Introduction on Credit Risk.

2. Credit is an amount of money available to be borrowed by an individual or a company
and agreed to repay thelender at someday in future, generally with interest.
Risk is nothing but possibility of losing assets through some activity i.e., banking credit
activity, market activity, operational activity etc.
Credit risk is the possibility that a borrower or counter party will fail to meet its
obligations in accordance with agreed terms. Credit risk, therefore arises from the bank’s
dealings with or lending to corporate, individuals, and other banks or financial
institutions. If theprobability of the loss is high, the credit risk involved isalso high, and
vice-versa
IntroductIonIntroductIon
CREDIT RISKCREDIT RISK
Types of credit riskTypes of credit risk
 Credit default risk
 Concentration risk
 Country risk
Factors affecting credit risk
 Quantity of loansrelativeto assetsor capital
 Rateof growth in theloan portfolio
 Composition of loan portfolio
 Degreeof dependenceon interest incomeand feeincomefrom loansfor profitability
Existenceof concentration in theloan portfolio
 Existenceand level of exceptionsto thecredit policy
 Quality of support for collateral valuation
 Quality of loan documentation
Level and trend of non-performing loans
 Existenceof rescheduled or restructured loans
 Quality of internal loan review and classification 1

3. Classification of Credit Risk for Financing a Project
CREDIT RISK COMPONENTS OF A PROJECT
Business/Industry
Risk
Financial
Risk
Technical
Risk
Marketing
Risk
Managerial &
Relationship
Risk
Security
Risk
I .Internal Rate Return (IRR)
ii. Profitability
iii. Return on equity
iv. Return on investment
v. Net profit to sales
vi. Expected growth Rate of
the project
vii. Payback period
I. Sourcing and Timeliness
ii. Relation and Communication
with suppliers
iii. Power, fuel and Water Supply
iv. Building and Layout
v. Transportation Facilities
vi. Engineering and Technical
Facility
vii. Others
I. Size of Business
ii. Age of Business
iii. Business Outlook
iv. Industry Growth
v. Market Competition
I. Size of potential market
ii. Growth of demand
iii. Supply
vi. Promotional Activity
v. Demand Forecasting
and Market Planning
I..Experience
ii. Team work
iii. Skill of the manager and the
management team
iv. Account conduct
v. Time to achieve full capacity
utilization
I. Security coverage
(primary)
ii. Collateral coverage
(Property location)
iii. Support (Guarantee)
GRADING CATEGORIES, SHORT NAME AND SCORES
Thecredit risk grading (CRG) isacollectivedefinition based on thepre-specified scaleand reflectsthe
underlying credit-risk for agiven exposure.
Grading In Short Score Grading In Short Score
Grade 1 - Superior (Low
Risk)
SUP 100 Grade 5 - Special Mention SM 55-64
Grade 2 - Good
(Satisfactory Risk)
GD 85+ Grade 6 – Substandard SS 45-54
Grade 3 - Acceptable (Fair
Risk)
ACCPT 75-84 Grade 7 - Doubtful (non-
performing)
DF 35-44
Grade 4 - Marginal (Watch
list)
MG/WL 65-74 Grade 8 – Bad and Loss (non-
performing)
BL <35
2

4. Decisio n Matrix o f CRG
Pre-Sanction Stage Grading Status Post-Sanction Stage
(1) Feasible
Superior
(1)Performing
Good
Acceptable
(2) Conditional/ Exceptionally
Acceptable
Marginal/ Watch list (2) Early Warning Account
(3) Not -Feasible
Special Mention
(3) Non-Performing
Sub-standard
Doubtful
Bad/Loss
Riskassessmentmodelof aprojectaccordingtotheimportanceof riskRiskassessmentmodelof aprojectaccordingtotheimportanceof risk
profile, thefollowing 5(Five)areconsideredforcorrespondingprincipalprofile, thefollowing 5(Five)areconsideredforcorrespondingprincipal
risksrisks
Principle Risk components Weight
Financial Risk 50%
Business/Industry Risk 18%
Management Risk 12%
Relationship Risk 10%
Security Risk 10%
Total 100%
3

5. Bangladesh Bank
Guidelines
Bangladesh Bank
Guidelines
Policy Guidelines
•Lending Guidelines
•Credit Assessment & Risk Grading
•Approval Authority
•Segregation of Duties
•Internal Audit
Policy Guidelines
•Lending Guidelines
•Credit Assessment & Risk Grading
•Approval Authority
•Segregation of Duties
•Internal Audit
Preferred
Organizational Structure
& Responsibilities
Preferred
Organizational Structure
& Responsibilities
Procedural Guidelines
•Approval Process
•Credit Administration
•Credit Monitoring
•Credit Recovery
Procedural Guidelines
•Approval Process
•Credit Administration
•Credit Monitoring
•Credit Recovery
Basic Credit Risk Management Framework
According to Bangladesh Bank Guidelines In ABL
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Board of DirectorBoard of Director
Risk Management CommitteeRisk Management Committee Executive CommitteeExecutive Committee Audit CommitteeAudit Committee
MD&CEOMD&CEO
Credit CommitteeCredit Committee
HoCRMHoCRM
Chief Risk OfficerChief Risk Officer
Credit Committee-1
President: DMD-1
Member: GM (Dhaka Circle-2)
Member: GM (Dhaka Circle-1)
Member: GM (HRPDOD)
Member: GM (ID & Khulna Circle)
Member: GM (IT)
Member: GM (Barisal Circle)
Member: GM (Faridpur Circle)
Member Secretary : DGM(CP&CRMD)
Credit Committee-1
President: DMD-1
Member: GM (Dhaka Circle-2)
Member: GM (Dhaka Circle-1)
Member: GM (HRPDOD)
Member: GM (ID & Khulna Circle)
Member: GM (IT)
Member: GM (Barisal Circle)
Member: GM (Faridpur Circle)
Member Secretary : DGM(CP&CRMD)
Credit Committee-2
President: DMD-2
Member: DMD-3
Member: GM (Credit)
Member: GM (CFO)
Member: GM (Comilla Circle)
Member: GM (ID & Khulna Circle)
Member: GM (CP&CRMD)
Member: GM (Shylhet Circle)
Member: GM (Principle Branch)
Member: GM (Chittagong Circle)
Member: GM (Mymensingh Circle)
Member Secretary : DGM(CP&RMD)
Credit Committee-2
President: DMD-2
Member: DMD-3
Member: GM (Credit)
Member: GM (CFO)
Member: GM (Comilla Circle)
Member: GM (ID & Khulna Circle)
Member: GM (CP&CRMD)
Member: GM (Shylhet Circle)
Member: GM (Principle Branch)
Member: GM (Chittagong Circle)
Member: GM (Mymensingh Circle)
Member Secretary : DGM(CP&RMD)

6. Credit Risk Management
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•Early Identification of Deterioration
in any Credit
•Prompt Reporting
•Proactive Measure
•Tracking the loan account which is
under risk or potential weakness
•Assessment procedure and analysis
techniques
•Frequency of monitoring
•Periodic examination of collaterals
and credit covenants
•Frequency of site visit
•Early Identification of Deterioration
in any Credit
•Prompt Reporting
•Proactive Measure
•Tracking the loan account which is
under risk or potential weakness
•Assessment procedure and analysis
techniques
•Frequency of monitoring
•Periodic examination of collaterals
and credit covenants
•Frequency of site visit
Credit Risk ManagementCredit Risk Management
Credit Risk AssessmentCredit Risk Assessment Credit Risk MitigationCredit Risk MitigationCredit Risk MonitoringCredit Risk Monitoring
Qualitative
Aspects
Qualitative
Aspects
Quantitative
Aspects
Quantitative
Aspects
External Credit
Rating
External Credit
Rating
•Proper documentation
•KYC
•Collateral
•Accountability
•Credit requirement
•Insurance coverage
•Syndicated loans
•Adherence to policy
•Front Office
•Middle Office
•Back Office
•SWOT
•Sensitivity
•Environment
•CIB
•Proper documentation
•KYC
•Collateral
•Accountability
•Credit requirement
•Insurance coverage
•Syndicated loans
•Adherence to policy
•Front Office
•Middle Office
•Back Office
•SWOT
•Sensitivity
•Environment
•CIB
•Tracking, monitoring and supervising risky and
potentially weak loan accounts by dedicated
team
•Assigned person promptly reports to the
delegated authority to take measure
•To co-ordinate with higher management and
field level
•Chalks out plans to recover classified loans
including write-off loans by Recovery Division
•Risk-based pricing
•Covenants
•Credit Insurance and credit derivatives
•Tightening
•Diversification
•Deposit Insurance
•Tracking, monitoring and supervising risky and
potentially weak loan accounts by dedicated
team
•Assigned person promptly reports to the
delegated authority to take measure
•To co-ordinate with higher management and
field level
•Chalks out plans to recover classified loans
including write-off loans by Recovery Division
•Risk-based pricing
•Covenants
•Credit Insurance and credit derivatives
•Tightening
•Diversification
•Deposit Insurance

7. Credit RiskCredit Risk
Measuring Credit Concentration Risk
Gini Coefficient(GC):
Where
G=Gini Coefficient
i=Element serial
y=value of element
n=total number of elements 7

8. Credit RiskCredit Risk
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