Credit Risk Management

Credit Risk Management

Credit risk is the risk of loss arising from the failure of a borrower, issuer, counterpart or customer to meet its financial obligations to the Bank. The Bank's credit risk policies define different level risk parameters under which credit risk is monitored and controlled.

Credit exposures are controlled by a system of limits/caps based on internal risk grading. This system applies to all credit exposures, foreign exchange settlement exposures and exposures arising from settling securities trades for customers.

The Bank's Credit Committee chaired by the Deputy Managing Director, Credit Division, regularly reviews the creditworthiness of issuers, counter parties and customers to whom the Bank provides credit. The committee makes recommendations to the approving authorities through the respective department.

Credit risk is managed by ensuring that exposures are sometime fully collateralized with appropriate higher margin. All such exposures are monitored on a regular basis and additional margin is called as required.

Bangladesh Bank has made risk grading mandatory for Banks & Financial institutions for loan amount of BDT 1.00 crore and above.

CRG scale has been classified as following 8 categories:

  1. Superior-low risk
  2. Good- satisfactory risk
  3. Acceptable- fair risk
  4. Marginal risk
  5. Special Mentioned
  6. Sub Standard
  7. Doubtful & Bad
  8. Bad & Loss

Weight of main risk components:

  1. Financial Risk 50%
  2. Business/Industry Risk 18%
  3. Management Risk 12%
  4. Security Risk 10%
  5. Relationship Risk 10%

The total weight of the above five components comprise 100% weight and the weight is put to the previously mentioned 8 categories and the weight is distributed as follows:

  1. Superior-low risk -100
  2. Good- satisfactory risk- 85+
  3. Acceptable- fair risk-75-84
  4. Marginal risk-65-74
  5. Special Mentioned-55-64
  6. Sub Standard-45-54
  7. Doubtful & Bad-35-44
  8. Bad & Loss-<35

Credit risk on the securities held outright by the Bank is managed by holding only investment-grade securities in routine circumstances, issued chiefly by governments and government organizations. The reinvestment of customer deposits may also give rise to credit exposures. In non-routine circumstances, the Bank will seek appropriate methods of mitigating credit risk, including indemnities from HTM Treasury.

Policy has already been formed and is being updated from time to time. Credit Risk Manuals and several Instruction Circulars have been issued to implement CRM. Early Alert System, Credit Recovery, NPL Management, Check list/Due date Diary have already been introduced and these are continuous processes. CEO and MD issues letters from time to time with instruction to implement CRM.