Chapter 1: Background of the Study

1.1 INTRODUCTION After completion of 8 semesters in the Evening MBA Program of the Faculty of Business Studies, Dhaka niversity, ! prepared my pro"ect paper on #redit $isk Management of the %ulshan Branch of Eastern Bank prepared on the #redit $isk Management &#$M' department of the (ank) !n the report it has gone through the standard operating procedures carried out (y the (ank and understood them *ell) Pro"ect paper has try to understand the regulatory compliance issues proposed (y Bangladesh Bank &BB' regarding credit management practices)

1.2 OBJ CTI! O" T# R $ORT +o provide a thorough understanding of the #redit $isk Management Practice follo*ed (y #$M, %ulshan Branch of Eastern Bank ,imited for SME credits) +he report attempts to sho* *hether the *hether the #redit $isk Management Practice follo*ed (y Eastern Bank is in compliance *ith Bangladesh Bank guidelines) Some core issues like #lassification procedures and -on.performing ,oan handling procedures *ill also (e discussed thoroughly) #redit $isk grading procedure proposed (y Bangladesh Bank has also (een intended to (e scrutini/ed in the report *ith the e0isting risk rating system follo*ed (y Eastern Bank ,imited) #redit $isk Management &Study on Eastern Bank ,imited' Page 1 of 23

1.% SCO$ O" T# STUD& +he scope of the study is limited to #$M, %ulshan (ranch only) +here *as no intention *hatsoever, to focus on ho* the loan and advances *ere marketed to the customers, ho* the relationships *ere (uilt and ho* each customers *ere follo*ed up or handled (y the $elationship Managers) Purpose of the report *ould (e to focus on ho* the credit management practice is (eing carried out (y the respective department like *hat is modus operandi, *hat is the evaluation techni4ues follo*ed (y the officers during evaluating a loan proposal and so on so forth) Also the report *on5t cover various legal issues regarding dis(ursement and recovery procedures of a loan) And finally entire risk management issues in the report *ill revolve around SME loan proposals only) 1.' SOURC S O" D(T( ) * T#ODO+O,&

Primary sources of data . Direct conversation *ith the employees of Eastern Bank ,imited) Secondary Sources of data . Annual $eports of the (ank, different reports, operational
manual for the employees, Bangladesh Bank #irculars, Bank Data(ase and various other pu(lications and *e(sites) For the analysis part, data have (een collected from the loan proposals and other documentation packages of the (ank) !ntervie* method to the EB, 6fficials has (een used for getting information) A case study has (een used to present the #redit $isk Assessment process of Eastern Bank ,imited)

1.- +I*IT(TIONS +he follo*ing limitations are apparent in the report7 +ime is the first limitation as the duration of the program *as of 18 *eeks only) Another limitation of this report is Bank5s policy of not disclosing some data and information for o(vious reason, *hich could have (een very much useful)

Chapter 2: Background of the Study

2.1 "OR*(TION !n pursuance of the 9Bank of #redit and #ommerce !nternational &6verseas' ,imited in Bangladesh &$econstruction' Scheme, 1::8;, framed (y the Bangladesh Bank and approved (y the %overnment of Bangladesh, the Eastern Bank ,imited *as formed as a pu(lic limited company incorporated in Bangladesh *ith primary o("ective to carry on all kinds of (anking (usiness in and outside the country) Eastern Bank ,imited had also taken over the (usiness, assets and lia(ilities of erst*hile Bank of #redit and #ommerce !nternational &6verseas' ,imited (ranches in Bangladesh *ith effect from 12th August, 1::8) 2.2 !ISION O" B+ <+o (ecome the (ank of choice (y transforming the *ay *e do (usiness and developing a truly uni4ue financial institution that delivers superior gro*th and financial performance and (e the most recogni/a(le (rand in the financial services in Bangladesh)5

#redit $isk Management &Study on Eastern Bank ,imited' Page 8 of 23

EB, dreams to (ecome the (ank of choice of the general pu(lic including (oth the consumer and the corporate clients) !t has adopted a ne* logo that looks very dynamic in its attractive colors that reflect all the changes that are taking place in EB,) 2.% *ISSION O" B+

=e *ill deliver service e0cellence to all our customers, (oth internal and e0ternal) =e *ill constantly challenge our systems, procedures and training to maintain a cohesive and
professional team in order to achieve service e0cellence)

=e *ill create an ena(ling environment and em(race a team.(ased culture *here people *ill
e0cel)

=e *ill ensure to ma0imi/e shareholder>s value)

2.' CURR NT B(N.IN, SC N(RIO IN B(N,+(D S# ) B+/S $OSITION From the (eginning of the year 833?, the entire (anking industry in Bangladesh started facing stiff competition to procure (usiness, under the changed circumstances of the policy of Bangladesh (ank to lo*er the rates of interest in lending and to go for syndication against large loan portfolios *ith the o("ective to ensure (etter operation and control of all functions of the (ank) Despite such situation the year *as a remarka(le one for Eastern Bank ,imited &EB,' *hen the (ank finally completed the introduction of a state.of.the art !+ technology platform of Fle0cu(e, a *orld class (anking soft*are) All of (ank5s 88 (ranches *ere connected to this !+ platform giving an envia(le opportunity to all the EB, customers to o(tain the most coveted services that no other (ank could offer them yet) #ustomers of ne* century are self.motivated, vigilant and informed a(out the market conditions, further more development of information technology and telecommunication systems created an environment *here(y customers demand convenience, reasona(ly priced (etter 4uality financial products and personali/ed services) #ustomer demand together *ith technological advancement created ne* challenges and opportunities in the (anking sector in Bangladesh) Adapting realistic and timely (usiness policies, investments in !+ are no* pre"udice to stay at the edge of this assertive and competitive (anking (usiness of the country) !nvention of ne* financial products and services and introduction of ne* delivery methods are the key concern of staying close to customers) +o cope *ith the status 4uo, Eastern Bank ,imited *elcomed these developments and restructured the (ank to meet the challenges in future) +he (ranches of the (ank are no* termed as the 9Sales @ Services #enter; *hich are solely concentrated providing service to the corporate and consumer clients and maintain relationship *ith them) +he strategic changes that it initiated (ack in 8338 to face this changing circumstance has (een completed in 833?) As a result, this ne* (usiness structure supported *ith the ro(ust (anking solution *ill allo* the (ank to focus on customers5 needs and provide the (est services and products to customer5s doorstep at an attractive price) Aeeping in mind such changed circumstances the (ank concentrated not only on *holesale (anking (ut also on other alternatives) For e0ample, introducing ne* productsB diversifying Bank5s activities in consumer and retail (ankingB simultaneously securing lo* cost deposits to sustain profita(ility, increase shareholders5 *ealthB rationali/ing the e0penses and optimi/ing fruitful use of the funds) +he cost to operating income ratio of the (ank in 833? *as at the lo*est (racket compared *ith other (anks) 2.- $ R"OR*(NC O" B+ IN R C NT & (RS Eastern (ank limited (egan its stressful "ourney in 1::8 and shaped itself to this position as a healthy financial institution and en"oy today commenda(le reputation in all circles in the country as *ell as a(road due to transparency in all layers of its transactions follo*ing the rules of (usiness set (y the Finance Ministry and Bangladesh Bank *ithout any lapse) !t has thus culminated a spirit of honest #redit $isk Management &Study on Eastern Bank ,imited' Page C of 23

team*ork amongst the management and staff to produce strong (alance sheets, 4uality portfolios, maintain high capital ade4uacy, paid up capital and reserves) Eastern Bank ,imited today has a strongly motivated and dedicated management and staffs that are the pathfinders for introduction of sophisticated products) !t has introduce the Automated +eller Machine &A+M', Point of Sales, !nternet Banking, Phone Banking, De(it #ard, etc) and also ne* products) Already it has introduced C A+M Machines in C of its (ranches) De(it #ard has also (een launched) #lients can also do their (usiness transactions through !nternet Banking) For e0ample, they can pay their utility (ills through !nternet Banking) +hese positive things shall (roaden its customer (ase and ena(le the (ank to have a competitive edge on other (anks) 2.-.1 R !I 0 O" B(N./S O$ R(TION As on C1st Decem(er 833? total assets &including contingencies' *ent up to +aka 8C,3?C million from +aka 18,??D million of 8338) During the same period operating profit has increased to +aka 8:8)? million from +aka EC3)E million of 8338) 2.-.2 S#(R #O+D RS/ 1UIT& Eastern Bank ,imited, as one of the largest capital (ased (anks in Bangladesh *ith an Authori/ed #apital of +aka 1,333 million, maintained a strong capital position in the year 833?) At the end of the year under revie*, the total shareholders5 e4uity of the (ank *as +aka 8,2C3 million) Detail (reakdo*n of changes in shareholders5 e4uity are given (elo*F &+aka in Million' 833C 888 8,D23 8C3 &1,8:8' 8,C83

Particulars Paid up #apital $eserve Fund @ 6ther $eserves $etained Earnings ,essF Pre.takeover loss of B##! +otal E4uity

833? 888 8ECC CD8 &18:8' 82C3

8338 E83 8,??8 8D8 &1,C3:' 8,111

Bank5s #apital Ade4uacy $atio &#A$' on the (asis of $isk =eighted Assets &$=A as per Bangladesh Bank guidelines', (oth in terms of +ier.! @ +ier.!! *as 1?)88G as on Decem(er C1, 833? as compared to 18)8EG in the year 833C) #ompared to the minimum re4uirement of #A$ :G, the Bank had sufficient surplus capital for gro*th and development)

C3333 8D333 83333 1D333 13333 EE23 D333 3 1::8 1::: 8333 8331 8338 833C 833? 11DC8 1D:2? 81821 1:381 8281? 8CCC:

#redit $isk Management &Study on Eastern Bank ,imited' Page ? of 23

FigureF Shareholders> E4uity &+aka in Million'

Pu(lic 8CG

Financial !nstitutions 1EG

FigureF Paid.up #apital Structure

C3G 8DG 83G 1DG 13G DG 3G 8333 8331 8338 833C 833? 8?)1EG 88)?:G 88)C8G 18)E8G 1?)88G

FigureF #apital Ade4uacy $atio 2.-.% D $OSITS +he (ank, a policy, discouraged high.cost term deposits and focused on reducing cost of funds (y increasing lo*.cost deposits) $ates of interest *ere revised from time to time in response to internal as *ell as e0ternal market conditions) Even under these e0treme situations deposit (ase has increased to +A 1D,2?: million &833?' from +A 11,:D8 &833C')

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14222 13222 1'222 12222 12222 4222 3222 '222 2222 2 1556 1554 1555 2222 2221 2222 222% 222'

Taka 7n *7887on

FigureF %ro*th of Deposits 2.-.' (SS TS +otal assets of the (ank stood at taka 8C,3?8 million as on Decem(er C1, 833? as against taka 18, ??D million as on Decem(er C1, 8338)

8D333 83333 1D333 13333 D333 3 1::E 1::8 1::: 8333 8331 8338 833C 833?

8C3?8 12883 1888? 18??D 18E12

1?C:? 13182 13:EC

+aka in Million

FigureF %ro*th of Assets 2.-.- +O(NS ) (D!(NC S +otal loans and advances of the (ank stood at +A 1?,:EC million indicating an increase of C8)2?G as against +A 11,888 million of preceding year) +he advance to deposit ratio as on Decem(er C1, 833? *as :D)28G)

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13222 1'222 12222 12222 4222 3222 '222 2222 2

1'56% 55'3 6522 -2-4 -6'' 41'1 12451 11244

1556

1554

1555

2222

2221

2222

222%

222'

Taka 7n *7887on

FigureF %ro*th of ,oans @ Advances 2.-.3 Inco9e: ;pen<e< ) $rof7t EB,5s income, e0pense @ profit statistics, $eturn on e4uity and cost to income ratios can (e summari/ed as follo*ingF

D333 ?D33 ?333 CD33 C333 8D33 8333 1D33 1333 D33 3

88?1 8388 1:82 1:8D 1:12 1211 11:: :8D 28: CD2 E:2 ?3C D81 2E? E3C EC1 ED: 13C3 18?8 1C1: 18DD 1882 1C?:

8:8

Inco9e ;pen<e< $rof7t

#redit $isk Management &Study on Eastern Bank ,imited' Page E of 23

1: :E 1: :8 1: :: 83 33 83 31 83 38 83 3C 83 3?
FigureF !ncome, E0penses @ Profit

CD)33G C3)33G 8D)33G 83)33G 1D)33G 13)33G D)33G 3)33G

8:)EDG

1:)C:G 1D)C8G

12):CG

1E)??G

1D)CCG

18)??G

1::8

1:::

8333

8331

8338

833C

833?

$eturn on E4uity

FigureF $eturn on E4uity

31% 30% 29% 28% 27% 26% 1::E 1::8 1::: 8333 8331 8338 833C 833?

FigureF #ost to !ncome $atio 2.-.6 DI!ID ND +he Board of Directors recommended payment of +aka ?C as cash dividend for the year ended Decem(er C1, 833? for each ordinary share of +aka 133 on total paid.up capital of 888 million as compared to 83G cash dividend per share of 833C, sho*ing a gro*th of 11DG) 2.3 COR$OR(T ,O! RN(NC ) R ,U+(TOR& CO*$+I(NC Eastern Bank ,imited practiced the principles of good corporate governance over the years that covered compliance of regulatory re4uirements, responsive to various stakeholders) Spirit of corporate governance also included practicing of the corporate culture *ithin the organi/ation and shared this (y the employees) Eastern Bank ,imited complied *ith all the regulatory guidelines prescri(ed (y the Banking #ompanies Act, Bangladesh Bank, -ational Board of $evenue and Securities @ E0change #ommission, !nternational Accounting Standards, etc)

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+a(leF EB, at a %lanceF &8333. 833?' $art7cu8ar< Authori/ed #apital Paid.up #apital $eserve Deposit @ 6ther Accounts ,oans @ Advances E0port !mport 2222 1,333 233 8,823 18,CED 8,1?1 E,881 18,DCC 2221 1,333 E83 8,C88 1C,8EE :,:?2 D,?38 11,?1D 2222 1,333 E83 8,??8 1C,221 13,8:1 ?,CD8 18,2?8

&figures in million' 222% 1,333 888 8,D23 11,:D8 11,888 C,DCC 12,8D2 222' 1333 888 8,ECC 1D,2?: 1?,:EC 8,C3C 8?,?1?

+a(leF EB, at a %lanceF &8333. 833?' &#ontinuedH' $art7cu8ar< Book Ialue per share &+aka' Market values per share &+aka' Earning per share &+aka' Dividend per share &+aka' $eturn on E4uity &Average' $eturn on Assets &Average' #lassified loan as a G of total ,oans #apital Ade4uacy $atio #ostF !ncome $atio -et !nterest Margin -um(er of Branches -um(er of Employees 2222 822)3E 182)33 ?3):1 C3)33 1D)C8G 1)DEG 8)81G 8?)1EG 88)E?G C)??G 81 2D8 2221 82D)38 8:1)33 ??)82 C3)33 12):CG 1)8?G 11)D8G 88)?:G 8:)C3G C)?2G 88 ?:8

&figures in million'

2222 8:D)8: C3C)33 D1)?: CD)33 1E)??G 8)3?G 1C)?2G 88)C8G 8E):1G C)??G 88 ?8?

222% 881)8E C88)33 ?C)81 83)33 1D)CCG 1):?G 1C)21G 18)8EG 88)1EG 8)?CG 88 ?:D

222' C1E)EC E83)33 D8)C8 ?C)33 18)??G 8)C8G E)1:G 1?)88G C3):CG C)82G 88 D88

#redit $isk Management &Study on Eastern Bank ,imited' Page : of 23

Chapter %: Cred7t Sanct7on $rocedure of B+

%.1 INTRODUCTION #redit $isk Management is one of the most crucial components of the dynamics of (ank management as credit lending is the principal activity for the commercial (anks) !n this segment of the report #redit $isk management practice of Eastern Bank ,imited *ill (e thoroughly discussed and then it *ill (e compared and contrasted *ith Prudential %uidelines of Bangladesh Bank) +hen t*o of the key credit management practicesF Jandling of -on.performing loans and procedures for loan classification *ill (e discussed simultaneously) %.2 CR DIT RIS. $isk is inherent in all aspects of a commercial operationB ho*ever for (anks and financial institutions, credit risk is an essential factor that needs to (e managed) #redit risk is the possi(ility that a (orro*er or counter party *ill fail to meet its o(ligations in accordance *ith agreed terms) #redit risk, therefore, arises from the (ank5s dealings *ith or lending to corporate, individuals and other (anks or financial institutions) Eastern Bank ,imited has categori/ed its credit risks into four (road categories for its risk management purpose) Each class of risk has their uni4ue management techni4ue) Follo*ing are the four (road categories of risks defined internally (y the (ankF #lass. A #lass. B #lass. # #lass. D %.2.1 C+(SS = (: Cred7t fac787t7e< e;tended to c87ent< >h7ch are <ecured ?y:

133G cash covered (y having the funds availa(le in EB,5s cash margin account 133G EB, Fi0ed Deposits fully liened @ pledged in favour of the Bank 133G in the form of %ovt) Sanchya Patra fully liened @ pledged in favour of the Bank 113G cash covered if credit facilities are in different currency than that of collateral

%.2.2 C+(SS = B: Cred7t fac787t7e< e;tended to c87ent< >h7ch are <ecured ?y:

Jypothecation of (usiness assets like !nventory, (ook de(ts @ assets, Plant @ Machinery Mortgage of fi0ed assets like Factory ,and @ Building and other real assets Partially cash covered or other collateral %uarantee from accepta(le Financial !nstitution or ,ien on fi0ed deposits issued (y them Personal or #orporate %uarantees %overnment %uarantee through Ministry of Finance

%.2.% C+(SS = C: #redit facilities e0tended to cover or to hedge foreign currency risk against ,etters of #redit are called e0change fluctuation risk) +he product, *hich EB, sells to its customers, is called For*ard #ontract &F=D FK' and can (e further e0plained as follo*sF

E0change Fluctuation $isk

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 For*ard #ontract against ,etters of #redit Jedge FK risk of EB,L6ther Bank ,etters of #redit $isk for Ma0) 183LC23 days

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%.2.' C+(SS = D: +his class of risk is concerned only *ith risks taken on a (anking financial institution and can (e further e0plained as follo*sF

$isk on (anking financial institutions &F!' including Bangladesh Bank #allLS+DL+ime placement *ith (anking financial institutions +erm E0posure on (anking Financial !nstitutions Financing against (anking Financial !nstitution5s acceptances -egotiation of E0port documents against valid e0port lcees Purchase of Pay 6rderLDemand Draft dra*n (y a (anking financial institutions -ostro Account *ith other (anking Financial !nstitutions Purchase of +reasury Bills from Bangladesh Bank
%.% CR DIT RIS. *(N(, * NT $R(CTIC #redit lending is the principal activity for a commercial (ank) !n this competitive (usiness market it has (ecome very crucial for a (ank to make prudential decisions *hile dis(ursing any loanB (e it in corporate sector, in SME sector or (e it consumer financing) =hile a (ank cannot make a loan decision *himsically it also has to measure the cost and price against dis(ursement of a loan) +hus credit risk management needs to (e a ro(ust process that should ena(le (anks to proactively manage loan portfolio in order to minimi/e losses and earn an accepta(le level of return for shareholders) !n this (ackground it is very essential that a (ank maintains a credit $isk Management department and that is the case for Eastern Bank ,imited, *hich has a full fledged #redit $isk Management &#$M' unit e0clusively to focus on the #orporate and SME loans of the overall portfolio) %.' CR DIT RIS. *(N(, * NT D $(RT* NT +he credit risk management department is placed suita(ly in the organi/ational dynamics so that ma0imum output can (e generated from it) All corporate and SME proposals of the (ank are approved through this particular department of the (ank) +he activities of the department includeF

6versight of the (ank5s credit policies, procedures and controls relating to all credit risks
arising from corporateLcommercialLinstitutional (anking, personal (anking, @ treasury operations) 6versight of the (ank5s asset 4uality) Directly manage all Su(standard, Dou(tful @ Bad and ,oss accounts to ma0imi/e recovery and ensure that appropriate and timely loan loss provisions have (een made) +o approve &or decline', *ithin delegated authority, #redit Applications recommended (y $M) =here aggregates (orro*er e0posure is in e0cess of approval limits, to provide recommendation to MDL#E6 for approval) +o provide adviceLassistance regarding all credit matters to line managementL$Ms) +o ensure that lending e0ecutives have ade4uate e0perience andLor training in order to carry out "o( duties effectively)

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FigureF #$M in the 6rgani/ational dynamics +he department is *ell e4uipped to handle all sorts of challenges of the (usiness dynamics) =ell e4uipped in the sense of having sufficient manpo*er, and (rilliant technical facilities, the department has made its o*n distinctive place in the organi/ation itself) +he E mem(er team is headed (y its 4ualified team leader) +he follo*ing sections *ill descri(e the standard operating procedures of the department for SME sectors) +he departmental structure of #$M is presented (elo*F

FigureF #$M organogram

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%.- R S$ONSIBI+IT& O" S* D $(RT* NT +he SME department is primarily responsi(le for (ringing (usiness to the (ank) +he $elationship Managers in different (ranches manage the clientsB they prepare the proposals in the standard format &a specimen copy of the credit application package has (een provided in the appendi0' and send them directly to the SME department at the Jead 6ffice) +he proposal is revie*ed (y the SME staffs for possi(le fla*s and other documentation checking) +hen the proposal is sent to the #$M department) +hree out of the seven credit officers are assigned e0clusively for the SME proposals) Each credit officers have (een allocated *ith specific (ranches) So as per allocation of their respective (ranches the officers receive proposals from the SME department) %.3 T# $ROC DUR(+ D(T(B(S After receiving a particular loan proposal it is given entry into a data(ase named <,og Sheet5) +he principal function of this data(ase is to keep track of each of the proposals that are assigned under each credit officer) Primary o("ective is to locate the status of each file at any time) A *eekly report from the data(ase is provided to the Jead of #$M and also a monthly report on SME proposals is placed to the Jead of SME from it) After giving entry into the data(ase, proposals are placed to respective credit officers)

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+he credit officers then start to revie* the loan proposal) +he (asic intention is to measure the e0act financial need of the customer and dis(urse the amount accordingly and to minimi/e the risk e0posure of the (ank in the process) !n terms of regularity the proposals may (e (roadly classified as one time and regular) 6ne time proposals include ,BPD, FBPD, ,#, Bank %uarantee and so on) +he regular proposals refers to approval for fresh credit like #ash #redit, Demand ,oan, +ime loan Pay order, +ime loan *ork order, restructuring of e0isting facilities etc) 6n an average follo*ing is the time needed (y each of the officers to revie* these t*o (road types of proposalsF Proposal +ype $e4uired $evie* +ime &Days' 6ne time 8 $egular : -oteF +he data have (een colleted from the previous C months revie* performance as is recorded in the <,og Sheet5 Data(ase) =ithin these periods the officers revie* the files as per standard operating procedures)

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%.6 ( SI*$+ 0OR."+O0 +he officer receives the loan proposal, he analy/es it) !f there are any o(servations or 4ueries that are not availa(le in the proposal then he sends 4ueries to the respective $M) After receiving the ans*ers of 4ueries he prepares his analysis and (ased on this prepares the recommendation for the proposal) +he recommendation first needs to (e approved (y the immediate supervisor of the officer, after the supervisor gives his approval then the officer places the recommendation *ith the loan proposal to the J6#$M) J6#$M after revie*ing the proposals gives his decision) +hen the credit officer prepares a sanction letter in the standard format of the (ank and for*ards the documents to the #redit Administration Department) +he #redit Administration department then loads the limit into the system) +his is a typical loan revie* activity of a credit officer *hich is presented in the figure (elo*F $M prepares #redit Application

SME #enter, Jead 6ffice

#redit officer, #$M

Approving Authority

-o Decision Mes

#redit Administration

%.4 (N(+&SIS O" ( R N 0(+ $RO$OS(+ @( C(S STUD&A $ene*al is a kind of proposal in *hich the e0isting relationship is rene*ed for a further period of time) +he previous relationship *as approved for a certain period of time for e0ample, for one year) After the stipulated time period if the client *ants to continue *ith the relation, he or she contacts the $M of the concerned (ranch) +he $M then as per standard format prepares the rene*al proposal) !t is to (e mentioned here that *hen the previous limit is to (e increased for the current year then it is called <$ene*al *ith enhancement5 *hen the previous limit is to (e reduced then it is termed as <$ene*al #redit $isk Management &Study on Eastern Bank ,imited' Page 12 of 23

*ith reduction5 and *hen the previous proposal is to (e restructured then it is called <$estructure and rene*al5) Follo*ing is a case presentation of ho* rene*al proposals are revie*ed (y a credit officer for #ash #redit &Jypo' facility) At first the credit officer matches the <facilities ta(le5 in the #redit Memorandum &#M' and Application for ,imit &AF,' of the current proposal *ith those of previous proposal to see *hether there is any deviation) !f there is any, he gets the fla* corrected (y $M or (y himself)

C* 222-

C* 2223

+he figure sho*s the state of the facilities (o0) +he facility under proposed column &833D' *as approved for C1st March 8332, should coincide *ith the e0isting column &8332', as it is no* an e0isting facility) Any mismatch in this case should (e corrected (y the credit officer at the very outset of the evaluation procedure of the proposal) After checking the facilities (o0 is complete the ne0t task is to match the collateral (o0) +his is done to find *hether there is any mismatch (et*een information regarding registered mortgage of the properties and so on) !t is e0pected that the #ollateral (o0 and description of the scheduled property *ithin *ill e0actly (e the same unless stated other*ise)

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C* 222-

+he description of the collateral should (e e0actly the same if not mentioned other*ise) So the officer should ensure their accuracy as any deviation *ould (ring serious legal conse4uences

C* 2223

#redit $isk Management &Study on Eastern Bank ,imited' Page 18 of 23

+hese are the ma"or checklists for the credit officer) Jo*ever, a detailed check list *ould (e provided in the later section of the report) !n case of evaluating rene*al proposal the main focal point of the officer remains is the account performance of the customer) As this is a tested client the officer *ill not analy/e the (usiness dynamics as ela(orately as (efore, *hen he sanctioned the proposed limit for the first time) $egarding the evaluation of account performance the officer tries to identify *hether the account statements reflect the operational performance of the client) +here are some ratios to consider in this case) +hese areF

%.4.1 a. Depo<7t Rat7o Deposit ratio is defined as #redit Summation to Sales) +he credit summation figure is readily availa(le in the account profita(ility part of the #M package) +his can also (e verified from the account statement of the client) +he purpose of this ratio is to measure ho* much amount *as deposited in the account out of the entire sales proceeds during the stated period) !t is e0pected that the client regularly deposit his money into the account) %.4.2 ?. (Berage Ut787Cat7on Rat7o Average utili/ation ratio captures *hether the client is utili/ing the sanctioned limit properly) !f the utili/ation ratio is good then it is evident that he is doing so and vice versa) Average utili/ation is arrived (y dividing the interest income for the year *ith respective interest rate) +his amount is then divided (y the total limit) Apart form these ratios account statement of the client is strictly scrutini/ed to find if there are any irregularities) +he account statement should reflect the operations of the (usiness for the client) +he monthly credit summation should coincide *ith the average monthly sales figures) Also the officers check the source of the de(it and credit transaction and their regularities) Also any *indo* dressing in the account performance are tried to (e figured out) #redit $isk Management &Study on Eastern Bank ,imited' Page 1: of 23

+he call report of the #M package states the current (usiness position of the client and his (usiness needs in detail) !t is prepared (y the $M disclosing his e0perience during his visit to the clients5 premises) +he portfolio revie* (asically provides a periodical statement of the financial health of the (usiness) Also some 4ueries regarding the operations of the (usiness is reported in this part of the proposal) Stock inspection report is another important section of the proposal, *hich is to (e strictly monitored in case of a rene*al proposal) +he report mentions the date of stock inspection, the (reak up of stocks and (ook de(t as on that date, total value of security, amount of e0cess security and so on) %.4.% Ca8cu8at7on of e;ce<< <ecur7ty: Funding 6utstanding as on stock inspection dateF KKK Security Ialue on same dateF KKK Dra*ing po*erF &Security value' K Dra*ing po*er &E3G' E0cess Security N Funding outstanding O Dra*ing po*er) Finally (ased on the data from the #M package the officers calculate the *orking capital re4uirement of the (usiness and check *hether it supports the proposed limit) 6n an average these are the things that are (eing analy/ed for approving a rene*al proposal of a client) +hese parts are addressed at its very (asic if not anything more for the stated purpose) Jo*ever, the analysis may not follo* the same chronological order as is mentioned a(ove) Follo*ing is the checklist that is pursued during the evaluation process &figure represents the e0cel model used to do the tasks'F =hether the proposal is placed *ithin e0piry date &!f not, collect a time e0tension proposal' +he e0isting proposal has a stipulated time period for *hich it *as sanctioned previously) After that date the limit *ill (ecome past due if not settled fully) +his *ould (e detrimental for the client, as it *ill (e reported in the #!B report of Bangladesh Bank) So it is very much necessary that the rene*al proposal (e su(mitted *ell *ithin the e0isting e0piry date) Jo*ever, if there are any issues like mortgage modification or so on, a time e0tension proposal may (e approved for the client to avoid the em(arrassment) !nsurance coverage &do *e have rene*ed insurance policyP

+he (ank needs to have ade4uate insurance coverage on its security against fire, flood and other risks) +he specific amount of insurance is 113G of the security value) !t is to (e checked during evaluation *hether the insurance coverage has (een rene*ed *ith the company) !nterest rate &=hether QN1?G or R +he minimum interest rate is revised from time to time) For e0ample current sla( for interest rate in EB, is 1DG for the regular SME clients) So the officer must make sure *hether stated interest rate is as per regulation of the (ank) Also the reduction of interest rate re4uires approval from higher authority so it is also to (e checked *hether interest rate is (eing reduced or not) #redit $isk Management &Study on Eastern Bank ,imited' Page 83 of 23

#heck the correspondence +he address of the customer is usually mentioned (ut the officer needs to check *hether there is any change in it or nonetheless it is mentioned or not) Declaration from #redit Admin Another important component of checklist is to look for any declaration from #redit Administration Department) +he declaration regarding documentation and other procedures needs to (e in place (efore sanction of the limit) So the officer checks *hether all the declarations are in place or not) +he declaration of the #redit Administration regarding the proposals are as follo*ingF #!B report o(tainedP Another important thing is to check is *hether #!B report has (een o(tained or not) +his is very important (ecause from this report status of client5s all loans can (e identified) !t is a standard practice that current #!B report &not older than 2 months' should accompany a loan proposal) Account Statement *ith other (anks !f the client has other loan relationships then the account statements of other (anks needs to (e o(tained) %.4.' CONC+USION After all the analysis if the credit officer is satisfied *ith the "ustification of limit he prepares his recommendation) +he recommendations are then su(mitted to his immediate supervisor for his approval) Finally all the documents are su(mitted to J6#$M for his approval) After getting the approval from J6#$M the officer then prepares a sanction letter as per standard format of the (ank) 6ne copy of the sanction letter is sent to the #redit Administration department &this department is responsi(le for loading the limit into the system so that the clients gets his loan' and another copy &original documents' is then stored in the #redit File of the client) +his is ho* the credit officer carries out a typical rene*al analysis)

Chapter ': Non=$erfor97ng 8oan C8a<<7f7cat7on Cr7ter7on

'.1 INTRODUCTION -P, &-on.performing ,oans' include those loans, *hich are sho*ing signs of *eakness in the credit 4uality of the loans) =hen the 4uality of a loan deteriorates, the first signal comes as irregularity in client5s loan repayment) 6ften a loan account starts having past dues) !nternational (est practices re4uire that a loan (e classified as non.performing if its principal andLor interest are three months or more in arrears) Banks in Bangladesh are allo*ed to classify non.performing loans (ased on a time frame of three months) Early recognition of non.performing loans stimulates collection efforts and helps reduce the possi(ility of loss of such assets) '.2 NON=$ R"OR*IN, +O(N: +(BOR(TION ,oans may (e termed as -on.Performing (oth from the o("ective and su("ective "udgment) 6("ective criteria for loan classification are grossly set (y Bangladesh Bank) Su("ective "udgment (y the (ank officials are guided (y the !nstruction #irculars from the top management) #redit $isk Management &Study on Eastern Bank ,imited' Page 81 of 23

+he follo*ing o("ective criteria *ere prescri(ed (y Bangladesh Bank for loan classification vide B$PD #ircular -o) 12, dated 32 Decem(er, 1::8 *ith su(se4uent amendments vide B$PD #ircular -o) : of 8331, B$PD #ircular -o)38 dated 1D Fe(ruary, 833D and B$PD #ircular -o) 3: dated 83 August, 833D) Type of +oan #ontinuous ,oan OBerdue per7od S :3 days S 183 days S 8E3 days S 1 year S :3 days S 183 days S 8E3 days S 1 year S :3 days VE4uivalent !nstallmentsW S 183 days VE4uivalent !nstallmentsW S 8E3 days VE4uivalent !nstallmentsW S 1 year VE4uivalent !nstallmentsW C8a<<7f7cat7on SMTT SS DF B, SM SS DF B, SM SS DF B,

Demand ,oan

Fi0ed +erm ,oan &U D Mears'

TTSM N Special Mention, SS N Su( Standard, DF N Dou(tful, B, N Bad @ ,oss Besides the o("ective criteria, EB, uses the follo*ing su("ective criteria to classify loans) !t can (e noted here that, loans are classified primarily (y o("ective criteria) Jo*ever, officials are encouraged to follo* the su("ective criteria side.(y.side the o("ective criteria) Brief descriptions of the four classification categories are provided in the follo*ing ta(le) Spec7a8 *ent7on @S*A Special Mention assets have potential *eaknesses that deserve management5s close attention) !f left uncorrected, these *eaknesses may result in a deterioration of the repayment prospects of the (orro*er) Facilities should (e do*ngraded to SM if sustained deterioration in financial condition is noted &consecutive losses, negative net *orth, e0cessive leverage', or if a significant petition or claim is lodged against the (orro*er) Full repayment of facilities is still e0pected Financial condition is *eak and capacity or inclination to repay is in dou(t) +hese *eaknesses "eopardi/e the full settlement of loans) ,oans should (e do*ngraded to SS if the customer intends to create a lender group for de(t restructuring purposes, the operation has ceased trading or any indication suggesting the *inding up or closure of the (orro*er is discovered) +he correction of the deficiencies may result in an improved condition) Full repayment of principal and interest is unlikely and the possi(ility of loss is e0tremely high) Jo*ever, due to specifically identifia(le pending factors, such as litigation, li4uidation procedures or capital in"ection, the asset is not yet classified as B,) Assets should (e do*ngraded to DF if the client is non.cooperative after recurrent re4uests for regulari/ing payment) +he (ank should pursue legal options to enforce security to o(tain repayment or negotiate an appropriate loan rescheduling) !n all cases, the re4uirements of Bangladesh Bank in #!B reporting, loan rescheduling and provisioning must (e follo*ed) Assets graded B, are long outstanding *ith no progress in o(taining repayment or in the late stages of *ind up L li4uidation)

Su?<tandard @SSA

Dou?tfu8 @D"A

Bad ) +o<< @B+A

#redit $isk Management &Study on Eastern Bank ,imited' Page 88 of 23

+he prospect of recovery is poor and legal options have (een pursued) +he proceeds e0pected from the li4uidation or reali/ation of security may (e a*aited) +he continuance of the loan as a (anka(le asset is not *arranted, and the anticipated loss should have (een provided for) +his classification reflects that it is not practical or desira(le to defer *riting off this (asically *orthless asset even though partial recovery may (e affected in the future) Bangladesh Bank guidelines for timely *rite off of (ad loans must (e adhered to) A (rief description of the activities of different departments other than #$M for (etter understanding of the -P, management function is presented (elo*) Besides these departments, $elationship Managers of #orporate Banking nits and SME units &Small @ Medium Enterprises' also play an active role in the -P, management) '.% CR DIT (D*INISTR(TION D $(RT* NT @C(DA Activities of #redit Administration Department include the follo*ing at its very (asicF a. Documentation of loans b. Dis(ursement of loans c. #redit Monitoring d. Early Alert process e. $eporting to Bangladesh Bank '.' S$ CI(+ (SS T *(N(, * NT D $(RT* NT @S(*DA Special Asset Management Department is responsi(le for all accounts classified in the (ank>s loan portfolio) +he three types of classification maintained (y the department are given (elo*F i' Su(.standard,

ii) Dou(tful and iii) Bad @ ,oss,

SAMD>s responsi(ility sectorsF

a. Monitoring and controlling the classified accounts through monthly reporting and 4uarterly
revie*Lupdate)

b. Actively follo* up *ith the (orro*ers for recovery, c. -egotiating and restructuringLrescheduling de(ts *herever feasi(le, on its o*n and Lor in d.
association *ith the concerned $elationship ManagerL nit JeadLArea JeadL,ine of Business and Jead 6ffice #redit $isk Management) $evie* for rescheduleLrestructureL*aiverL*rite.off is presented (y SAMD *ith, if deemed necessary, inputs from the related unit or (ranchLline of (usiness) Proposal is placed as per the format *ith all relevant supportLdocumentsL information to facilitate the process for approval from the appropriate authority duly recommended (y Jead of #redit $isk Management and Managing Director @ #E6) Advise client the reschedule L restructure L *aiver letter after proper approval from the EB, Board) Jead 6ffice #redit $isk Management releases the approved restructure LrescheduleL*aiveL*rite.off proposal to #redit Administration Department *ho are responsi(le for communicating the decision "ointly *ith Jead of SAMD to client as *ell as initiating action on the (ooks of account of the unit or the (ranch) Follo*.up responsi(ility on such *aiverLreschedule L*rite.off loans is assigned to SAMD)

e. f.

g.

#redit $isk Management &Study on Eastern Bank ,imited' Page 8C of 23

SAMD also prepares a #onsolidated $eport of all (ad loans *ritten.off on a 4uarterly (asis and su(mit the report to the Jead of #redit $isk management and Managing Director @ #E6) '.- D T CTION $ROC SS O" N$+ First and foremost re4uirement for any and all $elationship Managers L Sales @ Service Managers and #redit Managers is to identify a pro(lem credit in its earliest stages (y recogni/ing the signs of deterioration) Such signs include, (ut not limited to, the follo*ingF i' -on.payment of interest or principal or (oth on due dates or past.dues (eyond a reasona(le period or recurring past dues) !n case of 6verdrafts, &or #ash.#redits or similar facility', no movement in the account (eyond a reasona(le period) A deterioration in financial condition of the client, as gathered from client>s latest financial statements) A shortfall in collateral coverage, particularly if the collateral *as a key factor in the decision.making or the loan *as predicated on the sole factor of collateral &i)e), fully secured transactions') Death or *ithdra*al of key o*ner&s' or management personnel) #ompany filing for (ankruptcy or voluntary dissolution)

ii'

iii'

iv'

v' vi'

vii) Adverse market report a(out the company itself or its principal o*ners)
'.3 ST $S TO "O++O0 "OR C+(SSI"IC(TION Steps to follo* in such situations areF i' #AD rechecks the account, for all outstanding, including any outstanding in allied or sister company or in o*ner>s or partners> or directors personal name&s') #AD thoroughly revie*s loan documentation to confirm that 9the (ank has *hat the (ank needsX, documents are in proper form, properly e0ecuted and current &i)e) not time (arred') A revie* of the documentation serves as a good reminder of the Bank>s legal rights against the de(tor, principal o*nerLguarantors etc)

ii'

iii' #AD o(tains current figures to revie* these on strict li4uidation (asis, to take a close look at the assets and lia(ilities to determine *ho has the preferential right or prior lien to *hat assets) For ,imited ,ia(ility companies, a title search at the $YS# office *here all charges are filed is carried out) iv' !f %uarantors are involved, #AD looks closely at the net *orth statement and take steps to protect EB,>s interests5 vis.Z.vis other creditors) !n other *ords, if possi(le, perfect liens on %uarantor>s assets or give demand notice to guarantor) v' #oncurrently *ith the assessment of situation, once the account is classified Su(.standard, credit lines are fro/en *ith notice to all concerned, on a Xdamage.controlX concept)

#redit $isk Management &Study on Eastern Bank ,imited' Page 8? of 23

vi' A report in the prescri(ed form as per standard format is su(mitted to classify the account) A concurrent initial Action Plan to up.grade or recover the out.standing is also su(mitted in the Portfolio $evie* Format for approval)

vii' A full assessment of the pro(lem situation surrounding the account leads the revie*er to
decide options availa(le to the (ankF vi/ =ork.out, *ith no rescheduling =ork.out, *ith rescheduling, under proper rescheduling agreement and if needed *ith fresh documentation and renegotiated collateral security) ,egal action, *hich if situation so *arrant, is taken immediately &*ith prior approval from appropriate approving authority' *hen the need is recogni/ed to pre.empt any dissipation or transfer of the assets of the (orro*er or the guarantor) '.6 C+(SSI"IC(TION $ROC SS For the purpose of determining the X#lassifiedX status of an account, follo*ing guidelines are o(served i' +he process of #lassification of an account starts *ith strict application of the risk rating assessment that is compulsory for each (orro*ing relationship) Account deemed to (e classified are su("ect to Portfolio $evie* Form su(mission or a direct classification (y Jead 6ffice #redit $isk ManagementF Special Mention Su(.standard Dou(tful Bad @ ,oss ii' Jo*ever, unpaid !nterest or Principal or E0pired ,imit for a period of :3 days or more or recurring past dues &of Principal' remain the most significant $ules of +hum( triggering the classification) '.4 DO0N=,R(DIN,DU$,R(DIN, C+(SSI"I D (CCOUNTS +he follo*ings are the procedures for upgrading or do*ngrading the classified accountsF

a) b)

Primary responsi(ility lies *ith the concerned $elationship Manager to initiate the classification (y su(mitting the Portfolio $evie* Form in a timely manner) +his responsi(ility first moves laterally to $elationship Managers and escalates up*ards to nit JeadLSales @ Service Manager, if anyone having responsi(ility for the account in the layers fail to identify and report a classified name) !f and *hen a Portfolio $evie* Form is su(mitted, the concerned $elationship ManagerL nit JeadLArea Jead, Jead of ,ine of Business, revie*s it promptly) +he latter finally recommends the category or severity of classification along *ith Action Plan to upgradeLrecover outstanding) Jead of #redit $isk Management and Managing Director @ #E6 revie*s and agrees to the classification and the related Action Plan for recoveryLupgrade) Jead 6ffice #redit $isk Management is responsi(le to release and distri(ute copies of approved Portfolio $evie* Form toF 1) Area Jead, #orporate Banking L Jead of ,ine of Business 2. #oncerned nit Jead L Sales @ Service Manager 3. Jead of Special Asset Management Department

c)

#redit $isk Management &Study on Eastern Bank ,imited' Page 8D of 23

d)

Jead 6ffice #redit $isk Management may also independently classify an account in the normal course of inspection of a (ranch or unit>s loan portfolio) !n such event, the Portfolio $evie* Form *ill then (e filled in (y Jead 6ffice #redit $isk Management and *ill (e referred to the respective $elationship Manager L nit Jead L Area #orporate Jead L Jead of ,ine of Business andLor Jead of Special Asset Management Department for information) Action Plan for recoveryLupgrade *ill then (e presented (y Jead of Special Asset Management Department in consultation *ith $M L nit Jead L Area Jead L Jead of ,ine of Business to the Jead of #redit $isk Management @ Managing Director @ #E6 for approval) Such classification may (e superseded (y a more severe classification i)e) do*n grading, (y the regulatory (ody &Bangladesh Bank') =herever re4uired an independent assessment of the classified credit may (e conducted (y Jead 6ffice #redit $isk Management or (y internal auditor documenting as to *hy the credit deteriorated and *hat *ere the lapses) 6nly the Jead of #redit $isk Management @ Managing Director @ #E6 is empo*ered to up.grade a classified account (ut the recommendation has to originate from the Jead of Special Asset Management Department) #ontinuation of (usiness strategy &if any' for the upgraded account *ill re4uire the consent of Area Jead . #orporate Banking L Jead of ,ine of Business *ith proper "ustification) pgrading of a classified account has to (e *ell "ustified diligently and o("ectively (y all recommending officers) Essentially, complete removal of the reason&s' for classification should (e the (asis of any upgrading) #lassified Accounts are passed on to Special Asset Management Department in the follo*ing mannerF

e) f)

g)

h)

i)

Any and all accounts, *hich have (een do*ngraded to Su( Standard status) Any and all accounts, *hich have (een do*ngraded to Dou(tful or Bad @ ,oss status) =ithin E days of an account (eing do*ngraded to su(standard &SS.D', a $e4uest for
Action and a JandoverLDo*ngrade #hecklist are completed (y the $M and for*arded to SAMD for ackno*ledgment) +he account is assigned to an account manager *ithin the SAMD *ho *ill then in consultation *ith concerned $elationship ManagersL nit JeadLArea JeadL Jead of ,ine of Business prepare Action Plan for recovery or upgrade and get it approved (y Jead of #redit $isk Management and Managing Director @ #E6)

6fficer in Special Asset Management Department get the credit files transferred to their

Department from #orporate BankingL,ine of Business and under their custody for account (eing classified Su(standard, Dou(tful and Bad @ ,oss, and *ill monitor all upgradeLdo*ngrade)

6fficer in Special Asset Management Department must sign on the ,oan 6fficer in Special Asset Management Department must revie* the Stock $eport and
Documentation #hecklist to ensure revie* of loan documentation at hisLher end) Stock !nspection $eport of classified accounts to arrive at an effective action plan for recoveryLupgrade) Specimen of Stock $eport and Stock !nspection $eport attached)

Special Asset Management team in the standard *aiver format processes proposal for
restructureLrescheduleL*aiver for the classified accounts) +he proposal should #redit $isk Management &Study on Eastern Bank ,imited' Page 82 of 23

accompany copies of previous approvals, recent accepted Sanction ,etter (y client, ,a*yer5s opinion and updated status on ,oan Documentation)

j)

Jead of Special Asset Management in J)6) interfaces *ith Jead 6ffice #redit $isk Management @ Managing Director @ #E6 on all up.gradingLrecovery efforts in the conte0t of $ecovery, ,oan ,oss Provision and $estructureL$escheduleL=aiversL=rite.offs)

'.5 R $ORTIN, O" C+(SSI"I D (CCOUNTS +he reporting procedure for classified accounts have (een outlined (elo*F i' Accounts, *hich are, once classified (ut not up.graded or recovered are to (e separately reported on a monthly (asis to Jead 6ffice #redit $isk Management and Managing Director @ #E6) #omplete accuracy is to (e ensured *hile reporting these names) Such reports originate from #redit Administration Department) Jead of Special Asset Management Department su(mits monthly results on recovery status on all e0isting and ne*ly #lassified Accounts to Jead 6ffice #redit $isk Management and Managing Director @ #E6) Jead of Special Asset Management Department su(mits 4uarterly report on #lassified Accounts to Jead 6ffice #redit $isk Management and Managing Director @ #E6)

ii)

iii)

'.12 NON= (RNIN, +O(NS Follo*ing guidelines are strictly o(served for treatment of unpaidLuncollected interest in classified accountsF i' !f interest is over.due (y more than :3 days the outstanding must (e classified Special Mention . -on.Earning or even lo*er &such as Su(.standard', if not already so classified) !f any loan is classified as Special MentionLSu( standardLDou(tful, interest is charged on this loan, (ut this cannot (e treated as income) All such interest is credited to !nterest Suspense &#redits' A[#) or any other account specially designated for this purpose (y Bangladesh Bank) !f a loan is classified as Bad @ ,oss, charging of interest thereafter is suspended from the date of Bad @ ,oss classification) A contingentLmemo entry is taken up for the interest (eing suspended *hich is reversedL(rought (ack as actual lia(ility at the time of suit (eing filed for recovery or if restructureL*aiverLsettlement takes place) Jead of Special Asset Management Department ensures that these contingentLmemo items are monitored and reported on a 4uarterly (asis to Jead of #redit $isk Management and Managing Director @ #E6) A properly conducted overdraft facility can (e considered earning as long, as outstanding *ith interest de(ited to the account remain *ithin approved and valid limit) But, it is not permissi(le to increase overdraft limits to a(sor( interest charges unless specifically approved (y Jead of ,ine of BusinessLArea Jead #orporateLSales @ Service ManagersL provided such interest is settled (y cash deposit into the account *ithin 23 days of such de(its) Sometimes, Su(.standard loans may (e restructured or rescheduled, *ith the stipulation that as part of the rescheduling, accrued unpaid interest (e capitali/ed) 6nly in these situations, e0ceptions to the foregoing rule may (e allo*ed (ut strictly on the follo*ing conditionsF

ii)

iii)

iv'

v'

#redit $isk Management &Study on Eastern Bank ,imited' Page 8E of 23

a) +he restructuring or rescheduling is approved (y the appropriate approving authorities on the

(asis of a 9=ork.out; credit proposal)

b) +he interest to (e capitali/ed *ith principal is reserved from interest suspense accounts only
after full completion of documentation related to rescheduling and compliance of all conditions precedent related to rescheduling) vi' #lassified accounts for *hich restructureLrescheduled approved may (e upgradedLdeclassified to MarginalL=atchlist.C i)e) placed under earning status provided the follo*ing t*o criteria are met

a) Borro*er displays sustained repayment performance in accordance *ith the repayment plan) b) All principal and interest amounts contractually due are assured of repayment *ithin a
reasona(le period) Jo*ever, return of such accounts to earning status on this prete0t must have Jead 6ffice #redit $isk Management>s pre.fact concurrence)

vii)

Earlier, accounts *hich have (een classified (y Bangladesh Bank auditors during their course of inspection, *ould re4uire pre.fact approval from Bangladesh Bank for declassificationLupgrade as per their re4uirement) But in a recent amendment from BB states that the (oard of directors of the (ank can de.classify an account) !n this case, ho*ever, this phenomenon has to (e reported to BB)

'.11 ($$+IC(TION O" $(&* NTS INTO C+(SSI"I D +O(NS !f a classified loan or part of any classified loan is collected than accrued interest and suspended interest should (e settled first any residual *ill (e applied for settlement of Principal ,oan) '.12 R !I 0 O" C+(SSI"I D (CCOUNTS #lassified Accounts &like Su(.standard, Dou(tful and Bad @ ,oss' are revie*ed on a 4uarterly (asis in the manner and as stipulated in the 6(ligor $isk $ating &6$$' guidelines of the (ank) !f $elationship Manager feels that due to irregularities or over.dues, etc), regular lines should not (e rene*ed (ut e0isting outstanding should (e placed on li4uidation (asis &i)e) ad"ustment purpose', a rene*al *ork.out #M covering a' +he outstanding, *ith specific maturities, (' Anticipated date of li4uidation &or e0piry of the facilities' and c' Action plan to either up.grade or complete recovery must (e su(mitted in the normal manner @ account should (e rated Special Mention . ?) !f up.to.date financials are not availa(le, $elationship Manager should su(mit rene*als (ased on latest availa(le ones) More than perfunctory tradeL(ank checking must accompany the #M) '.1% CR (TION O" +O(N +OSS $RO!ISION As part of pragmatic and conservative approach to sustain the 4uality of the Bank>s loan portfolio and hence, the earning stream, ,oan ,oss Provision e0ercise is (eing made mandatory for all ,ine of Business and Jead of Special Asset Management of the Bank) Such e0ercise is dictated (yF a' generally accepted (anking practice, (' conservative approach to assess the 4uality of $isk Assets *here(y the most accurate health of the ,oan Portfolio is reflected #redit $isk Management &Study on Eastern Bank ,imited' Page 88 of 23

on the (ooks of the Bank and c' to (e guided (y Bangladesh Bank instructionsLguidelines on provisioning) Follo*ing guidelines are o(servedF i' +he prudential Provision Practice dictates that rather than *ait until the close of the fiscal yearB provision e0ercise *ould (e an on.going one, *ith the needed provision created, *hen an account is classified and continues to remain classified) +he provision e0ercise is to (e carried out (y each 4uarter end, (ased on reports on #lassified Accounts related to previous 4uarter) Bangladesh Bank instructionsLguidelines are follo*ed for the purpose of ,oan ,oss Provision e0ercise) nless other*ise enhanced (y Bangladesh Bank regulatory (ody, ,oan ,oss provision policy as per the matri0 given (elo* is adopted and follo*ed (y the line of Business and Special Asset Management Department of the Bank) Past Due 6LS E0pired #redit &#$!+E$!A' :3 days 183 days 8E3 days C23 days #lassification Status Special Mention Su(standard Dou(tful Bad @ ,oss Provision to (e held against -et ,oan Ialue DG 83G D3G 133G

ii'

iii)

6(ligor $isk $ating ? D 2 E

Follo*ing formula is applied in determining the re4uired amount of provisionF 1) 8) C) %ross 6utstanding ,essF &i' #ash margin held or Fi0ed DepositsLSP under lien) !nterest in Suspense Account KKK

&ii' ,oan Ialue &For *hich provision is to (e created (efore considering estimated reali/a(le value of other securityLcollateral held' ,essF Estimated salvage value of securityLcollateral held -et ,oan Ialue

& KKK ' & KKK ' KKK & KKK ' EEE

?)

For the purpose of provision against classified loans, 9Eligi(le Securities; mean the follo*ing - 133G of deposit under deposit against the loan - 133G of the market value of gold or gold ornaments pledged *ith the Bank - 133G of the value of %ovt) (ondLSanchayapatra under lien - D3G of the market value of easily marketa(le commodity kept under the control of the (ank - D3G of the market value of land and (uilding mortgaged *ith the (ank - D3G of the average market value for last 32 months or D3G of the face value *hichever is less, of the shares traded in stock e0change #redit $isk Management &Study on Eastern Bank ,imited' Page 8: of 23

+he amount of re4uired provision may, in some circumstances, (e reduced (y an estimated reali/a(le forced sale value of &i)e) Salvage Ialue' of any tangi(le collateral held &vi/F mortgage of property, pledged goods L or hypothecated goods repossessed (y the (ank, pledged readily marketa(le securities etc') Jence, in these situations, it *ill (e advisa(le to evaluate such collateral, estimate the most realistic sale value under duress and net.off the value against the outstanding (efore determining the -et ,oan value for provision purposes) #onservative approach is taken to arrive at provision re4uirement and Bangladesh Bank guideline to (e properly follo*ed) ProvidedF +he classification criteria are strictly and o("ectively applied and #lassified accounts are monitored in the manner as stipulated in this *rite.up, a concerted focused attention on the classified loans is e0pected) !f an account is thus revie*ed and rated say Su(.standard and 83G provision is made there against, in su(se4uent assessments if the account sho*s further signs of deterioration, do*ngrading to XDou(tful; is *arranted) +his should then prompt, as per the matri0, a D3G provision of the -et ,oan Ialue) +herefore, the process of> classification should trigger the Prudential ,oan ,oss Provision e0ercise) (' +he action is not completely a 9(lind faith; one, since uni4ue circumstances and recovery prospects may still lead the assessor to provide for less than the prudential level) Yudgmental evaluation should accordingly play the desired role and final decision for the e0tent of loss provision *ill rest *ith the Jead of #redit $isk Management and Managing Director @ #E6)

a)

iv) Jo*ever, only the Managing Director @ #E6 can approve the ,oan ,oss Provision, *hether
specific &against each classified account' or general reserves on the strength of recommendation from Special Assets Management and Jead of #redit $isk Management) '.1' $ROB(B+ +OSS 6nly for the purpose of Prudential Provision E0ercise 9Pro(a(le ,ossX category of rating is to (e determined) !n general, accounts *hich are already classified XDou(tfulX (ut have not (een do*n.graded to >,ossX should (e evaluated from the 9Pro(a(le ,oss; perspective) +o determine this, follo*ing factors should (e revie*ed and score (e assigned against each &Jigh score *ill mean higher pro(a(ility of ,oss and vice versa')

#redit $isk Management &Study on Eastern Bank ,imited' Page C3 of 23

+O0 RIS. #I,# RIS. Ano*n history of defaults (y (orro*ers in the particular industry or (usiness segment Attitude of (orro*erF #ooperative @ *illing to *ork *ith (ank or non. cooperative @ un*illing ,ife of account in dou(tful category &a period 8E3 days or more is a strong contender of higher risk and loss pro(a(ility' Past recovery efforts and success rate &account *ith less that 8DG success rate of recovery of gross 6LS is a strong contender of loss pro(a(ility' +angi(le #ollateralLSecurities heldF i. clear priority of lien, or charge vi/ 1st registered mortgage &lack of this F higher risk' ii. perfected documentation allo*ing smooth attachment process through legal means) iii. historical time from to o(tain attachment orders &longer e0pected action time *ill mean higher pro(a(ility of loss' lily of loss' iv. $eadily salea(le prospects at market value &Jigher G of reali/a(le value *ill mean lo*er) risk and vice versa' 3 3 3 to to to 13 83 13

to

83

to

?3

-oteF

An account scoring more than D3G may 4ualify to (e high as a 9Pro(a(le ,oss; and *ould despite (eing classified 9Dou(tful may deserve a higher provision on a -et ,oan value (asis)

'.1- R CO! R& $ROB(BI+IT& C(T ,ORI S TO B (SSI,N D TO (++ C+(SSI"I D +O(NS A) ,oans determined to have high pro(a(ility of recovery *ithin 2 monthsB recovery efforts to continue on an on.going (asis) ,oans determined to have moderate pro(a(ility of recovery *ithin 1 yearB revie* recovery efforts on a C monthly (asis) ,oans determined to have lo* and remote pro(a(ility of recoveryB revie* case on a 2 monthly (asis) ,oans determined to have virtually no chance of recoveryF charge.off the (ooks) Jo*ever in this situation proper approval from the appropriate approving authorities should (e o(tained and also shall (e guided (y Bangladesh Bank circularsLinstructions &if any' and su("ect to complete analysis ofF Banking practice, ,egal and ta0 implication and Status of each individual credit)

B)

#)

D)

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Chapter -: CR* $o87c7e< Reco99ended ?y Bang8ade<h Bank

-.1 INTRODUCTION +his section details fundamental credit risk management policies that are recommended for adoption (y all (anks in Bangladesh (y Bangladesh Bank and EB,5s compliance status *ith these guidelines) +he guidelines outline general principles that are designed to govern the implementation of more detailed lending procedures *ithin individual (anks) EB,5s practice regarding general credit risk management has (een e0plained in the follo*ing section *ith their congruence *ith the regulatory guidelines) -.2 + NDIN, ,UID +IN S +he (ank has its esta(lished #redit Policies &9,ending %uidelines;' that clearly outline the senior management5s vie* of (usiness development priorities and the terms and conditions that should (e adhered to in order for loans to (e approved) +he ,ending %uidelines is updated at least annually to reflect changes in the economic outlook and the evolution of the (ank5s loan portfolio, and is distri(uted to all lendingLmarketing officers) +he ,ending %uidelines is approved (y the Managing DirectorL#E6 @ Board of Directors of the (ank (ased on the endorsement of the (ank5s Jead of #redit $isk Management and the Jead of #orporateL#ommercial Banking) Any departure or deviation from the ,ending %uidelines is e0plicitly identified in credit applications and a "ustification for approval is provided) +he ,ending %uidelines provides the key foundations for $elationship Managers &$M' to formulate their recommendations for approval, and includes the follo*ingF -.% INDUSTR& (ND BUSIN SS S ,* NT "OCUS +he ,ending %uidelines clearly identify the (usinessLindustry sectors that should constitute the ma"ority of the (ank5s loan portfolio) +his *ill provide necessary direction to the (ank5s marketing staff) -.' T&$ S O" +O(N "(CI+ITI S +he type of loans that are permitted is clearly indicated and defined, such as =orking #apital, +rade Finance, +erm ,oan, etc) A full list of EB, credit products for SME and consumer clients has (een attached in the appendi0) -.- SIN,+ BORRO0 RD,ROU$ +I*ITS !n case of single (orro*er e0posure limit the (ank strictly follo*s Bangladesh Bank guidelines) +he regulation regarding the stated purpose communicated vide B$PD circular no D dated April 3:, 833D is provided (elo*F 9As a result of increase in capital of almost all the (anks, no* it has (een decided to reduce the single (orro*er e0posure limit from D3G to CDG, thusF +he total outstanding financing facilities (y a (ank to any single person or enterprise or organi/ation of a group shall not at any point of time e0ceed CDG of the (ank5s total capital su("ect to the condition that the ma0imum outstanding against fund (ased financing facilities &funded facilities' do not e0ceed 1DG of the total capital) -on funded credit facilities e)g) letter of credit, guarantee etc) can (e provided to a single large (orro*er) But under no circumstances, the total amount of the funded and non.funded credit facilities shall e0ceed CDG of a (anks total capital)

#redit $isk Management &Study on Eastern Bank ,imited' Page C8 of 23

Jo*ever, in case of e0port sector single (orro*er e0posure limit shall remain unchanged at D3G of the (ank5s total capital) But funded facilities in case of e0port credit shall also not e0ceed 1DG of the total capital); -.3 DISCOUR(, D BUSIN SS T&$ S +he BB guideline advices that (anks should outline industries or lending activities that are discouraged) As a minimum, the follo*ing should (e discouragedF

Military E4uipmentL=eapons Finance Jighly ,everaged +ransactions Finance of Speculative !nvestments ,ogging, Mineral E0tractionLMining, or other activity that is ethically or environmentally sensitive ,ending to companies listed on #!B (lack list or kno*n defaulters #ounterparties in countries su("ect to - sanctions Share ,ending +aking an E4uity Stake in Borro*ers ,ending to Jolding #ompanies Bridge ,oans relying on e4uityLde(t issuance as a source of repayment)

Eastern (ank limited follo*s the guideline and also in addition they have a list of the discouraged (usiness of their o*n *hich can not (e printed for the sake of confidentiality) -.6 +O(N "(CI+IT& $(R(* T RS Facility parameters &e)g), ma0imum si/e, ma0imum tenor, and covenant and security re4uirements' is clearly stated) As a minimum, the follo*ing parameters &mentioned in the guideline' is adoptedF

Bank does not grant facilities *here the (ank5s security position is inferior to that of any other
financial institution)

Assets pledged as security is al*ays properly insured) !n fact, EB, ensures 113G insurance
on the hypothecated security for a particular facility) +he (ank also has its o*n list of insurance companies from *hich the client can take insurance)

Ialuations of property taken as security is performed prior to loans (eing granted) Also
recogni/ed Crd party professional valuation firm is appointed to conduct the valuations) -.4 CR DIT (SS SS* NT A thorough credit and risk assessment is conducted prior to the granting of loans, and at least annually thereafter for all facilities) +he results of this assessment are presented in a #redit Application that originates from the relationship managerLaccount officer &9$M;', and is approved (y #redit $isk Management &#$M') +he $M is the o*ner of the customer relationship, and is held responsi(le to ensure the accuracy of the entire credit application su(mitted for approval) $Ms are familiar *ith the (ank5s ,ending %uidelines and should conduct due diligence on ne* (orro*ers, principals, and guarantors) !t is essential that $Ms kno* their customers and conduct due diligence on ne* (orro*ers, principals, and guarantors to ensure such parties are in fact *ho they represent themselves to (e) +he (ank has its esta(lished Ano* Mour #ustomer &AM#' and Money ,aundering guidelines *hich is adhered to at all times)

#redit $isk Management &Study on Eastern Bank ,imited' Page CC of 23

#redit Applications summari/e the results of the $Ms risk assessment and include, as a minimum, the follo*ing detailsF Amount and type of loan&s' proposed) Purpose of loans) ,oan Structure &+enor, #ovenants, $epayment Schedule, !nterest' Security Arrangements !n addition, the follo*ing risk areas are also addressedF -.4.1 Borro>er (na8y<7< +he ma"ority shareholders, management team and group or affiliate companies is assessed) Any issues regarding lack of management depth, complicated o*nership structures or inter.group transactions are addressed, and risks mitigated) -.4.2 Indu<try (na8y<7< +he key risk factors of the (orro*er5s industry are assessed (y the $M) Any issues regarding the (orro*er5s position in the industry, overall industry concerns or competitive forces is addressed and the strengths and *eaknesses of the (orro*er relative to its competition should (e identified) -.4.% Supp87erDBuyer (na8y<7< Any customer or supplier concentration is reported in the credit application, as these could have a significant impact on the future via(ility of the (orro*er) -.4.' #7<tor7ca8 "7nanc7a8 (na8y<7< An analysis of a minimum of C years historical financial statements of the (orro*er is presented in (ank5s specified format) +he analysis should address the 4uality and sustaina(ility of earnings, cash flo* and the strength of the (orro*er5s (alance sheet) Specifically, cash flo*, leverage and profita(ility must (e analy/ed) -.4.- (dherence to +end7ng ,u7de87ne< #redit Applications should clearly state *hether or not the proposed application is in compliance *ith the (ank5s ,ending %uidelines) -.4.3 *7t7gat7ng "actor< Mitigating factors for risks identified in the credit assessment is identified and reported in the application) -.4.6 +oan Structure +he $M makes sure that the amounts and tenors of proposed financing are "ustified (ased on the pro"ected repayment a(ility and loan purpose) E0cessive tenor or amount relative to (usiness needs increases the risk of fund diversion and may adversely impact the (orro*er5s repayment a(ility) -.4.4 Secur7ty A current valuation of collateral is o(tained and the 4uality and priority of security (eing proposed is assessed) ,oans are not granted (ased solely on security) Ade4uacy and the e0tent of the insurance coverage are also taken into consideration) -.4.5 Na9e +end7ng !n this case (ank also follo*s the prudential guidelines *hich says 9#redit proposals should not (e unduly influenced (y an over reliance on the sponsoring principal5s reputation, reported independent means, or their perceived *illingness to in"ect funds into various (usiness enterprises in case of need) +hese situations should (e discouraged and treated *ith great caution) $ather, credit proposals and the granting of loans should (e (ased on sound fundamentals, supported (y a thorough financial and risk analysis;)

#redit $isk Management &Study on Eastern Bank ,imited' Page C? of 23

-.5 ($$RO!(+ (UT#ORIT& +he prudential guidelines regarding approval authority (y BB is stated (elo*F 9+he authority to sanctionLapprove loans must (e clearly delegated to senior credit e0ecutives (y the Managing DirectorL#E6 @ Board (ased on the e0ecutive5s kno*ledge and e0perience) Approval authority should (e delegated to individual e0ecutives and not to committees to ensure accounta(ility in the approval process) +he follo*ing guidelines should apply in the approvalLsanctioning of loansF #redit approval authority must (e delegated in *riting from the MDL#E6 @ Board &as appropriate', ackno*ledged (y recipients, and records of all delegation retained in #$M) Delegated approval authorities must (e revie*ed annually (y MDL#E6LBoard) +he credit approval function should (e separate from the marketingLrelationship management &$M' function) +he role of #redit #ommittee may (e restricted to only revie* of proposals i)e) recommendations or revie* of (ank5s loan portfolios) Approvals must (e evidenced in *riting, or (y electronic signature) Approval records must (e kept on file *ith the #redit Applications) All credit risks must (e authori/ed (y e0ecutives *ithin the authority limit delegated to them (y the MDL#E6) +he 9pooling; or com(ining of authority limits should not (e permitted) #redit approval should (e centrali/ed *ithin the #$M function) $egional credit centers may (e esta(lished, ho*ever, all large loans must (e approved (y the Jead of #redit and $isk Management or Managing DirectorL#E6LBoard or delegated Jead 6ffice credit e0ecutive) +he aggregate e0posure to any (orro*er or (orro*ing group must (e used to determine the approval authority re4uired) Any credit proposal that does not comply *ith ,ending %uidelines, regardless of amount, should (e referred to Jead 6ffice for Approval MDLJead of #redit $isk Management must approve and monitor any cross.(order e0posure risk) Any (reaches of lending authority should (e reported to MDL#E6, Jead of !nternal #ontrol, and Jead of #$M) A monthly summary of all ne* facilities approved, rene*ed, enhanced, and a list of proposals declined stating reasons thereof should (e reported (y #$M to the #E6LMD;) +he (ank tries to follo* the a(ove guidelines as perfectly as possi(le) +he e0isting approval authority for approving credit proposals is summari/ed (elo*F +ype of #redit FundedL -on.funded FundedL -on.funded FundedL -on.funded FundedL -on.funded #ash Against Security &#lass A. EB, FD$s' #ash Against Security &#lass B. FD$sLother (ank' #onsumer Banking Amount p to +A 1)33 #rore p to +A 1)D3 #rore p to +A C)33 #rore p to +A D)33 #rore p to +A 8D)33 #rore p to +A 13)33 #rore +enor 18 month 18 month 18 month 23 month 23 month 23 month Approving Authority Jead of #$M Jead of #$M @ Jead of #orporate Banking &"ointly' DMD &singly' DMD @ MD &"ointly' DMD @ MD &any one' DMD @ MD &any one'

All products &E0ceptions'

23 month

DMD @ MD &any one'

#redit $isk Management &Study on Eastern Bank ,imited' Page CD of 23

-.12 S ,R ,(TION O" DUTI S EB, segregates the follo*ing lending functionsF

#redit ApprovalL$isk Management $elationship ManagementLMarketing #redit Administration

+he purpose of the segregation is to improve the kno*ledge levels and e0pertise in each department, to impose controls over the dis(ursement of authori/ed loan facilities and o(tain an o("ective and independent "udgment of credit proposals) -.11 $R " RR D OR,(NIS(TION(+ STRUCTUR ) R S$ONSIBI+ITI S +he guideline proposes that appropriate organi/ational structure must (e in place to support the adoption of the policies of the guidelines) +he key feature is the segregation of the MarketingL$elationship Management function from ApprovalL$isk ManagementLAdministration functions) !t also proposes credit approval should (e centrali/ed *ithin the #$M function) $egional credit centers may (e esta(lished, ho*ever, all applications must (e approved (y the Jead of #redit and $isk Management or Managing DirectorL#E6LBoard or delegated Jead 6ffice credit e0ecutive) +he organi/ational structure of EB, &credit related' is compared (elo* *ith that of the BB guideline) EB, ensures that all credit approvals are centrali/ed *ithin the #$M function) +here are three regional corporate (ases t*o in Dhaka and the other one in chittagong, ho*ever, all applications are su(mitted to #$M of Dhaka Jead office and approved (y the Board, MDLDMD or J6#$M as appropriate) For the SME sector, all proposals come to Dhaka SME center and then approved through #$M)

M a n a g in g D ir e c t o r L # E 6 J e a d o f # r e d it $ is k M a n a g e m e n t &# $ M ' # r e d i t A d m i n is t r a t i o n
&M a y re p o rt s e p a ra te ly to M D L# E 6 '

J e a d o f # o rp o ra te L # o m m e r c ia l B a n k in g $ e la t io n s h ip M a n a g e m e n t L M a r k e t in g & $ M ' B u s in e s s D e v e lo p m e n t

6 t h e r D ir e c t &!n te rn a l A u d

# r e d it A p p r o v a l
& in c lu d e s r e g i o n a l c r e d i t c e n t r e s i f a p p li c a ( l e '

M o n it o rin g L $ e c o v e ry & i n c l u d e s r e g io n a l r e c o v e r y c e n t r e s i f a p p li c a ( l e '

#redit $isk Management &Study on Eastern Bank ,imited' Page C2 of 23

M a n a g in g D ir e c t o r L # E 6 J e a d o f # r e d it $ is k M a n a g e m e n t &# $ M ' # r e d i t A d m i n is t r a t i o n
&M a y re p o rt s e p a ra te ly to M D L# E 6 '

J e a d o f # o rp o ra te L # o m m e r c ia l B a n k in g $ e la t io n s h ip M a n a g e m e n t L M a r k e t in g & $ M ' B u s in e s s D e v e lo p m e n t

6 th e r D ir e c t $ e p o r ts & ! n te rn a l A u d it, e tc )'

# r e d it A p p r o v a l
& in c l u d e s r e g io n a l c r e d i t c e n t r e s if a p p l ic a ( le '

M o n it o rin g L $ e c o v e ry & in c lu d e s r e g io n a l r e c o v e r y c e n t r e s if a p p l ic a ( l e '

+he follo*ing chart represents the preferred management structure in the BB guidelineF

+he credit related structure of EB, is as follo*sF

-.11.1 .ey Re<pon<7?787t7e<: Aey responsi(ilities of concerned parties as mentioned in the prudential guidelines are discussed (elo*F #redit $isk Management &#$M'

6versight of the (ank5s credit policies, procedures and controls relating to all credit risks
arising from corporateLcommercialLinstitutional (anking, personal (anking, @ treasury operations)

#redit $isk Management &Study on Eastern Bank ,imited' Page CE of 23

 6versight of the (ank5s asset 4uality) Directly manage all Su(standard, Dou(tful @ Bad and ,oss accounts to ma0imi/e recovery
and ensure that appropriate and timely loan loss provisions have (een made)

+o approve &or decline', *ithin delegated authority, #redit Applications recommended (y $M)
=here aggregate (orro*er e0posure is in e0cess of approval limits, to provide recommendation to MDL#E6 for approval)

+o provide adviceLassistance regarding all credit matters to line managementL$Ms) +o ensure that lending e0ecutives have ade4uate e0perience andLor training in order to carry
out "o( duties effectively) #redit Administration

+o ensure that all security documentation complies *ith the terms of approval and is
enforcea(le)

+o monitor insurance coverage to ensure appropriate coverage is in place over assets

pledged as collateral, and is properly assigned to the (ank)

+o control loan dis(ursements only after all terms and conditions of approval have (een met,
and all security documentation is in place)

+o maintain control over all security documentation) +o monitor (orro*er5s compliance *ith covenants and agreed terms and conditions, and
general monitoring of account conductLperformance) $elationship ManagementLMarketing &$M'

+o act as the primary (ank contact *ith (orro*ers) +o maintain thorough kno*ledge of (orro*er5s (usiness and industry through regular contact,
factoryL*arehouse inspections, etc) $Ms should proactively monitor the financial performance and account conduct of (orro*ers)

+o (e responsi(le for the timely and accurate su(mission of #redit Applications for ne*
proposals and annual revie*s,

+o highlight any deterioration in (orro*er5s financial standing and amend the (orro*er5s $isk
%rade in a timely manner) #hanges in $isk %rades should (e advised to and approved (y #$M)

-.12 ($$RO!(+ $ROC SS +he approval process segregates the *ork of $elationship ManagementLMarketing from the approving authority) +he responsi(ility for preparing the #redit Application rests *ith the $M *ithin the corporateLSME (anking department) #redit Applications are recommended for approval (y the $M team and for*arded to the approval team *ithin #$M and approved (y individual e0ecutives)

#redit $isk Management &Study on Eastern Bank ,imited' Page C8 of 23

+he recommending or approving e0ecutives take responsi(ility for and are held accounta(le for their recommendations or approval) -.12.1 (pproB7ng S* propo<a8< +he $M first sends the credit application to the SME center in Jead office Dhaka) +he SME center then checks the documents and make sure they are *ell *ithin the lending guidelines of the (ank) +hey also provide additional condition for sanction as appropriate) After revie*ing they send the proposal to the #$M department) +he respective credit officers revie* the proposal and get the approval from the approving authority) +he routing process of credit proposals and its approvals can (e summari/ed as follo*sF

#redit $isk Management &Study on Eastern Bank ,imited' Page C: of 23

$ecommendation (y $M

#entral SME center &$evie*ed (y SME officials'

#$M &Analy/ed (y officers of #$M)

Approved (y J6#$MLDMDLMD

+he follo*ing diagram illustrates the preferred approval process (y BBF #redit Application $ecommended By $M L Marketing

\onal #redit 6fficer &\#6'

Jead of #redit &J6#' @ Jead of #orporate Banking &J6#B'

Managing Director

Executive Committee/Board

#redit $isk Management &Study on Eastern Bank ,imited' Page ?3 of 23

-.1% CR DIT *ONITORIN, +o minimi/e credit losses, monitoring procedures and systems are in place that provides an early indication of the deteriorating financial health of a (orro*er) At a minimum, systems are in place to report the follo*ing e0ceptions to relevant e0ecutives in #$M and $M teamF

Past due principal or interest payments, past due trade (ills, account e0cesses, and (reach of
loan covenantsB

,oan terms and conditions are monitored, financial statements are received on a regular
(asis, and any covenant (reaches or e0ceptions are referred to #$M and the $M team for timely follo*.up)

+imely corrective action is taken to address findings of any internal, e0ternal or regulator
inspectionLaudit)

All (orro*er relationshipsLloan facilities are revie*ed and approved through the su(mission of
a #redit Application at least annually) EB, has an e0cellent !+ (ack(one, *hich produces the a(ove information for centralLhead office as *ell as local revie*) -.1' CONC+USION #ompliance *ith the guidelines of BB circulars or directions is a must for all the scheduled (anks in the country) EB, is no e0ception is this case) All the circulars related to credit are properly filed in the department) !t is made sure from the top management that each and every credit officer understands all the circulars and directions and e0ercise due diligence during operation regarding the stated issue) +he follo*ing section discusses a similar topic, *hich necessarily re4uires (ank5s strong compliance regarding it)

#redit $isk Management &Study on Eastern Bank ,imited' Page ?1 of 23

Chapter 3: (na8y<7< of Cred7t R7<k ,rad7ng

3.1 INTRODUCTION #redit risk grading is an important tool for credit risk management as it helps the Banks @ financial institutions to understand various dimensions of risk involved in different credit transactions) +he aggregation of such grading across the (orro*ers, activities and the lines of (usiness can provide (etter assessment of the 4uality of credit portfolio of a (ank or a (ranch) +he credit risk grading system is vital to take decisions (oth at the pre.sanction stage as *ell as post.sanction stage) At the pre.sanction stage, credit grading helps the sanctioning authority to decide *hether to lend or not to lend, *hat should (e the loan price, *hat should (e the e0tent of e0posure, *hat should (e the appropriate credit facility, *hat are the various facilities, *hat are the various risk mitigation tools to put a cap on the risk level) At the post.sanction stage, the (ank can decide a(out the depth of the revie* or rene*al, fre4uency of revie*, periodicity of the grading, and other precautions to (e taken) 3.2 D ! +O$* NT O" T# SCOR C(RD +he ,ending $isk Analysis &,$A' manual introduced in 1::C (y the Bangladesh Bank has (een in practice for mandatory use (y the Banks @ financial institutions for loan si/e of BD+ 1)33 crore and a(ove) Jo*ever, the ,$A manual suffers from a lot of su("ectivity, sometimes creating confusion to the lending Bankers in terms of selection of credit proposals on the (asis of risk e0posure) Mean*hile, in 833C end Bangladesh Bank provided guidelines for credit risk management of Banks *herein it recommended, interalia, the introduction of $isk %rade Score #ard for risk assessment of credit proposals) Since the t*o credit risk models are presently in vogue, the %overning Board of Bangladesh !nstitute of Bank Management &B!BM' under the chairmanship of the %overnor, Bangladesh Bank decided that an integrated #redit $isk %rading Model (e developed incorporating the significant features of the a(ove mentioned models *ith a vie* to render a need (ased simplified and user friendly model for application (y the Banks and financial institutions in processing credit decisions and evaluating the magnitude of risk involved therein) 3.% D "INITION O" CR DIT RIS. ,R(DIN, @CR,A +he #redit $isk %rading &#$%' is a collective definition (ased on the pre.specified scale and reflects the underlying credit.risk for a given e0posure) A #redit $isk %rading deploys a num(erL alpha(etL sym(ol as a primary summary indicator of risks associated *ith a credit e0posure) #redit $isk %rading is the (asic module for developing a #redit $isk Management system) 3.' "UNCTIONS O" CR DIT RIS. ,R(DIN, =ell.managed credit risk grading systems promote (ank safety and soundness (y facilitating informed decision.making) %rading systems measure credit risk and differentiate individual credits and groups of credits (y the risk they pose) +his allo*s (ank management and e0aminers to monitor changes and trends in risk levels) +he process also allo*s (ank management to manage risk to optimi/e returns) 3.- US O" CR DIT RIS. ,R(DIN, +he #redit $isk %rading matri0 allo*s application of uniform standards to credits to ensure a common standardi/ed approach to assess the 4uality of individual o(ligor, credit portfolio of a unit, line of (usiness, the (ranch or the Bank as a *hole) As evident, the #$% outputs *ould (e relevant for #redit $isk Management &Study on Eastern Bank ,imited' Page ?8 of 23

individual credit selection, *herein either a (orro*er or a particular e0posureLfacility is rated) +he other decisions *ould (e related to pricing &credit.spread' and specific features of the credit facility) +hese *ould largely constitute o(ligor level analysis) $isk grading *ould also (e relevant for surveillance and monitoring, internal M!S and assessing the aggregate risk profile of a Bank) !t is also relevant for portfolio level analysis) 3.3 NU*B RS (ND S#ORT N(* O" ,R(D S US D IN T# CR, +he proposed #$% scale consists of 8 categories, of *hich categories 1 to D represent various grades of accepta(le credit risk and categories 2 to 8 represent unaccepta(le levels of credit risk) ,R(DIN, Super7or ,ood (ccepta?8e *arg7na8D0atch87<t Spec7a8 *ent7on Su? <tandard Dou?tfu8 Bad ) +o<< 3.6 RIS. D "INITIONS Bangladesh (ank has set different criteria for risk grading definitions) Jo*ever, they can (e (roadly categori/ed asF a' Accepta(le #redit $isk and (' naccepta(le #redit $isk Follo*ing is a detailed discussion of these t*o (road categories of risks) 3.4 (CC $T(B+ CR DIT RIS. +he follo*ing D categories are considered as accepta(le credit risk) +he respective risk category features have (een provided (elo*F Super7or = @SU$A = 1 S#ORT N(* S P %D A##P+ M%L=, SM SS DF B, NU*B R 1 8 C ? D 2 E 8

#redit facilities, *hich are fully secured i)e) fully cash covered) #redit facilities fully covered (y government guarantee) #redit facilities fully covered (y the guarantee of a top tier international Bank)
,ood = @,DA =2 Strong repayment capacity of the (orro*er +he (orro*er has e0cellent li4uidity and lo* leverage) +he company demonstrates consistently strong earnings and cash flo*) Borro*er has *ell esta(lished, strong market share) Iery good management skill @ e0pertise) All security documentation should (e in place) #redit facilities fully covered (y the guarantee of a top tier local Bank) Aggregate Score of 8D or greater (ased on the $isk %rade Score Sheet

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(ccepta?8e = @(CC$TA =%

+hese (orro*ers are not as strong as %66D %rade (orro*ers, (ut still demonstrate
consistent earnings, cash flo* and have a good track record)

Borro*ers have ade4uate li4uidity, cash flo* and earnings) #redit in this grade *ould normally (e secured (y accepta(le collateral &1st charge over
inventory L receiva(les L e4uipment L property') Accepta(le management Accepta(le parentLsister company guarantee Aggregate Score of ED.8? (ased on the $isk %rade Score Sheet *arg7na8D0atch87<t = @*,D0+A ='

+his grade *arrants greater attention due to conditions affecting the (orro*er, the industry or
the economic environment)

+hese (orro*ers have an a(ove average risk due to strained li4uidity, higher than normal
leverage, thin cash flo* andLor inconsistent earnings) =eaker (usiness credit @ early *arning signals of emerging (usiness credit detected) +he (orro*er incurs a loss ,oan repayments routinely fall past due Account conduct is poor, or other unto*ard factors are present) #redit re4uires attention Aggregate Score of 2D.E? (ased on the $isk %rade Score Sheet

Spec7a8 *ent7on = @S*A = +his grade has potential *eaknesses that deserve management5s close attention) !f left uncorrected, these *eaknesses may result in a deterioration of the repayment prospects of the (orro*er) Severe management pro(lems e0ist) Facilities should (e do*ngraded to this grade if sustained deterioration in financial condition is noted &consecutive losses, negative net *orth, e0cessive leverage', An Aggregate Score of DD.2? (ased on the $isk %rade Score Sheet) 3.5 UN(CC $T(B+ CR DIT RIS. +he follo*ing C categories are considered as unaccepta(le credit risk) +he respective risk category features have (een provided (elo*F Su?<tandard= @SSA = 3 Financial condition is *eak and capacity or inclination to repay is in dou(t) +hese *eaknesses "eopardi/e the full settlement of loans) Bangladesh Bank criteria for su(.standard credit shall apply) An Aggregate Score of ?D.D? (ased on the $isk %rade Score Sheet) Dou?tfu8= @D"A = 6 Full repayment of principal and interest is unlikely and the possi(ility of loss is e0tremely high) Jo*ever, due to specifically identifia(le pending factors, such as litigation, li4uidation procedures or capital in"ection, the asset is not yet classified as Bad @ ,oss) Bangladesh Bank criteria for dou(tful credit shall apply) An Aggregate Score of CD.?? (ased on the $isk %rade Score Sheet) BadD+o<<= @B+A =4 #redit $isk Management &Study on Eastern Bank ,imited' Page ?? of 23

 #redit of this grade has long outstanding *ith no progress in o(taining repayment or on the
verge of *ind upLli4uidation)

Prospect of recovery is poor and legal options have (een pursued) Proceeds e0pected from the li4uidation or reali/ation of security may (e a*aited) +he
continuance of the loan as a (anka(le asset is not *arranted, and the anticipated loss should have (een provided for) +his classification reflects that it is not practical or desira(le to defer *riting off this (asically valueless asset even though partial recovery may (e affected in the future) Bangladesh Bank guidelines for timely *rite off of (ad loans must (e adhered to) ,egal proceduresLsuit initiated) Bangladesh Bank criteria for (ad @ loss credit shall apply) An Aggregate Score of less than CD (ased on the $isk %rade Score Sheet) 3.12 R ,U+(TOR& D "INITION ON ,R(DIN, O" C+(SSI"I D (CCOUNTS !rrespective of credit score o(tained (y a particular o(ligor, grading of the classified names should (e in line *ith Bangladesh Bank guidelines on classified accounts, *hich presently areF Su( standard . if any loan is past dueLoverdue for 183 days and a(ove) Dou(tful . if any loan is past dueLoverdue for 8E3 days and a(ove) Bad @ ,oss . if any loan is past dueLoverdue for C23 days and a(ove) 3.11 $ROC DUR "OR CO*$UTIN, CR DIT RIS. ,R(DIN, +he follo*ing step.*ise activities outline the detail process for arriving at credit risk grading) 3.11.1 ST $ I: ID NTI"&IN, (++ T# $RINCI$(+S RIS. CO*$ON NTS #redit risk for counterparty arises from an aggregation of the follo*ingF Financial $isk BusinessL!ndustry $isk Management $isk Security $isk $elationship $isk Each of the a(ove mentioned key risk areas re4uire to (e evaluated and aggregated to arrive at an overall risk grading measure) Ba8uat7on of "7nanc7a8 R7<k: $isk that counterparties *ill fail to meet o(ligation due to financial distress) +his typically entails analysis of financials i)e) analysis of leverage, li4uidity, profita(ility @ interest coverage ratios) +o conclude, this capitali/es on the risk of high leverage, poor li4uidity, lo* profita(ility @ insufficient cash flo*) Ba8uat7on of Bu<7ne<<DIndu<try R7<k: $isk that adverse industry situation or unfavora(le (usiness condition *ill impact (orro*ers5 capacity to meet o(ligation) +he evaluation of this category of risk looks at parameters such as (usiness outlook, si/e of (usiness, industry gro*th, market competition @ (arriers to entryLe0it) +o conclude, this capitali/es on the risk of failure due to lo* market share @ poor industry gro*th) Ba8uat7on of *anage9ent R7<k: $isk that counterparties may default as a result of poor managerial a(ility including e0perience of the management, its succession plan and team *ork) Ba8uat7on of Secur7ty R7<k: $isk that the (ank might (e e0posed due to poor 4uality or strength of the security in case of default) +his may entail strength of security @ collateral, location of collateral and support) #redit $isk Management &Study on Eastern Bank ,imited' Page ?D of 23

Ba8uat7on of Re8at7on<h7p R7<k: +hese risk areas cover evaluation of limits utili/ation, account performance, conditionsLcovenants compliance (y the (orro*er and deposit relationship)

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#redit $isk Management &Study on Eastern Bank ,imited' Page ?E of 23

3.11.2 ST $ II: (++OC(TIN, 0 I,#T TO $RINCI$(+ RIS. CO*$ON NTS According to the importance of risk profile, the follo*ing *eights are proposed in guideline for corresponding principal risks) $r7nc7pa8 R7<k Co9ponent<: 0e7ght: Financial $isk D3G BusinessL!ndustry $isk 1DG Management $isk 1DG Security $isk 13G $elationship $isk 13G 3.11.% ST $III: ST(B+IS#IN, . & $(R(* T RS $r7nc7pa8 R7<k Co9ponent<: Financial $isk BusinessL!ndustry $isk Management $isk Security $isk $elationship $isk .ey $ara9eter<: ,everage, ,i4uidity, Profita(ility @ #overage ratio) Si/e of Business, Business 6utlook, !ndustry %ro*th, #ompetition @ Barriers to Business &entryLe0it' E0perience, Succession @ +eam =ork) Security #overage, #ollateral #overage and Support tili/ation of ,imit, Account #onduct, #ompliance of covenantsLconditions @ Personal Deposit

3.11.' ST $ I!: (SSI,NIN, 0 I,#T TO (C# O" T# . & $(R(* T RS $r7nc7pa8 Co9ponent<: "7nanc7a8 R7<k R7<k .ey $ara9eter<: 0e7ght: -2F 1DG 1DG DG 1-F DG CG CG

,i4uidity Profita(ility #overage Bu<7ne<<DIndu<try R7<k Si/e of Business Business 6utlook !ndustry gro*th #redit $isk Management &Study on Eastern Bank ,imited'

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Market #ompetition EntryLE0it Barriers *anage9ent R7<k E0perience Succession +eam =ork Secur7ty R7<k Security coverage #ollateral coverage Support Re8at7on<h7p R7<k

tili/ation of limit Account conduct #ompliance of covenants Lcondition Personal deposit 8G 3.11.- ST $ !: ,I!IN, NTR& TO T# *OD + TO (RRI! (T SCOR After the risk identification @ *eightage assignment process &as mentioned a(ove', the ne0t steps *ill (e to input actual parameter in the score sheet to arrive at the scores corresponding to the actual parameters) +his report provides a *ell programmed MS E0cel (ased credit risk scoring sheet &developed (y Bangladesh Bank' to arrive at a total score on each (orro*er) +he e0cel program re4uires inputting data accurately in particular cells for input and *ill automatically calculate the risk grade for a particular (orro*er (ased on the total score o(tained) +he follo*ing steps are to (e follo*ed *hile using the MS E0cel program) 6pen the MS K, file named, CR,GSCOR GS# T +he entire K, sheet named, CR, is protected e0cept the particular cells to input data) !nput data accurately in the cells *hich are BORD R D @ are colored & ++O0.

8G 8G 1-F DG DG DG 12F ?G ?G 8G 12F CG CG 8G

Some input cells contain DRO$ DO0N +IST for some criteria corresponding to the Aey Parameters) #lick to the input cell and select the appropriate parameters from the DRO$ DO0N +IST as sho*n (elo*)

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3.11.3 ST $ !I: (RRI!IN, (T T# CR DIT RIS. ,R(DIN, B(S D ON TOT(+ SCOR +he follo*ing is the proposed #redit $isk %rade matri0 (ased on the total score o(tained (y an o(ligor) Nu9?er 1 8 C ? D 2 E 8 R7<k ,rad7ng Superior %ood Accepta(le MarginalL=atchlist Special Mention Su(.standard Dou(tful Bad @ ,oss Short Na9e S P %D A##P+ M%L=, SM SS DF B, Score 133G cash covered %overnment guarantee !nternational Bank guarantees 8D] ED.8? 2D.E? DD.2? ?D.D? CD.?? RCD

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3.12 CR DIT RIS. ,R(DIN, $ROC SS +he follo*ings are the directives for*arded (y Bangladesh Bank regarding the risk grading processF <#redit $isk %rading should (e completed (y a Bank for all of its clients *hose credit limit is BD+ 1)33 crore and a(ove) For Superior $isk %rading &S P. 1' the score sheet is not applica(le) +his *ill (e guided (y the criterion mentioned for superior grade account i)e) 133G cash covered, covered (y government @ (ank guarantee) #redit risk grading matri0 *ould (e useful in analy/ing credit proposal, ne* or rene*al for regular limits or specific transactions, if (asic information on a (orro*ing client to determine the degree of each factor is a' readily availa(le, (' current, c' dependa(le, and d' parametersLrisk factors are assessed "udiciously and o("ectively) $isk factors are to (e evaluated and *eighted very carefully, on the (asis of most up.to.date and relia(le data and complete o("ectivity must (e ensured to assign the correct grading) #redit risk grading e0ercise should (e originated (y $elationship Manager and should (e an on.going and continuous process) $elationship Manager shall complete the #redit $isk %rading Score Sheet and shall arrive at a risk grading in consultation *ith a Senior $elationship Manager and document it as per #redit $isk %rading Form: *hich shall then (e concurred (y the #redit 6fficer in consultation *ith a Senior #redit 6fficer) All credit proposals *hether ne*, rene*al or specific facility should consist of a' Data #ollection #hecklist, (' ,imit Score Sheet, and d' #redit $isk %rading Form) tili/ation Form c' #redit $isk %rading

+he credit officers then *ould pass the approved #redit $isk %rading Form to #redit Administration Department and #orporate BankingL,ine of BusinessL$ecovery nit for updating their M!SLrecord) +he appropriate approving authority through the same #redit $isk %rading Form shall approve any su(se4uent changeLrevision i)e) upgrade or do*ngrade in credit risk grade)5 3.1% (R+& 0(RNIN, SI,N(+S @ 0SA Early =arning Signals &E=S' indicate risks or potential *eaknesses of an e0posure re4uiring monitoring, supervision, or close attention (y management) !f these *eaknesses are left uncorrected, they may result in deterioration of the repayment prospects in the Bank5s assets at some future date *ith a likely prospect of (eing do*ngraded to classified assets) Early identification, prompt reporting and proactive management of Early =arning Accounts are prime credit responsi(ilities of all $elationship Managers and must (e undertaken on a continuous (asis) Despite a prudent credit approval process, loans may still (ecome trou(led) +herefore, it is essential that early identification and prompt reporting of deteriorating credit signs (e done to ensure s*ift action to protect the Bank5s interest) #redit $isk Management &Study on Eastern Bank ,imited' Page D1 of 23

!rrespective of credit score o(tained (y any o(ligor as per the proposed risk grade score sheet, the grading of the account highlighted as Early =arning Signals &E=S' accounts shall have the follo*ing risk symptoms) *arg7na8D0atch 87<t @*,D0+= 'A: if . Any loan is past dueLoverdue for :3 days and a(ove) Fre4uent drop in security value or shortfall in dra*ing po*er e0ists)

Spec7a8 *ent7on @S* = -A: if . Any loan is past dueLoverdue for 183 days and a(ove Ma"or document deficiency prevails &such deficiencies include (ut not limited toB (oard resolution for (orro*ing not o(tained, sanction letter not accepted (y client, chargesLhypothecation over assets favoring (ank not filed *ith $egistrar, Yoint Stock #ompanies, mortgage not in place, guarantees not o(tained, etc)' A significant petition or claim is lodged against the (orro*er) +he #redit $isk %rading Form of accounts having Early =arning Signals should (e completed (y the $elationship Manager and sent to the approving authority in #redit $isk Management Department) +he #redit $isk %rade should (e updated as soon as possi(le and no delay should (e there in referring Early =arning Signal accounts or any pro(lem accounts to the #redit $isk Management Department for their early involvement and assistance in recovery) 3.1' CR DIT RIS. ,R(DIN, R !I 0 #redit $isk %rading for each (orro*er should (e assigned at the inception of lending and should (e periodically updated) Fre4uencies of the revie* of the credit risk grading are mentioned (elo*B

-um(er 1 8 C ? D 2

$isk %rading Superior %ood Accepta(le MarginalL=atchlist Special Mention Su(.standard

Short S P %D A##P+ M%L=, SM SS

$evie* fre4uency &at least' Annually Annually Annually Jalf yearly ^uarterly ^uarterly

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E 8

Dou(tful Bad @ ,oss

DF B,

^uarterly ^uarterly

3.1- R(TIN, S&ST * O" (ST RN B(N. +I*IT D EB, has its o*n its risk rating methodology) Each corporate and SME client of the (ank has their o*n ratings) !t is termed as 6(ligor $isk $ating &6$$') 6nce a rating is given it is closely monitored in each 4uarterL half yearly to "ustify its status or for upgrading or do*ngrading purpose of the same)

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O?87gor R7<k Rat7ng +he follo*ing ta(le provides the rating and the features necessary for the assignment of rating to each of the o(ligor) !t also states the preferred strategy to (e follo*ed for the rated clients) 6nce an o(ligor is a*arded *ith a rating then it is revie*ed on a 4uarterly (asis) All the clients are closely monitored to see *hether there are any violations of the conditions and covenants, deterioration of security, all the performance parameters are revie*ed (e the respective credit officer (ased on the 4uarterly report named <portfolio revie*5 and other e0cerpts as necessary) +hen he recommends the rating to higher authority and if those are approved the ne* ratings are assigned to each client)

R(TIN, %66D

Short %D

No 1

CRIT RI( %ro*ing !ndustry &%ro*th 1DG]' Among top 83 in the !ndustry Strong management *ith succession Steady gro*th in financial performance Satisfactory payment recordLaccount turnover ,i4uidity CK and a(ove ,everage 3)DK and (elo* +imely su(mission of financial information Strong

STR(T ,& $etain and gro* *ith client Sell multi products

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ParentLSister 6ffice %uarantee %ood collateral 6$ 133G cash covered %ro*ing !ndustry &%ro*th 13G]' Accepta(le player in the market %ood management *ith succession Accepta(le gro*th in financial performance Satisfactory payment recordLaccount turnover ,i4uidity 1)DK and a(ove ,everage 1)DK and (elo* +imely su(mission of financial information Accepta(le ParentLSister 6ffice %uarantee Accepta(le collateral

A##EP+AB,E

A##EP

$etain and gro* *ith client Sell multi products

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MA$%!-A,L=A +#J,!S+

M%L=,

R(TIN, SPE#!A, ME-+!6-

Short SM

No ?

Pro(lem in !ndustry ,oosing market share +hin management *ith no succession nrelia(le salesLoperating profit) nsatisfactory payment recordLaccount turnover ,i4uidity (elo* 1K Jigh ,everage Perpetual delay in su(mission of financial information !ncomplete ,oan Documentation Drop in collateral value or collateral shortfall Past due over 23 days CRIT RI( Pro(lem in !ndustry ,oosing market share Severe management pro(lem #ompany

-o increase in credit limit #lose monitoring thru clear action plan Ensure 133G completion of loan doc) Semi.annual revie* Follo* up for settlement of past dues

STR(T ,& Possi(le e0itLreduction of credit limit #lose monitoring thru clear action plan Ensure 133G completion of

#redit $isk Management &Study on Eastern Bank ,imited' Page D2 of 23

operating at losses *ith sales going do*n) nsatisfactory payment recordLaccount turnover ,i4uidity (elo* 1K L insufficient cash flo* Jigh ,everage Financial !nformation not availa(le !ncomplete ,oan Documentation Drop in collateral value or collateral shortfall Diversion of fund Past due over :3 days S B S+A-DA$D SS D All criteria of Special Mention Past due over 183 days

loan doc) ^uarterly revie* Follo* up for settlement of past dues

#redit limit for ad"ustment purpose #lear e0it plan to (e in place ^uarterly revie* Follo* up for settlement of past dues #redit limit for ad"ustment purpose

D6 B+F ,

DF

All criteria of Su(standard #lient out of

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(usiness Past due over 8E3 days

^uarterly revie* Follo* up for settlement of past dues ,egal action #redit limit for ad"ustment purpose ^uarterly revie* Follo* up for settlement of past dues ,egal action

BAD @ ,6SS

B,

All criteria of Dou(tful Past due over C23 days

$ecently Bangladesh Bank has provided a circular mentioning the classification category for the SME sector vide B$PD circular no 83, dated Decem(er 83, 833D &to (e implemented from April 8332' in *hich it has proposed the follo*ing categoryF

Superior &S P' %ood &%D' Accepta(le &Accepta(le' MarginalL *atch list &M%L=,' Special Mention Account &SMA' Su(standard &SS' Dou(tful &DF' ,oss &B,'

+he original circular is provided in the appendi0 section of the report)

Chapter 6: "7nd7ng< ) Conc8u<7on

6. 1 "INDIN,S

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Eastern Bank ,imited follo*s a #redit $isk Management Practice that complies *ith the rules and regulation set (y Bangladesh Bank) Eastern Bank has set e0tensive procedures (oth at the pre.sanction stage of credit proposal assessment and also at the post Osanction stage) +he procedures are transparent, accounta(le and decentrali/ed in such manner that they ensure ma0imum effectiveness in risk assessment of credit proposal) +horough analysis of eastern Bank5s credit assessment procedure and e0tensive interpretation of Bangladesh Bank circulars regarding credit assessment and risk grading procedure helped in the comparison of the t*o systems) Eastern Bank5s process hardly deviates from that dictated (y Bangladesh Bank) Bangladesh Bank credit risk management policies re4uires (ank to set lending guidelines *hich EB, does and revie*s on annual (asis) As per BB re4uirement it is set (y top management) EB,5s detailed product definition sho*s that each product falls under Bangladesh Bank (road classification of loan products) Eastern (ank ,imited follo*s the BB guideline regarding discouraged lending activities and also in addition they have a list of the discouraged (usiness of their o*n) +he Bank tries to adhere to the prudential guidelines regarding approval authority set (y Bangladesh (ank as perfectly as possi(le) Eastern Bank5s organi/ation structure and delegation of responsi(ility is in line *ith the structure proposed (y Bangladesh Bank) Bangladesh Bank re4uires all commercial (anks to use risk grade score card for risk assessment of credit proposals) +he #redit $isk %rading matri0 allo*s application of uniform standards to credits to ensure a common standardi/ed approach to assess the 4uality of individual o(ligor, credit portfolio of a unit, line of (usiness, the (ranch or the Bank as a *hole) +he #redit $isk %rading scale consists of 8 categories *hich can (e (roadly classified into t*o categories that of accepta(le and non.accepta(le credit proposals) EB,5s o(ligor risk rating system has E categories, each of *hich is a reflection of the scales provided under #$%, e0cept *ith that of Superior #redit) EB,5s rating starts from good) +he criteria for rating matches more or less *ith that of #$% only in EB,5s case the outlook is more conservative)

6. 2 R CO** ND(TION EB,5s approach to credit is more conservative than that proposed (y Bangladesh Bank) Although this approach might seem more prudent, ho*ever in face of increasing competition from ne* generation (anks, EB, needs carry out the follo*ingF Develop more customi/ed parameters for credit approval process under the general guidelines of Bangladesh Bank to increase its market) Data used for assessment of credit proposals should (e checked for authenticity and accuracy) #$% score depends heavily on the financial data provided (y potential (orro*er) +herefore steps should (e taken to make those data more relia(le) EB,5s $M should (e more a*are of manipulative 4ualitative data than (usiness development) +here should (e procedures and parameters to identify and eliminate such manipulation) #ontinuous improvement of the lending procedure *ould reduce the default risk of the (ank and increase its profita(ility)

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6. % CONC+USION Bangladesh5s (anking system is heavily affected (y (ad loans) +his not only makes (ank more conservative, contracts the lending system, it discourages investment) As a result gro*th of the economy is impeded) 6ne ma"or reason for default loan is (anks5 ineffectiveness of assessing credit risk of a proposed investment) =ith time, Bangladesh Bank has set rules and general guidelines to help (ank assess risk and mitigate their credit risk) !n spite of that many (anks fail to attract good credit and run profita(ly) +hus it is not only the guidelines provided (y Bangladesh Bank that a commercial lending institution need to follo* (ut it o*n lending policies should (e in place to ensure ma0imum effectiveness of credit assessment) =ith this perspective in mind the report has attempted to analy/e the lending procedures of Eastern Bank especially in the SME sector and check *hether it complies *ith that of Bangladesh Bank) !n doing so the standard operating procedures of the (ank have (een delineated in details along *ith a case study to present a picture of the operation carried out in the field) +he report has also discussed (anks procedures for managing its non.performing loans and loan classification procedures and cross checked those *ith the central (ank guidelines) +he ne*ly proposed #redit $isk %rading Score sheet (y Bangladesh Bank has also (een discussed in the report *ith Eastern (ank5s very o*n risk rating system) A(ove all, the report provides a detailed discussion of some the crucial issues of credit risk management and tries to focus on the practice of Eastern Bank ,imited in this regard under the regulatory frame*ork prevailing in the country) +he report finds that EB, not maintains its guidelines and procedures in compliance *ith the Bangladesh (ank directives (ut has a more conservative look to credit risk than that re4uired (y Bangladesh Bank) +his conservative approach has its pros and cons) +herefore some suggestions has (een made at the end to increase the profita(ility of the (ank *hile still maintaining its appreciative position in credit risk assessment)

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