The Analysis of Credit Risk Appraisal Procedure of LankaBangla Finance Limited

1.1 Origin of the report

After the completion of theoretical courses of program of Masters of Business Administration (MBA), each student is required to do intern in different organizations to have some practical knowledge and experience of the job exposure and to familiar with the official environment thereof.

The paper is prepared based on the internship program. This is a requirement of the internship program arranged by Department of Finance, Faculty of Business studies, University of Dhaka. Each intern must carry out a specific project paper, which is approved by the supervisor assigned by the Department of Finance, Faculty of Business Studies, University of Dhaka.

Hence I was selected for LankaBangla Finance Limited (LBFL) by the placement office of the department and since then I have started my journey in the Head Office of LBFL.

The project paper is titled as Analysis of Credit Risk Appraisal Procedure of LankaBangla Finance Limited

1.2 Scope of the study

LankaBangla Finance Limited is one of the leading NBFIs in Bangladesh. The report covers the organizational structure, background, objectives, functions & products and the credit risk appraisal procedure and its application in the company. The scope is limited to credit appraisal division & its functions, credit risk evaluation procedure, different stages of CRAP, CRG models used for different loan proposals, customer segmentation criterion in different divisions, eligibility criterion for loan applicant, credit assessment criterion in different divisions and real cases describing the CRAP in details.1.3 Objective of the study

The pivotal objective of this study is to give an overview of the practical knowledge and experience that I have gathered during my internship period in LankaBangla Finance Limited. The broad objective of the study is to focus on the credit risk appraisal system followed by LankaBangla Finance Limited. The specific objectives of the study are as follows:

To find out the steps followed in credit risk appraisal system in LBFL

To determine how the CRG is done to determine an applications acceptance

To analyze the credit risk appraisal systems different steps

To measure the effectiveness of the CRA system in lease/loan decision

To indicate the standard industry practice regarding CRA

1.4 Methodology

This report is a judgmental one and also descriptive in nature. Analysis of the CRA system includes different flow charts- describing the mechanism of the system. Sources of data and data analysis techniques are described below- A) Sources of data:

There are two sources of data have been used and most of the data are collected from the primary sources for the cases. The sources are-

1. Primary Sources: a. Interviewing the officials of head office b. Loan appraisal files with documents andc. Official records and observing & doing practical work

2. Secondary Sources: a. Annual report of LBFL b. Published Booklets/Manuals of the company c. Website of the Company andd. Various published documents & report of the companyB) Data analysis techniques:

Flowcharts are presented to show the CRAP Cases are presented following the CRAP in step by step with their calculations and judgments

Tables, Graphs and Charts are used in presenting data

Microsoft Excel is used in calculating and constructing of graphs

1.5 Limitations of the report

Some problems were faced during the preparation of the report. That is why making a quality project paper is a crucial issue. As there were some problems, it creates some limitations in preparation of this paper. In spite of those limitations, a wholehearted effort was given to make the report a success. The limitations were-

The companys policy of not disclosing some data and information for obvious reason, which could very much useful.

The employees of the company were busy with their scheduled work. As a result I could not manage them to give me enough time.

Lastly, lack of in-depth knowledge, experience and analytical ability for writing such report.

2.1 Introduction

LankaBangla Finance Limited (LBFL) a joint venture financial institution established with multinational collaboration is in operation since 1997 having license from Bangladesh Bank under Financial Institutions Act, 1993. It started its operations in Bangladesh as Vanik Bangladesh Limited (VBL) as a multi product financing company. VBL was established through collaboration between Vanik Incorporation Limited, a leading financial institution of Sri Lanka and some foremost Bangladeshi entrepreneurs. Within a few years VBL has marked its strong presence in the leasing, credit card and corporate finance sector.

In 2003, the company entered into a new dimension with fresh equity investments from Sampath Bank Limited, one of the leading commercial banks of Sri Lanka and the then Chinkara Capital Limited (now First Gulf Asia Holdings Limited), a Singapore based multi faceted asset management and investment banking company with investments throughout ASEAN, South Korea and the Middle East and Europe. This investment doubled the paid up capital of the company and helped it to expand its operations tremendously. The trend continued in the following years and in 2004 One Bank Limited became equity partner. Thus the total paid up capital rose to Tk. 260 million in early 2005 from Tk. 100 million in 1998. In order to reflect the ongoing changes in ownership and operations, the company was renamed as LankaBangla Finance Limited in May 2005 with a commitment to contribute more in building up a robust financial sector in the country.

In August 2006, the Company offered shares to the general public amounting Tk. 90 million through IPO. With this raise the paid up capital of the Company will reach Tk. 350 million. The registered office of LankaBangla Finance Limited is located at 20 Kemal Ataturk Avenue, Banani, Dhaka. It also has two branch offices in Chittagong & Sylhet.The shareholding structure of LBFL consists of Commercial Banks, Investment Bank, Corporate & prominent Industrialists from home & abroad. The current structure is depicted in the pie chart below:

2.2 Corporate Profile

(as on December 31, 2010)

Name of the companyLankaBangla Finance Limited

Legal formPublic Limited Company

Date of Incorporation5 November, 1996

Date of Commencement5 November, 1996

Licensed as Financial Institution by Bangladesh Bank30th October, 1997

Local Shareholders88.57%

Foreign Shareholders11.43%

IPO6 August, 2006

Listing with DSE17 October, 2006

Listing with CSE31 October 2006

Trading of Share in Stock Exchanges1 November, 2006

Authorized CapitalTk. 1000 million

Paid-up CapitalTk. 531.3 million

Term Deposits Tk. 4560 million

Licensed as Primary Dealer23rd November, 2009

Number of Branches03

Number of Branches02

Number of Shareholders5151

2.3 Strategic Analysis

Vision

To be the nations most preferred financial services provider.

Mission

To lead by example through a commitment that empowers the organization at every level to strive for the height level of quality, customer care and stakeholder value.

Goals

To be the most sought after facilitator in creating wealth

To maximize the value of being our Customer, Shareholder pr Employee

To establish strong regional presence

To optimize contribution to the society

2.4 Functions & Product Details

LankaBangla has been operating in the market as a leading diversified financial services company engaged in Lease Finance, Term Loans, Auto Loan, Domestic Factoring of Receivables, SME Finance and Credit Card Operations.Term Deposits

LankaBangla is authorised by Bangladesh Bank to receive deposit from individual and institution. Under LankaBangla Deposit Scheme one can invest ones money with full trust & confidence. Any Individual/Firm/Corporate Houses are eligible to participate in the Deposit Scheme of LBFL.

Details of Deposit Schemes at LBFL:

1. LankaBangla Cumulative Term Deposit: Under this scheme the clients Deposit will turn into a desirable amount through accumulation of interest. The minimum tenure of the scheme is at least 2 years.

2. LankaBangla Periodic Return Term Deposit: Under this scheme one can draw the interest periodically (Monthly/Quarterly/Half-yearly/Annually) keeping the original deposited amount intact.

3. LankaBangla Double Money Term Deposit: Deposit amount placed at a time will turn double on completion of 5 years 9 months.

4. LankaBangla Money Builders Term Deposit: Under this scheme the depositor will open an account with a minimum amount of Tk. 100,000, there after he/she will deposit a fixed amount on monthly basis for an agreed period. On expiry the depositor will receive the deposited amount along with the interest accrued there on.

Lease Facility

The company started its leasing operations in March 1998. Initially the focus was only on Lease for purchase of machinery, equipment needed for new project establishment, expansion, replacement, and modernization of business, and Sale & Leaseback facilities. Gradually product range has been increased to include Medium Term Loan, Short-Term loan for corporate houses and Car Lease for Individuals (professionals & businessman) etc. Home Loan

In the quest of further diversify the products and service range, LBFL launched Mortgage Loan Division in 2008 under which the following services are provided:

Home Loan Real Estate Development Finance One can apply for LankaBangla Home Loan for any of the following purposes:

Purchase of Apartments or House

Construction of Apartment or House

Renovation and Restructuring of existing Apartment or House

Purchase of Commercial space including Shop and Chamber for professionals.

Any purpose loan against Mortgage of Property.

Existing Loan pay off

And one can apply to avail Real Estate Developer Finance for the following purposes:

Constructing Residential Apartment Project within premium location of Dhaka, Chittagong and Sylhet City Corporation and Narayanganj, Gazipur, Savar, Comilla pourashaova.

Constructing Commercial Project within premium location of Dhaka & Chittagong City Corporation.

Renovation and Restructuring of existing commercial Building.

Auto Loan

Auto loan facility in LBFL is a kind of lease facility and thus the autos are leased to the client for the loan repayment period. And at the end of the period the auto is transferred to the client after full repayment of loan. There are four segments of customer to whom LBFL provide auto loan facility. The said four segments are defined to the PPG of the company with their eligibility criterias. The four segments are-

1. Salaried Individuals

2. Businesspersons

3. Self Employed Professionals

4. Land Lords

Auto loan facility is provided for- brand new, reconditioned and used vehicles. Reconditioned vehicles should not be more than government approved import policy. Used vehicles should not be more than 5 years old from registration date and not more than 8 years from manufacturing date. All the specifications for a auto loan eligibility are delineated in the PPG of the company.SME Loan

Recently Bangladesh Bank has introduced detailed guidelines for SME sector and financial institutions have been ordered to expand its business in SME sector. LBFL put high emphasis on this sector. LBFL will follow the definition of SME segment as defined by Bangladesh Bank, which is as follows:

For Small Enterprise:

SectorsFixed assets excluding land & building (in BDT)Workforce

Service Sector50,000 to 5,000,000Not more than 25

Trading Sector50,000 to 5,000,000Not more than 25

Manufacturing Sector50,000 to 15,000,000Not more than 50

For Medium Enterprise:

SectorsFixed assets excluding land & building (in BDT)Workforce

Service Sector5,000,000 to 100,000,000Not more than 50

Trading Sector5,000,000 to 100,000,000Not more than 50

Manufacturing Sector15,000,000 to 200,000,000Not more than 150

Businesses of Proprietorship, Partnership & Private Limited Company in Manufacturing, Trading, or Service industry are eligible for having SME loan from LBFL. The length of business must be minimum 2 years in the same line of business supported by trade license. Other eligibility criteria are well defined in the PPG of the company.

Factoring

LankaBangla specialize in providing with instant cash through the purchase of accounts receivable or debts outstanding which is a financing technique known as Factoring. Factoring moves the businesss cash flow forward creating immediate cash to improve its financial position and increase the purchasing power. Thereby, it provides with the economic strength to expand production, increase sales and profits. Factoring is a comprehensive service for incorporating:

Credit Advice

Credit Control

Generation of Statements & Reminders to Debtors

Collection of Cash and Cheques

Providing Cash in Advance of Collections and

Providing Relevant Data to the Client on the Up-To-Date Status.

Two types of factoring facilities provided by LBFL are-1. With Recourse: Where the client takes over the bad debts.

2. Non- Recourse: Where LBFL underwrites the bad debt risks.

LankaBangla provides factoring with recourse to the client. Currently it offered only domestic factoring facilities, where the client, its debtors and the factoring company are all in the same country and a single local currency is used in all transactions.

Credit Card

By launching the Vanik Classic and Gold Credit Cards in 1998 LBFL became the only issuer in the market to have introduced a private label card accepted at a merchant network of around 3000 establishments across Dhaka, Chittagong, Sylhet and Coxs Bazaar. This was soon followed by the introduction of the first co-branded card by Dhaka Bank under Vanik franchise. Encouraged by the popularity of the cards in the market it was decided to further widen the horizon. As a result in 2005, license has been obtained from MasterCard International to introduce its globally recognized card products. Since then successfully launched the LankaBangla MasterCard Gold and Classic Cards and achieved a significant increase its card member base and also expanded the acceptance of the cards in the market, LankaBangla also started issuing VISA card from November 2009.

Two types of Credit Cards are provided by LBFL:

1) Gold Credit Card

2) Classic Credit Card.

The distinguishing features for these two Cards basically lie in the salary or income group. The minimum fixed monthly income expected for Classic Cardholder is Tk. 13,500. And for a Gold Cardholder is Tk. 58,000 fixed monthly income.Consumer Loan

Very recently LBFL launched consumer loan facility. This product is operated preliminarily under the home loan division. The first clients were the existing employees of the LankaBangla family. It will be opened to the general public very recently.

2.5 Organogram

SHAPE \* MERGEFORMAT

2.6 Financial Highlights

LankaBangla Finance Limited has completed successful years of its journey towards its goal by way of stretching maximum and achieving its best. Figures of 2010 speak for themselves the steady growth in its fundamental indicators over the past few years. Table below shows the comparatives figures:Consolidated Financial Highlights:(Tk. in Million)Particulars2007200820092010

Financial Performance

Total Assets 5,782.388,108.8713,435.0019,322.24

Total Liabilities 5,185.037,186.4011,335.0714,532.20

Business Disbursement 3,024.223,258.974,689.284,275.50

Current Assets 3,977.615,554.928,839.668,985.65

Current Liabilities 3,477.924,793.277,394.947,869.65

Non Current Assets 1,804.772,553.954,595.9310,337.59

Long Term Liabilities 1,707.122,393.123,940.136,662.55

Term Deposits 1,818.522,627.304,432.904,560.00

Total Investment Portfolio4,717.466,869.6310,699.1715,064.57

Operational Performance

Operating Revenue 946.961,542.182,427.074,176.11

Operating Expenses 648.571,069.971,362.381,513.72

Financial Expenses 418.76707.16936.611,016.08

Net Profit Before Tax 298.39472.21908.072,331.10

Net Profit After Tax 210.47377.64744.081,700.15

Financial Ratios

Current Ratio 1.141.161.21.14

D/E Ratio 8.687.795.43.03

Coverage Ratio 1.51.531.792.67

ROE (%) 41.23%40.94%35.42%35.49%

ROA (%) 4.89%4.66%5.54%8.80%

Equity Parameters

Authorized Capital 1,000.001,000.001,000.001,000.00

Paid-up Capital 350385442.75531.3

Shareholders' Equity 597.34922.482,100.534,790.04

No. of Share Outstanding 3538.544.2853.13

NAV Per Share 17.0723.9647.4490.18

EPS5.479.811432

Market Price Per Share (Closing) 100.1196.6313.8497.9

PE Ratio (Times) 18.320.0422.4115.56

Dividend Payout Ratio (%) 76.50%69.45%44.15%72.49%

Dividend Yield (%) 2.50%1.53%1.12%1.10%

2.7 Achievements

LankaBangla honored with ICAB & SAFA Awards for Best Published Accounts and Reports. It has been awarded the ICAB national award consecutively from 2006 to 2009 and SAFA merit award in 2008 & 2009. These achievements are the recognitions of the companys continuous efforts towards transparency in disclosure of information and adherence to accounting practices in line with national and international standards.

3.1 Credit Risk Appraisal (CRA)

Definition:The process by which a lender evaluates the technical feasibility and economic viability to judge creditworthiness of the prospective borrower is known as Credit Appraisal. Credit appraisal process of a customer lies in assessing- whether a customer is able to repay the loan amount in the stipulated time or not. Financial Institutions (FIs) have their own methodology to determine a borrowers creditworthiness. All FIs employ their own unique objective, subjective, financial and non-financial techniques to evaluate the creditworthiness of their customers.Components of Credit Appraisal Process While assessing a customer, the FI needs to know the different information regarding the potential borrower like- income of applicant and co-applicant, age of applicant, educational qualifications, profession, experience, additional sources of income, past loan record, family history, employer/business, security of tenure, tax history, assets of applicants and their financing pattern, recurring liabilities, other present and future liabilities and investments etc. Out of these, the income of an applicant is the most important criteria to understand and calculate the creditworthiness of that applicant. Different FIs have different set of guidelines for selecting clients. But the basic eligibility conditions are more or less same and each FI has certain norms within which the customer needs to fit in to be eligible for a loan. Based on these parameters, the maximum amount of loan that the FI can sanction and the customer is eligible for is worked out. The profile of the customer is studied properly. Their CIB (Credit Information Bureau) status is also checked.

The 3 methods used to arrive at Eligibility Installment to income ratio (IIR) Fixed obligation to income ratio (FOIR)

Loan to cost ratio (LCR)1. Installment to income ratio (IIR)This ratio is generally expressed as a percentage. This percentage denotes the portion of the customer's monthly installment on the loan taken. Usually, FIs use maximum up to 40% ratio as standard. This is because it is has been observed that under normal circumstances, a person can pay an installment maximum up to 40% of his salary towards a loan.

2. Fixed obligation to income ratio (FOIR)This ratio signifies the importance of the regularity in the repayment of previous loans. In this calculation, the FI considers the installments of all other loans already availed of by the customer and still due, including the new loan applied for. In other words, this ratio includes all the fixed obligations that the borrower is supposed to pay regularly on a monthly basis to any lender.

3. Loan to cost ratio (LCR)This ratio is used by FIs to calculate the loan amount that an applicant is eligible to pay on the basis of the total cost of the property. This ratio sets the upper limit or the maximum loan amount that a person is eligible for, irrespective of the loan eligibility under any other criteria. The maximum amount of loan the borrower is eligible to pay is pegged as equal to the cost or value of the property. Even if the FIs calculations of eligibility, according to the above mentioned two criterions, turns out to be higher, the loan amount can't exceed the cost or value of the property. This ratio is set equal to between 60% to 80% of the registered value of the property.

Hence, while deciding on the maximum amount of loan a customer can be given, the FIs use these three parameters. These parameters help in computing loan eligibility, which is crucial in calculating the creditworthiness of a customer. It also acts as a guide to determine the loan amount.3.2 Credit Appraisal Division (CAD) in LBFL

Recently the CAD is created for the purpose of smoothing the appraisal process in LBFL. The division is headed by an Assistant Vice President of the company. A of total four personnel will work in this division, but now it has just the head with chair is functioning. The main three functions of CAD are-1. Credit Appraisal

2. Management Credit Committee (MCC)

3. Client Visit

1. Credit Appraisal:

The credit appraisal in CAD starts after receiving a file from respective department. The loan proposal is thoroughly analyzed. If it is required to discuss with the respective officer or the head of the division it is done accordingly. After reviewing the proposal if it is still seemed uncomfortable for firm to make loan the file is declined. Otherwise the file is accepted and preparation is taken to place it to MCC meeting. The CRG is done before the meeting for every file placed in the meeting. The process is depicted in the following figure below. Facts that are focused-

2. Management Credit Committee (MCC):

One of the most important functions of the CAD is to call up MCC meeting regularly. It is the full discretion of the Head of the CAD to call the meeting. The duty of the Head of the CAD is to send the notice of the meeting to all the credit committee members beforehand. All the papers of the meeting like- attendance sheet, minutes & notice; are duly filed by the CAD for future reference both in the soft and hard format. Photocopy of the minutes duly signed by all the members are also send to them for reservation and meeting up further working necessity. A handwritten register is also maintained with the meetings references duly signed by the Head of ICC and the MD. 3. Client Visit:

The Head of the CAD is also performing the visit of clients. The clients who applied for big loan amount or who are seemed prospective in the eye of the firm or who are thought to be visited for confirmation are visited by the head of CAD along with the respective divisions head or officer. The visit is also performed when the MCC referred this.

3.3 Credit Risk Appraisal Procedure in LBFL

The overall credit appraisal procedure (CAP) in LBFL can be divided into four parts. The four parts are-

1. Application Stage

2. Specific Division of LBFL

3. Credit Appraisal Division (LBFL)

4. Decision Stage

1. Application Stage:

This is the first part of the CAP, starts with the application for loan to LBFL. The clients/borrowers can directly come to the office and apply; as indicated by the solid arrow in the flow chart. The other way of getting clients is through product marketing officer (PMO); as indicated by the dotted line in the flow chart.

The clients are required to fill-up the printed application form provided by the firm. Necessary documents are required to submit with the loan application form as per requirement for different loan purposes. The application stage ends here.

2. Specific Division of LBFL:

After getting the loan application with required documents the authorized officer of the division prepares a pre-appraisal or call report or Approval/Rejection Form for approval. The chairman and the MD provide their consent in this regard. This is done in a specific format and sent for approval through e-mail. The MD can reject or approve the proposal. If the proposal is rejected the file is declined. If the MD approves the proposal the next step begins.

The next step in this part of CAP is physical verification. This is done by directly by the officials of LBFL considering the significance of the loan. There is set of standards according to which it is determined which level of officials will visit the client physically. In case of big loan even the MD visits the client. A 3rd party verification is also done before the officials visit. Visit reports are filed with the application form along with the necessary documents provided by the client.

The last step in this part of CAP is to make a loan appraisal proposal (LAP). There is a standard format of LAP for every division. The LAP includes more or less the following information like- the financing proposal, clients information, financing terms, security, credit status, justification and recommendation. In this stage some numerical analysis of client is also done as required by different divisions. The DBR, IIR, FOIR etc. calculations are shown in the LAP.The file is then sent to the CAD.

3. Credit Appraisal Division:

After receiving a file from a division for placing it to the MCC the total file is thoroughly scrutinized in this division. If any query is there regarding a file then it send it to the respective for verification or correction. The file can be rejected from this stage as it seemed unusual or inconvenient to give loan to the potential client. The head of the CAD then prepares CRG for the loan proposal in the standardized format. The head of the CAD finally call the MCC to place the prospective loan proposals for final approval by the credit committee.

4. Decision Stage:

The final part of the CAP is the decision stage. The credit committee finally approves or rejects a loan proposal. The committee may also defer a loan proposal. The purpose of this is to further scrutinize. A proposal may be approved with condition.

All these parts are depicted in a flowchart in the next segment.3.4 Flowcharts of CRAP

The four stages are same for all the divisions in CRAP. The basic difference lies in the first two stages for Home loan and SME division. For other division- Auto, Lease and Factoring the process is like the overall process. That is why, only the first two stages of CRAP for SME and Home loan division are described below with flow charts. The flow charts are also shown for the first two stages. CRAP for SME Loan:

1. Application Stage:

This is the first part of the CAP, starts with the application for loan to LBFL. The clients/borrowers can directly come to the office and apply. The other way of getting clients is through product marketing officer (PMO).

The clients are required to fill-up the printed application form provided by the firm. Necessary documents are required to submit with the loan application form as per requirement for SME loan purposes.

After apply for loan with the necessary documents there is a preliminary visit by RM of LBFL. If the RM satisfied with the condition of the client the process proceeds otherwise the file is declined.

The application stage ends here.

2. SME Division of LBFL:

After getting the loan application with required documents the authorized officer of the division prepares a pre-appraisal for approval. The chairman and the MD give their consent in this regard. This is done in a specific format and sent for approval through e-mail. The MD can reject or approve the proposal. If the proposal is rejected the file is declined. If the MD approves the proposal the next step begins.

The next step in this part of CAP is physical verification. This is done by directly by the officials of LBFL considering the significance of the loan. There is set of standards according to which it is determined which level of officials will visit the client physically. A 3rd party verification is also done before the officials visit. Visit reports are filed with the application form along with the necessary documents provided by the client.

The last step in this part of CAP is to make a loan appraisal proposal (LAP). There is a standard format of LAP for every division. The LAP in SME division includes- Client information report, Approval/Rejection Form, Credit Appraisal, Bank Reflection, Monthly sales report, DBR calculation and Working capital limit calculation.The file is send to the CAD.

The next two steps are same as the overall process.

CRAP for Home Loan:

1. Application Stage:

This is the first part of the CAP, starts with the application for loan to LBFL. The clients/borrowers can directly come to the office and apply. The other way of getting clients is through product marketing officer (PMO).

The clients are required to fill-up the printed application form provided by the firm. Necessary documents are required to submit with the loan application form as per requirement for Home loan purposes.

The application stage ends here.

2. Home Loan Division of LBFL:

After receiving the files, the authorized officer starts the loan appraisal procedure. The first thing is to make a call report which is the pre-appraisal report. The preliminary consent of the Chairman and MD was taken. And as they approve all the applications, the files were ready for further processing. This is done in a specific format and sent for approval through e-mail. The MD can reject or approve the proposal. If the proposal is rejected the file is declined. If the MD approves the proposal the next step begins.

The next step is to visit the clients proposed property. Both the 3rd party visit and the own officials visit were conducted. The authorized officials were visited the clients. A satisfactory visit report was submitted with the files.

Now it was time to prepare the LAP. The authorized officer in the head office is responsible for making the LAP. The first step is to prepare the Appraisal Report of Mortgage/Home Loan. The appraisal report consists of 10 specific headings under which the total scenario can be grasped all at once. The LAP includes- The Proposal, Purpose, Project Status, Applicant Profile, Financing Terms, Security, Income & Expenditure Analysis, Credit Investigation and Justification & Recommendation.The next step begins with the reviewing of the appraisal report by the VP of the division If all things are found acceptable then the file is sent to the CAD for further process. The next two steps are same as the overall process.

3.5 Credit Risk Grading (CRG)

Credit Risk Grading, widely known as CRG, is the numerical presentation of the risk level of a client applied for a loan from a financial institution. The CRG includes some key calculations based on which score is given to the client. Most of the parameters in the CRG model are judgmental and they are converted in number to assess the risk level of the potential loan applicant.

Alternatively defined a CRG is the numerical presentation of different credit risk categories. Different credit risks include- financial risk, personal risk, business/industry risk, management risk, relationship risk etc. These risks are numerically presented on the CRG based on calculations and judgments. The unique CRG score is the summation of all the individual score of the different risk categories. Based on the unique CRG score a potential borrower can be classified among the 8 risk grades followed by the FIs in our country. These grades are suggested by Bangladesh Bank and presented in the table below-Risk GradeDescriptionShortScore

1SuperiorSUPFully cash secured

2GoodGD85+

3AcceptableACCPT75-84

4Marginal/WatchlistMG/WL65-74

5Special MentionSM55-64

6SubstandardSS45-54

7DoubtfulDF35-44

8Bad/LossBL