1.1 Origin of the Report

The Applied Research Work program exercise a significant importance as it is undertaken after

completion of a vast theoretical course, Organized by the Department of Business

Administration, the students study thoroughly about the institutions. At the end of the program,

the students are required to place the accomplishment and findings of the work through the

writing of report covering the topic assigned to them. During the program each student is

supervised and guided by a teacher of the department. It enables the students to develop their

analytical skills and scholastic aptitudes.

I have conducted a study on “Credit Risk Analysis of First Security Islami Bank Limited’. 

My supervisor Mr. Ashraful Ferdous Chowdhury, Lecturer, Department of Business

Administration, Leading University, Sylhet, also approved the topic and authorized me to

prepare this report as part of the fulfillment of internship requirement.

1.2 Objectives

The objective of this report is to focus on two broad issues. One is to briefly look at First

Security Islamic Bank and understand the whole banking process, keeping close attention on

their culture. The second objective and the main issues of this report is as follows-

To briefly discuss about the different investments made by FSIBL and discuss their process,

policies and regulations.

To briefly discuss about the consumer credit approval procedure of the Bank as a system.

Analyze different important risk assessment criteria in credit risk management.

1.3 Scope

The report limits its scope to First Security Islamic Bank only.

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1.4 Limitations

Information at the bank is confidential & critical.

FSIBL maintains their credit policy and different statistical information strictly confidential.

The findings are not statistically validated.

No statistical analysis is done. The findings are not statistically validated. It is done on a

subjective analysis approach.

1.5 Methodology

1.5.1 Approach

The report is based on both primary and secondary research. The secondary research

provided the main input for the report. This provided a theoretical basis of the report. The

primary research was done to interlink between different concepts & processes of risk

assessment.

1.5.2 Information Source

Information collected to furnish this report is both from primary and secondary in nature.

This study is mainly based on the information extracted from various published annual

reports, books, documents, study reports and articles. Interviews and discussion with the

senior executives of the Bank gave some insights into the problems and issues of the study.

The methods of collecting data followed throughout the study may be detailed as under:

FSIBL credit policy and guidelines

Practical Banking experience of the bank’s officers.

Discussion with the officers / executives of the Bank.

Annual Reports

Journals of existing literature

Different websites.

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1.6 Report Organization

This report is divided in five chapters. The following chapter is the organization part i.e. this

chapter will give an overview of First Security Islami Bank Limited. In chapter (iii) to Credit

Risk Management Policy and Practice of FSIBL is critically analyzed focusing on Credit and

Risk Assessment Process, Credit Risk Grading System, Credit Approval Process and Monitoring,

Credit Administration Process, and Loan Classification and Recovery and finally chapter (iv)

deals with Empirical Analysis, findings and conclusion.

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2.1 HISTORICAL BACKGROUND

First Security Islami Bank Limited (FSIBL) was incorporated in Bangladesh on 29 August 1999

as a banking company under Companies Act 1994 to carry on banking business. It obtained

permission from Bangladesh Bank on 22 September 1999 to commence its business. The Bank

carries banking activities through its Fifty Three (53) branches in the country. The commercial

banking activities of the bank encompass a wide range of services including accepting deposits,

making loans, discounting bills, conducting money transfer and foreign exchange transactions,

and performing other related services such as safe keeping, collections and issuing guarantees,

acceptances and letter of credit.

At the beginning, FSIBL started their business with traditional commercial banking services.

However, from 2008 they converted their business to Islamic Banking with Islamic Shariah Act.

The FSIBL has played a pioneering role in shaping the future of the Banking industry in

Bangladesh since its inception. The Bank started in 1999 with 14 branches and now it has 53

branches in Bangladesh and recently the bank introduce an Exchange House in Canada.

The Bank also maintains a comprehensive correspondent relationship with top ranking banks.

FSIBL has already started their on-line, SMS and ATM banking facilities for their clients.

2.2 Vision of the Bank

“Wherever you are, you can Bank with us” is the motto of First Security Islami Bank. FSIBL is

prepared to meet the challenge of the 21st century well ahead of time. To cope with the challenge

of the new millennium it hired experienced and well-reputed banker of the country from the

inception. The bank has efficient and dedicated professional and equipped with modem

technology to provide the best service in the need of the people and thus to realize its vision. So

the Bank defamed its Vision: ‘to be the most efficient Islamic Bank in terms of customer service

profitability and technology application’.

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2.3 Mission

To develop & deliver the most innovative products, manage customer experience, deliver quality

services that contributes to brand strength, establishes a competitive advantage and enhances

profitability, thus providing value to the stakeholders of the bank

2.4 Goal of the bank

To exceed customer expectations through innovative Islamic financial products & services and

establish a strong presence to recognize shareholder’s expectation and optimize their rewards

through dedicated work force.

2.5 Special Features of FSIBL

All activities of FSIBL are conducted under a profit/loss based system according to

Islamic Shariah to get the nation rid of Usury.

Its investment policies under different modes are fully Shariah compliant and well

monitored by the board of Shariah Council.

FSIBL has included online banking in its wide range of services. Bangladeshi

software has been introduced in this feature to promote the local developers.

FSIBL regularly arranges its AGMs (Annual General Meeting). Whenever needed

EGMs (Extraordinary General Meeting) are also arranged.

They believe in providing dedicated services to the clients imbued with Islamic spirit

of brotherhood, peace and fraternity.

The bank is committed towards establishing a welfare-oriented banking system to

meet the needs of low income and underprivileged class of people.

The Bank upholds the Islamic values of establishment of a justified economic system

through social emancipation and equitable distribution of wealth.

Following the Islamic traditions, it is assisting in the economic progress of the

socially deprived people; in the creation of employment opportunities and in

promotion of rural areas to ensure a balance development of the country.

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2.6 FSIBL’s Inter Division and Branch Coordination

All the 53 branches are computerized under distributed server environment. Another few

branches are planning to open in near future. FSIBL has already started their on-line, SMS and

ATM banking facilities for their clients.

FSIBL have set up Wide Area Network through Radio, Fiber-Optics & other available

communication media systems to provide any branch banking to their customers. Customer of

one branch is now able to deposit and withdraw money at any of our branches.

 2.7 Online Banking

FSIBL Online banking application addresses the needs of small, individual and corporate

account holders of the bank. This application provides a comprehensive range of banking

services that enable the customer to meet most of their banking requirements over the Net at any

branch.

2.8 SMS Banking

SMS banking is a technology-enabled service offering from banks to its customers, permitting

them to operate selected banking services over their mobile phones using SMS messaging. First

Security Islami Bank Ltd. has officially launched SMS banking service from December 17,

2007.

2.9 Merchant Banking

FSIBL’s Merchant Banking Group is strongly positioned to offer perfect financial solutions its

client’s business. They specialize in the arrangement of various forms of Foreign Currency

Credits for Corporate. FSIBL provide the resources, convenience and services to meet its clients’

needs by arranging Foreign Currency credits through:

• Commercial loans

• Syndicated loans

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• Lines of Credit from Foreign Banks and Financial Institutions

• FCNR loans

• Loans from Export Credit Agencies

• Financing of Imports.

2.10 Product and Services

In the memorandum and articles of association of the First Security Islami Bank is revised its

area of operation is clearly written. The product of FSIBL is targeted to fulfill that aim. The

product and services that are currently available are given below:

Depository Products

First Security Islami Bank is now offering 09 depository products for mobilizing the savings of

the general people. There are also emphasizing on non-fund business and fee based income. Bid

bond/ bid security can be issued at our customer's request.

FSIBL is posed to extend L/C facilities to its importers / exporters through establishment of

correspondent relations and Nostro Accounts with leading banks all over the world.

Loan Products

First Security Islami Bank offers a wide range of loan and advance product to the client for

financing different purpose that fulfill the requirements of the bank and have good return to the

investment as well as satisfy the client.

Other Product and Services

The bank has its concentration for new product and services development for satisfying its

customer and increasing its customer base. They prefer now faster service with least cost. For

delivering faster service the bank has introduced online banking service. There are other products

and services that FSIBL has introduced. They are:

Online Banking Services

Locker Services

Utility Bills

ATM services

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3.1 Introduction

Risk is inherent in all commercial operations. For Banks and Financial institutions, Credit risk is

an essential factor, which needs to be managed properly. Credit risk virtually is the possibility

that a borrower will fail to repay debt in accordance with the terms of sanction. Credit risk,

therefore, arises from the bank's lending operations. In the present day's state of deregulation and

globalization, in banks a range of activities have increased, so also are the risks. Expansion of

bank's lending operations rang new products have forced the banks to confront newer risk areas

and therefore to work out proper risk addressing devices. Credit risks are so exhaustive that a

single device cannot encompass all the risks. Moreover lending risks today have assumed such

diverse nature, that newer techniques are to be applied to effectively contain the risks. In order to

effectively contain risks, credit risk management has to be done in order to enable the bank to

proactively manage loan portfolios in order to minimize losses and earn acceptable level of

return for the shareholders. In the present scenario of fast changing, dynamic global economy

and the increasing pressure of globalization, liberalization, consolidation and Dis-intermediation,

it is essential to undertake robust credit risk management policies and procedures, sensitive and

responsive to these changes.

First Security Islami Bank Ltd. (FSIBL) is committed to extend high quality services to its

clients through different financial products and profitable utilization of fund by undertaking

various lending operations including financing trade, consumer finance, commerce & Industry

etc. In conducting lending operations FSIBL always bears in mind the essence of proper risk

identification and their effective management. It is also recognized that failure in proper

identification and management of risks may result in a large quantum of bank advances turning

into non-performing.

In the above background, First Security Islami Bank Ltd. calls attention to the need of an

effective credit risk management process has prepared the policy guidelines for Credit Risk

Management. The policy will be reviewed annually by the Board of Directors of the bank. The

policy must be strictly followed by all concerned officials and any deviation from the risk

management policies to be clearly identified and justification for approval to be provided.

The Credit Risk Management System of FSIBL covers the following main purposes, which make

the credit management system more effective and fruitful.

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1) To provide directional guidelines to all concerned to improve risk management culture &

establish minimum standard for managing risks in credit operations.

2) To adopt an appropriate working method.

3) To keep legal aspects relating to loans and advances vivid.

4) To introduce and adopt uniform practice in working.

5) To make working procedure rational.

6) To make lending correct information based.

7) To identify proper lending area.

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

9) To make credit documentation exhaustive.

10) To ensure proper supervision, monitoring & follow up.

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

and to protect bank's interest.

3.1.1 Lending principles

To safeguard Bank's interest over the entire period of the advance, FSIBL generally gives

emphasis on a comprehensive view of the capital, capacity, integrity of the borrower, adequacy,

nature of security, compliance with all legal formalities, and completion of all documentation

and finally a constant watch on the account. Where advances are granted against the guarantee of

a third party, that guarantor must be subjected to the same credit assessment as made for the

principal borrower. The basis of security valuations is expert third party assessments, current

market price and forced sale value.

While making lending decisions, particular attention should be given to the analysis of credit

proposals received from heavily leveraged Companies and those dealing in non-essential

consumer goods, taking special care about their debt servicing abilities. Besides the bank gives

emphasis on the following sound credit principles:

(a) Present and future business potentiality for optimum deployment of Bank's fund to

increase return on assets.

(b) Preference for self-liquidating quality business.

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(c) Avoiding marginal performers.

(d) Risk dispersion is basic to sound credit principles and policies. Bank should be careful

about large and undue concentration of credit to industry, one obligors and common

product line etc.

(e) Managing the amount, size, nature and soundness of one-obligor exposures relative to the

size of the borrower and Bank's position among his other lenders.

(f) Personal guarantees of the principal partners or the Directors of the Companies and

where necessary, subordination agreement should be obtained.

(g) The asset-conversion or transaction flow cycle and the net trading cycle of the customer

i.e. the terms on which they conduct-the business.

3.1.2 Credit evaluation

To minimize default risk of credit, FSIBL generally adopts the following credit evaluation

process:

Prevailing credit practices in the market.

Credit worthiness, background and track records of the borrower.

Financial standing of the borrower supported by financial statement and other

documentary evidences.

Legal jurisdiction and implications of applicable laws.

Effect of any applicable regulations and laws.

Purpose of the credit facility.

Terms and conditions of the credit facility.

Viability of the business concern.

Cash flow analysis and also projections thereof.

Quality, value and adequacy of security, if available.

Risk taking capacity of the borrower.

Entrepreneurship and managerial capabilities of the borrower.

Reliability of the sources of repayment.

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

Profitability of the proposal to the bank or company concerned.

Credit Risk Grading

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Yield from the facility

Market aspect

Total global exposure of the borrower

CIB Status of borrower

3.1.3 Policy Guidelines

The Investment Policy guidelines of the Bank describes details fundamental Investment risk

management policies, outlines general principles that are designed to govern the implementation

of more detailed Investment procedures and Investment risk analysis / risk grading system.

3.1.4 Investment Guidelines

The basic principles of Investment are described in this section. It must be clearly understood

at the outset that these principles are not inflexible and are given as guidelines for protecting

the Investments. The followings are the general principle to be considered for Investment to

customer on a basis consistent with the global operational objectives and business strategies

of the bank:

a. The bank shall provide suitable Investment services and products for the markets in

which it operates.

b. Investments shall normally be Investment from customers deposit and not out of

temporary funds or borrowing from other Banks.

c. Investment facility will be allowed in a manner, which will in no way compromise

with Banks standards of excellence.

d. All Investment extension must comply with the requirements of Bank’s

Memorandum and Articles of Association, Banking Companies Act 1991 as amended

from time to time / Bangladesh Bank’s instructions and other applicable rules and

regulations.

e. A prudent banker should always adhere to the following principles of Investment to

his customer: (1) Background, character and capability of the borrowers, (2) Purpose

of the facility, (3) Term of facility, (4) Safety, (5) Security, (6) Profitability, (7)

Source of repayment, (8) Diversity

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It should be remembered that selection of the appropriate borrowers, proper follow-up and

end-use supervision through constant follow-up and monitoring are the cornerstone for

timely recovery. These guidelines will be updated annually.

Before selecting a customer / client and subsequent recommendation for Investment, the

Investment Officer / Relationship Manager must observe the following basics of Investment:

Industry and Business Segment Focus

As a general practice First Security Islami Bank Limited will definitely concentrate its

business in Trade Investment / Export – Import business and all types of Commercial

Investment, Industrial / Project Investment / Syndication and structured Investment /

SME Investment and other specialized programs except otherwise restricted by the

Government or indicated as unethical and banned items.

The Bank will give emphasis to diversify its business portfolio commensurate with

economic and business trend, life cycle of the products, demand supply gap, social and

national obligation etc. The Bank’s policies for Investment in different major sectors are

summarized as follows:

SL Sectors Policies

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1) Textile/Spinning/Sweater/Knitting/Denims & Garments To expand

2) Cement To maintain

3) Construction / Real estate / House building To maintain

4) Telecommunication To maintain

5) Communication Selective basis

6) Information Technology (IT) Project To expand

7) Agro-based Industry To expand

8) Hospital / Clinic / School / College / University Selective basis

9) Healthcare / Pharmaceuticals / Medicine To expand

10) Electrical / Electronic appliance To expand

11) Investment to NBFI Selective basis

12) Special Program: Consumer Investment Scheme, SME

Investment Scheme, Lease Investment Scheme, Hire

Purchase, Earnest Money Investment Scheme, Mortgage

Investment, Employees House Building Scheme, ATM,

VISA Investment Card, EEF, etc.

Selective basis

13) Plastic / Packaging Selective basis

14) Leather To expand

15) Steel and Engineering To expand

16) Edible oil To maintain

17) Scrap Vessel Restricted way

18) Paper / Pulp / Partex To expand

19) Chemicals To maintain

20) Others Based on merit

The Bank’s policy is to handle the specialized business sectors / segments by setting up

separate units in Head Office Investment Division. In view of this, Bank has a plan to set up

the following units in Head office Investment Division:

a. Corporate Banking (already implemented),

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b. Project Investment,

c. Syndication Investment,

d. Garments Sector,

e. SME (already implemented),

f. Specialized Schemes like

a. Consumer Investment Scheme,

b. Lease Investment Scheme,

c. Hire Purchase,

d. Earnest Money Investment Scheme,

e. Mortgage Investment,

f. Employees House Building Scheme,

g. ATM, VISA Investment Card, EEF, etc.

The Policies for the above specialized segments / sectors have been / to be circulated to

all concerns from time to time.

3.1.5 Types of Investment Facilities

The Bank’s Policy is to introduce diversified / new types of Products / Product derivatives

along with usual Banking Products. At present the Bank offers the following facilities:

i. Investment / Deployment of Funds:

a. Bai-Murabaha (Deferred Lump Sum/ Installment Sale)

b. Bai-Muajjal (Deferred Installment / Lump Sum Sale)

c. Ijara (Leasing)

d. Musharaka (Joint-Venture Profit-Sharing)

e. Mudaraba (Trustee Profit-Sharing)

f. Bai-Salam (Advance Sale and Purchase)

g. Hire-Purchase

h. Direct Investments

i. Post Import Investment

j. Purchase and Negotiation of Export Bills

k. Inland Bills Purchased

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l. Murabaha Import Bills

m. Bai-Muajjal Import Bills

n. Pre Shipment Investment

o. Quard-ul-Hasan (Benevolent Investment)

ii. Letter of Guarantee:

a. Tender Guarantee

b. Performance Guarantee

c. Guarantee for Sub-Contracts

d. Shipping guarantee

e. Advance Payment guarantee

f. Guarantee in lieu of Security Deposits

g. Guarantee for exemption of Customs Duties

h. Others

iii. Letter of Credit (L/C) / Back to Back Letter of Credit (L/C)

iv. Specialized Schemes

a. Consumer Investment Scheme,

b. SME Investment Scheme,

c. Lease Investment Scheme,

d. Hire Purchase,

e. Earnest Money Investment Scheme,

f. Mortgage Investment,

g. Employees House Building Scheme,

h. ATM, VISA Investment Card, EEF, etc.

3.1.6 Single Borrower / Group Limits / Syndication

The Bank may extend the maximum Investment facilities (funded/non-funded) to a single

client/enterprise/group as per guidelines of Bangladesh Bank BRPD circulars issued / to be

issued from time to time on the following criteria:

Clients falling under Grade 1 category as per Bank’s Risk Grading System.

15

Covered by adequate collateral security or Guarantee.

Established long term business / Banking relationship.

The total outstanding Investment facilities by the Bank to any single client or

enterprise or organization / group shall not at any point of time maximum ceiling as

stipulated by the extreme Banking Authority i.e. Bangladesh Bank or as advised by

Bangladesh Bank from time to time.

Total large Investment portfolio of the Bank will not exceed the limit as

stipulated by the Bangladesh Bank depending on the capital base and the volume of

the non-performing Investments of the Bank in the portfolio or as advised by

Bangladesh Bank from time to time.

In line with basic principles of Investment, the Bank always discourages to lend its

maximum ceiling to a single client / group to minimize the risk. The Bank will prefer as a

policy guideline to arrange syndicated Investment / participate in the syndicated /

consortium Investment arrangement or in a club Investment.

One obligor / Group Concept:

Group Relationship would be established as per Bangladesh Bank guidelines provided /

to be provided from time to time.

3.1.7 Investment Caps

The Bank Management will establish a specific industry sector exposure cap to

avoid over concentration in any one-industry sector. Sector-wise allocation of

Investment shall be made annually with the approval of the EC of the Board /

Board of Directors.

Diversification of Investment Portfolio will be encouraged so as to reduce the risk

of dependence on a particular sector for balanced socio-economic development of

the country.

Branches shall submit a report outlining trend and outstanding to the Head of

Investment Administration Division on quarterly basis for onward submission to

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the Executive Committee of the Board of Directors / Board of Directors for

information/ perusal/ guidance.

3.1.8 Discouraged business types (areas of business)

Military Equipment / Weapons Investment,

Companies listed on CIB black list or known defaulters,

Highly Leveraged Transactions,

Investment of Speculative Investments,

Tobacco Sector / Logging, Mineral Extraction / Mining or other activity that is

Ethically or Environmentally Sensitive,

Counter parties in countries subject to UN sanctions,

Bridge Investment [Equity/Debt issuance as a source of repayment],

Investment to Holding Companies.

3.1.9 Investment Facility Parameters

The Bank in general will approve / renew trade Investment facility for the

period of 01 (one) year from the date of approval / last expiry date.

The Bank will extend medium term Investment for 3 (three) years period.

The Bank will extend long term Investment for maximum period of 7 (seven)

year including grace period of 6 (six) months to 18 (eighteen) months (depending

on the nature of Project) for project Investment but in case of need, in syndication

or club Investment, the Bank may extend the period of Investment up to 8 (eight)

years or as per consensus of the syndicated members.

However, in case of House Building Investment (General), the repayment

period will be a maximum of 20 (Twenty) years.

House Building Investment to Bank’s employee shall be governed as per

policy guidelines of “Employees House Building Investment” scheme.

Besides above, the Bank will extend Investment facilities under special

program like Consumer Investment Scheme, Small Investment Scheme, SME

Investment, Doctor’s Investment Scheme, Women Entrepreneurship Development

Project, Personal Investment, Car Investment, House Building Investment

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(General) / Mortgage Investment, NBFI’s as per policy set/to be set by the Bank

under the policy guidelines of the specific scheme.

The rate of Profit / Commission / Charges / Fees etc. would be as per the

approved schedule of charges with variation permissible as per Bangladesh Bank

guidelines and with the approval of competent authority.

The Profit rate to be charged and to be paid out on yearly basis except the

especial schemes and unless otherwise specified in the approved terms.

Repayment of term Investment would be fixed on monthly/quarterly basis.

In general, the cash margin for L/C would be 10% of the L/C amount or on

the basis of Banker – Customer relationship subject to the minimum requirement

of Bangladesh Bank whichever is higher.

For the import of Capital machinery, the cash margin for L/C would be 25% -

30% or on the basis of Banker – Customer relationship subject to the minimum

requirement of Bangladesh Bank whichever is higher.

The competent authority of the Bank, as mentioned above, would specifically

approve any exception.

Security accepted against Investment facilities shall be properly valued and

shall be affected in accordance with Laws of the country in which the security is

held. An appropriate margin of security will be taken to reflect such factor as the

disposal costs or potential price movements of the underlying assets.

Accepted Securities: Cash/Cash equivalent, Land and Building (registered

mortgage with registered IGPA), hypothecation / ownership of Plant and

Machinery, stock of goods, assignment of bills / receivables, book debts, pledge of

shares, guarantee / Corporate Guarantee, etc.

Valuation of the landed property / Building / Machinery / Stock of Raw

materials / finished products shall be done by the Bank’s enlisted professional

surveyors duly checked by the Bank officials.

Mortgage formalities including execution of registered IGPA must be

completed as per legal vetting of the Bank’s approved enlisted Lawyer.

The value of the mortgage property shall be preferably being double of the

facility to be extended depending upon other security coverage.

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The security condition may be relaxed depending upon the Investment worthiness of the

client / Banker-Customer relationship / potentiality of the business.

Any exceptions of the parameters mentioned above are subject to be approved by the

competent authority as per delegated power approved by the Board of Directors

3.1.10. Cross Border Risk / Political and Sovereign Risk

Risk associated with cross border Investment. Borrowers of a particular country may be

unable or unwilling to fulfill principle and/or Profit obligation, distinguished from ordinary

Investment risk because the difficulty arises from a political event, such as suspension of

external payments. For example, export documents negotiated for countries like Nigeria. This

risk can also be named as Third world debt crisis

3.1.11. Pricing Policy

Profit rates/pricing of Investments, charges, commissions, etc. on various Investment

categories will depend on the level of risk, period of Investment and type of security offered.

The higher the risk, the higher will be the Profit rate. However, exceptions shall be made in

case of Investment in national priority sectors.

The Bank from time to time circulate the Profit rate / pricing of Investments / charges /

commissions, etc. to its branches with the approval of competent authority and as per

guidelines of Bangladesh Bank. As on date the Bank fixes a mid rate for Investment based on

the Average Cost of Fund. All pricing of Investments shall, however, have relevance to the

market condition and be approved by the appropriate authority of the Bank.

3.1.12. Investment and Marketing Fundamentals

To place a high priority on the quality of Investment exposure, new proposals

must meet Bank’s Investment criteria review for improving risk positions.

Maximization of profit is the basic aim of the bank, as such every profit

opportunity should be explored and professional skills be employed in this

direction.

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To avoid unnecessary wastage of time, energy and ambiguity a clear, concise

and summary type communications shall be used.

To be thoroughly familiar with the Bank’s policies and functions.

To keep the expense burden of Investment operations to the barest minimum

and endeavor to improve the cost efficiency of Investment operations.

To contribute one’s best in all matters where his approval, concurrence or

other action is involved.

To apply strong common sense in all Investment matters by raising questions-

does this make sense? Is there a better way? How to improve this?

To avoid all temptations which may jeopardize or compromise the Bank’s risk

assets?

3.2Credit Risk Assessment, Policies and regulations

3.2.1. Investment Assessment and Risk Grading

All financial activities involve a certain degree of risk and particularly, the financial

institutions of the modern era are engaged in various complex financial activities requiring

them to put proper attention to every detail.

Investment Assessment

A thorough Investment and Risk assessment shall be conducted for all types of Investment

proposals. The results of this assessment to be presented in the approved Investment

Appraisal Form that originates from the Investment Officer / Relationship Manager (RM)

and is to be approved by the Investment Committee / Executive Committee of the Board of

Directors / Board of Directors. The Investment Officers / RM is the owner of the customer

relationship and must be held responsible to ensure the accuracy of the entire Investment

application / proposal submitted for approval. The Investment Officer / RMs must be familiar

with Bank’s Investment Guidelines and should conduct due diligence on new borrowers,

principals and guarantors in line with policy guidelines.

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Investment Appraisal should summarize the results of Investment Officers / RMs risks

assessment and includes, as a minimum, the following details:

Amount and type of Investment(s) proposed

Purpose of Investment(s)

Results of Financial analysis

Investment structure (Tenor, Covenants, Repayment schedule, Profit)

Security Arrangements

KYC Concept

The Investment Officers/RM must 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 i.e., Know Your Customer (KYC).

The Banker – Customer relationship would be established first through opening of CD/

STD / SB accounts. Proper introduction, photographs of the account holders / signatories,

passport, Trade License, Memorandum and Articles of the Company, certificate of

incorporation, certificate of commencement of business, List of Directors, resolution, etc.

i.e. all the required papers as per Bank’s policy and regulatory requirements are to be

obtained at the time of opening of the account. A declaration regarding approximate

transaction to the account is to be obtained during opening of account. Information

regarding business pattern, nature of business, volume of business etc. is to be

ascertained. Any suspicious transaction must be timely addressed and brought down to

the notice of the Head Office / Bangladesh Bank as required and also appropriate

corrective measures to be taken as per the direction of Bank Management/Bangladesh

Bank.

Risk Management/Investment Risk Assessment – Investment Decision

A comprehensive and accurate appraisal of the risk in every Investment proposal of the Bank

is mandatory. No proposal can be put on place before approving authority unless there has

been a complete analysis. In order to safeguard Bank’s Profit over the entire period of the

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Investment, a comprehensive view of the capital, capacity, integrity of the borrower,

adequacy, nature of security, compliance with all regulatory /legal formalities, condition of

all documentation and finally a continuous and constant supervision on the account are called

for. It is absolute responsibility of the Investment Officer / RM to ensure that all the

necessary documents are collected before the proposal is placed for approval. Where

Investments are granted against the guarantee of the third party, that guarantor must be

subject to the same Investment assessment as made for the principal borrower.

While making Investment decisions, attention shall be given to the analysis of Investment

proposals received from heavily leveraged companies and those dealing in non-essential

consumer goods. Special care regarding their debt servicing abilities is to be taken. Emphasis

shall be given on the following several Investment principles:

Present and future business potentiality for optimum deployment of Bank’s

fund to increase return on assets,

Preference for self liquidating quality business,

Avoiding marginal performers,

Risk depression is basic to sound Investment principles and policies. Bank

shall be careful about large and undue concentration of Investment to industry,

one obligor and common product line etc.,

Managing the amount, size, nature and soundness of one-obligor exposures

relative to the size of the borrower and Bank’s position among his other lenders,

Personal guarantee of the principal partners or the Directors of the Company

shall be obtained.

3.2.2 Prudential Regulations:

1. FACILITIES TO RELATED PERSONS

22

The consumer finance facilities extended by bank to the directors, major shareholders,

employees and family members of these persons shall be at arms length basis and on normal

terms and conditions applicable for other customers of the banks. The Bank shall ensure that the

appraisal standards are not compromised in such cases and market rates are used for these

persons.

2. TOTAL FINANCING FIACILITIES TO BE COMMENSURATE WITH THE

INCOME

While extending financing facilities to the customers, the bank would ensure that the total

installment of the loans extended by the Bank is commensurate with the take home

income/disposable income and repayment capacity of the borrower. This measure would be in

addition to bank’s usual evaluations of each proposal concerning credit worthiness of the

borrowers, that the banks' portfolio under consumer finance fulfills the prudential norms and

instructions issued by the Central Bank and does not impair the soundness and safety of the bank

itself.

3. CLASSIFICATION AND PROVISIONING FOR ASSETS

Subjective evaluation of performing and non-performing investment portfolio shall be made for

risk assessment and, where considered necessary, any account including the performing account

will be classified, and the category of classification determined on the basis of time based criteria

shall be further downgraded. Such evaluation shall be carried out on the basis of credit

worthiness of the borrower, its cash flow, operation of the account, adequacy of the security,

inclusive of its realizable value and documentation covering the advances.

4. RESCHEDULING OF INVESTMENT/LOAN

Rescheduling of investment/loan will be governed by rules & regulations as prescribed by

Bangladesh Bank from time to time.

5. TRANSFER FACILITIES FROM ONE CATEGORY TO ANOTHER TO AVOID

CLASSIFICATION

23

The bank shall not transfer any investment/loan or facility to be classified from one category of

consumer finance to another to avoid classification.

6. CREDIT INFORMATION BUREAU (CIB) CLEARANCE

While considering proposals for any exposure, banks should give due weight age to the credit

report relating to the borrower and his group obtained from a Credit Information Bureau (CIB) of

Bangladesh Bank. The condition of obtaining CIB report will be governed by rules & regulations

as prescribed by Bangladesh Bank from time to time.

REGULATIONS FOR CREDIT CARDS

REGULATION – 1

The bank should take reasonable steps to satisfy themselves that cardholders have received the

card, whether personally or by mail. The banks should advise cardholders of the need to take

reasonable steps to keep the card safe and the PIN secret so that frauds are avoided.

REGULATION – 2

Bank shall provide the credit card holders with the statements of account at monthly intervals,

unless there has been no transaction of any outstanding balance on the account since last

statement.

REGULATION – 3

Bank shall be liable for all transactions not authorized by the credit card holders after they have

been properly served with a notice that the card has been lost/stolen. However, the bank's

liability shall be limited to those amounts wrongly charged to the credit card holder's account. In

order to mitigate the risks in this respect, the banks are encouraged to take insurance cover

against wrongly charged amounts, frauds, etc.

REGULATION – 4

In case the cardholders make partial payment, the banks should take into account the partial

payment before charging service fee/mark-up amount on the outstanding/billed amount so that

the possibility of charging excess amount of mark-up could be avoided.

24

REGULATION – 5

Due date for payment must be specifically mentioned on the accounts statement. If fine/penalty

is agreed to be charged in case the payment is not made by the due date, a clear mention of the

same should be given in the agreement.

REGULATION -6

Maximum unsecured limit under credit card to a borrower (supplementary cards shall be

considered part of the principal borrower) shall not exceed Tk. 500,000/-. The banks may allow

financing under the credit card scheme in excess of the limit of Tk. 500,000/-, provided the

excess amount is secured appropriately. However, in no case the limit will be allowed to exceed

Tk. 2 million.

In case of foreign currency cards, cards can be issued subject to repayment is made against

respective foreign currency account or against lien of foreign currency quota allocated to

Bangladeshi nationals by Bangladesh Bank from time to time.

REGULATIONS FOR HPSM (AUTO)

REGULATION – 1

The vehicles to be utilized for commercial purposes shall not be covered under the Prudential

Regulation for consumer finance. Any such financing shall ensure compliance with existing

regulations covering lending. These regulations shall only apply for financing vehicles for

personal use.

REGULATION – 2

The maximum tenure of the HPSM (Auto) investment shall not exceed five-year.

REGULATION – 3

The bank shall not allow Hire Purchase under Shirkatul Milk (Auto) (including insurance)

exceeding TK. 5 million per individual under this head. For the purpose of this regulation, auto

facility to the dependent members of an individual shall also be treated as part of the exposure of

that individual.

While allowing HPSM (Auto), the bank shall ensure that the minimum down payment does not

fall below 20% of the value of vehicle.

25

REGULATION – 4

In addition to any other security arrangement on the discretion of the banks, the vehicles

financed by the banks shall be properly secured by way of hypothecation.

REGULATION – 5

The banks shall ensure that the vehicle remains properly insured (comprehensive) at all times

during the tenure of the investment.

REGULATION – 6

The clause of repossession in case of default should be clearly stated in the investment

agreement. At least 15 days before enforcing repossession, banks shall send a legal notice to the

borrower through courier service of registered mail against proper acknowledgment. The

repossession expenses charged to the borrower shall not be more than actual incurred by the

bank. However, the maximum amount of repossession charges shall be listed in the schedule of

charges provided to customer. The banks shall develop an appropriate procedure for repossession

of the vehicles and shall ensure that procedure is strictly in accordance with law.

REGULATION – 7

A detailed repayment schedule should be provided to the borrower at the outset. Where

alterations become imminent because of late payment or prepayment and the installment amount

or period changes significantly, the revised schedule should be provided to the borrower at

earliest convenience of the bank but not later than 15 days of the change. Further even in case of

insignificant changes, upon the request of the customer, the bank shall provide him revised

repayment schedule free of cost.

REGULATION – 8

The bank desirous of financing the purchase of used cars shall prepare uniform guidelines for

determining value of the used vehicles. However, in no case the bank shall finance the cars older

than five year.

26

REGULATION – 9

The bank should ensure that a good number of authorized auto dealers are placed at their panel to

eliminate the caches of collusion of other unethical practices.

REGULATIONS FOR HPSM (HOUSE BUILDING)

REGULATION – 1

The maximum per party limit in respect of housing finance by the banks will be Tk 7.5 million.

The housing finance facility shall be provided at a maximum debt equity ratio of 80:20.

REGULATION – 2

The bank shall ensure that at no time the total exposure under house financing exceeds 10% of

the net consumer advances.

REGULATION – 3

Bank will extend mortgage investment for housing, for a period not exceeding twenty year. Bank

should be mindful of adequate asset liability matching.

REGULATION – 4

The house financed by the bank shall be mortgaged in bank's favour by way of registered

mortgage with registered Power of Attorney.

REGULATION – 5

Bank shall either engage professional staff or arrange sufficient training for concerned officials

to evaluate the property, assess the genuineness and integrity of the title documents, etc.

REGULATION – 6

The bank's management should put in place a mechanism to monitor conditions in the real estate

market (or other product market) to ensure that its policies are aligned to current market

conditions.

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REGULATION – 7

Banks must develop floating rate products for extending housing finance, thereby managing

interest rate risk to avoid its adverse effects. Banks also must develop in-house system to stress

test their housing portfolio against adverse movements in interest rates as also maturity

mismatches.

REGULATIONS FOR PERSONAL INVESTMENT INCLUDING INVESTMENTS

FOR THE PURCHASE OF CONSUMER DURABLES

REGULATION – 1

Limits per person for such investment will be Tk.3 lac without any securities. However, bank

may lend higher amounts provided the investments are secured appropriately. But, in no case, the

investment amount will be allowed to exceed Tk.10 lac. The investment secured against liquid

securities shall however, be exempt from this limit.

REGULATION – 2

In cases, where the investment has been extended to purchase some durable goods/item, the same

will be hypothecated with the bank besides other securities, which the bank may require on its

own.

REGULATION – 3

The maximum tenure of the investment shall not exceed 5 year.

3.2.3 Basics of Investment Risk

The following risk areas shall be considered for analyzing a Investment proposal.

Borrower Analysis (Management / Ownership / Corporate Risk)

The majority shareholders, management teams and group or affiliate companies

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

ownership structures or inter-group transactions shall be addressed, and risks to be

mitigated. The following questions may be asked to assess the Management Risk:

28

Who is the borrower? Does any particular/special characteristic of borrower

need particular attention? For example, if the borrower is a Trust, this calls for

examination of Trust Deed.

Are there adequate abilities and experience in senior management?

Is there adequate depth and succession planning?

Is there any conflict amongst owners / senior managers that could have serious

implications?

Is the Manager/Investment Officer satisfied about the character, ability,

integrity and experience of the borrower?

Industry Analysis (Business and Industry Risk)

The key risk factors of the borrower’s industry shall be assessed. Any issues

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

competitive forces (demand supply gap) shall be addressed and the strengths and

weaknesses (SWOT Analysis) of the borrower relative to its competition to be

identified. For the above purpose the Investment Officers/RM may obtain / collect

data from the statistical yearbook / economic trends of Bangladesh Bank / public

report / newspaper/ journals etc. The following questions may be asked to assess

the Business and Industry Risk:

Are there any significant concentrations of sales (by customer, industry,

country, region)?

How does the borrower rate with its competitors in market share?

Can increased direct production costs be passed on to customers?

Does the borrower deal in products that are subject to obsolescence?

Is the purpose of borrowing consistent with the objectives of the Company?

Is the purpose legal? Does it contravene any laws of the country and any

instruction issued by the Bangladesh Bank/Head Office?

Supplier / Buyer Analysis / Market Risk

Any customer or supplier concentration shall be addressed, as these could have a

significant impact on the future viability of the borrower.

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Market Risk

The sufficient market data is to be obtained to identify clients/borrowers’ market

share in the industry / demand-supply gap in the market.

Technological Risk

The product that is manufactured must be technologically viable i.e. whether the

technology applied is updated. The product’s stage in its life cycle must be

understood. Technical Aspects of the products must be addressed. The Investment

Officer/RM must be satisfied with the mitigating factors of technical and

technological risk, associated with the products.

Financial Analysis (Historical / Projected)

An analysis of a minimum of 3 years historical financial statements of the

borrower should be presented. Where reliance is placed on a corporate guarantor,

guarantor’s financial statement should also be analyzed. The analysis should

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

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

must be analyzed. In this regard the Investment Officer / RM must look into the

status of chartered accountant audit firm.

Where term facilities (tenor > 1 year) are being proposed, a projection of the

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

analysis of the sufficiency of cash flow to service debt repayments. Investments

shall not be granted if projected cash flow is insufficient to repay debts. In this

regard the possibilities of cost overrun and sensibility analysis shall be done. The

following questions may be asked to assess the Financial Risk:

Does the borrower produce financial statements on time?

Is working Capital Adequate?

Has the customer actual title to stock?

Have financial covenants been met?

Has there been any major sale of shares by directors?

Any significant change in asset conversion cycle? (Account Receivables/

payables Inventory etc.)

30

Account Conduct

For existing borrowers, the historic performance in meeting repayment

obligations (trade payments, cheque, Profit and principal payments, etc.) shall be

assessed. In this regard the Investment Officer / RM may look into the account

turnover like debt summation / Investment summation / highest debit balance/

highest Investment balance (or lowest debit balance), no. of debit entries/ no. of

Investment entries for last three years (year wise).

Adherence to Investment Guidelines

The Investment Applications/ Appraisals must be prepared in line with Bank’s

Investment guidelines. It must be clearly stated whether or not the

application/proposal is in compliance with Bank’s Investment Policy Investment

guidelines. Related questions to be addressed are:

Is proposed application in compliance with Bank’s guidelines?

Does the Investment to clients also compliant with Central Bank’s guideline?

What are the Niche Products?

Profit Rate Risk

The Profit rate must be fixed based on different risk factors associated with the

type of business such as liquidity risk, commodity risk, equity risk, and

Investment period risk. Profit rate also arises from the movements of Profit rate in

the market. In assessing the pricing and profitability, the Investment Officer/RM

must consider the income from ancillary business like foreign exchange business,

group business, volume of business etc. Related questions to be addressed are:

What is the rate of Profit charged?

Is the rate fixed in consideration to the risk factors?

Will the rate charged be profitable to the Bank?

Foreign Exchange Risk

31

The foreign exchange transaction is associated with foreign currency fluctuation

risk. Therefore the Investment Officer/RM must take care of for the Forex risk.

The questions to be addressed are:

Does the business involve foreign currency dealings?

What are trends of foreign currency fluctuation?

Cost overrun Risk

This type of risk is generally involved in taking project Investment decision. A

high degree of cost overrun may cause the failure of the project. Therefore the

Investment officer must consider the cost components of the project and their

chance of devaluation. The questions to be addressed are-

Whether the construction cost may increase?

Whether the imported machinery cost may increase for the fluctuation of the

foreign currency.

Are all types of cost components addressed during preparation of feasibility

report?

Does sensitivity analysis prove sufficient shock absorbing capability?

Mitigating Factors

The Investment Officer/RM must address to different risks associated with the

proposal. The possible risk include but not limited to market risk, financial risk,

foreign exchange risk, risk of cost overrun, margin sustainability and/or volatility,

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

acquisition or expansion, new business line/product expansion: management

changes or succession issues, customer or supplier concentrations, and lack of

transparency or industry issues. Mitigating factors for risks identified in the

Investment assessment shall have to be described and understood.

The Bank must assess the critical risks of facilities given / to be given and ways /

factors of mitigation of those risks. Some of the critical factors are:

Volatility

High debt

32

Overstocking

Rapid growth

Acquisition

Debtors issues

Succession

Investment Structure

The amounts and tenors of Investment proposed should be justified based on the

projected repayment ability and Investment purpose. Excessive tenor or amount

relative to business needs increase the risk of fund diversion and may adversely

impact the borrower’s repayment ability. Related questions to be addressed are:

Are facilities justified by the borrower’s business?

Are any capital / long term expenditure being Investment by short time

borrowing (either OD or TR)?

What is the amount required? Is it sufficient or excess for the purpose

mentioned?

Security

Bank’s approved enlisted surveyors must make a current valuation of collateral

and the quality and priority of security being proposed shall be assessed properly.

Investment shall not be granted solely on security consideration. Adequacy and

the extent of the insurance coverage shall be assessed. The Investment

Officer/RM must look into the client’s Profit / dependability on the collateral

offered as security.

Is security offered acceptable and adequate?

Has all the security been perfected in accordance with the Investment

application?

Have any valuation and inspection been undertaken since the last

application?

If you hold a guarantee, do you consider it has value?

33

Has the Investment rating of the Borrower deteriorated and has you

considered the requirement for additional security?

Can a valid charge be obtained on the security?

Name Investment (Relationship Assessment)

Investment proposals shall not be unduly influenced by an over reliance on the

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

willingness to inject funds into various business enterprises in case of need. These

situations shall be discouraged and treated with great caution. Rather, Investment

proposals and the granting of Investments will be based on sound fundamentals

supported by a thorough financial and risk analysis. Related questions to be

addressed are:

Has the borrower complied with the terms of the facility?

Adverse feature include: any past dues / excesses / delays / cheque returns

and or default in covenants and / or failure to meet Profit.

Does the account fluctuate with the seasonality of the business?

Has the relationship strategy and earnings for the last twelve months been

met?

3.2.4 Credit Assessment

A thorough credit and risk assessment is conducted before granting of loans, and all approved

facilities are reviewed at least annually. Credit assessment is presented in a credit application

duly signed and approved by the official of the branch.

In case an account deviates from the guidelines the same are identified in credit applications and

justifications for approval are provided by the originating officials of the branch. Bank conducts

financial analysis on a regular basis and monitors changes in the client's financial condition.

The proposals are prepared in proposal format that originates in the credit department of the

branch and is processed and approved by the Head of Branch and Head office

Management/Executive committee as per delegated authority. At the time of originating, a

proposal accuracy of all information to be ensured. Originating officers follow credit principles,

34

credit policy and guidelines and conduct due diligence on new borrowers, principals and

guarantors. They also adhere to the FSIBL's established Know Your Customer (KYC), Money

Laundering guidelines, and Bangladesh Bank's regulations. For initiating credit relationship

credit officer/Head of Branch (HOB) call on the client, visit factory/business centers to see

production facility/stock/storage, pattern/business transactions/reputation etc and through these,

to assess possibilities of establishing a remunerative relationship. He/she also conducts due

diligence to get market information on the borrower from industry sources, competitors, local

area. The Head of Branch is also the part of this process. In this regard if required, the Head of

Branch and/or Credit officer may also take help of Head Office Engineer/Head Office personnel

for initial assessing the credit needs of large borrowers.

Based on findings of such calls/visits/inspection, the Head of Branch (HOB)/Credit Officer

initiates proposal, containing information on client's background, business, market share,

integrity, credit exposure, existing banking relationships, and credit needs along with pricing,

loan structure (tenor, covenants, repayment schedule) purpose of credit, type of credit, security

arrangement, etc.

Before sending proposal to the approving authority, the originating officials of the branch ensure

that the following steps/formalities have been taken/completed properly and incorporated in the

credit proposal appropriately:

1. Current CIB Report obtained

2. Repayment sources of the borrower has been justifiably established by financial analysis

3. Purpose and amount with types of loan proposed by the borrower stated in the proposal.

4. Earnings from the relationship properly assessed in the credit proposal.

5. Pre-sanction Inspection report/call report/site visit report is in place.

6. Management profile & Capital structure, Constitution, Date of Establishment are stated in

the proposal.

7. Experience of Borrowers, business skills, management & successions are properly

mentioned in the proposal.

8. Borrower's Rating in the Industry is assessed along with overall industry concerns and

borrowers strength & weakness relative to its competitions are identified.

9. Industry's position along with supplier and buyer risk is analyzed.

35

10. Borrower credit worthiness is established by review of 3 years historical financial

statements and past track record.

11. Cash Flow analysis justifying client's ability to repay is reflected in the credit proposal.

12. Industry and Business analysis is done in the proposal.

13. Credit facilities availed from other banks are clearly stated in the proposal and opinions

are obtained regarding the credit standing of 'the borrowers.

14. Credit facilities are based on an evaluation of the borrower's business needs.

15. Possible risks are identified in the credit assessment & Risk mitigating factors are clearly

mentioned in the credit proposal.

16. Credit proposals clearly mention current outstanding against all limits.

17. Audited financials, Large Loan positions etc. are reflected in the credit proposals.

18. Branches ensure that collateral has been properly valued, verified and are managed.

19. Account conduct of the borrower & his allied concerns have been done.

20. Amount and tenors are justified based on the projected repayment ability & loan purpose.

21. Adequacy and the extent of Insurance coverage are assessed.

22. Policy compliance is clearly stated in the Credit Proposal.

23. Changes in pricing of facilities are highlighted in credit proposal.

24. Usage of borrowed fund is confirmed through financial statement analysis.

25. Borrowers Risk Grade has been done as per Bangladesh Bank Guidelines, examined &

approved by the authorized official and stated in the credit proposal.

3.2.5 Risk Grading

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 Investment

Applications.

Presently the Bank is following/conducting the Investment Risk Analysis to assess the risk

grade. The concerned Investment Officer / RM must clearly indicate the risk grade (as per the

finding) in the specific column of Investment appraisal form so that the authority can take

decision on the matter.

36

Risk Rating Grad

e

Details

Superior

(SUP) –

Low Risk

1

Investment facilities, which are fully secured i.e. fully cash covered.

Investment facilities fully covered by government guarantee.

Investment facilities fully covered by guarantee of a top tier

international Bank

Good (GD) –

Satisfactory

Risk

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.

Investment 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) –

Fair Risk

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.

Investment 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

37

Risk Rating Grad

e

Details

Marginal /

Watch List -

(MG/WL)4

This grade warrants greater attention due to conditions affecting the

borrower, the industry or the economic environment.

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

higher than normal leverage, thin cash flow and/or inconsistent

earnings.

Weaker business Investment& early warning signals detected.

The borrower incurs a loss

Investment repayments routinely fall past due

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

Investment 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 financials (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 Investments.

Bangladesh Bank criteria for sub-standard Investment shall apply

An Aggregate Score of 45-54 based on the Risk Grade Score

Sheet.

38

Risk Rating Grad

e

Details

Doubtful(DF

)

(Non -

performing)

7

Full repayment of principal and Profit is unlikely and the possibility of

loss is extremely high.

However, due to specifically identifiable pending factors, liquidation

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

Loss.

Bangladesh Bank criteria for doubtful Investment shall apply.

An Aggregate Score of 35-44 based on the Risk Grade Score

Sheet.

Bad and

Loss (BL)

(Non-

performing)

8

Investment 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 Investment 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 Investments must be adhered to. Legal procedures/suit

initiated.

Bangladesh Bank criteria for bad & loss Investment shall apply.

An Aggregate Score of less than 35 based on the Risk Grade Score

Sheet.

3.2.6 Product Program Guidelines (PPG)

39

Fundamentally, investment policies and procedures can never sufficiently capture all the

complexities of the product. Therefore, the following investment principles are the ultimate

reference points for all concerned bank staff-making consumer-financing decisions:

Assess the customer’s character for integrity and willingness to repay

Only invest when the customer has capacity and ability to repay

Only extend investment if bank can sufficiently understand and manage the risk

Use common sense and past experience in conjunction with thorough evaluation and

investment analysis.

Do not base decisions solely on customer’s reputation, accepted practice, other investor’s

risk assessment or the recommendations of other officers

Be proactive in identifying, managing and communicating investment risk

Be diligent in ensuring that investment exposures and activities comply with the

requirement set out in Product Program

3.3 Credit Approval Process:

Investment approval authority must be delegated in writing from the Head of Consumer Banking

responsible for the Consumer business, acknowledged by recipients and records of all delegation

retained.

The investment approval function should be separate from the marketing / sales function.

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

kept on file with the Investment Applications.

Investment approval should be centralized within the Investment function. Regional investment

centers may be established, however, all large investments (as defined in the PPG) must be

approved by the Head of Investment or delegated Head Office Investment executive. Any

investment proposal that does not comply with Investing Guidelines, regardless of amount,

should be referred to Head Office for Approval.Any breaches of Investing authority should be

reported to MD/CEO, Head of Internal Control, and Head of Investment.

40

It is essential that executives charged with approving investments have relevant training and

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

should have:

At least 5 years experience working in Branch / Sales team as a relationship manager

or account executive.

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

A good working knowledge of Accounting.

A good understanding of the local market.

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

declined stating reasons thereof should be reported by Investment Team to the Business Head.

3.3.1 De duplication check:

All approved applications must be checked against Banks database to identify whether the

applicant is enjoying any other investment in other account apart from the declared investments.

It must also be checked that the applicant has a credit card (if the bank offers this product) and

any payment default is made. This should be mandatory for Credit Card approval. In such cases

the application must be rejected.

3.3.2 Maintenance of Negative Files

Two negative files – one listing the individuals and the other listing the employers - are to be

maintained to ensure that individual with bad history and dubious integrity and employers with

high delinquency rate do not get personal loan from bank.

3.3.3 Investment Administration

After approval, Investment Team will send / forward the approved applications along with the

security and other documents to the Investment Administration Team under Operations Unit for

processing. The Investment Administration function is critical in ensuring that proper

documentation and approvals are in place prior to the disbursement of investment facilities.

Under Investment Administration there may be two-sub unit, Documentation & QC and

Investment Administration Dept who will process the document and disburse the Investment.

41

3.3.4 Investment Documentation

Investment Documentation dept is responsible:

To ensure that all security documentation complies with the terms of approval.

To control investment disbursements only after all terms and conditions of approval have

been met, and all security documentation as per the checklist of approved PPG is in

place.

To maintain control over all security documentation.

To monitor borrower’s compliance with agreed terms and conditions, and general

monitoring of account conduct/performance.

Upon performing the above, Documentation dept will forward the Limit Insertion

Instruction (refer Appendix II) to the Investment Administration unit for limit and other

information to input into the bank’s main system.

3.3.5 Disbursement

Investment Administration dept will disburse the Investment amounts under investment facilities

only when all security documentation is in place. CIB report is obtained, as appropriate, and

clean. A sample documentation and disbursement checklist is attached as Appendix III.

Strict security controls over the storage of blank cards, the embossing of blank cards and

dispatch of cards to holders is essential. There must be procedures for evaluating, authorizing

and monitoring credit card facilities that are at least as stringent as those of normal investments.

3.3.6 Custodial Duties:

Investment disbursements and the preparation and storage of security documents should be

centralized in the regional investment centers.

Security documentation is held under strict dual control, in locked fireproof storage. For cards,

banks should ensure that its controls over issue, delivery and the use of such cards are strong. In

particular, bank should have system for notifying retailers promptly of the numbers of mislaid or

stolen cards.

42

3.4 Risk Management:

3.4.1.Credit RiskThe credit risk is managed by the Consumer Investment & Collections unit (CICU), which is

completely segregated from sales. The following elements contribute to the management of

investment risks:

The investment risk associated with the products is managed by the following:

1. Investment will be given only after proper verification of customer’s static data and after

proper assessment & confirmation of income related documents, which will objectively

ascertain customer’s repayment capacity.

2. Proposals will be assessed by independent Investment division (CICU) completely

separated from sales.

3. Every investment will be secured by hypothecation over the asset financed, and

customer’s authority taken for re-possession of the asset in case of investment loss. For

HPSM (Auto), the vehicle will be registered in bank’s name, which will give the bank the

legal right of re-possession when required.

4. The investment approval system is parameter driven which will substantially eliminate

the subjective part of the assessment procedure.

5. There will be dedicated ‘collection’ force who will ensure timely monitoring of

investment repayment and its follow up.

6. The Investment & Collection activities will be managed centrally and investment

approval authorities will be controlled centrally where the branch managers or sales

people will have no involvement

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3.4.1.1 Contact Point Verification

Contact Point Verification is done for all applicants except for the High Net Worth (HNW)

individuals or customers having account relationship with banks.

The external CPV includes residence, office and telephone verifications (format of CPV report

attached in Annexure IV). All verifications are done to seek/verify/confirm the

declared/undeclared information of the applicant.

3.4.2 Third Party Risk

In case of third party deposits/security instruments, we verify third party’s signature against the

specimen attached to the original instrument and bank will also send the instrument to the issuing

office for their verification and written confirmation on lien marking and encashment of the

instrument. Therefore, any inherent risk emanating from accepting third party deposits/security

instruments is minimal.

3.4.3 Acquiring Risk

For credit card acquiring risk arises in the form of potential charge-back loss for the Bank.

Following measures are undertaken to mitigate the acquiring risks:

All merchants are trained and monitored through a call/visitation program on a

regular basis

Schemes (VISA and MasterCard) rules and regulations are strictly followed

Assignment of merchant floor limits are in accordance with schemes prescribed limits

Online authorization activity is monitored through a parameter driven system

While giving authorizations, high ticket size merchants are closely monitored

Electronic transaction capture at high volume/frequency merchants

In case where a merchant is at fault for a potential charge-back loss, the bank recovers

the same by debiting the merchant account held with Banks.

3.4.4 Fraud Risk

There is an inherent fraud risk in any credit cards business. The most common fraud risks are:

3.4.4.1Transaction Fraud

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For credit cards, transaction fraud exposure may arise from the usage on lost/stolen card, misuse

of card numbers and counterfeit cards. Over the last twelve years cards acquiring volume has

increased quite significantly and now there is a need to set up a separate fraud department for

efficient monitoring and handling of all suspicious high-risk transactions.

3.4.4.2 Application Fraud

The applicant’s signature is not verified for authenticity. However, the applicant’s identity is

confirmed by way of scrutiny of identification and other documentation. A Contact Point

Verification (CPV) agency is in place to verify applicant’s residence, office and contact phone

numbers.

There always remains the possibility of application fraud by way of producing forged

documents. Considering the current market practices and operational constraints, it is not feasible

to validate the authenticity of all documentation. However, in the near future, we may consider

validating the bank statement (the most important and commonly provided income document)

through CPV agent.

3.4.5 Liquidity and Funding Risk

This risk will be managed and the position monitored by the Asset Liability Committee headed

by the Managing Director / CEOs of the Banks.

3.4.6 Political and Economic Risk

Political and economical environment of a country play a big role behind the success of business.

Banks should always keep a close watch in these areas so that it is able to position itself in the

backdrop of any changes in country’s political and economical scenario.

3.4.7 Operational Risk

For consumer investments, the activities of front line sales and behind-the-scene maintenance

and support are clearly segregated. Consumer Investment & Collections Unit (CICU) will be

formed.

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CICU will manage the following aspects of the product: a) inputs, approvals, customer file

maintenance, monitoring & collections; b) the Operation jobs like disbursal in the system

including raising debit standing orders and the lodgment and maintenance of securities. Type ‘a’

jobs and type ‘b’ jobs will be handled by separate teams within CICU; therefore the risk of

compromise with investment / security documentation will be minimal.

It will ensure uncompromising checks, quick service delivery, uncompromising management of

investment risks and effective collections & recovery activities.

For credit cards, controls will be in place to ensure that operational risks are managed. These

include:

Segregation of duties e.g. data input independently validated against source documentation.

Similarly card and PIN production and handling are also done independently.

Restricted access to certain important areas / functions to ensure adequate control and

security e.g. card embossing, dispatch and supervisory access into the core card processing

system. Besides, all staff is only given the minimum required level of access into the system

to perform their departmental functions properly.

Dual controls e.g. plastic custody, card destruction, access into the system for parameter

changes etc.

3.4.8 Maintenance of Documents & Securities

The applications and other documents related to Consumer investments will be held in safe

custody by CICU or Operations Unit. All this documents will go under single investment file per

customer developed before launch of the product.

The physical securities and the security documents will be held elsewhere inside fire-proof

cabinets under CICU’s or Operation’s custody. The dual-key system for security placement and

retrieval will have to be implemented.

3.4.9 Internal Audit

The Bank has a segregated internal control and compliance division who will be responsible with

performing audits of all departments. Audits should be carried out on a regular or periodically as

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agreed by the Management to assess various risks and possible weaknesses and to ensure

compliance with regulatory guidelines, internal procedures, Investing Guidelines and Bangladesh

Bank requirements.

3.5 Monitoring and Recovery:

3.5.1 Monitoring

A bank’s investment portfolio should be subject to a continuous process of monitoring. This will

be achieved by regular generation of over limit and overdue reports, showing where facilities are

being exceeded and where payments of interest and repayment of principle are late. There should

be formal procedures and a system in place to identify potential investment losses and remedial

actions has to be taken to prevent the losses. Besides that the systems should be in place to report

the following exceptions to relevant executives in Investment / sales and branch marketing staff:

Past due principal or profit/mark-up payments;

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

inspection/audit.

All investment facilities are reviewed annually.

Computer systems should be able to produce the reports for central / head office as well

as branch review.

3.5.2 Recovery

The collection process for personal investments 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 investment 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.

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Analysis and Findings:

In the quest of reducing the inherent risk on investments, the management of FSIBL practices a

set of self developed policies and regulations. The management team of the bank developed a set

of requirement guidelines which they follow before embarking upon any kind of financing.

Moreover, the bank has also developed and follows some prudential regulations and specific

regulations for each types of investment/credit it makes.

All the efforts taken by the bank mainly has one purpose: to maintain secured investments. In

this chapter, I have taken the help of Six C’s of credit to analyze different guidelines and

regulations followed by the bank. They are discussed below:

4.1 Six C’s:

CHARACTER (Credit Reputation): A person with a good character is one who willingly and

responsibly lives up to agreements. One distinctive sign of a good character is a responsible

attitude toward paying bills and meeting obligations on time.

CAPACITY: The ability to repay a loan or make payments on merchandise with present income

is known as capacity. Creditors want to make certain that you will have enough money left over

each month after other fixed expenses have been met to pay your credit debts.

CAPITAL: Property and other assets that total more than debts are known as capital. In other

words, when you add up all that you own (assets) and subtract all that you owe (liabilities), the

difference (your net worth or capital) should be sufficient to ensure payment of another bill.

CONDITIONS: All other existing debts, stability of employment, personal factors, and other

factors that might affect a person’s ability or desire to meet financial obligations are important

conditions to be considered. For example, a person who has moved six times during the past

year might not be considered a good risk because of living conditions that indicate some type of

problem.

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COLLATERAL: Property or possessions that can be mortgaged or used as security for payment

of a debt are known as collateral. If a debt is not paid as agreed, the collateral is repossessed and

sold to pay the debt.

COMMON SENSE: A person’s inner ability to make wise decisions is often referred to as

common sense. A loan officer or credit manager would determine that you have good common

sense based on how you answer questions (either orally or in writing). Good decisions are

reflected in answers such as reasons for leaving employment, number and types of credit cards

and balances outstanding, or references listed on an application.

4.1.1. Analysis:

Character: This point enlightens the borrower’s willingness to repay the loan. If we look on the

Product Program Guidelines (PPG) (Discussed in chapter 3, Section 3.3.5) the bank has a

specific guideline for its loan officer to assess the customer’s character for integrity and

willingness to repay the loan.

Capacity: As discussed above, this point tells about the ability of the borrower to repay the loan.

FSIBL has precise guideline (discussed in PPG section 3.3.5) that ensures an inspection on the

customer’s ability to repay the loan. The bank also has regulation (under section 3.2) that tells

the loan officer to make sure the customer as the ability to repay the loan.

Capital: This calls for the worthiness of the borrower or the evaluation of the total net worth of

the customer. FSIBL checks the customers’ net worth condition by doing credit evaluation

process (Discussed in chapter 3, section 3.1.2)

Conditions: Here, a customer’s present conditions are examined. While applying for a loan, the

bank takes all necessary information that shows the condition of the customer.

Collateral: This point is self explanatory. FSIBL has precise regulation and policy on getting

proper collateral from the customer before sanctioning a loan. However, a customer is not always

asked to provide a collateral security (In case issuing Credit Card etc.). Mainly collateral security

is asked during processing of large loans.

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Common Sense: In credit assessment process, a customer is also reviewed about his/her ability

to make wiser decisions.

4.2 MAJOR FINDINGS

The major findings as revealed from the study are as under: Banks are financial intermediaries linking the savers and the users of fund and the main

income flow comes from lending activities. But lending possesses the inherent and default risk. Proper risk management and policy regulation can help to reduce such risk to a great extent. As such Credit Risk Management (CRM) is obviously vital and important for a bank of financial institution.

Bank CRM policy provides directional guidelines to all concerned to improve risk management culture and establish minimum standard for managing risks in credit operations.

It has been observed that First Security Islami Bank follows prudential regulation for Credit risk management that has been established by the Bank Management under the light of existing regulatory requirement.

FSIBL follows a minimum requirement policy for consumer credit. They follow certain guidelines before undertaking consumer financing.

Its credit management policy and segregation of key responsibilities is standard to mitigate the credit risk.

The bank has a highly experienced, well-educated, self-motivated and proactive credit management team.

Bank completes the Credit Risk Grading (CRG) in each proposal as per Bangladesh CRG

Manual and guidelines before sanctioning a loan (except SME and cash-back). But CRG comes with inherent limitations that sometimes indicate wrong score for risk grading. For example, higher current ratio measures high score which is not true in all kinds of borrowers. It depends on types of business. Very high liquidity indicates inefficiency of management in utilizing current portion of fund or working capital. Besides data in most cases are not available regarding industry growth which carries maximum score 3(three).

The impact of change in the employee productivity on deposit and loans & advances was the largest contributor to the change in deposit and loans & advances.

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Conclusion:

Over the last decade our understanding of commercial banks within the financial sector has

improved substantially. But they are virtually facing several types of systematic and

unsystematic risks. Bangladesh Bank, our central bank, has also identified five core risks in

financial sectors. Among such risks the most important risk banks and financial institutions faced

is credit risks which also know as default risk in credit. For Banks and Financial institutions,

Credit risk is an essential factor, which needs to be managed properly. Credit risk virtually is the

possibility that a borrower will fail to repay debt in accordance with the terms of sanction. Credit

risk, therefore, arises from the bank's lending operations. In the present day's state of

deregulation and globalization, banks a range of activities have increased, so also are the risks.

Expansion of bank's lending operations rang new products have forced the banks to confront

newer risk areas and therefore to work out proper risk addressing devices. Credit risks are so

exhaustive that a single device cannot encompass all the risks. Moreover lending risks today

have assumed such diverse nature, that newer techniques are to be applied to effectively contain

the risks. In order to effectively contain risks, credit risk management has to be done in order to

enable the bank to proactively manage loan portfolios in order to minimize losses and earn

acceptable level of return for the shareholders. In the present scenario of fast changing, dynamic

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

disintermediation, it is essential to undertake robust credit risk management policies and

procedures, sensitive and responsive to these changes.

In the above backdrop, First Security Islami Bank Limited should be committed to extend high

quality services to its clients through different financial products and profitable utilization of

fund by undertaking various lending operations including financing trade, commerce & Industry

etc. In conducting lending operations the bank should always bears in mind the essence of proper

risk identification and their effective management. It is also recognized that failure in proper

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identification and management of risks may result in a large quantum of bank advances turning

into non-performing.

The current report aimed at critically examining the CRM policy and practice of First Security

Islami Bank. The main objective of this report was to evaluate the CRM policy and practice of

First Security Islami Bank Limited along with how efficiently the Bank was providing credit to

different sector by mitigating the possible risks.

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