Credit Risk Management - Bangladesh Bank

MANAGING CORE RISKS OF FINANCIAL INSTITUTIONS CREDIT RISK MANAGEMENT Industry Best Practices 2 2 1 1 J J u u l l y y 2 2 0 0 0 0 5 5 BANGLADESH BANK CREDIT RISK MANAGEMENT Industry Best Practices PREPARED FOR: BANGLADESH BANK PREPARED BY: FOCUS GROUP ON CREDIT RISK MANAGEMENT Focus Group Members Credit Risk Management Name Designation Organization Team Co-ordinator Sudhir Chandra Das DGM Bangladesh Bank A. Farjad Ahmed Head of Credit and Delta Brac Housing Finance Business Corporation Ltd. Development Ariful Alam Chowdhury Senior Manager IDLC of Bangladesh Ltd Hasan Iqbal MD Bangladesh Industrial Finance Company Ltd. Md. Akter Hossain SVP Prime Finance & Investment Co. Ltd. Sannamat Team Members Md. Kamrul Hassan Senior Manager IPDC

of Bangladesh Ltd. Mustafizur Rahman SVP International Leasing & Financial Services Ltd. Ramendra Nath Paul VP Phoenix Leasing company Ltd. Shabbir Ahmed DMD National Housing Finance & Investments Ltd. Shamsul Tawhid EVP Uttara Finance and Investments Ltd. Syed Ehsan Quadir MD United Leasing Company Ltd. Abbreviations ALMC Asset/Liabilities Management Committee AOA Articles of Associations BA Borrower’s Application BB Bangladesh Bank BCA Borrower Credit Application BOD Board of Directors BR Board Resolution BRTA Bangladesh Road Transport Authority CA Credit Application CC Credit Committee CEO Chief Executive Officer CIB Credit Information Bureau CLR Classified Loan Review CLRR Cash Liquidity Reserve Ratio CPA Certified Public Accountants CRG Credit Risk Grading CRM Credit Risk Management CRMC Credit Risk Management Committee CRMD Credit Risk Management Department EC Executive Committee FG Focus Group Forex. Foreign Exchange FI Financial Institution FSV Forced Sale Value HOBU Head of Business Unit HOCRO Head Office Credit Risk Officer IT Information Technology KYC Know Your Customer L/C Letter of Credit MD Managing Director MIS Management Information System MMD Mercantile Marine Department MOA Memorandum of Articles NPL Non Performing Loan RAJUK Razdhani Unnayan Kartipakha RFA Request For Action RJSC Registrar of Joint Stock Companies RM Relationship Manager RU Recovery Unit SME Small and Medium Enterprise SRO Statutory Regulator Order ULR Ultimate Realizable Value WEDB Wage Earners Development Bond ZCRO Zonal Credit Risk Officer INTRODUCTION Risk is the element of uncertainty or possibility of loss that prevail in any business transaction in any place, in any mode and at any time. In the financial arena, enterprise risks can be broadly categorized as Credit Risk, Operational Risk, Market Risk and Other Risk. Credit risk is the possibility that a borrower or counter party will fail to meet agreed obligations. Globally, more than 50% of total risk elements in banks and FIs are Credit Risk alone. Thus managing credit risk for efficient management of a FI has gradually become the most crucial task. Credit risk may take the following forms: x In direct lease/term finance: rentals/principal/and or interest amount may not be repaid x In issuance of guarantees: applicant may fail to build up fund for settling claim, if any; x In documentary credits: applicant may fail to retire import documents and many others x In factoring: the bills receivables against which payments were made, may fail to be paid x In treasury operations: the payment or series of payments due from the counter parties...

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