. Economic Term paper of Bangladesh-2007
11.Bangladesh Bank Website. http://www.bangladesh-bank.org/
12. Guidelines of Basel-II implementation, By Bangladesh Bank-2009
13.Yahoo : http://www.yahooanswer.com/
14.Goggle : http://www.google.com.bd/
15.Wikipedia : http://en.wikipedia.org/wiki/Main_Page
16. Essentials of Managerial Finance – by Scoot Besley & Eugene F. Brigham
17. Ask : www.ask.com
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