internship report: crm practice of basic bank limited, bangladesh
TRANSCRIPT
Prepared By
MD. Jamal Hossain
ID: 16-050
March 2014
An Internship Report presented in partial Fulfillment of the
Requirements for the BBA program at University of Dhaka
Department of Banking & Insurancei
Credit Risk Management Practice in Banks:A Study on Basic Bank Limited
University of Dhaka
Internship Report on
Credit Risk Management Practice in Banks: A study on
BASIC Bank Limited
Submitted to:
Mr. Raad Mozib Lalon
Lecturer
Dept. of Banking and Insurance
University of Dhaka
Submitted by:
MD. Jamal Hossain
ID: 16-050
Dept. of Banking and Insurance
University of Dhaka
ii
Date of Submission: 6th March, 2014
March 6, 2014
Mr. Raad Mozib Lalon
Lecturer
Dept. of Banking and Insurance
University of Dhaka
Subject: Submission of Internship Report on ‘ Credit Risk
Management Practice in Bank: A Study on BASIC Bank Limited .’
Dear Sir,
With due respect, I would like to submit my internship report on
‘Credit Risk Management Practice in Bank: A Study on Basic Bank
Limited, Bangladesh.’ I have completed my internship report as
part of the course requirement of BBA program under your
supervision. It has been a worthwhile experience for me
undertaking such a report work to get exposure to the real life
of a banking organization. I am grateful for your guidelines and
iii
directions. I tried to put my best effort for the preparation of
this report.
Hereby, I hope that you would be kind and generous enough to
accept my sincere effort and oblige thereby. It will be my
pleasure to answer any clarification regarding this report.
Sincerely yours,
MD Jamal Hossain
ID: 16-050
………………………………
iv
Certificate of the Supervisor
To Whom It May Concern
This is to certify that the internship report on “Credit Risk
Management Practice in Bank: A Study on BASIC Bank Limited” for
the degree of Bachelor of Business Administration (BBA) major in
Banking & Insurance from University of Dhaka carried out by MD
Jamal Hossain, Id # 16-050 under my supervision. No part of
the internship report has been submitted for any degree, diploma,
title, recognition before.
………………………………
Mr. Raad Mozib Lalon
Lecturer
Department of Banking and Insurance
University of Dhaka
v
Declaration
I do hereby solemnly declare that the work presented in this
Internship Report titled “Credit Risk Management Practice in
Bank: A Study on BASIC Bank Limited” is an original work done by
me under the supervision of Mr. Raad Mozib Lalon, Lecturer,
Department of Banking & Insurance, and University of Dhaka.
No part of this report has been previously submitted to any other
University/ College/ Institution/ Organization for any academic
certificate/ degree/ diploma/ qualification.
The work I have presented does not breach any existing copyright
and no portion of this copied from any work done earlier for a
degree or otherwise.
I further undertake to indemnify the Department against any loss
or damage arising from breach of the forgoing obligation, if any.
………………………………
MD Jamal Hossain
Id # 16-050
Department of Banking & Insurance
vi
Faculty of Business Studies
University of Dhaka
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Acknowledgement
First and foremost, I would like to express my deep gratitude to
the almighty Allah for giving me the ability to complete the
report within the due time and without any major tribulations.
I would like to express heartiest gratitude to my academic
supervisor Mr. Raad Mozib Lalon for his important suggestions,
excellent guidelines and supervisions for preparing this
internship report on ‘Credit Risk Management Practices in Banks:
A study on Basic Bank Limited’. I would also like to give thanks
to Mr. Abdus Sattar Khan, AGM, Uttara Branch, BASIC Bank Limited
for his kind concern and consideration regarding my academic
requirements as my external supervisor. Also I express special
gratitude to all the other employees of Uttara branch of BRAC
Bank Limited who have shared their knowledge regarding banking
with me.
Finally, I would like to convey my gratitude to my parents,
teachers, friends and many others who extend their support to
prepare the report.
viii
Executive Summary
Credit risk is one of the most vital risks for any commercial
bank. Credit risk arises from the failure of the borrower to pay
the installments of the loan regularly. It may arise from either
an inability or an unwillingness to perform in the pre-commitment
contracted manner. The real risk from credit is the deviation of
portfolio performance from its expected value. The credit risk of
a bank is also effect the book value of a bank. The more credit
of a particular is in risk, the more probability of a bank to be
insolvent. Globally, more than 50% of total risk elements in
Banks and Financial Institution (FI) s are credit risk alone.
Thus managing credit risk for efficient management of a FI has
gradually become the most crucial task. Credit risk management
encompasses identification, measurement, matching mitigations,
monitoring and control of the credit risk exposures.
In my whole report, I was working on the credit risk Management
of BASIC Bank Limited. I have collected last five year financial
data of BBL about credit risk management. In my analysis I have
showed a comprehensive overview about CRM in different phase of
my report. First, I have showed the importance, advantage,
challenges and process of CRM. Then I have described about the
CRM practice and performance of BBL. Finally, I analyze the
impact of CRM on banks financial performance. I have used Ms
ix
Excel to analyze the data. I have also used SPSS software to
compare relationship between CRM and banks profitability. After
analysis and discussion I have identified the summary of my
research’s findings. I have also given some recommendations about
CRM for the company.
After analyzing the financial data, I like to conclude that BBL
is one of the most promising banks in our country. According to
its CRM performance, the level credit risk of BBL is in moderate
level. However, it has the ability to reduce the credit risk
possibility and keep it in lower level.
x
List of Abbreviations
BBL BASIC Bank Limited SS Substandard
CAR Capital Adequacy
Ratio
DF Doubtful
FI Financial Institution BL Bad and Loss
NPL Non Performing Loan SAM Special Asset
Management
NPLR Non Performing Loan
Ratio
SMA Special Mention
account
ROA Return on Assets SME Small medium
enterprise
TL Total Loan DPD Days Past Due
CRM Credit Risk
Management
EEA Early Alert Account
BB Bangladesh Bank LLPR Loan Loss Provision
Ratio
GOB Government of
Bangladesh
MSE Mean Square Error
SSI Small Scale LAN Local Area Network
xi
Industries
CRAB Credit Rating Agency of Bangladesh Limited
NGO Non-Government Organization
xii
Table of Contents
Chapter Name Page No1.0 Introductory
Discussion…………………………………………………….
1.1 Introduction…………………………………………………………….
1.2 Background of the
Study……………………………………………….
1.3 Rationale of the Study………………………………….
………………
1.4 Objective of the Study
…………………………………………………
1.5 Methodology of the
Study……………………………………………...
1.6 Limitation of the
Study………………………………………………...
1.7 Structure of the Report
………………………………………………...
2.0 Review of Literature………………………………………………………….
01- 05
02
02
02
03
04
05
05
06-08
09-12
10
10
11
11
11
11
xiii
3.0 Organizational Overview……………………………………………………
3.1 Company Profile of
BBL………………………………………………
3.2 Function of BBL……………………………………………………….
3.3 Mission of BBL………………………………….……………….
…….
3.4 Vision of BBL …………………………………………………………
3.5
Technology…………………………………………………………......
3.6 Risk
Management……………………………………………………...
3.7 CRAB Rating……………………………………………………...
…...
12
Table of Contents
Chapter Name Page No
xiv
4.0 Theoretical Framework of
CRM…………………………………………
3.1 What is Credit Risk Management?
…………………………………….
3.2 Why CRM is Important?
……………………………………………….
3.3 Advantage of CRM………………………………….………………
3.4 Challenges of CRM …………………………………………………
5.0 Process of CRM in Banks……………………………………………………
5.1 Credit Processing /
Approval…………………………………………..
5.2 Credit Approval/
Sanction……………………………………………..
5.3 Credit Documentation………………………………….
………………
5.4 Credit
Administration…………………………………………………
5.5 Disbursement…………………………………………………………..
5.6 Monitoring & Control of Individual
13- 15
14
14
15
15
16-23
17
18
19
20
21
21
22
22
23
xv
Credit……………………………
5.7 Monitoring the Overall Credit
Portfolio……………………………….
5.8 Classification of
Credit………………………………………………...
5.9 Managing Problem/ Credit
Recovery………………………………….
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Table of ContentsChapter Name Page No
6.0 CRM Practice in BASIC
Bank………………………………………………
6.1 Credit Risk Policy of
BBL……………………………………….…….
6.2 Credit Risk Management
Department……………………………….…
6.3 Credit Risk Management Wings
………………………………….…...
6.4 Credit Approval of
BBL…………………………………………….…
6.5 Credit Collection of
BBL………………………………………………
6.6 Classification and Loss Recognition
Policy……………………………
6.7 Provisioning Procedure of
BBL……………………………………….
6.8 Loan
24-33
25
26
26
27
28
29
31
32
33
34-39
35
38
40-47
41
41
42
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Rescheduling……………………………………………………..
6.9 Bad Portfolio Recovery…………………..
…………………………….
7.0 CRM Performance of BASIC
Bank………………………………………
7.1 Trend Analysis……………………………………….
………………...
7.2 Ratio Analysis……………………………….…………………………
8.0 The Impact of CRM on Banks
Profitability…………………………
8.1 Overview of the
Research………………………………….…….…….
8.2 Previous Research about this
Topic…………………...…………….…
8.3 Sample Selection and Model
Specification …………………………...
8.4 Data Input and Regression
Line……………………………………….
8.5 Result of Research and
43
44
xviii
Interpretation…………………………………
Table of Contents
Chapter Name Page No9.0 Findings Summary, Recommendation and
Conclusion………
9.1 Summary of
Findings…………………………………………………..
9.2 Recommendation……………………………………...
……………….
9.3 Conclusion………………………………………….….………………
Bibliography and References:
Appendix:
48- 51
49
50
51
xix
List of TablesTable
No.
Table Title Page No.
1.1 Structure of the Report 5
3.1 BASIC Bank at a glance 12
5.1 CRM Process in Banks 176.1 Credit Collection steps in BASIC Bank 286.2 Loan Classification 30
6.3 Rate of Loan Provisioning 316.4 Rescheduling of Demand and Continuous Loan 327.1 Standard Loan of BASIC Bank 38
7.2 NPL Loan of BASIC Bank 39
8.1 Description of Model Variables 42
8.2 Inputted data for SPSS 43
8.3 Summary of Regression analysis 44
8.4 Summary of coefficient analysis 45
8.5 Summary of ANOVA Test 46
xx
List of FiguresFigure No. Figures Title Page No.
5.1 Credit Approval Process 18
5.2 Credit Documentation Process 19
List of GraphsGraphs No. Figures Title Page No.
7.1 Total Loans & Advances trend of BBL. 35
7.2 Trend of Non Performing Loan of BBL 36
7.3 Trend of Unclassified Loans of BBL 36
7.4 Trends of Provisions for Classified
Loans
37
7.5 Standard Loan to Total Loans Ratio 38
7.6 NPL to Total Loans Ratio 39
8.1 Multiple Regression line 43
xxi
Chapter: 01
Introductory Discussion
1
1.1 Introduction: Risk is the element of uncertainty or possibility of loss that
prevail in any business transaction in any place, in any mode and
at any time. In the financial arena, enterprise risks can be
broadly categorized as Credit Risk, Operational Risk, Market Risk
and Other Risk. Credit risk is the possibility that a borrower or
counter party will fail to meet agreed obligations. Globally,
more than 50% of total risk elements in Banks and Financial
Institution (FI) s are credit risk alone. Thus managing credit
risk for efficient management of a FI has gradually become the
most crucial task. Credit risk management encompasses
identification, measurement, matching mitigations, monitoring and
control of the credit risk exposures. As a leading bank of
Bangladesh, Basic Bank Limited has a fully functioning department
to perform the crucial task of Credit Risk Management (CRM).
1.2 Background of the Study:
This research study is not only a way for getting acknowledged
about the efficiency in managing credit risk of Bangladeshi
Banks, but also a conclusive reference for studying how CRM
practices helps to increase profitability and long term
sustainability of that banks. I will conduct my study under the
close supervision of my academic supervisor who will consistently
monitor my progress and recommend any steps taken with a view to
rectifying the errors occurred during my study on proposed
2
research proposal. For conducting this research, I have to
collect secondary data relating to the financial status of Basic
Bank Ltd from the year 2008 to 2012.
1.3 Rationale of the study:
To complete my graduation program from the Department of Banking
& Insurance, University OF Dhaka, I joined in BASIC Bank Limited
as an Intern. For fulfill my internship my report will be on
“Credit Risk Management practice in Bank: A Study on BASIC Bank
Limited”. I have been recommended by the Supervisor of my
department to work about Credit Risk Management.
1.4 Objective of the study:The indispensible objective of this research is to examine how
bank of Bangladesh especially “Basic Bank Ltd” is efficient in
practicing credit risk management throughout its operation.
Moreover there are some other subordinated as well as principal
objectives regarding CRM of Banks as revealed below:
To get cognizant about how much a bank especially my
selected bank named “Basic Bank Ltd” is efficient in
consistently practicing credit risk management.
To know the importance and advantages of CRM on the
perspective of banking institutions.
3
To identify the standard process of credit risk management
used by banking organization.
To analysis the credit risk policy used by a bank specially
my selected BASIC Bank Ltd.
To know about what kinds of challenges are likely to faced
by both the Bangladesh Bank and others commercial banks in
adopting credit risk management practices.
To scrutinize that how CRM practice impact on banks
profitability and sustainability.
To identify the functions of different wings as well as the
whole department of CRM.
To analyze how a bank make decision for a credit
disbursement.
To know how a bank collect the loan from its customers.
To identify how a bank classify the loan category according
to guideline of Central Bank.
To know how a bank keep provision for the classified loan.
To analyze how and when a bank reschedule a loan agreement.
To analyze how Banks go after for a default loans.
To identify the effectiveness of Banks to recover their bad
portfolio.
4
1.5 Methodology of the Study:
Research Type:
This is a descriptive research which is relevant to an
inquisitive study as it requires some analysis on the efficient
management of bank’s credit risk as well as the crystal clear
concepts on how the CRM affect banks profitability and
sustainability.
Types of Data:
Primary Sources: The primary source of information is based on my
practical experience of three months long internship at Uttara
Branch of Basic Bank Ltd.
Secondary Sources: The secondary source of information is based
on official website, Annual report, operation manual of Credit
Risk Management and annual report of Basic bank, Bangladesh bank
website as well as related different other websites, books etc.
Data analysis Tools:
After collecting the relevant data, I will conduct the relevant
analysis of data consisting of both statistical analysis and
financial analysis as mention below:
5
Statistical tools for analysis: The statistical tools that will
be used for the purpose of deriving various relationships among
various variables considered under research are given below:
Trend Analysis
Multiple regression analysis
Testing Hypothesis
Financial Analysis: For conducting the financial analysis I will
utilize the ration analysis and other important financial
analysis to identify the efficiency of CRM practices of
Bangladeshi Banks.
1.6 Limitations of the study:
On the way of preparing this report, I have faced following
problems that may be termed as the limitation of the study:
Bank’s policy of not disclosing some sensitive data and
information for obvious reason posed an obstacle to prepare
more informative report.
Personal limitations like inability to understand some
official terms, office decorum etc. created a few problems.
1.7 Structure of the Report:
Table 1.1: Structure of the Report
6
Chapter No
Chapter Name
Chapter 1 :
Introductory Discussion
Chapter 2 :
Literature Review
Chapter 3 :
Organizational Overview
Chapter 4 :
Theoretical Framework of CRM
Chapter 5 :
Process of CRM in Banks
Chapter 6 :
CRM Practice in BASIC Bank Limited
Chapter 7 :
CRM Performance of BASIC Bank Limited
Chapter 8 :
The Impact of CRM on Banks Profitability
Chapter 9 :
Summary of Findings, Recommendation and Conclusion
7
Chapter: 02
Review of Literature
8
Credit Risk Management and Risk based Supervision in Banks has
been the subject of study of many Agencies and Researchers and
Academicians. There is a treasure of literature available on the
subject. A careful selection of relevant material was a
formidable task before starting the research. Efforts have been
made to scan the literature highly relevant to the Context.
Rajagopal (1996) made an attempt to overview the bank’s risk
management and suggests a model for pricing the products based on
credit risk assessment of the borrowers. He concluded that good
risk management is good banking, which ultimately leads to
profitable survival of the institution. A proper approach to risk
identification, measurement and control will safeguard the
interests of banking institution in long run.
Froot and Stein (1998) found that credit risk management through
active loan purchase and sales activity affects banks’
investments in risky loans. Banks that purchase and sell loans
hold more risky loans (Credit Risk and Loss loans and commercial
real estate loans) as percentage of the balance sheet than other
banks. Again, these results are especially striking because banks
that manage their credit risk (by buying and selling loans) hold
more risky loans than banks that merely sell loans (but don’t buy
them) or banks that merely buy loans(but don’t sell them).
Treacy and Carey (1998) examined the credit risk rating mechanism
at US Banks. The paper highlighted the architecture of Bank
9
Internal Rating System and Operating Design of rating system and
made a comparison of bank system relative to the rating agency
system. They concluded that banks internal rating system helps in
managing credit risk, profitability analysis and product pricing.
Bagchi (2003) examined the credit risk management in banks. He
examined risk identification, risk measurement, risk monitoring,
and risk control and risk audit as basic considerations for
credit risk management. The author concluded that proper credit
risk architecture, policies and framework of credit risk
management, credit rating system, and monitoring and control
contributes in success of credit risk management system.
10
Muninarayanappa and Nirmala (2004) outlined the concept of credit
risk management in banks. They highlighted the objectives and
factors that determine the direction of bank’s policies on credit
risk management. The challenges related to internal and external
factors in credit risk management are also highlighted. They
concluded that success of credit risk management require
maintenance of proper credit risk environment, credit strategy
and policies. Thus the ultimate aim should be to protect and
improve the loan quality.
Khan, A.R. (2008) illustrates that Credit risk is one of the most
vital risks for any commercial bank. Credit risk arises from non
performance by a borrower. It may arise from either an inability
or an unwillingness to perform in the pre-commitment contracted
manner. The real risk from credit is the deviation of portfolio
performance from its expected value. The credit risk of a bank is
also effect the book value of a bank. The more credit of a
particular is in risk, the more probability of a bank to be
insolvent.
Banerjee, Prashanta K., & Farooqui Q.G.M. (2009) said that the
objective of the credit management is to maximize the performing
asset and the minimization of the non-performing asset as well as
ensuring the optimal point of loan and advance and their
efficient management. The lending guideline should include
Industry and Business Segment Focus, Types of loan facilities,
11
Single Borrower and group limit, Lending caps. It should adopt a
credit grading system .All facilities should be assigned a risk
grade.
Rose, Peter S. (2001) examined that for most banks, loans are the
largest and most obvious source of credit risk; however, other
sources of credit risk exist throughout the activities of a bank,
including in the banking book and in the trading book, and both
on and off the balance sheet. Banks are increasingly facing
credit risk (or counterparty risk) in various financial
instruments other than loans, including acceptances, interbank
transactions, trade financing, foreign exchange transactions,
financial futures, swaps, bonds, equities, options, and in the
extension of commitments and guarantees, and the settlement of
transactions.
12
Chapter: 03
Organizational Overview
13
3.1 Company Profile of BASIC Bank Limited:Bangladesh Small Industries and Commerce Bank Limited, popularly
known as BASIC Bank, is a state-owned scheduled bank. However,
it is not a nationalized Bank. It is a bank-company and operates
on the lines of a private bank. The very name Bangladesh Small
Industries and Commerce Bank Limited is indicative of the nature
of the bank. It is a blend of development and commercial banks.
BASIC Bank registered under the Companies Act 1913. It was
incorporated under this Act on the 2nd of August 1988. The bank
started its operation from the 21st of January 1989. It is
governed by the banking Companies Act 1991. The bank was
established as the policy makers of the country felt the urgency
for a bank in the private sector for financing Small Scale
Industries (SSIs). At the outset, the bank started as a joint
venture enterprise of the BCC Foundation with 70 percent shares
and the government of Bangladesh (GOB) with the remaining 30
percent shares. The BCC Foundation being nonfunctional following
the closure of the BCCI, the government of Bangladesh took over
100 percent ownership of BASIC on 4th June 1992. Thus the Bank is
state owned. However, the Bank is not nationalized; it operates
like a private bank as before.
3.2 Functions of BASIC Bank: Term loans to industries especially to small-scale
enterprises.14
Full-fledged commercial banking service including collection
of deposit, short term trade finance, working capital
finance in processing and manufacturing units and financing
and facilitating international trade.
Technical support to Small Scale Industries (SSls) in order
to enable them to run their enterprises successfully.
Micro credit to the urban poor through linkage with Non-
Government Organizations (NGOs) with a view to facilitating
their access to the formal financial market for the
mobilization of resources.
15
3.3 Mission of BASIC Bank: To provide best development and commercial banking services to
the common people of Bangladesh and provide special support to
the small scale business enterprises.
3.4 Vision of BASIC Bank: Provide the best banking services to all kinds of people and
contribute for economic development of the country.
3.5 Technology of BASIC:BASIC bank has its own software developed in 1991. Local area
network (LAN) has been installed in Head office and 15 branches
of the bank. Wide area network (WAN) has been set up between Head
office and branches using X.28 leased line of BTTB. As continuous
up gradation of technology its Gulshan branch, Dhaka, Zindabazar
branch, Sylhet, Rangpur Branch, Rajshahi branch has become online
few years ago.
3.6 Risk Management:In banking business, no reward can be expected without risk.
Management of BASIC Bank has established a formal program for
managing the business risk faced by the bank. BASIC bank is very
much cautious about its investment. Every loan proposal is placed
under careful scrutiny before approval. Board of Directors
16
approval is necessary for the proposal of large amount of loans.
Internal audit team and recovery team exercise close monitoring
on every loan transaction. Management regularly reviews the banks
overall assets and liabilities structure and makes necessary
changes in the mix asset/liabilities of balance sheet. The Bank
also has a liquidity policy to ensure financing flexibility to
cope with unexpected future cash demand. The Bank takes necessary
action to avoid foreign exchange risk which is called as
exposure.
3.7 CRAB Rating: Credit Rating Agency of Bangladesh Ltd. (CRAB) has assigned long
term rating BBB1 as Stand Alone Rating and A2 as Government
Support Rating and short term rating ST-3 for the year
2012.Commercial Banks rated 'BBB' in the long term have adequate
capacity to meet their financial commitments. However, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the Commercial Banks in higher-
rated categories.
Commercial Banks rated ST-3 in the short term category are
considered to have below average capacity for timely repayment of
obligations, although such capacity may impair by adverse changes
in business, economic or financial conditions. Commercial Banks
rated in this category are characterized with satisfactory level
17
of liquidity, internal fund generation and access to alternative
sources of funds is outstanding.
Table 3.1: Basic Bank at a Glance
Name BASIC Bank LimitedDate of Incorporation August 2, 1998Date of Inauguration of
Operation
January 21, 1989
Head office Sena kalian Bhaban (6th floor), 195,
Motijeel,
Dhaka – 1000, BangladeshNumber of Branches 68Service provided Deposit scheme, credit facility and
foreign exchange serviceAuthorized capital Tk. 5000.00 million
Paid up capital Tk. 2946.98 million
Ownership Government of Bangladesh
Banking software used KASTLE core
Technology used Members of SWIFT
SWIFT BKSIBDDH
Email [email protected]
Website www.basicbanklimited.com
18
Chapter: 04
Theoretical Framework of CRM
19
4.1 What is Credit Risk Management (CRM)?Credit risk is most simply defined as the potential that a bank
borrower or counterparty will fail to meet its obligations in
accordance with agreed terms and conditions. The objective of
Credit Risk management is to minimize the risk and maximize banks
risk adjusted rate of return by assuming and maintaining credit
exposure within the acceptable parameters. The Credit Risk
Management department is responsible for upholding the integrity
of the Bank’s risk/return profile. It ensures that risks are
properly assessed, and that risk/return decisions are made
accurately and transparently. The overall success in credit
management depends on the banks credit policy, portfolio of
credit, monitoring, supervision and follow-up of the loan and
advance. Therefore, while analyzing the credit risk management of
a bank, it is required to analyze its credit policy, credit
procedure and performance regarding credit risk management.
4.2 Why CRM is important for Banking
Institutions?
The importance of credit risk management for banking is
tremendous. Banks and other financial institutions are often
faced with risks that are mostly of financial nature. These
institutions must balance risks as well as returns. For a bank to
20
have a large consumer base, it must offer loan products that are
reasonable enough. However, if the interest rates in loan
products are too low, the bank will suffer from losses. In terms
of equity, a bank must have substantial amount of capital on its
reserve, but not too much that it misses the investment revenue,
and not too little that it leads itself to financial instability
and to the risk of regulatory non-compliance.
The risks of losses that result in the default of payments of the
debtors are a kind of risks that must be expected. Because of the
exposure of banks to many risks, it is only reasonable for bank
to keep substantial amount of capital to protect its solvency and
to maintain its economic stability. The second Basel Accords
provides statements of its rules regarding the regulations of
that come with lending and investment practices, banks must
assess the risks. Credit risk management must play its role then
to help banks be in compliance with Basel II Accord and other
regulatory bodies.
To manage and assess the risks faced by banks, it is important to
make certain estimates, conduct monitoring, and perform reviews
of the performance of the bank. However banks are into lending
and investing practices, it is relevant to make reviews on loans
and to scrutinize and analyze portfolios. Loan reviews and
portfolio analysis are crucial then determining the credit and
investment risks. The credit risk management system used by many
banks today has complexity; however it can help in the assessment
21
of risks by analyzing the credits and determining the probability
of defaults and risks of losses. Credit risk management for
banking is a very useful system, especially if the banks are in
line with the survival of banks in the business world.
4.3 Advantages of Credit Risk Management:
First: the awareness of possible threats. This also includes
identification of possible loss of assets. In that way, the
bank can have back up funds in case they lose an asset.
The manager can also highlight how difficult it will be if a
large loan default and affect the performance of bank.
Effective credit risk management improves the current and
future financial performance.
When a threat occurs, it’s important for all departments to
come together and deal with it. Risk management prevents a
department from isolation. Its divide the authority of
function across the whole organization.
4.4 Challenges of Credit Risk Management:
Cost: The CRM practice will shell out cash from the bank
funds. Banks will have to improve their cash generating
tactics in order to provide means for training and
maintenance for something that hasn’t happened yet.
22
Training: The time spent for development and research will
have to be allocated for training to ensure proper execution
of risk management.
Motivation: Employees needs to be motivated in every moment
to deal with the credit risk.
23
Chapter: 05
Process of CRM in Bank
24
Credit risk management process should cover the entire credit
cycle starting from the origination of the credit in a financial
institution’s books to the point the credit is extinguished from
the books (Morton Glantz, 2002). It should provide for sound
practices in:
Table 5.1: CRM Process in banks
Credit Risk Management Process
5.1 Credit processing/appraisal5.2 Credit approval/sanction2.3 Credit documentation5.4 Credit administration5.5 Disbursement5.6 Monitoring and control of
individual credits5.7 Monitoring the overall credit
portfolio 5.8 Credit classification and5.9 Managing problem credits/recovery
5.1 Credit Processing/Appraisal:
Credit processing is the stage where all required information on
credit is gathered and applications are screened. Credit
application forms should be sufficiently detailed to permit
gathering of all information needed for credit assessment at the
25
outset. In this connection, financial institutions should have a
checklist to ensure that all required information is, in fact,
collected. Financial institutions should set out pre-
qualification screening criteria, which would act as a guide for
their officers to determine the types of credit that are
acceptable. For instance, the criteria may include rejecting
applications from blacklisted customers. These criteria would
help institutions avoid processing and screening applications
that would be later rejected.
26
5.2 Credit-approval/Sanction:
A financial institution must have in place written guidelines on
the credit approval process and the approval authorities of
individuals or committees as well as the basis of those
decisions. Approval authorities should be sanctioned by the board
of directors. Approval authorities will cover new credit
approvals, renewals of existing credits, and changes in terms and
conditions of previously approved credits, particularly credit
restructuring, all of which should be fully documented and
recorded. Prudent credit practice requires that persons empowered
with the credit approval authority should not also have the
customer relationship responsibility.
Approval authorities of individuals should be commensurate to
their positions within management ranks as well as their
expertise. Depending on the nature and size of credit, it would
be prudent to require approval of two officers on a credit
application, in accordance with the Board’s policy. The approval
process should be based on a system of checks and balances. Some
approval authorities will be reserved for the credit committee in
view of the size and complexity of the credit transaction.
Depending on the size of the financial institution, it should
develop a corps of credit risk specialists who have high level
expertise and experience and demonstrated judgment in assessing,
approving and managing credit risk. An accountability regime
should be established for the decision-making process,27
accompanied by a clear audit trail of decisions taken, with
proper identification of individuals/committees involved. All
this must be properly documented.
Figure 5.1: Credit Approval Process1
1 Source: (Credit Approval Process and Credit Risk Management, 2005, Oesterreichische National bank)
28
5.3 Credit Documentation:
Documentation is an essential part of the credit process and is
required for each phase of the credit cycle, including credit
application, credit analysis, credit approval, credit monitoring,
and collateral valuation, and impairment recognition, foreclosure
of impaired loan and realization of security. The format of
credit files must be standardized and files neatly maintained
with an appropriate system of cross-indexing to facilitate review
and follow up.
The Bangladesh Bank will pay particular attention to the quality
of files and the systems in place for their maintenance.
Documentation establishes the relationship between the financial
institution and the borrower and forms the basis for any legal
action in a court of law. Institutions must ensure that
contractual agreements with their borrowers are vetted by their
legal advisers.
Credit applications must be documented regardless of their
approval or rejection. All documentation should be available for
examination by the Bangladesh Bank. Financial institutions must
establish policies on information to be documented at each stage
of the credit cycle. The depth and detail of information from a
customer will depend on the nature of the facility and his prior
performance with the institution. A separate credit file should
be maintained for each customer. If a subsidiary file is created,
it should be properly cross-indexed to the main credit file.29
Financial institutions should maintain a checklist that can show
that all their policies and procedures ranging from receiving the
credit application to the disbursement of funds have been
complied with. The checklist should also include the identity of
individual(s) and/or committee(s) involved in the decision-making
process (Morton Glantz, 2002).
Figure 5.2: Credit Documentation Process
30
5.4 Credit Administration:
Financial institutions must ensure that their credit portfolio is
properly administered, that is, loan agreements are duly
prepared, renewal notices are sent systematically and credit
files are regularly updated. An institution may allocate its
credit administration function to a separate department or to
designated individuals in credit operations, depending on the
size and complexity of its credit portfolio (Credit Risk
Management: Industry Best Practices 2005, Bangladesh Bank).
A financial institution’s credit administration function should,
as a minimum, ensure that:
Credit files are neatly organized, cross-indexed, and their
removal from the premises is not permitted;
The borrower has registered the required insurance policy in
favor of the bank and is regularly paying the premiums;
The borrower is making timely repayments of lease rents in
respect of charged leasehold properties;
Credit facilities are disbursed only after all the
contractual terms and conditions have been met and all the
required documents have been received;
Collateral value is regularly monitored;
The borrower is making timely repayments on interest,
principal and any agreed to fees and commissions;
Information provided to management is both accurate and
timely;31
Responsibilities within the financial institution are
adequately segregated;
Funds disbursed under the credit agreement are, in fact,
used for the purpose for which they were granted.
“back office” operations are properly controlled;
The established policies and procedures as well as relevant
laws and regulations are complied with; and
32
5.5 Disbursement:
Once the credit is approved, the customer should be advised of
the terms and conditions of the credit by way of a letter of
offer. The duplicate of this letter should be duly signed and
returned to the institution by the customer. The facility
disbursement process should start only upon receipt of this
letter and should involve, inter alia, the completion of
formalities regarding documentation, the registration of
collateral, insurance cover in the institution’s favor and the
vetting of documents by a legal expert. Under no circumstances
shall funds be released prior to compliance with pre-disbursement
conditions and approval by the relevant authorities in the
financial institution.
5.6 Monitoring and Control of Individual
Credits:
To safeguard financial institutions against potential losses,
problem facilities need to be identified early. A proper credit
monitoring system will provide the basis for taking prompt
corrective actions when warning signs point to deterioration in
the financial health of the borrower. Examples of such warning
signs include unauthorized drawings, arrears in capital and
interest and deterioration in the borrower’s operating
33
environment (Morton Glantz, 2002). Financial institutions must
have a system in place to formally review the status of the
credit and the financial health of the borrower at least once a
year. More frequent reviews (e.g at least quarterly) should be
carried out of large credits, problem credits or when the
operating environment of the customer is undergoing significant
changes.
In broad terms, the monitoring activity of the institution will
ensure that:
Funds advanced are used only for the purpose stated in the
customer’s credit application;
Financial condition of a borrower is regularly tracked and
management advised in a timely fashion;
Borrowers are complying with contractual covenants;
Collateral coverage is regularly assessed and related to the
borrower’s financial health;
The institution’s internal risk ratings reflect the current
condition of the customer;
5.7 Monitoring the Overall Credit Portfolio
(Stress Testing):
An important element of sound credit risk management is analyzing
what could potentially go wrong with individual credits and the
overall credit portfolio if conditions/environment in which
borrowers operate change significantly. The results of this
34
analysis should then be factored into the assessment of the
adequacy of provisioning and capital of the institution. Such
stress analysis can reveal previously undetected areas of
potential credit risk exposure that could arise in times of
crisis (Morton Glantz, 2002).
Possible scenarios that financial institutions should consider in
carrying out stress testing include:
Significant economic or industry sector downturns;
Adverse market-risk events; and
Unfavorable liquidity conditions.
Financial institutions should have industry profiles in respect
of all industries where they have significant exposures. Such
profiles must be reviewed /updated every year. Each stress test
should be followed by a contingency plan as regards recommended
corrective actions. Senior management must regularly review the
results of stress tests and contingency plans. The results must
serve as an important input into a review of credit risk
management framework and setting limits and provisioning levels
(Morton Glantz, 2002).
5.8 Classification of credit:
Credit classification process grades individual credits in terms
of the expected degree of recoverability. Financial institutions
must have in place the processes and controls to implement the
board approved policies, which will, in turn, be in accord with
35
the proposed guideline. They should have appropriate criteria for
credit provisioning and write off. International Accounting
Standard 39 requires that financial institutions shall, in
addition to individual credit provisioning, assess credit
impairment and ensuing provisioning on a credit portfolio basis.
Financial institutions must, therefore, establish appropriate
systems and processes to identify credits with similar
characteristics in order to assess the degree of their
recoverability on a portfolio basis.
Financial institutions should establish appropriate systems and
controls to ensure that collateral continues to be legally valid
and enforceable and its net realizable value is properly
determined. This is particularly important for any delinquent
credits, before netting off the collateral’s value against the
outstanding amount of the credit for determining provision. As to
any guarantees given in support of credits, financial
institutions must establish procedures for verifying periodically
the net worth of the guarantor.
5.9 Managing Problem Credits/Recovery:
A financial institution’s credit risk policy should clearly set
out how problem credits are to be managed. The positioning of
this responsibility in the credit department of an institution
may depend on the size and complexity of credit operations. The
36
monitoring unit will follow all aspects of the problem credit,
including rehabilitation of the borrower, restructuring of
credit, monitoring the value of applicable collateral, scrutiny
of legal documents, and dealing with receiver/manager until the
recovery matters are finalized.
The collection process for personal loans starts when the account
holder has failed to meet one or more contractual payment
(Installment). It therefore becomes the duty of the Collection
Department to minimize the outstanding delinquent receivable and
credit losses. This procedure has been designed to enable the
collection staff to systematically recover the dues and
identify / prevent potential losses, while maintaining a high
standard of service and retaining good relations with the
customers. It is therefore essential and critical, that
collection people are familiar with the computerized system,
procedures and maintain effective liaison with other departments
within the bank (Prudential regulations for consumer financing
2004, Bangladesh Bank).
37
Chapter: 06
CRM Practice in BASIC Bank Ltd
38
6.1 Credit Risk Policy of BASIC Bank Limited: In order to minimize credit risk, BASIC Bank Limited has
formulated a comprehensive credit policy according to Bangladesh
Bank Core Risk Management guidelines. Credit policy of the Bank
provided for the separation of the credit approval function from
business, marketing and loan administration function. Credit
policy of BBL recommended through credit assessment and risk
grading of all clients at the time of approval and portfolio
review. Credit policy also provides the guidelines of required
information for credit assessment, marketing strategy, approval
process, loan monitoring, early alert process, credit recovery,
NPL account monitoring, NPL provisioning and write off policy,
etc. The board of directors reviews the credit policy of the bank
annually.
BASIC Bank credit principle:
1. Aggregate loans and advances shall not exceed ten times the
Bank’s net worth or 65% of customers’ deposits whichever is
lower.
2. Within the aggregate limit of loans and advances as
mentioned in (1) above, 50% of lending will be to small
industry sector in accordance with prescribed norms of the
Government and the Central Bank in terms of the Bank’s
objectives with 50% to the commercial sector.
39
3. No term loans will be approved for the commercial sector.
Exceptions will be rare and will require approval of the
Executive Committee.
4. All lending will be adequately secured with acceptable
security and margin requirements as laid down by the Head
Office Credit Committee.
5. The Bank shall not incur any uncovered foreign exchange risk
(currency exposure) in the lending of funds.
6. The Bank shall not incur any risk of exposure in respect of
unmatched rates of interest on funding of loans and advances
beyond 15% of outstanding loans and advances.
7. End-use of working capital facilities will be closely
monitored to ensure lending user for the purpose for which
they were advanced. Loans and advances shall be normally
funded from customers’ deposits of a permanent nature, and
not out of short term temporary funds or borrowings from
other banks or through short term money market operations.
6.2 Credit Risk Management Department: Considering the key elements of Credit Risk the bank has
segregated duties of the officers/ executives involved in credit
related activities. Separate division for Corporate, SME, Retail
and Credit Cards have been formed which are entrusted with the
duties of maintaining effective relationship with the customers,
marketing of credit products, exploring new business
40
opportunities etc. For transparency in the operations during the
entire credit year four teams have been set up. Those are:
Credit Approval Team
Asset Operations Department
Recovery Unit
Impaired Asset Management
In credit management process, Sales Teams of the Corporate,
Retail, SME, AND Credit Cards business units book the customers;
the Credit Division does thorough assessment before approving the
credit facility. Asset Operations Department ensures compliance
of all legal formalities, completion of all documentation, and
security of the proposed credit facility and finally disburses
the amount. The Sales Team reports to the Managing Director & CEO
through their line, the Credit Division reports to the Managing
Director & CEO, while the Asset Operations Department reports to
the Deputy Managing Director & COO. This arrangement has not only
ensured segregation of duties and accountability but also helps
in minimizing the risk of compromise with quality of the credit
portfolio.
6.3 Credit Risk Management Wings: Credit Risk Management Department of BASIC Bank Limited conducted
their functions by six wings. Those are:
Wholesale Credit
Retail Underwriting
41
SME Underwriting
Central Collection Unit
6.4 Credit Approval of BASIC Bank Limited:
Approval Authorities of the individual and
Corporate Loans: The approval authority of individual loan is mainly done by the
credit officer in a branch. However, the authorities of corporate
loan mainly consist of I. Head of Credit, Wholesale Banking &
Medium Business II. Chief Credit Officer. III. Managing Director
& CEO IV. Board Due to large ticket size of loan facility, most
of the proposals received by Wholesale Credit team is approved by
the Board of Directors.
Lending criteria for general loan: To evaluate a general loan proposal, Credit team apply the
General 5C‟s which are-
Character
Capacity
Capital
Conditions
Collateral
Lending Criteria for SME and Corporate loan:
42
1. Entrepreneur: The promoter or entrepreneur of the proposed
project should be creditworthy.
2. Viability of the Project: The project should be viable from
organizational, technical, commercial, financial and economic
points of view. The project should be technically sound and
environment-friendly. Technology transfer in case of borrowed
know-how ought to be ensured. Building should be well planned and
well constructed. Market prospect and potential for the product
has to be fully assured at competitive prices. There should be
reasonable debt equity ratio as determined by the Bank on
individual case basis. Debt service coverage ratio should be at
least 2.5 times at the optimum level of production. IRR should
preferably be not less than 20 percent.
43
6.5 Credit Collection of BASIC Bank Limited:
Collection Processes:
Customers are provided with an Offer Letter or Banking
Arrangement letter during Loan disbursement where the total
payment mood and loan details are described. When a customer
fails to fulfill the agreed terms or misses the required payment,
the account then enters collections. Collection department is
responsible for collecting the overdue amount from the delinquent
customers. There are different stages involved in collection
after an account enters delinquency till regularization of the
account by recovering the overdue. Basically collection can be
broadly divided into four stages which are servicing, locating,
collecting and cancellation & write-off. The aging of an account
in collections is with reference to the days since missed
payment.
Collection Steps:
Table 6.1: Credit Collection Steps of BASIC Bank2
Days Past Due(DPD)
Collection Action
1-14 Letter, Follow up & Persuasion over phone
15-29 1st Reminder letter & Sl. No. 1 follows
2 Source: (Prudential regulations for consumer financing 2004, Bangladesh Bank)
44
30-44 2nd reminder letter + Single visit45-59 3rd reminder letter
Group visit by team member Follow up over phone Warning on legal action by next 15
days60-89 Call up loan
Final Reminder & Serve legal notice
legal proceedings begin90 and above Telephone calls/Legal proceedings
continue Collection effort continues by
officer & agent Letter to different
banks/Association
6.6 Classification & Credit LossRecognition Policy:
The objective of this policy is to ensure timely recognition of
credit losses and consistent application of policies across all
businesses.
Impaired Accounts:The term "impaired accounts" encompasses all accounts classified
as risk grades- Sub Standard (SS), Doubtful (DF), and Bad & Loss
(BL). Such cases would normally be transferred to the Special
Assets Management (SAM) team and/or Collections Team for remedial
management. But, Managing Director may uniformly decide when45
classified account will be transferred to SAM. All accounts risk
graded SS, DF & BL exhibit some degree of impairment are
collectively termed "Impaired Accounts"/”Non Performing Assets”.
Sub Standard Accounts: Any 180 (Days Past Due) DPD account
and/or as per guidelines of Bangladesh Bank.
Doubtful Accounts: Any 270 DPD account (minimum) and/or as per
guidelines of Bangladesh Bank.
Bad & Loss Accounts: Any 360 DPD account (minimum) and/or as per
guideline of Bangladesh Bank.
Special Mention Accounts: Though Special Mention Accounts are not
classified as impaired account under present rules of Bangladesh
Bank, but such accounts are most likely to be turned into
impaired accounts. Any 90 DPD account must be risk graded as SMA
as per existing Bangladesh Bank Policies.
46
Table 6.2: Loan Classification
Types ofFacility
Loan Classification
SMA Sub Standard Doubtful Bad & Loss
Overdue
Period
Provision(%)
Overdue
Period
Provision(%)
Overdue
Period
Provision(%)
Overdue
Period
Provision(%)
Continuous Loan
90Daysor
more
5% 6months ormorebutlessthan9
months
20% 9monthsor
morebutlessthan12
months
50% 12monthsormore
100%
DemandLoan
90daysor
more
5% 6months ormorebutlessthan9
months
20% 9monthsor
morebutlessthan12
months
50% 12monthsormore
100%
TermLoan upto 5years
90daysor
more
5% 6months ormorebutlessthan12
months
20% 12monthsor
morebutlessthan18
months
50% 18monthsormore
100%
Term 90 5% 12 20% 18 50% 24 100%
47
Loanover 5years
daysor
more
months ormorebutlessthan18
months
monthsor
morebutlessthan24
months
monthsormore
ShortTerm
Agricultural &MicroCredit
90daysor
more
5% 12months ormorebutlessthan36
months
5% 36monthsor
morebutlessthan60
month
5% 60monthsormore
100%
6.7 Provisioning Procedures of BASIC Bank:
General Provisions :
A specific debt provision must be assessed and raised as soon as
accounts are classified as SMA, SS, DF, and BL. The specific
provision raised should be at least the minimum amount as per
provisioning requirement of Bangladesh Bank.
Table 6.3: Rate of Loan Provisioning
Business Unit Rate of Provision
UC SMA SS DF BL
48
Consum
erHouse Building &
Professional
2% 5% 20% 50% 100%
Other than House
Building &
Professional
5% 5% 20% 50% 100%
Small & Medium
Enterprise
2% 5% 20% 50% 100%
Short term Agricultural
Credit & Micro Credit
5% - 5% 5% 100%
All others 1% 5% 20% 50% 100%
Specific Provisions:
Specific provisions are raised against a specific account, or any
portion thereof, which based on known facts, conditions and
values of eligible security, interest suspense, is considered to
be uncollectible.
49
6.8 Loan Rescheduling:
Rescheduling of Term Loans:
The loans which are repayable within a specific time period under
a prescribed repayment schedule are treated as Term Loans. For
rescheduling such loans following policies will be followed:
Application for first rescheduling will be considered only
after cash payment of at least 15% of the overdue
installments or 10% of the total outstanding amount of loan,
whichever, is less;
Rescheduling application for the second time will be
considered after cash payment of minimum 30% of the overdue
installments or 20% of the total outstanding amount of loan,
whichever, is less;
Rescheduling of Demand and Continuous Loan:
The loans which can be transacted without any specific repayment
schedule but have an expiry date for repayment and a limit are
treated as Continuous Loan. In addition, the loans which become
repayable after those are claimed by the bank are treated as
Demand Loans. If any contingent or any other liabilities are
turned to forced loan (i.e. without any prior approval as regular
loan) those also are treated as Demand Loans. For rescheduling of
50
Demand and Continuous Loans, the rates of down payment shall be
as under:
Table 6.4: Rescheduling of Demand & Continuous Loan
Amount of Overdue Loan Rates of Down payment
Up to Tk.1.00 (one) crore 15%Tk. 1.00(one) crore to Tk. 5.00
(five) crore
10% (but not less than Tk.15.00
lac)Tk. 5.00(five) crore and above 5% (but not less than Tk.50.00
lac)
6.9 Bad Portfolio Recovery of BASIC BankLimited:
Special Asset Management- SME and Retail Banking:
The role of SAM is to recover the Bank’s bad portfolio. SAM deals
with Bank’s non-performing loans through legal
persuasion/procedure and facilitates external and internal
recovery forces to maintain Bank’s portfolio at risk (PAR) at a
steady position.
File Transfer: Files transfer to SAM from SME when the loan
reaches at DPD 180. SAM receives the file from Retail when the
loan reaches at DPD 360.
51
Legal Notice: Legal notice issued to SME at DPD 145 and for
Retail at DPD 360, SAM-S&R would arrange to serve 1st legal
notice for warning the default borrower to adjust the total
outstanding and 2nd legal notice would be served after bouncing
the cheque or before litigation.
Write- off Management: BASIC Bank has a specific Write-off policy
developed based on Bangladesh Bank circulars. SAM takes
initiative to write-off bad portfolios as per policy if following
criteria satisfied, a) Classification status will be Bad/Loss
(BL) b) 100% provided c) Litigated (under any kind of Law of the
land).
Special Asset Management & Credit Inspection -
Wholesale Banking & Medium Business:
Credit Inspection: Credit Inspection through file and field level
area deals with all matters relating to credit inspection,
ensuring compliance of BBL policy towards credit granting
process, corporate portfolio review and physical inspection of
client's premise and files
Early Alert Account (EAA): Early Alert Process is an effective
tool & technique that help BBL in detecting any deterioration in
corporate and medium enterprise clients account and trigger
Bank’s problem accounts at an early stage so that proper
attention can be given to avoid any losses.
52
53
Chapter: 07
CRM Performance of BASIC Bank Ltd
(Trend and Ratio Analysis)
54
7.1 Trend Analysis: Trend analysis is a forecasting technique that relies primarily
on historical time series data to predict the future. For this
research report the trends are discussed for the credit related
factors like total loan disbursements, position of unclassified
and classified loans amount etc.
Total Loans and advance Trend:
2008 2009 2010 2011 20120
10002000300040005000600070008000900010000
Total loans & advances Trend ( Tk. in crore)
Graph 7.1: Total Loans & Advances trend of BBL.
55
The above graphical representation indicates that the amount of
total loans and advance of BBL in the year of 2008 to 2012 was
respectively BDT 2726.91, 2926.15, 4634.15, 5688.47, & 8595.57
Taka (crore). Over the five years from the year 2008 to 2012
almost all the years the amount of loans and advance has been
increased. So it can be said that there is an increasing trend or
upward trend over the last five years in the total loan facility
provided by the BBL.
Trend of Classified loans (NPL):
2008 2009 2010 2011 20120
200
400
600
800
1000
Classified Loan (NPL) Trend (TK/ Crore)
Graph 7.2: Trend of Non Performing Loan of BBL
According to above graph, the NPL of BBL is in an increasing
trend. From year 2008 to 2011 the NPL increased in a steady rate.
However in 2012 the NPL amount is very high. This shows the
inefficiency of CRM in the year of 2012.
56
Trend of Unclassified loan (Standard):
2008 2009 2010 2011 20120
2000
4000
6000
8000
10000
Unclassified Loan (Standard) Trend (Taka/Core)
Graph 7.3: Trend of Unclassified Loans of BBL
In the graph, it seems that the unclassified loans trend for 5
years is not very fluctuated; overall it was increasing in a
steady rate. In the NPL trend section, I describe that high
amount of NPL shows CRM efficiency in 2012, but this graph shows
that the NPL is very high because the loan disbursement amount
was large.
Provision against Classified Loans & Advances:
57
2008 2009 2010 2011 2012020406080100120140160180
Provision against classified Loans & Advances ( in crore)
(tk. in crore)
Graph 7.4: Trends of Provisions for Classified Loans
From the above graph we can see there are an increasing trend in
the provision for classified loans and advance of the BBL among
the last five years. That means in the last five years they
emphasized more on classified loans and advances. We see that in
the year 2008 the amount of provision for classified loans and
advances was 41.58 crore taka and in the next year the amount was
52.33 crore. The provision amount was higher in 2012, which was
tk. 174.9 crore.
7.2 Ratio Analysis:
58
Here, I will analyze the CRM performance of BASIC Bank using some
ratios of Standard and NPLs loans because I think ratio is the
best tools for analyzing any types of performance of a financial
institutions.
Standard Loan to Total Loans Ratio:
Table 7.1: Standard Loan of BASIC Bank (2008-2012)3
Year Amount ofStandard Loan
(Taka)
Total Loans andAdvance (Taka)
Ratio ofStandard Loansto total loansand advance
(Taka)2008 25604245829 27269131180 93.89 %2009 27617360130 29261534342 94.38 %2010 43848867094 46341513504 94.62 %2011 53989096940 56884757885 94.91 %2012 78270032892 85955762411 91.05 %
2008 2009 2010 2011 201289.00%90.00%91.00%92.00%93.00%94.00%95.00%96.00%
Standard Loan to Total Loans Ratio
ratios
33 Data source: Annual Report of BASIC Bank (2008-2012)
59
Graph 7.5: Standard Loan to Total Loans Ratio
From the above figure of ratio of Standard Loan to Total Loans
and Advances of BASIC Bank Ltd., we can see that in year 2012the
ratio declined .Otherwise in other four years the ratio increases
than the previous year.
Non Performing Loan to Total Loans Ratio:
Table 7.2: NPL Loan of BASIC Bank (2008-2012)4
Year Amount of NPL(Taka)
Total Loans andAdvance (Taka)
Ratio of NPL tototal loans andadvance (Taka)
2008 1666143915 27269131180 6.11 %2009 1644498230 29261534342 5.62 %2010 2493173427 46341513504 5.38 %2011 2895434176 56884757885 5.09 %2012 7693040736 85955762411 8.95 %
2008 2009 2010 2011 20120.00%
2.00%
4.00%
6.00%
8.00%
10.00%NPL to Total Loans Ratio
rati
os
Graph 7.6: NPL to Total Loans Ratio44 Data source: Annual Report of BASIC Bank (2008-2012)
60
From the above figure, it can easily be understand that from 2009
to 2011 the NPL to total loans ratio was in steady rate. However,
in 2012 this ratio increases marginally higher than the previous
years. The main reason of this increase is the recent credit scam
of BASIC bank limited.
Chapter: 08
The Impact of CRM on Bank’s
Profitability (Statistical Analysis)
61
8.1 Overview of the research:
The overall objective of this particular research is to
investigate the impact of credit risk management on bank’s
profitability. To find the relationship between these two
elements, I select one dependent variable and three independent
variables. Then I conduct multiple regression analysis with the
variables. Throughout the research, I focus on the main
objective; however, I have tried to fulfill some specific
objective too.
The specific objectives are to:
Determine the extent to which non performing loans affect
banks profitability.
Investigate the impact of loan loss provisions on banks
profitability.
Determine whether banks capital adequacy contributes to
banks profitability.
8.2 Previous Research about This Topic:
There have been debate and controversies on the impact of credit
risk management and bank’s financial performance. Over the few
decades, many scholars carried out extensive studies on this
topic and produced mixed results; while some found that credit
risk management impact positively on banks financial performance,
62
some found negative relationship and others suggest that other
factors apart from credit risk management impacts on bank’s
performance. Specifically, Kargi (2011) found in a study of
Nigeria banks from 2004 to 2008 that there is a significant
relationship between banks performance and credit risk
management. He found that loans and advances and non performing
loans are major variables that determine asset quality of a bank.
Kithinji (2010) analyzed the effect of credit risk management
(measured by the ratio of loans and advances on total assets and
the ratio of non-performing loans to total loans and advances on
return on total asset in Kenyan banks between 2004 to 2008). The
study found that the bulk of the profits of commercial banks is
not influenced by the amount of credit and non performing loans.
The implication is that other variables apart from credit and non
performing loans impact on banks’ profit.
8.3 Sample Selection and Model
Specification:
The sample data is gathered from the annual report of BASIC bank
(2008-2012). For the analysis, I consider return on asset as
dependent variable, and non performing loan ratio, loan loss
provision and capital adequacy ratio as independent variables. So
the model of this equation will be:
ROA = a + b1* NPLR + b2*LLPR + b3*CAR ……………………………………. (1)
63
Table 8.1: Description of Model Variables
Variable Description
ROA ( Return on Asset)
It is the ratio of net operating profit that a
company earns from its business operations in
a given period of time to the amount of the
company’s total asset. It is a good indicator
of Banks Profitability.NPLR ( Non PerformingLoan Ratio)
The ratio of nonperforming loan to total loan
is known as NPLR. It is a good indicator of
Credit risk management.LLPR ( Loan Loss Provision ratio)
The ratio of amount of provision to the total
classified loan. It is an indicator of credit
risk management efficiency.CAR ( Capital Adequacy Ratio)
This is the index regulatory authorities use
to determine the optimum amount of money that
a bank must have to be able to take certain
levels of risk endangering deposits funds, or
its existence
64
8.4 Data Input and Regression Line:
Table 8.2: Inputted data for SPSS
Year ROA NPLR LLPR CAR
2008 1.30 4.59 24.76 12.022009 1.41 4.83 35.33 13.48
2010 1.24 4.83 32.80 9.412011 1.40 4.38 37.05 10.132012 .03 8.22 33.23 10.05
2008 2009 2010 2011 20120
5
10
15
20
25
30
35
40
Regression Line
ROANPLRLLPRCAR
rati
os
Graph 8.1: Multiple Regression line
65
8.5 Result of research and Interpretation:
Regression Analysis:
Table 8.3: Summary of Regression analysis (Appendix 1)
Name of Test ResultR .999
R2 .998Adjusted R2 .991
SSE .05464
Coefficient of correlation (R): In this table, the value of R =
0.999 expresses that there is a high degree of positive
relationship between the dependent variable ROA and the
independent variables NPLR, LLPR and CAR. If the independent
variables increase at that point this will result in the
dependent variable increase accordingly. So it can be said that,
credit risk management affect on banks profitability.
Coefficient of determination (R2): The term R Square is the
multiple coefficient of determination interpreted as the
proportion of variability in the dependent variable that can be
explained by the estimated multiple regression equation. Hence,
when multiplied by the 100, it can be interpreted as the
percentage of the variability in Gross Premium that can be
explained by the estimated regression equation. Here R2 = 0.998
66
(99.8 % expressed in percentage) indicates 99.8% of the
variability in obtained ROA is explained by the independent
variables LLPR, NPLR and CAR.
Adjusted R Square: If a variable (say for ‘NPLR’) is added to the
model, R Square = 0.991 becomes larger even if the added variable
is not statistically significant. The Adjusted R Square
compensated for the number of independent variables in this
model.
Standard Error of Estimate: Standard Error of Estimate shows how
much error or variability stands between the estimated result and
actual forecasted result. Here the value is 0.0564 that show the
amount of variability of our estimated result and the actual
result of the observation.
Coefficients Analysis:
Table 8.4: Summary of coefficient analysis (Appendix 2)
Name of Test ResultConstant 2.195
NPLR -.353PPLR .010CAR .041
From this table, we got the parameters of the regression line.
Here, the constant ‘a’ is 2.195 and the slopes b1, b2 and b3 are
67
-.353, .010 and .041 respectively. From these data the regression
equation can be constructed as:
ROA = 2.195 + (-.353*NPLR) + .10
LLPR + .041 CAR
The equation implies that a unit change in the independent
variable NPLR causes the dependent variable ROA to change by an
amount of -.353 when LLPR and CAR are constant. As b1 is
negative, this movement of the dependent variable ROA with the
independent variable NPLR will be in the negative direction. That
is when the amount of NPLR will increase, ROA will decrease and
vice versa.
The equation also implies that a unit change in the independent
variable LLPR causes the dependent variable ROA to change by an
amount of .010 when NPL and CAR are constant. As b2 is positive,
this movement of the dependent variable ROA with the independent
variable NPLR will be in the positive direction. That is when the
amount of LLPR will increase, ROA will increase and vice versa.
68
In the equation we get the other coefficient of net regression as
0.041. This indicates that when NPLR and LLPR are constant, ROA
will change by 0.041 with a unit change in CAR the movement of
these two variables will be also in the same direction as the
LLPR.
ANOVA Test:
Table 8.5: Summary of ANOVA Test (Appendix 3)
Name of Test ResultMSR 0.462
MSE 0.003F 154.620
Sig. 0.059
The F-test is used to determine whether a significant
relationship exists between dependent variable named ROA and the
set of all independent variables such as NPLR, CAR and LLPR; F-
test is referred to the test of overall significance.
In this ANOVA model, the hypothesis for the F-test involves the
parameters of the regression models:
Ho (Null Hypothesis): β1 = 0
H1 (Alternative Hypothesis): β1 ≠ 0
69
If H0 is rejected, I have enough evidence to deduce that two of
the parameters are not equal to zero and that overall
relationship between ROA, NPLR, LLPR and CAR are significant.
However, if H0 is accepted, I do not have the sufficient evidence
to deduce that a significant relationship exists between
dependent and independent variables.
If H0 is accepted, MSR provides an unbiased estimate of ∂2, and
the value of MSR or MSE becomes larger. To determine how large
values of MSR/MSE must be to reject H0, I make use of the fact
that if H0 is true and the assumptions about the multiple
regression model are valid, the sampling distribution of MSR/MSE
is an F-distribution with p degrees of freedom in the numerator
and (n-p-1) in the denominator . The summary of F- test is given
below:
F = MSR/MSE = 0.462/.003 = 154.620
Significance of aptitude test: At a significance level of .05 any
independent variable having a significant level around .05 will
regard as significant. In our aptitude test significance level of
0.059 is significant.
70
Significance of overall model: At a significant level of .05 the
overall model will be significant if the F ratio is large enough
and the significance level is around .05. In our test the F ratio
is 154.620 which is large enough to describe the overall test and
the significance level is .059 which is close to .05. So we can
conclude that the overall relationship is significant.
Here we accept alternative hypothesis. Thus there is a
relationship between ROA and the credit risk management.
71
Chapter: 09
Findings Summary, Recommendation
and Conclusion
72
8.1 Summary of Findings:
Credit risk is an investor’s risk of loss arising from a
borrower who does not make payments as promised. Such an
event is called default. Other terms for credit risk are
default risk & counterparty risk.
The importance of credit risk management for banking is
tremendous because Banks and other financial institutions
make profit from their credit disbursement. So it is very
important for banks and other financial institution to manage
credit risk properly. Effective CRM helps to increase the
present and future financial performance of a bank.
The main challenges of CRM are additional cost for training
and employee motivation.
The process of CRM contains several elements such as Credit
processing, Approval, Documentation, Administration,
Disbursement, Monitoring Credit classification and Credit
recovery etc.
The BBL follows the rules and regulation given by the
Bangladesh Bank in practicing Credit risk management. It
generally focuses on industrial credit policy rather than
general credit. The CRM department of BBL includes approval,
operation, and recovery and asset management unit.
73
BBL recover its bad portfolio by using some recovery methods
such as file transfer, legal notice, write off management,
early alert account and credit inspection etc.
The level of credit risk of BBL is in moderate level. The
amount of total loans, unclassified loans and classified
loans is in increasing trend. BASIC Bank maintains good
amount provision against the classified loans. The NPLR and
STLR ratio is in good level for BBL.
The relationship between CRM and Banks profitability is
positive. Therefore, it can be said that effective CRM can
contributes on Banks financial performance.
8.2 Recommendations:
BBL should have a clear written guideline for CRM. The
lending guideline should include Industry & Business segment
focus, types of loan facilities, single borrower & group
limit, lending caps, discouraged business types, loan
facility parameters, and cross border risk.
It should adopt a credit grading system in which all
facilities should be assigned a risk grade & the borrowers
risk grades should be clearly stated on credit application.
74
Approval authority should be delegated to individual
executives rather than Executive Committee/ Board to ensure
accountability. This system will not only ensure
accountability of individual executives but also expedite the
approval process.
The organization structure should have to be changed to put
in place the segregation of Marketing / Relationship
Management function from approval / Risk Management /
Administration function.
The employees of BBL should carefully check the customers KYC
form, and take enough collateral before providing them loan.
BBL should follow the CRG model provided by the Bangladesh
Bank.
BBL should keep as much as provision against the loans.
BBL should lessen the NPL ratio low by the proper management
of loan.
BBL should provide better training to the employees about
CRM.
75
8.3 Conclusion:
To conclude the report, it is imperative to mention that default
clients have been a major problem for the banking financial
institutions for long and the financial institutions have been
trying to minimize the default problem all along. The Bangladesh
Bank has been striving to assist the financial institutions to
get out of the default risk problem and formulating policies for
that purpose. As a continuance to this, Bangladesh Bank has been
providing directives when and where it seems to be necessary.
As a leading financial institution of Bangladesh, BASIC Bank
Limited has been maintaining its operation in a smooth way.
Though the bank faced many problems, its experience in the field
of corporate and proper lending policy make it very much cautious
about the risk. A very skillful and technically enriched CRM
department is always working with its full capacity to analyze
the risk of its products and services. So far it has proved
itself as a successful organization in assessing risk and thus
takes care of it.
The main purpose of this paper is to show about the CRM practice
of banks. It describes about the theoretical framework,
importance, process, advantage and challenges of CRM. It also
describes the CRM practice and performance of BBL. Finally it
tries to find if there is a relationship between CRM performance
76
and banks profitability. All these analysis is described on the
perspective of BASIC Bank limited, Bangladesh.
77
Bibliography & References:
1. Annual Report of BASIC Bank Limited (2008-2012)
2. Bagchi S K (2003), “Credit Risk Management – A Panacea or
Conundrum?”, SBI Monthly Review, Vol. 42, No. 10, pp. 497-504.
3. Banerjee, Prashanta K., & Farooqui Q.G.M. (2009), “Credit
Management in Banks-BIBM”
4. Bangladesh-bank.org. 2013. CREDIT RISK MANAGEMENT - Bangladesh
Bank. [online]
5. Froot Kenneth A and Jeremy C Stein (1998), “Risk Management,
Capital Budgeting, and Capital Structure Policy for Financial
Institutions: An Integrated Approach”, Journal of Financial
Economics, Vol. 47, pp. 55-82.
6. Glantz, M. 2002. Managing bank risk. Amsterdam: Academic Press.
7. Kargi, H. S. (2011), “Credit risk and the Performance of
Nigeria banks” Ahmadu Bello University Zaria.
8. Khan, A.R. “Bank Fund Management (A fund emphasis)-Year 2008”
9. Kinthinji, A. M. (2010), “Credit risk management and
profitability of commercial banks in Kenya”
10. Muninarayanappa and Nirmala (2004), “Credit Risk Management
in Banks – Key Issues”, Journal of Accounting & Finance, Vol. 18, No.
1, pp. 94-98.
1
11. Prudential Regulation for Banks: Selected Issues. 2011.
Prudential regulations for consumer financing 2004, Bangladesh Bank.
12.Rajagopal S (1996), “Bank Risk Management – A Risk Pricing
Model”, SBI Monthly Review, Vol. 35, No. 11, pp. 553-567.
13. Rose, Peter S. (2001) “Commercial Bank Management”
14. Treacy William F and Carey Mark S (1998), “Credit Risk
Rating at Large US Banks”, Federal Reserve Bulletin, November.
2
Appendix:
Appendix 1: (Summary of Regression Analysis)
Model Summary
Model R
RSquare
AdjustedR Square
Std.Error of
theEstimate
Change Statistics
R SquareChange
FChange df1 df2
Sig. FChange
1 .999a .998 .991 .05464 .998 154.620 3 1 .059
a. Predictors: (Constant), CAR, PPL, NPLR
Appendix 2: (Summary of Coefficient Analysis)
Coefficientsa
Model
UnstandardizedCoefficients
Standardized
Coefficients
t Sig.
Correlations
BStd.Error Beta
Zero-order Partial Part
1(Constant) 2.195 .325 6.758 .094
NPLR -.353 .018 -.962 -19.865 .032 -.991 -.999 -.921
PPL .010 .006 .081 1.707 .337 -.003 .863 .079
CAR .041 .017 .117 2.378 .253 .379 .922 .110
a. Dependent Variable: ROA
Appendix 3: (Summary of ANOVA Analysis)
3
ANOVAb
ModelSum ofSquares df Mean Square F Sig.
1 Regression 1.385 3 .462 154.620 .059a
Residual .003 1 .003
Total 1.388 4
a. Predictors: (Constant), CAR, PPL, NPLR
b. Dependent Variable: ROA
4