credit risk management of jbl
DESCRIPTION
An internship report on Credit Risk Management of Janata Bank Limited.TRANSCRIPT
CREDIT RISK MANAGEMENT
Janata Bank Limited Bangladesh
INTRODUCTION
Janata Bank Limited
1.1 Introduction
Financial institutions are very much essential for the overall development of a country. Especially banks play an important role in the field of promotion of capital, encouragement of entrepreneurship, generation of employment opportunities etc. Market economy or free economy is widely used-concept about the present economy of Bangladesh. The country adopted the concept in the late seventies with the privatization of significant number of enterprises. The practices of free market economy started from the eighties with the changing of the world economy. A number of initiatives were taken from the nineties to increase the competition and efficiency in money market, relaxation of unwanted rules and regulations, improvement of loan related law and other situations and improve the financial base of the banks of the country.1.2 Statement of the ProblemCommercial banks are in the risky business. In the process of providing financial services, they assume various kinds of financial risks. Over the last decade our understanding of the place of commercial banks within the financial sector has improved substantially. The very nature of the banking business is so sensitive because more than 85% of their liability is deposits from depositors (Saunders, Cornett, 2005). Banks use these deposits to generate credit for their borrowers, which in fact is a revenue generating activity for most banks. This credit creation process exposes the banks to high default risk which might led to financial distress including bankruptcy. All the same, beside other services, banks must create credit for their clients to make some money, grow and survive stiff competition at the market place. The principal concern of this report is to assess What is the credit structure of Janata Bank Limited? What tools or techniques they use to manage their credit risk?
What extent their performance can be affected by credit risk management policies and strategies? What are the clients perceptions towards the performance of the bank?
What are the processes followed by the bank to disburse credit?
What are the major fields of credit? Who are borrowers of credit and what are their purposes?
What are the requirements needed to get credit facility?
What are the actions the bank normally takes in the case of loan recovery?
What are the problems faced by the bank to credit risk management process?
How can the credit risk management process be improved?1.3 Origin of the ReportThe report entitled Credit Risk Management Process from the Perspective of Janata Bank Limited has been prepared as a partial fulfillment of BBA Program authorized by Administrator of BBA Program, Department of Management Studies, Jagannath University, Dhaka.
1.4 Rationale of the Study
Due to the increased competition of the increased number of commercial banks and the growing economy, the expectations of the customers have also increased than ever before. Realizing the present condition, banks, especially the commercial banks are trying to elevate their loan giving service as much as reachable to their customers. The most serious difficulty facing the financial sector is the high level of interest rate and inflation rate. So it is the duty of the top management of the commercial banks to work with the situation.1.5 Objectives of the ReportThe objectives of the report are to determine how credit policy applied in sanctioning and recovering loans and advances. Credit policy varies in terms of loan sector, status of the organization, government policy, fiscal budget and guidelines etc. There are mainly two objectives behind the preparation of this report- primary objective and secondary objectives. Primary Objective To represent the Credit Management of Janata Bank Limited.
Secondary Objectives To assess the credit structure of the bank in practice.
To measure the effectiveness of credit risk management process.
To identify the recovery performance of the bank.
To analyze the credit management process followed by the bank. To assess and highlight on the legal actions followed by the bank.
To find out problems and suggesting recommendations for further improvement.
1.6 Scope of the Study
Janata Bank Ltd. is the second largest commercial Bank in Bangladesh. Janata Bank Ltd. operates through 889 branches including 4 overseas branches at United Arab Emirates. It is linked with 1202 foreign correspondents all over the world. The researcher is assigned to learn practical knowledge from Janata Bank Ltd. Alubazar branch. In this study I would try to concentrate on the theoretical aspect of credit management, that is, the definition of credit management, policy of credit management, tools for managing credit etc. I would analyze the data on the bank and various programs for loan recovery, problems in loan in loan recovery, pattern of loan recovery and the performance of the bank under study in loan recovery, the information in respect to the classification of unsound credit and provision thereon and also concentrates on the performance of the bank. And finally I would conclude with the critical evaluation of the credit management under the guidelines of the Bank Companies Act 1991 and a discussion on the major findings and recommendations.
1.7 Methodology of the StudyThe report is descriptive in nature. To fulfill the objectives of this report total methodology has divided into two major parts:
a) Data Collection Procedure:
In order to make the report more meaningful and presentable, two sources of data and information have been used widely.The Primary Sources are as follows:- Face to face conversation with the official staff. Practical deskwork Simple depth interview technique was used by asking a number of open-ended questions to collect the information.
Relevant file study as provided by the officers concerned.The Secondary Sources are as follows:- Annual report of Janata Bank Ltd.
Periodicals Published by Bangladesh Bank
Office files and documents
Study related books and journals
Web sites.b) Data Processing & Analysis:
Collected information have then processed & compiled with the aid of MS Word, Excel & other related computer software. Necessary tables have been prepared on the basis of collected data and various statistical techniques have been applied to analyses on the basis of classified information. Detail explanation and analysis have also been incorporated in the report.
1.8 Limitations of the StudyTo prepare a report on the topic like this in a short duration is not easy task. In preparing this report some problems and limitations have encountered which are as follows:a) The main constraint of the study was insufficiency of information, which was required for the study. There are various information the bank employee cannot provide due to security and other corporate obligations.
b) As the data, in most cases, are not in organized way, the bank failed to provide all information.
c) Due to time limitation, many of the aspects could not be discussed in the present report.d) Political unrest during the internship period.e) Since the bank personnel were very busy, they could not pay enough time.
f) Lack of opportunity to access to internal data.
g) The researcher had to base on secondary data for preparing this report.
h) Legal action related information was not available.
AN OVERVIEW OF JANATA BANK LIMITED
Janata Bank Limited
2.1 History of Janata Bank Ltd.
Janata Bank Limited, one of the state owned commercial banks in Bangladesh, has an authorized capital of Tk. 20000 million (approx. US$ 250 million), paid up capital of Tk. 11000.00 million, reserve of Tk.17234 million. The Bank has a total asset of Tk. 508567 million as on 31st December 2012. Immediately after the emergence of Bangladesh in 1971, the erstwhile United Bank Limited and Union Bank Limited were renamed as Janata Bank. On 15th November, 2007 the bank has been corporatized and renamed as Janata Bank Limited.
Janata Bank Limited operates through 889 branches including 4 overseas branches at United Arab Emirates. It is linked with 1202 foreign correspondents all over the world. The Bank has more than 15(fifteen) thousand employees.
2.2 Company profileName of the companyJanata Bank Limited
Registered addressJanata Bhaban, 70, Motijheel C/A, Dhaka-1000.Bangladesh.
Legal statusPublic limited
Date of incorporation21 may, 2007.
Paid up capitalTk. 11000.00 million
Websitehttp://www.janatabank-bd.com
Swift codeJANB BD DH
Fax Pabx ; 9560000
Overseas branches
1 ABU DHABI 2 SHARJAH 3 DUBAI 4 AL-AIN
2.3 Governing Body and ManagementThe Board of Directors is composed of 13 (Thirteen) members headed by a Chairman. The Directors are representatives from both public and private sectors. The Bank is headed by the Chief Executive Officer & Managing Director, who is a reputed banker.
Name Designation
DR.Abul BarkatChairman
Mr . Md. Enamul Haq ChoudhuryDirector
Dr. Jamaluddin Ahmed, FCADirector
Ms. Parveen Mahmud, FCADirector
Mr. Nagibul Islam DipuDirector
Dr. R M DebnathDirector
Syed Bazlul Karim, B.P.M.Director
Prof. Mohammed MoinuddinDirector
Mr. Md. Abu NaserDirector
Ms. Sangita AhmedDirector
Dr. Nitai Chandra NagDirector
Mr. S. M. Aminur RahmanCEO & Managing Director
2.4 Vision of Janata Bank Ltd.To become the effective largest commercial bank in Bangladesh to support socio-economic development of the county and to be a leading bank in South Asia.2.5 Mission of Janata Bank Ltd.The mission of the bank is to be an effective commercial bank by maintaining stable growth strategy, delivering high quality financial products, providing excellent customer service through an experienced management team and ensuring good corporate governance in every step of banking network.2.6 Organizational StructureHierarchy of Janata Bank Ltd. Management
Managing Director
Deputy Managing Director
General Manager
Deputy General Manager
Assistant General Manager
First Assistant General Manager
Senior Executive Officer
Executive Officer
Assistant Executive Officer
2.7 Departments of Janata Bank Ltd.According to the 1st principle of management if the jobs are not organized considering their interrelationship and are not allocated in a particular department, it would be very difficult to control the system effectively. If the departmentalization is not fitted for the particular works there would be haphazard situation and the performance of a particular department would not be measured. Janata Bank Limited has done this work very well.
1. Central Accounts Division (CAD)2. Credit Division
3. International Division
4. Information & Technology Division
5. Human Resources Division
6. Audit & Inspection Division7. Foreign Remittance Management Division8. Treasury Department
a) Foreign Currency Management Division b) Local Currency Management Division9. Legal Matters Division
10. Human resources management division Besides above divisions there are also some divisions like:
(Agro-Based Financing Division(Disciplinary & Appeal Division
(Establishment &Engineering Division(Project Monitoring & Review Division
(Employee Welfare & Transport Division(Public Relation Division
(MIS& Statistics Division(Vigilance & Control Division
(Common Division(Marketing &Development Division
(General Advance Division(Micro-Credit Division
(Modernization & Restructuring Division(Rural Credit Division
(Reconciliation Division
THEORETICAL BACKGROUND OF CREDIT RISK MANAGEMENT
Janata Bank Limited
3.1 What is Credit? In banking terminology, credit refers to the loans and advances made by the bank to its customers or borrowers. Bank credit is a credit by which a person who has given the required security to a bank has liberty to draw to a certain extent agreed upon. It is an arrangement for deferred payment of a loan or purchase. (Wikipedia dictionary)
Credit means a provision of, or commitment to provide, funds or substitutes for funds, to a borrower, including off-balance sheet transactions, customers lines of credit, overdrafts, bills purchased and discounted, and finance leases. (Guideline on credit risk management, Bank of Mauritius)
3.2 What is Credit Risk? Risk means the exposure to a chance of loss or damage. Risk is the element of uncertainty or possibility of loss that exist in any business transaction. Credit risk is the likelihood that a borrower or counter party will be unsuccessful to meet its obligation in accordance with agreed terms and conditions. Credit risk means the risk of credit loss that result from the failure of a borrower to honor the borrowers credit obligation to the financial institution. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms.3.3 What is Credit Risk Management? Credit risk management is the lending institution's primary line of defense to protect itself against customers who fail to meet the terms of the loans or other credit that was extended to them. Credit risk management is an important aspect of a bank's success and ensures a lending institution will not take on more risk than it can handle.
3.4 Functions of Credit Risk Management Identification of risk,
Measurement,
Aggregation,
Planning and management,
Monitoring of the risks arising in a bank's overall business.
3.4.1. Identification of RiskA bank's risks have to be identified before they can be measured and managed.
Typically banks distinguish the following risk categories:
Credit risk
Market risk
Operational risk
3.4.2. Measurement
The consistent assessment of the three types of risks is an essential prerequisite for successful risk management. While the development of concepts for the assessment of market risks has shown considerable progress, the methods to measure credit risks and operational risks are not as sophisticated yet due to the limited availability of historical data. Credit risk is calculated on the basis of possible losses from the credit portfolio. Potential losses in the credit business can be divided into
1. Expected losses: Expected losses are derived from the borrower's expected probability of default and the predicted exposure at default less the recovery rate, i.e. all expected cash flows, especially from the realization of collateral. The expected losses should be accounted for in income planning and included as standard risk costs in the credit conditions.
2. Unexpected losses: Unexpected losses result from deviations in losses from the expected loss. Unexpected losses are taken into account only indirectly via equity cost in the course of income planning and setting of credit conditions. They have to be secured by the risk coverage.
Two main methods are used to measure unexpected losses today:
1. Scenario analysis2. Value-at-Risk concept1. Scenario analysis: Under a scenario analysis, the available historical market data and/or internal bank data are used to create scenarios concerning the possible development of default rates. Like in VaR analysis, scenarios for the normal case, in which loss developments are assumed that have already occurred in a certain historical period under review; and worst case scenarios assuming the incurrence of extreme losses are assumed. These scenarios are used to determine the extent of the fluctuations, in the portfolios value for the occurrence of the event. Value fluctuations may, for example, refer to the extent of losses from lending or changes in the value of the collateral. The highest possible risk is calculated on the basis of the scenario analysis. The scenario analysis is limited in its explanatory power as it takes into account only a few changes in parameters. Its results will be of lower quality than those of the VaR concept, as the scenarios applied are limited to a small number of historical events and the diversity of the parameters contained in the VaR concept cannot be achieved. Banks that base their risk controlling on the results from scenario analysis usually have to accept less precise results than they would get using the VaR approach. Therefore, it seems advantageous to shift to a value-at-risk process, but it is essential to determine what additional cost would be incurred in implementing the concept, and what additional benefit would be derived from more effective management that would result from the implementation.
2. Value-at-Risk Concept: The VaR states the maximum loss that will not be exceeded with a certain probability (confidence level) at a given horizon (holding period). To determine the value at risk a confidence level is determined which reflects the probability that the calculated maximum loss will not be exceeded within the holding period. The confidence level is usually between 95% and 99.95%, which means that higher losses are possible, but will only occur with a probability of between 5% and 0.05%. The holding period states the horizon during which the losses can occur and is derived from the liquidity of the assets observed. To calculate the credit VaR, it is necessary to determine the distribution of potential losses in the credit portfolio. For this purpose, assumptions are made in terms of the future development of the default rate and the exposure at default (credit amount outstanding at the time of default, minus proceeds from collateral and estate).
3.4.3 Aggregation
When aggregating risks, it is important to take into account correlation effects which cause a bank's overall risk to differ from the sum of the individual risks. This applies to risks both within a risk category as well as across different risk categories.
3.4.4. Planning and ManagementFurthermore, risk management has the function of planning the bank's overall risk position and actively managing the risks based on these plans.
The most commonly used management tools include:
Risk-adjusted pricing of individual loan transactions
Setting of risk limits for individual positions or portfolios
Use of guarantees and credit insurance
Securitization of risks
Buying and selling of assets
3.4.5. Monitoring
Risk monitoring is used to check whether the risks actually incurred lie within the prescribed limits, thus ensuring an institution's capacity to bear these risks. In addition, the effectiveness of the measures implemented in risk controlling is measured, and new impulses are generated if necessary. (Basel Committee on Banking Supervision, 2000)
3.5 Objectives of Credit Risk Management
Credit risk management must satisfy other objectives while retaining customers. Credit risk management is chiefly responsible for the protection of an organization's lending assets. It must also provide internal communication to its credit representatives with policies and procedures that reduce ambiguity and allow them to best fulfill their duties.
Risk Reduction: Credit risk management satisfies it primary objective of risk reduction through credit analysis and review. Credit analysis is the research and investigation required to determine the risk involved with lending to a customer. This is performed by using information from credit applications, public records and credit reports. Credit applications provide information like the applicant's name, address, age, Social Security number, driver's license number and credit references. Information from public records may include judgments, liens and business registrations. Credit reports provide financial information from credit bureaus like Experian, Equifax and Trans Union. They can reveal an applicant's credit lines, payment history, legal information (bankruptcies and judgments) and credit score. By researching and investigating an applicant's financial background, credit risk management is able to gauge the risk involved in doing business with him. For established customers, a credit review process should be employed to stay familiar with the credit situation of clients. This process allows for credit limit adjustments and other actions to reduce the company's credit risk. Internal Communication: Credit risk management must provide internal communication to its credit department and representatives. This not only allows them to fulfill their obligations in risk reduction, but also allows them to operate more efficiently by providing clear instruction on how to perform or act. Through the use of credit policies and procedures, credit risk management is able to better satisfy this objective. Credit policy defines the rules and guidelines regarding the performance of lending functions within an organization. This can include target customers, interest rates, loan amounts, collateral requirements and other risk analysis requirements. To provide the credit department with specifics on how to achieve the company's credit policies, credit procedures are used. These procedures can include information requirements for the investigation and analysis of credit. They can also detail information about the credit approval process, account suspension notifications and circumstances requiring management approval or notification. Credit policies and procedures reduce ambiguity amongst the organization's credit representatives. This facilitates an easier and more efficient approach to credit risk management. Customer Services: Providing good service is necessary to retain customers. The company's marketing and sales departments are directly responsible for sales by attracting new clients. Credit risk management, while not charged with making sales, are still indirectly responsible for them in how they treat clients (customer service). Being polite and professional are rudimentary skills. But learning to work with customers, while satisfying a risk reduction role, takes training and development. Without good customer service as a basic objective, the organization stands to lose customers. Hard credit measures such as overly-conservative credit limits, payments terms and collateral requirements can chase customers away. Without customers there is no need for credit risk management, as the organization will naturally cease to exist. Departmental Coordination: Another objective of credit risk management involves coordinating with other departments. By working with the collections department, credit risk management is better able to stay in touch with customer payment issues and possible financial problems. Coordinating with the accounting and finance departments can provide information regarding cash-flow requirements and possible changes needed regarding financial risk. Communicating closely with the sales department can reduce internal and external conflicts regarding account decisions.
3.6 Tools Used to Manage Credit Risk in International Finance: When trading crosses international borders a whole new layer of complexity appears. This complexity breeds risk factors particular to international finance. The major risks international finance has to deal with are changes in foreign exchange rates and shifts in economic and political climates. The use of financial tools can help mitigate these and other risks.
Risk-Reward Ratio: Risk-Reward Ratio compares the potential profit of an investment with the risk involved in the transaction. Calculate it by dividing the projected profit of the trade by what you stand to lose if the trade goes wrong. In the Foreign Exchange market (Forex) the minimum acceptable risk-reward ratio is 1:2, although beginners should try and keep to ratios of 1:3 and above. Black-Schools Formula: Black-Schools formula is a mathematical tool widely used in the pricing of options. It provides an approximation to the right long and short position in a stock. Use this formula with caution as it relies on unsubstantiated assumptions like the "normality assumption," which ignores the possibility of an extreme change in the market.
Diversification: Diversification reduces the overall risk of an investment by spreading its components to a mixed variety of investments. Use it to reduce the overall effect on your portfolio of changes (positive or negative) in the value of a security.
3.7 Limits
The definition of limits is necessary to curb the risks associated with bank's activities. It is intended to ensure that the risks can always be absorbed by the predefined coverage capital. When the limits are exceeded, risks must be reduced by taking such steps as reducing exposures or using financial instruments.
3.7.1 Limit Structure
The maximum risk limit is determined by the capital allocated to cover credit risks in the planning process. The bank's organizational structure has a significant impact on the way in which the limits are designed. One important success factor in the effective use of limits for risk controlling purposes is that a unit or an employee has the appropriate responsibility for an organizational unit which is assigned a limit. This is the only way to ensure that compliance with the limits is monitored and suitable measures are taken. (Bernanke, 2006)
3.7.2 Limit Monitoring and Procedures Used When Limits Are Exceeded
The stipulated limits can have a direct impact on the credit approval. It needs to be determined if compliance with the limits should be examined before or after the credit decision is taken. In practice, this compliance is usually checked ex post, i.e. after the credit approval based on the portfolio under review, and is not a component of the individual loan decision. The credit decision is taken based on the borrower's credit standing and any collateral, but independently of the portfolio risk. Such ex-post observation can result in a relatively high number of cases in which limits are exceeded, thus reducing the effectiveness of the limit stipulations.
Some banks check the compliance with the limits immediately during the credit approval process. Prior to the credit decision, compliance with the relevant limits is checked in case the credit is approved. Bringing limit monitoring into play at this early stage is also referred to as ex-ante monitoring. This helps prevent the defined limits from being exceeded in the course of approving new loans. Ex-ante monitoring is quite complex.
Graph 1: Responsibilities in case of excess over limit
Source: (Credit Approval Process and Credit Risk Management, 2005)The limit utilization has to be documented in the credit risk report. Processes and responsibilities concerning measures to be taken when limits are exceeded have to be defined clearly. The decision makers responsible have to be informed depending on the extent to which the limits are exceeded and the approach taken to remedy the situation.3.8 Credit Risk Management Process
Credit risk management process should cover the entire credit cycle starting from the origination of the credit in a financial institutions books to the point the credit is extinguished from the books (Morton Glantz, 2002). It should provide for sound practices in:
3.8.1 Credit processing/appraisal
3.8.2 Credit approval/sanction
3.8.3 Credit documentation
3.8.4 Credit administration
3.8.5 Disbursement
3.8.6 Monitoring and control of individual credits
3.8.7 Monitoring the overall credit portfolio (stress testing)
3.8.8 Credit classification and
3.8.9 Managing problem credits/recovery
3.8.1 Credit Processing/AppraisalCredit processing is the stage where all required information on credit is gathered and applications are screened. Credit application forms should be sufficiently detailed to permit gathering of all information needed for credit assessment at the outset. In this connection, financial institutions should have a checklist to ensure that all required information is, in fact, collected. Financial institutions should set out pre-qualification screening criteria, which would act as a guide for their officers to determine the types of credit that are acceptable. For instance, the criteria may include rejecting applications from blacklisted customers. These criteria would help institutions avoid processing and screening applications that would be later rejected.
Moreover, all credits should be for legitimate purposes and adequate processes should be established to ensure that financial institutions are not used for fraudulent activities or activities that are prohibited by law or are of such nature that if permitted would contravene the provisions of law. Institutions must not expose themselves to reputational risk associated with granting credit to customers of questionable repute and integrity.
The next stage to credit screening is credit appraisal where the financial institution assesses the customers ability to meet his obligations. Institutions should establish well designed credit appraisal criteria to ensure that facilities are granted only to creditworthy customers who can make repayments from reasonably determinable sources of cash flow on a timely basis (Morton Glantz, 2002).
Financial institutions usually require collateral or guarantees in support of a credit in order to mitigate risk. It must be recognized that collateral and guarantees are merely instruments of risk mitigation. They are, by no means, substitutes for a customers ability to generate sufficient cash flows to honor his contractual repayment obligations. Collateral and guarantees cannot obviate or minimize the need for a comprehensive assessment of the customer's ability to observe repayment schedule nor should they be allowed to compensate for insufficient information from the customer.
Care should be taken that working capital financing is not based entirely on the existence of collateral or guarantees. Such financing must be supported by a proper analysis of projected levels of sales and cost of sales, prudential working capital ratio, past experience of working capital financing, and contributions to such capital by the borrower itself.
Financial institutions must have a policy for valuing collateral, taking into account the requirements of the Bangladesh Bank guidelines dealing with the matter. Such a policy shall, among other things, provide for acceptability of various forms of collateral, their periodic valuation, process for ensuring their continuing legal enforceability and realization value (Morton Glantz, 2002).
In the case of loan syndication, a participating financial institution should have a policy to ensure that it does not place undue reliance on the credit risk analysis carried out by the lead underwriter. The institution must carry out its own due diligence, including credit risk analysis, and an assessment of the terms and conditions of the syndication. As a general rule, the appraisal criteria will focus on:
amount and purpose of facilities and sources of repayment;
integrity and reputation of the applicant as well as his legal capacity to assume the credit obligation;
risk profile of the borrower and the sensitivity of the applicable industry sector to economic fluctuations;
performance of the borrower in any credit previously granted by the financial institution, and other institutions, in which case a credit report should be sought from them;
the borrowers capacity to repay based on his business plan, if relevant, and projected cash flows using different scenarios;
cumulative exposure of the borrower to different institutions;
physical inspection of the borrowers business premises as well as the facility that is the subject of the proposed financing;
borrowers business expertise;
adequacy and enforceability of collateral or guarantees, taking into account the existence of any previous charges of other institutions on the collateral;
current and forecast operating environment of the borrower;
background information on shareholders, directors and beneficial owners for corporate customers; and
Management capacity of corporate customers (L.R.Chowdhury,2004).3.8.2 Credit-approval/Sanction
A financial institution must have in place written guidelines on the credit approval process and the approval authorities of individuals or committees as well as the basis of those decisions. Approval authorities should be sanctioned by the board of directors. Approval authorities will cover new credit approvals, renewals of existing credits, and changes in terms and conditions of previously approved credits, particularly credit restructuring, all of which should be fully documented and recorded. Prudent credit practice requires that persons empowered with the credit approval authority should not also have the customer relationship responsibility.
Approval authorities of individuals should be commensurate to their positions within management ranks as well as their expertise. Depending on the nature and size of credit, it would be prudent to require approval of two officers on a credit application, in accordance with the Boards policy. The approval process should be based on a system of checks and balances. Some approval authorities will be reserved for the credit committee in view of the size and complexity of the credit transaction.
Depending on the size of the financial institution, it should develop a corps of credit risk specialists who have high level expertise and experience and demonstrated judgment in assessing, approving and managing credit risk. An accountability regime should be established for the decision-making process, accompanied by a clear audit trail of decisions taken, with proper identification of individuals/committees involved. All this must be properly documented.
Graph 2: Credit Approval Process
Source: (Credit Approval Process and Credit Risk Management, 2005)3.8.3 Credit Documentation
Documentation is an essential part of the credit process and is required for each phase of the credit cycle, including credit application, credit analysis, credit approval, credit monitoring, and collateral valuation, and impairment recognition, foreclosure of impaired loan and realization of security. The format of credit files must be standardized and files neatly maintained with an appropriate system of cross-indexing to facilitate review and follow up.
The Bangladesh Bank will pay particular attention to the quality of files and the systems in place for their maintenance. Documentation establishes the relationship between the financial institution and the borrower and forms the basis for any legal action in a court of law. Institutions must ensure that contractual agreements with their borrowers are vetted by their legal advisers (L.R.Chowdhury, 2003).
Credit applications must be documented regardless of their approval or rejection. All documentation should be available for examination by the Bangladesh Bank. Financial institutions must establish policies on information to be documented at each stage of the credit cycle. The depth and detail of information from a customer will depend on the nature of the facility and his prior performance with the institution. A separate credit file should be maintained for each customer. If a subsidiary file is created, it should be properly cross-indexed to the main credit file (L.R.Chowdhury, 2004).
For security reasons, financial institutions should consider keeping only the copies of critical documents (i.e., those of legal value, facility letters, signed loan agreements) in credit files while retaining the originals in more secure custody. Credit files should also be stored in fire-proof cabinets and should not be removed from the institution's premises.
Financial institutions should maintain a checklist that can show that all their policies and procedures ranging from receiving the credit application to the disbursement of funds have been complied with. The checklist should also include the identity of individual(s) and/or committee(s) involved in the decision-making process (Morton Glantz, 2002).
Graph 4: Credit DocumentationSource: (Credit Approval Process and Credit Risk Management, 2005)3.8.4 Credit Administration
Financial institutions must ensure that their credit portfolio is properly administered, that is, loan agreements are duly prepared, renewal notices are sent systematically and credit files are regularly updated. An institution may allocate its credit administration function to a separate department or to designated individuals in credit operations, depending on the size and complexity of its credit portfolio (Credit Risk Management: Industry Best Practices2005, Bangladesh Bank).
A financial institutions credit administration function should, as a minimum, ensure that:
credit files are neatly organized, cross-indexed, and their removal from the premises is not permitted;
the borrower has registered the required insurance policy in favor of the bank and is regularly paying the premiums;
the borrower is making timely repayments of lease rents in respect of charged leasehold properties;
credit facilities are disbursed only after all the contractual terms and conditions have been met and all the required documents have been received;
collateral value is regularly monitored;
the borrower is making timely repayments on interest, principal and any agreed to fees and commissions;
information provided to management is both accurate and timely;
responsibilities within the financial institution are adequately segregated;
funds disbursed under the credit agreement are, in fact, used for the purpose for which they were granted;
back office operations are properly controlled;
the established policies and procedures as well as relevant laws and regulations are complied with; and
On-site inspection visits of the borrowers business are regularly conducted and assessments documented (L.R.Chowdhury,2004).
Graph 5: Functions of Credit Administration Department
Source: (Credit Risk Management: Industry Best Practices2005, Bangladesh Bank)
3.8.5 DisbursementOnce the credit is approved, the customer should be advised of the terms and conditions of the credit by way of a letter of offer. The duplicate of this letter should be duly signed and returned to the institution by the customer. The facility disbursement process should start only upon receipt of this letter and should involve, inter alia, the completion of formalities regarding documentation, the registration of collateral, insurance cover in the institutions favor and the vetting of documents by a legal expert. Under no circumstances shall funds be released prior to compliance with pre-disbursement conditions and approval by the relevant authorities in the financial institution (L.R.Chowdhury, 2004).
3.8.6 Monitoring and Control of Individual Credits
To safeguard financial institutions against potential losses, problem facilities need to be identified early. A proper credit monitoring system will provide the basis for taking prompt corrective actions when warning signs point to deterioration in the financial health of the borrower. Examples of such warning signs include unauthorized drawings, arrears in capital and interest and deterioration in the borrowers operating environment (Morton Glantz, 2002). Financial institutions must have a system in place to formally review the status of the credit and the financial health of the borrower at least once a year. More frequent reviews (e.g at least quarterly) should be carried out of large credits, problem credits or when the operating environment of the customer is undergoing significant changes.
In broad terms, the monitoring activity of the institution will ensure that:
funds advanced are used only for the purpose stated in the customers credit application;
financial condition of a borrower is regularly tracked and management advised in a timely fashion;
borrowers are complying with contractual covenants;
collateral coverage is regularly assessed and related to the borrowers financial health;
the institutions internal risk ratings reflect the current condition of the customer;
contractual payment delinquencies are identified and emerging problem credits are classified on a timely basis; and
Problem credits are promptly directed to management for remedial actions.
More specifically, the above monitoring will include a review of up-to-date information on the borrower, encompassing:
Opinions from other financial institutions with whom the customer deals;
Findings of site visits;
Audited financial statements and latest management accounts;
Details of customers' business plans;
Financial budgets and cash flow projections; and
Any relevant board resolutions for corporate customers. The borrower should be asked to explain any major variances in projections provided in support of his credit application and the actual performance, in particular variances respecting projected cash flows and sales turnover (Credit Risk Management: Industry Best Practices2005, Bangladesh Bank).
3.8.7 Monitoring the Overall Credit Portfolio (Stress Testing)An important element of sound credit risk management is analyzing what could potentially go wrong with individual credits and the overall credit portfolio if conditions/environment in which borrowers operate change significantly. The results of this analysis should then be factored into the assessment of the adequacy of provisioning and capital of the institution. Such stress analysis can reveal previously undetected areas of potential credit risk exposure that could arise in times of crisis (Morton Glantz, 2002).
Possible scenarios that financial institutions should consider in carrying out stress testing include:
Significant economic or industry sector downturns;
Adverse market-risk events; and
Unfavorable liquidity conditions.
Graph 6: Early Warning Systems
Source: (Credit Approval Process and Credit Risk Management, 2005)
Financial institutions should have industry profiles in respect of all industries where they have significant exposures. Such profiles must be reviewed /updated every year. Each stress test should be followed by a contingency plan as regards recommended corrective actions. Senior management must regularly review the results of stress tests and contingency plans. The results must serve as an important input into a review of credit risk management framework and setting limits and provisioning levels (Morton Glantz, 2002). 3.8.8 Classification of CreditIt is required for the board of directors of a financial institution to establish credit risk management policy, and credit impairment recognition and measurement policy, the associated internal controls, documentation processes and information systems;
Credit classification process grades individual credits in terms of the expected degree of recoverability. Financial institutions must have in place the processes and controls to implement the board approved policies, which will, in turn, be in accord with the proposed guideline. They should have appropriate criteria for credit provisioning and write off. International Accounting Standard 39 requires that financial institutions shall, in addition to individual credit provisioning, assess credit impairment and ensuing provisioning on a credit portfolio basis. Financial institutions must, therefore, establish appropriate systems and processes to identify credits with similar characteristics in order to assess the degree of their recoverability on a portfolio basis.
Financial institutions should establish appropriate systems and controls to ensure that collateral continues to be legally valid and enforceable and its net realizable value is properly determined. This is particularly important for any delinquent credits, before netting off the collaterals value against the outstanding amount of the credit for determining provision. As to any guarantees given in support of credits, financial institutions must establish procedures for verifying periodically the net worth of the guarantor.
3.8.9 Managing Problem Credits/Recovery
A financial institutions credit risk policy should clearly set out how problem credits are to be managed. The positioning of this responsibility in the credit department of an institution may depend on the size and complexity of credit operations. The monitoring unit will follow all aspects of the problem credit, including rehabilitation of the borrower, restructuring of credit, monitoring the value of applicable collateral, scrutiny of legal documents, and dealing with receiver/manager until the recovery matters are finalized.
The collection process for personal loans starts when the account holder has failed to meet one or more contractual payment (Installment). It therefore becomes the duty of the Collection Department to minimize the outstanding delinquent receivable and credit losses. This procedure has been designed to enable the collection staff to systematically recover the dues and identify / prevent potential losses, while maintaining a high standard of service and retaining good relations with the customers. It is therefore essential and critical, that collection people are familiar with the computerized system, procedures and maintain effective liaison with other departments within the bank (Prudential regulations for consumer financing 2004, Bangladesh Bank).
3.8.9.1 Collection ObjectivesThe collectors responsibility will commence from the time an account becomes delinquent until it is regularized by means of payment or closed with full payment amount collected. The goal of the collection process is to obtain payments promptly while minimizing collection expense and write-off costs as well as maintaining the customers goodwill by a high standard of service. For this reason it is important that the collector should endeavor to resolve the account at the first time worked. Collection also protects the assets of the bank. This can be achieved by identifying early signals of delinquency and thus minimizing losses. The customers who do not respond to collection efforts - represent a financial risk to the institution. The Collectors role is to collect so that the institution can keep the loan on its books and does not have to write-off / charge off.
3.8.9.2 Identification and Allocation of AccountsWhen a customer fails to pay the minimum amount due or installment by the payment due date, the account is considered in arrears or delinquent. When accounts are delinquent, collection procedures are instituted to regularize the accounts without losing the customers goodwill whilst ensuring that the banks interests are protected.
3.8.9.3 Collection StepsTo identify and manage arrears, the following aging classification is adopted:
For all products other than credit cards
Days Past Due (DPD)Collection Action
1-14Letter, Follow up & Persuasion over phone (Annexure V)
15-291st Reminder letter & Sl. No. 1 follows
30-442nd reminder letter + Single visit
45-59
3rd reminder letter (Annexure VI)
Group visit by team member
Follow up over phone
Letters to Guarantor, Employer, Reference all above effort follows
Warning on legal action by next 15 days
60-89
Call up loan (Annexure VII)
Final Reminder & Serve legal notice
legal proceedings begin
Repossession starts
90 and above
Telephone calls/Legal proceedings continue
Collection effort continues by officer & agent
Letter to different banks/Association
Table 1: Credit Recovery Steps
Source: (Prudential regulations for consumer financing 2004, Bangladesh Bank)
For credit cards:
Days Past Due (DPD)Collection Action
X Letter reminding payment past due
Soft call requesting payment
30-59 Block card with decline response
Call insisting payment
Letter advising account status (blocked)
60-89 Block card with decline response
Call insisting payment
Letter advising a/c status (blocked) and threatening card cancellation if not regularized
90-119 Call insisting immediate payment
Letter advising cancellation & surrender of card
Hot-list & circulate within the merchants
Employ recovery agent where appropriate
120-149 Call threatening litigation
Threatening letter to employer (for salaried only)
Publish name & photograph in newspaper
Personal visitation by recovery agent
Set-off SCB Account(s), if any
Serve legal notice where appropriate
150+ Bad debt allocation
Account handed over to recovery agency
Stop interest accrual
Personal visitation by recovery agent
Legal action
Table 2: Credit Recovery Steps for Credit Card
Source: (Prudential regulations for consumer financing 2004, Bangladesh Bank)
PRACTICAL EXPERIENCE
Janata Bank Limited
This report is based on the internship program. Janata Bank Limited arranges internship program provide practical knowledge about banking activities for university students as universities conducted with different organization after the completion of theoretical courses of program of Bachelor of Business Administration (BBA). A group of interns must carry out a specific project, which is assigned by Janata Bank. In this particular report, I am an internee of the previously mentioned program and the concerned organization is Janata Bank Limited which is a prominent Bank of Bangladesh. Hence I was placed in Alubazar Branch, Dhaka of Janata Bank Limited from November 11, 2013 to January 11, 2014.During these two months of internship program I was assigned with many tasks, mainly with the credit disbursement process. In the process of credit management, I learned
Filling customer loan request form,
Writing credit proposal, Stock valuation, Renewal of loan, Writing sanction letter Preparing profit and loss account or last 3 years for clients Evaluation and description of collateral property Preparing Credit Investigation Bureau (CIB) report, Gathering charge documentation,
Filling inquiry form, Writing TT (Telegraphic Transfer), DD (Demand Draft), MT (Mail Transfer), pay order, pay slip etc.Besides these, I got valuable skills and experience, and benefit from close support and guidance from senior staff, that enabled me to work in the corporate sector and developed an edge that I can take into my career after university.
CREDIT RISK MANAGEMENT OF JANATA BANK LIMITED
Janata Bank Limited
Credit Risk Management of Janata Bank LimitedThe credit risk management process followed in Janata Bank Limited can be categorized in the following specific segments:
5.1 Credit Mission Statement of Janata Bank Limited5.2 Credit Policy Guidelines
5.3 Credit Assessment
5.4 Credit Risk Grading
5.5 Credit Approval Process
5.6 Credit Risk Management
5.7 Credit Recovery5.1. Credit Mission Statement
To provide credit facilities to customers of Janata Bank Limited with care and competence and institute Janata Bank Ltd. as the ideal credit service provider in the country in terms of wide range of credit products, competitive price, adherence to credit norms, exercising due diligence and effective management of risk assets.
5.2. Credit Policy Guidelines
The credit policy guidelines of Janata Bank Limited include the following:
4.2.1 Credit principles
4.2.2 Credit Portfolio mix
4.2.3 Products and services of Janata Bank Ltd5.2.1 Credit Principles in Janata Bank LimitedThe credit division of Janata Bank Ltd is guided by 10 specific credit principles. They are as follows:
i) Evaluate borrower's nature for reliability and keenness to pay.
ii) Evaluate borrower's loan settlement capability.
iii) Develop action plans for the likelihood of non-payment.
iv) Extension of credit in satisfactorily controllable risk areas.
v) Guarantee self-directed participation of the credit officials in the credit extension process.
vi) Perform the credit process in an ethical manner.
vii) Be proactive in recognizing, administering and conveying credit risk
viii) Janata Bank Ltd. requirements must be followed in ensuring the credit exposures and operations.
ix) Try to achieve an acceptable equilibrium between risk and reward.
x) Construct and sustain a diversified credit portfolio.
i) Evaluate borrower's nature for reliability and keenness to pay
A borrower's capacity and commitment to repay a loan are two important factors to a bank. In this respect, the bank has to examine the customer's records and background in his former credit / loan related dealings. The bank should not engage itself into any commitment where there is potential threat and in these cases the bank the bank should be prepared for some exit plans.
ii) Evaluate borrower's loan settlement capability
The loan servicing capacity of the borrower is an essential factor that has to be assessed by the bank prior to the extension of any credit facilities. For this purpose, financial techniques and procedures can be used by the bank. The bank should examine the customer's reason for borrowing, major modes of repayment, historical and projected financial information, industry and competitive position, managerial skills, information source and systems, borrower's operational efficiency, cyclical fluctuations in operations, supply and distribution position.
iii) Develop action plans for the likelihood of non-payment
Any kind of loan carries the possibility of default and thus it is very important for the bank to assess the secondary and tertiary modes of repayment along with the primary source. For this purpose, the bank should consider the security value, value impairment conditions, should define and document the terms and conditions of loan and ensure effective assessment.iv) Extension of credit in satisfactorily controllable risk areas
To avoid any potential adverse situation, the bank should engage itself only in those areas where it can effectively manage and handle the transaction risk as well as the entity or business risk. In this regard, the bank has the responsibility toward developing and maintaining a productive and efficient relationship with the borrower.
v) Guarantee self-directed participation of the credit officials in the credit extension process
The independent credit participation of the credit officials is desired since it can aid in achieving the benefits of synergy and accountability. The credit personnel should utilize his or her personal skill and ability in determining the credit worthiness of the borrower and should convey all positive and negative information in time of seeking credit approval.
vi) Perform the credit process in an ethical manner
Any kind of unethical and illegal behavior, speculation, conflict of interests is prohibited in Janata Bank Ltd. Customer related information should be kept confidential.
vii) Be proactive in recognizing, administering and conveying credit risk
The bank has to be proactive in identifying the state of the borrower's after disbursement performance. Regular monitoring of the accounts, prompt reporting of material deterioration, utilizing Early Warning System (EWS), adjusting of lending terms and conditions are also important factors to be confirmed.
viii) Janata Bank Ltd. requirements must be followed in ensuring the credit exposures and operations
Bank's guidelines, requirements and internal directives must be complied with. The Relationship Manager must exercise his or her judgment in unforeseen circumstances.
ix) Try to achieve an acceptable equilibrium between risk and reward
The bank should be compensated for the risk it takes. Therefore, an appropriate as well as competitive pricing strategy has to be followed. Credit exposure, loan period, security, credit structure etc. should be arranged in accordance with the bank's policies and guidelines keeping the risk return priorities in view.x) Construct and sustain a diversified credit portfolio
Undiversified investment can expose the bank to industry specific risk. Therefore, Janata Bank Ltd. has to adhere to its policy about sectoral allocation of portfolio, maintain approved ceiling for single borrower, and accurately identify risk characteristics of each exposure.
5.2.2 Credit portfolio mix Trade finance------------------------------------ xx %
Industry- Short term working capital -------- xx %
Retail and SME --------------------------------- xx %
Project- Finance medium and long term ----- xx %
Others --------------------------------------------- xx %5.2.3 Products offered by Janata Bank LtdSecured Overdraft
(SOD)General purpose
100% cash covered
12 months period
Overdraft (OD)General purpose
12 months period
Time loanAgainst security or collateral
To finance inventory / receivables
12 months
Term loanAgainst fixed assets
Over 12 months
Maximum 7 years
Packing Credit Against export LC and export order
180 days
Payment against document (PAD)Against sight LC
21 days
Loan against trust receipt (LATR)Against import LC
180 days
Cash credit (Hypo)To finance inventory
12 months
Local documentary bill purchased (LDBP)To purchase discount against local usence LC
180 days
Foreign documentary bill purchased (FDBP)To purchase discounted export document
45 / 180 days
Sight LCFor imports
12 months
Back to back LC & AcceptanceFor import of raw materials and accessories for subsequent export
Maximum 180 days
Letter of GuaranteeFor contractual obligations
Specific period
Table 3: Products offered by JANATA BANK LTDSource: JANATA BANK LTD credit policy
5.3. Credit AssessmentBefore extension of loans, a comprehensive credit risk appraisal is done and annual reviews are made. A credit memorandum (CM) is prepared by the Relationship Manager (RM) which includes the findings of such assessment. The RM used to be the owner of the customer relationship and he / she is held responsible for complying with all the policies and guidelines of Bangladesh bank, bank laws, Janata Bank Ltd. policies and guidelines etc.
The credit assessment procedure can be segregated into three segments:
5.3.1 Call report
5.3.2 Credit Memorandum5.3.1 Call report
At the time inception of a relationship, the relationship manager tries to gather more and more information about the client. He / she sometimes visit the business premises to get an idea about the financial and operational condition of the prospective client. The market reputation, competitive position etc. are also duly assessed. Branch manager along with the relationship manager is also connected in this process. These initial visits or enquiries are referred to as 'calls'.Based on the findings of such calls, RM and the branch manager send a call report to the Head of Marketing, Head of Credit and Managing Director for initial review.
The call report contains some basic information about the client such as:
a) Client's background
b) Business
c) Market share
d) Reliability
e) Credit exposure
f) Existing banking relationships
g) Credit requirements
h) Pricing of the proposed credit facility5.3.2 Credit Memorandum (CM)
If the Head Office conveys positive sign for a call report, then only the branch RM goes for preparing a CM. The preparation of CM includes the in-depth analysis of credit risk factors, critical assessment of the client in the light of credit policy guidelines of the bank. Then it is sent to the Head of Marketing to enclose the necessary recommendations and to commence the credit approval process. The CM has to be accompanied with all the required legal documents and the financial information of the prospective client.
The CM generally contains the followings:a) A specific control number and base number for each client.
b) The credit risk grading score.
c) The authorization for the approval process.
d) The description of the proposed facility.
e) Rationale behind the loan extension.
f) Financial information of the client mainly the income statements for the past years, earnings forecasts in normal and adverse conditions.
g) Forecasted earnings from the relationship to be established.
h) Lending agreement.
i) Compliance of the policies and guidelines of Bangladesh Bank and Janata Bank Ltd.Most of the times CM also contains the followings:a) Facility Planb) Security Schedule c) Security Assistanced) Paymente) Lending Covenantsf) Risks and Mitigatesg) Visit and Inspectionh) Repayment
The CM also contains the assessment of the following areas:
a) Borrower analysis
The majority shareholders, management team and group or affiliate companies are assessed. Any issues regarding lack of management depth, complicated ownership structures or intergroup transactions are addressed, and risks mitigated.
b) Industry Analysis
The key risk factors of the borrowers industry are assessed. Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces are addressed and the strengths and weaknesses of the borrower relative to its competition are identified.
c) Supplier/Buyer Analysis
Any customer or supplier concentration is addressed, as these could have a significant impact on the future viability of the borrower.
d) Historical Financial Analysis
An analysis of a minimum of 3 years historical financial statements of the borrower is presented. Where reliance is placed on a corporate guarantor, guarantor financial statements are also analyzed. The analysis addresses the quality and sustainability of earnings, cash flow and the strength of the borrowers balance sheet. Specifically, cash flow, leverage and profitability are analyzed.
e) Projected Financial Performance
Where term facilities (tenor > 1 year) are being proposed, a projection of the borrowers future financial performance is provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans are not granted if projected cash flow is insufficient to repay debts.
f) Account Conduct
For existing borrowers, the historic performances in meeting repayment obligations (trade payments, cheques, interest and principal payments, etc) are assessed.
g) Adherence to Lending Guidelines
Credit Applications clearly state whether or not the proposed application is in compliance with the banks Lending Guidelines. The Banks Head of Credit or Managing Director/CEO approve Credit Memorandum that does not adhere to the banks Lending Guidelines.
h) Mitigating Factors
Mitigating factors for risks identified in the credit assessment are identified. Possible risks include, but are not limited to: 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.
I) Loan Structure
The amounts and tenors of financing proposed are justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrowers repayment ability.j) SecurityA current valuation of collateral is obtained and the quality and priority of security being proposed are assessed. Loans are not granted based solely on security. Adequacy and the extent of the insurance coverage are also assessed. (Janata Bank Ltd. credit policy, 2005)5.4. Credit Risk Grading
According to Bangladesh Bank guidelines, all Banks should adopt a credit risk grading system. Therefore, Janata Bank Ltd. has duly implemented a credit risk grading policy in its credit risk assessment program. The system defines the risk profile of borrowers to ensure that account management, structure and pricing are commensurate with the risk involved.
(Focus Group on Credit Risk Management, (2005), Credit Risk Management: Industry Best Practices, Managing Core Risks of Financial Institutions, Bangladesh Bank)
Risk grading is a key measurement of a Banks asset quality. All facilities are assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities are immediately changed. Credit Memorandum includes a clear statement of the borrower's risk grade.
Janata Bank Ltd. applies the following credit risk grading matrix as provided by Bangladesh Bank guidelines. Risk RatingGrade
Superior Low Risk1
Good Satisfactory Risk2
Acceptable Fair Risk3
Marginal - Watch list4
Special Mention5
Substandard6
Doubtful and Bad
(non-performing)7
Loss
(non-performing)8
Source: (Focus Group on Credit Risk Management, (2005), Credit Risk Management: Industry Best Practices, Managing Core Risks of Financial Institutions, Bangladesh Bank)
If any facility is to be downgraded, the RM prepares The Early Alert Report and it is duly forwarded to the higher authority for approval. After approval, the report is forwarded to Credit Administration, who is responsible to ensure the correct facility/borrower Risk Grades are updated on the system. 5.5. Credit Approval Process
Before commencing the credit approval process, a proper credit analysis is done through Credit Memorandum. No credit facility may be approved unless a satisfactory presentation package has been prepared. Prior to securing the requisite approval, the authority ensures due diligence that:
a) The Bank is in possession of all credit information required to properly evaluate the risk being undertaken.
b) A detailed credit analysis has been completed, to include a written analysis of the financial condition of the borrower.
c) The proposed extension of credit fully meets the standard of purpose, quality etc.
d) The Board of Investment Registration, permission for all regulatory bodies, clean CIB reports etc. are obtained.
In the approval process, the bank segregates its relationship management from the approving authority. All the facilities offered by the branch must be approved from the Herd of Credit Committee.
5.5.1 Sanction AdviceAfter the facility has been approved, the credit officers of the branch prepare a sanction advice which is addressed to the client. It is a kind of formal letter addressed to the client that provides information regarding the amount of the loan, its purpose, tenor, interest, security details, insurance coverage and other specific and general conditions applicable to the client.
A sanction advice contains the following information:
a) Address of the client
b) Subject
c) Facility type
d) Review / repayment date
e) Security details
f) Insurance coverage
g) Specific conditions
h) General conditions
i) Other conditions and covenants
A sanction advice is accompanied with the necessary legal documents. These documents may include:
a) Demand promissory note
b) Letter of agreement
c) Letter of continuity
d) Letter of revival
e) Letter of disbursement
f) Letter of hypothecation with supplementary documents
g) Registered deed of mortgage
h) Letter of guarantee
i) Registered power of attorney etc.
5.6. Credit Risk Management
The credit risk management process of Janata Bank Ltd. has the function of consistent monitoring of the transactions within approved limits and recovering the bank's dues in time. The key responsibilities of the credit risk management process are as follows:
a) Oversight of the banks credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking, personal banking, & treasury operations.
b) Oversight of the banks asset quality.
c) Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made.
d) To approve (or decline), within delegated authority, Credit Applications recommended by RM. Where aggregate borrower exposure is in excess of approval limits, to provide recommendation to MD/CEO for approval.
e) To provide advice/assistance regarding all credit matters to line management/RMs.
f) To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively.
(Focus Group on Credit Risk Management, (2005), Credit Risk Management: Industry Best Practices, Managing Core Risks of Financial Institutions, Bangladesh Bank)The credit risk management process of Janata Bank Ltd. includes the following operations:
5.6.1 Loan Administration
5.6.2 Credit Monitoring5.6.1 Loan Administration
The main responsibilities performed by the loan administration department are as follows:
a) To ensure that all security documentation complies with the terms of approval and is enforceable.
b) To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral, and is properly assigned to the bank.
c) To control loan disbursements only after all terms and conditions of approval have been met, and all security documentation is in place.
d) To maintain control over all security documentation.
e) To monitor borrowers compliance with covenants and agreed terms and conditions, and general monitoring of account conduct/performance. (Focus Group on Credit Risk Management, (2005), Credit Risk Management: Industry Best Practices, Managing Core Risks of Financial Institutions, Bangladesh Bank)
5.6.1.1 Documentation
Credit administration department ensures the following in connection with documentation:
a) All approvals and documents are in place.
b) Documents are prepared in accordance with the approved terms and conditions and are legally enforceable
c) Vetting of required documents is done.
d) Protection of the bank's security interest.
e) Any exception from the standard loan facility is duly authorized from the Head of Credit.
5.6.1.2 Disbursement
The loan administration department performs the following responsibilities in connection with the disbursement to ensure that:
a) All standard security and charge documents are in place.
b) Documentation check list has been prepared.
c) Credit administration department has duly authorized the disbursement.
d) Disbursement authorization form is documented as an evidence of document.
e) A proper back up of all the documents is maintained in the computer system.
f) Incomplete documentation has received temporary waiver from the authority.
g) Pricing of the facility is appropriate.
h) All disbursements / drawings are in the form of approved credit facility.
i) Excess over limit are allowed under pre-fact approval.
j) A clean updated CIB report is obtained before disbursement.
k) The lending cap of the bank is duly maintained. (Janata Bank Ltd credit policy)5.6.2 Credit Monitoring
To minimize credit losses, monitoring procedures and systems are in place that provides an early indication of the deteriorating financial health of a borrower. Credit monitoring process at Janata Bank Ltd tries to monitor the following:
Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants
Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up.
Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit.
(Focus Group on Credit Risk Management, (2005), Credit Risk Management: Industry Best Practices, Managing Core Risks of Financial Institutions, Bangladesh Bank)5.6.2.1 Branch Monitoring
Credit monitoring activities in the branch performs the following responsibility:
a) Monitor transactions in accounts to ensure turnover and utilization of limits.
b) Thoroughly review all past dues, collateral short fall, covenant breach and other irregularities.
c) Rectify all audit objections and follow their suggestions.
d) Periodic client calls and review by branch head.
e) Formal periodic review of all relationships.
f) Factory visit / stock inspection and progress of work against work / implementation of projects are to be recorded and reviewed.
g) Borrower to be communicated about past dues, over due installments, expiry of insurance, guarantee, limits etc.
h) Early alert reports are prepared within 7 days of identification of weakness in the business and financial weakness of the client and sent to Head Office Loan Administration.
5.6.2.2 Loan Review Committee:
The IT system of Janata Bank Ltd produces overdue positions on 3 periods viz. 30 days, 60 days and 90 days and above. It also produces expired limits and excess over limits (EOLs). The loan MIS are duly distributed to branches, HOM, HOC, HOO, HOCA and MD. A designated loan admin officer follows up the position on a daily basis. Besides, the loan review committee of the bank formally follows up the overdue positions, expired limits and EOL with the branches on a monthly basis which is minute for taking actions at the earliest, before the account further deteriorates.
5.6.2.3 Early Alert Process:
An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Banks credit position at some future date with a likely prospect of being downgraded to CG 5 or worse (Impaired status), within the next twelve months. Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis.
An Early Alert report is completed by the RM and sent to the approving authority in CRM for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade is updated as soon as possible.
Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Banks interest.
5.7 Credit Recovery
The credit division performs the following recovery related functions:a) Directly managing accounts with sustained deterioration (a risk rating of sub standard or worse)
b) Determining work out plan / Recovery strategy.
c) Pursuing all avenues to maximize recovery, including placing customers into receivership or liquidation as appropriate.
d) Ensuring adequate and timely loan loss provisions are made based on actual and expected losses.
e) Keeping top management appraised of grade 6 or worse accounts.
RECOMMENDATIONS AND CONCLUSIONS
Janata Bank Limited
6.1 FindingsEvery bank has its own credit procedure. Bank under study possesses a standard credit procedure. As the objective of my study is to make a comment on the Credit Management of Janata Bank Limited, I try my best to collect data for the study and find out the reality. Based on the data generated during my study period I will sum up my findings here and I think this will help me to achieve my objectives. If we look at historical background ofJanata Bank Ltd, we can see that, the objective of JB is to earn profit as well as to improve the economic welfare of the people as a whole. Janata Bank Limited has a significant role in long term project financing in both agriculture and industrial sectors. AgainJanata Bank Ltdhas a deep concern for rural farmers. Private sector usually concentrates in the urban areas where as public sector i.e. Janata Bank Ltd spread their banking network all over the world. With a view to implementing government policies,Janata Bank Ltdhas been maintaining its position in extending credit to government bodies, sector corporations and private enterprises. According to the standard and banks credit procedure, credit operation is started from the customer application to the branch for the loan. But in most cases, many customers go directly to the directors of the bank and directors send them to the branch offices with his/her reference. In these cases, proper appraisal is not possible as directors the most powerful persons and bank management must give priority towards the decision of the directors. This phenomenon is very common in the bank which hampers the spontaneous procedure of credit appraisal. Bangladesh Bank monitors all the policies of all the private and nationalized banks of the country. According to the Bangladesh Banks strategy, all banks must possess the standard policies which are designed by the central bank. Janata Bank Limited also possesses a standard credit proposal form. In that form all necessary information are required to fill up. But in practice credit officers do not fill up the proposal form properly. Most of the cases, they use assumption rather than exact figure. This practice might end up with bad or classified one. A standard policy starts from the customers direct application for the loan in the branch office. But its a common phenomenon that most of the customers directly contact with Head office and Head office choose the branch offices to disburse the loan. It hampers the normal procedure. Branches always stay under pressure when they get order for disbursement from Head office. When branches get order from the head office, then appraisal system loses its formal track. So Head office should not send any order to the branch office without prior appraisal. Every bank has its own budget and plan regarding loan portfolio. This loan portfolio must be diversified so that bank could diversify its risk. A proper and preplanned portfolio can eliminate the risk of huge classified loan or bad loans as this aspect is very much sensitive toward many external and internal factors. The bank under study i.e. Janata Bank Limited does not have any proper guide line where to invest; moreover they do not do any future plan to maintain a well structured portfolio to decrease the possibility of classified loan. This type of practice is working as an obstacle in smooth credit disbursement as well as in credit appraisal system. Janata Bank Ltddistributes loans without sufficient security in some cases. This is violation of the Bangladesh bank order. In many cases bank face this problem because banks credit officer fails to value collateral property. Proper valuation means collateral will exactly cover the risk of bad loan. Officials must do it with due care. The recovery performance ofJanata Bank Ltdis not in a satisfactory level at all and the position of those in that respect deteriorated heavily during last two phases. The recovery performance in agriculture is worse than in other sectors. On the other hand, as private sector banks distribute more loans on short term basis and relatively better than public sector. But if we compare it from the efficiency point, then it is clear that they are not still efficient in credit management as they are unable to recover half of their distributed loan in different sectors. Janata Bank Ltddoes not keep enough provisions against classified loans and advances. Private sector banks are relatively efficient in processing and executing legal actions against defaulters for their nonpayment of loans and advances in due time that of public sector bank. The Credit Management ofJanata Bank Ltdis not fully conformity with the guidelines prescribed in the Bank Companies Act 1991 and International Accounting Standard-30(IAS-30).6.2 ConclusionsDuring the two months internship program at Janata Bank Limited, Alubazar Branch, almost all the desks have been observed more or less. This internship program, at first, has been arranged for gaining knowledge of practical banking to compare this practical knowledge with theoretical knowledge. Comparing practical knowledge with theoretical involves identification of weakness identified. Though all departments and sections are covered in this program, it is not possible to go to the depth of each activities of branch because of time limitation. However, highest effort has been given to achieve the objectives the internship program.I have discussed so far about the different aspects of Credit Management Process of Janata Bank. For my report, I have selected Janata bank. JB plays an important role in the banking sector as well as in our economy. The success of a bank depends largely on the efficient credit management. A successful credit management is not only need for a banks own performance but also it is needed for the smooth development of an economy. In any strategy of economic development, therefore, it is essential to emphasize the evaluation of a sound and well integrated credit management system from the view point of both resources mobilization and efficient allocation of funds. Janata Bank Ltd, Alubazar Branch is playing an important role in the banking system and in the payment system of Bangladesh.6.3 Recommendations Central bank should take proper actions for ensuring equivalent distribution of loan and advances.. Lending policies in our country should be geared to growth potential rather than being determined by the pre-existing collateral.
Changes in lending policies will not suffice the purposes unless it is followed by a change in the attitude and outlook of both the borrowers and the bankers.
Improvement of credit management depends on the development of relevant, adequate, proper and reliable data base at the public sector banks as well as private sector banks in Bangladesh.
For developing a reliable credit management system for the commercial banks specially Janata Bank, it should require to introduce as improved information system within bank as well as among the borrowers. Because ultimately it is what a borrower does with money that should guide the credit plan, the borrowers also have to know exactly where they are going, what their opportunities and how fast they can move.
The security must be valued properly by the independent values and constantly watched so that the value of mortgage property becomes sufficient to recover the default loan.
Publishing the names of defaulter as well as good and regular payers in various dailies and granting various sorts of facilities to good borrowers will create a moral persuasion on the borrowers. This maydecrease the number of defaulters and the volume of large outstanding loan amounts as well.
Pressure from outsider and influence extorted by borrowers are also a great impediment in the smooth functioning of loan recovery process. The role of government in this case is the most important factor required to solve these sorts of problem.
More and more competent personnel must be recruited to reduce the weakness of credit management. Competent executives will ensure the reduction of wrong appraisal and evaluation of projects.
Prompt legal actions be taken against willful loan defaulters
The new entrepreneurs should be encouraged in disturbing loans and those who have the records of regular payment, should be given preference.
Steps should be taken so that guarantors cannot avoid their responsibility.
It is observed that the defaulters generally get various sorts of exemptions as declared by the government from time to time. Government must not show any kind of mercy to the defaulters in any way which may encourage the default culture. This type of action may discourse the borrowers to become willful defaulters.
The existing huge amount of classified loans demand for special and corrective attention for example:
By obtaining suitable reduction on amount.
Additional security.
More complete financial data concerning the obligors condition or
Other such action as the specific circumstances may require.
The attempt to encourage banks to require borrowers comply with banking laws and regulations and clear up industrial properties prior to granting a loan.
Janata Bank should follow some straight ward mechanical procedures in assessing the risk of a borrower.
The formulation of a sound credit policy in the possibility of default loans.
The formulation of a sound credit policy in the banking sector as a whole has to take into account all these factors and each bank has to attempt to work out for itself what it is capable of doing so as best as possible.References1. Annual reports of Janata Bank Limited and Bangladesh Bank.2. Several booklets from Janata Bank limited.
3. Several newsletters from Janata Bank Limited.
4. Website: www.janatabank-bd.com; 1/1/14; 8:00PM5. Practical participation of JBL
6. Different Types of Forms of JBL
7. Managing Core Risk in Banking: Credit Risk Management, Janata Bank, Head Office, Dhaka.Appendices-A: AbbreviationsA/CAccount
AGMAnnual General Meeting
ATMAutomated Teller Machine
BBBangladesh Bank
BABBangladeshAssociation of Banks
CCCash Credit
CIBCredit Information Bureau
DDDemand Draft
EXP FormExport Form
IMP FormImport Form
JBLJanata Bank Limited
L/CLetter of Credit
POPay Order
TINTax Identification Number
TTTelegraphic Transfer
CMCredit Memorandum
CRMCredit Risk Management
Appendices-B: QuestionnairesDear Respondents,This is a questionnaire designed to collect data on the credit risk management and its impact on bank performance which will be used as an input for a report in a partial fulfillment of BBA degree in Management Studies. Your genuine response is solely used for academic purpose and the data will be treated utmost confidentiality. Therefore, your kindly cooperation is appreciated in advance.Responses to this questionnaire will be used to develop general findings and conclusions without specific reference to institutions, clients or credits, except where information may be independently available in the public domain or where permission has been granted approval.
I assure you that your personal details will be held confidential. Thank you!Personal Information:Full Name: ______________________________________________________________Nationality: ___________________________Profession: _________________________
Contact Details: Office: ________________ Mobile: _______________________
Which best describes your position in the bank?
Board Member Senior Executive Manager Head of department Risk Officer
Others_______________________Specific Questions:1. How many years of experience do you have working with bank and I the area risk management? Less than 1 year 1-5 years 5-10 years More than ten years2. What is your expectation from effective credit risk management in your organization? (You can use more than one answer) Reduce financial loss Improve communication with the stake holders Improve decision making Improve resource allocation Other (please specify)
3. Who has the authorit