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The RU Account Manager should determine the Force Sale Value (FSV) for accountsgrade 6 or worse. Force Sale Value is generally the amount that is expected to be realizedthrough the liquidation of collateral held as security or through the available operatingcash flows of the business, net of any realization costs. Any shortfall of the Force SaleValue compared to total loan outstandings should be fully provided for once an account isdowngraded to grade 7. Where the customer in not cooperative, no value should beassigned to the operating cash flow in determining Force Sale Value. Force Sale Valueand provisioning levels should be updated as and when new information is obtained, butas a minimum, on a quarterly basis in the CLR.Following formula is to be applied in determining the required amount of provision:1. Gross Outstanding XXX2. Less: (i) Cash margin held or FixedDeposit s /SP under lien. ( XXX )(ii) Interest in Suspense Account ( XXX )3. Loan Value(F or which provision is to be created before consideringestimated realizable value of other security/collateral held) XXX4. Less : Estimated salvage value of security/collateral held ( XXX )(See Note below) Net Loan Value XXX Note: The amount of required provision may, in some circumstances, be reduced by anestimated realizable forced sale value of (i.e. Salvage Value) of' any tangible collateralheld (viz: mortgage of property, pledged goods / or hypothecated goods repossessed bythe bank, pledged readily marketable securities etc). Hence, in these situations, it will beadvisable to evaluate such collateral, estimate the most realistic sale value under duressand net-off the value against the outstanding before determining the Net Loan value for provision purposes. Conservative approach should be taken to arrive at provisionrequirement and Bangladesh Bank guideline to be properly followed. 4.3.4.5 Incentive Program: Banks may wish to introduce incentive programs to encourage Recovery Unit AccountManagers to bring down the Non Performing Loans (NPLs). The table below shows anindicative incentive plan for RU account managers: Recovery as a % of Principal plus interestRecommended Incentive as % of net recovery amount If CG 7-8 if written off 7 6 % t o 1 0 0 % 1 . 0 0 % 2 . 0 0 % 5 1 % t 0 7 5 % 0 . 5 0 % 1 . 0 0 % 2 0 % t

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5.0 COMPLIANCE OF BBK GUIDELINES BY NCC BANK LIMITED In the previous sections of this report we have critically analyzed NCC Banks existingcredit risk management system as well as Bangladesh Banks best practices guidelines for managing credit risk. Comparing NCC Banks current credit risk management systemwith the BBK best practices guideline we see that NCC Bank lacks some of the best practices in banking industry which can be generated in the following way5.1Credit Policies/ Lending Guideline: In the above analysis we have seen that NCCBank limited has no written credit policy though it follows some policy. As there is nowritten credit policy, branch managers sometimes get confused whether to go with a project or not.Thus NCC Bank limited should have a lending guideline available in every branches sothat credit officers can take quick decision whether to accept or reject a project. Thelending guideline should include the following- Industry or business segment focus. Types of loan facilities Details of single borrower/ group limit Lending caps Discouraged business type Loan facility Parameters Cross Border risk 5.2 Credit Assessment & Risk Grading: Though credit is properly assessed in NCCBL, but there is no risk grading system applied here. It should adopt a credit risk gradingsystem to ensure account management, structure and pricing are commensurate with therisk involved. 5.3 Approval Authority: In Bangladesh Banks guideline it is written that Approvalauthority should be delegated to individual executives and not to committees to ensureaccountability in approval process. But in NCC Bank limited we see that every credit

goes to the board via credit committee. As a result, wastage of time occurs and no one isheld accountable for a bad loan. 5.4 Segregation of Duties:

According to Bangladesh Bank Guideline Banks should aimto segregate the following lending functions to improve the knowledge levels andexpertise in each department:- Credit Approval/ Risk Management- Relationship Management/ Marketing- Credit AdministrationBut in NCC Bank limited there is no such departmentation or segregation of duties. Insmall branches of NCCBL only single loan officer do all the jobs like loan marketing,risk assessing and credit administration. 5.5 Internal Audit: NCC Bank limited has a segregated internal audit/ controldepartment charged with conducting audit of all departments as suggested by Bangladesh bank guideline. 5.6 Preferred Organizational Structure: Currently NCC Bank does not follow the preferred management structure as suggested by BBk guideline. The key feature in the preferred management structure is the segregation of Marketing/ Relationship functionfrom approval/Risk management/ Administration function. 5.7 Approval process: According to BBk best practice guideline, the recommending or approving executives should take responsibility for and be held accountable for their recommendations and approval. The recommended delegated approval authority levelsare as followsHead of Credit/CRM Executives up to 15% of capitalManaging Director/ C EO Up to 25% of capitalEC/ Board All exceed 25% of capitalBut in NCC Bank we see that every credit proposal goes to Executive committee i.e. board. 5.8 Credit Administration: The BBk guidelines suggest that Credit administration bestrictly segregated from relationship management/ marketing. As a result the possibilityof controls being compromised or issues not being highlighted at the appropriate levelcan be avoided. The credit administration has the following functions- Disbursement Custodial duties Compliance requirementIn NCC Bank credit officers under supervision of Branch Credit In-charge or Manager also carry out all the three functions of credit administration. But Credit Marketing andadministration is yet to be segregated. 5.9 Credit Monitoring: To minimize credit losses, monitoring procedures and systemsshould be in place that provides an early indication of the deteriorating financial health of a borrower. Early identification, prompt reporting and proactive management of EarlyAlert Accounts are prime credit responsibilities of all relationship Managers. An earlyAlert Account is one that has risks or potential weakness of a material

nature requiringmonitoring, supervision or close attention by management.In NCC Bank credit monitoring is also done by credit In charge or branch managers. As aresult Early Alert Accounts do not get that much attention as needed. 5.10 Credit Recovery: According to BBk guideline the recovery unit (RU) of CRMshould directly manage accounts with sustained deterioration. On a quarterly basis, aClassified Loan review (CLR) should be prepared by the RU Account Manager to updatethe action/ recovery plan, review and assess the adequacy of provisions, and modify asappropriate.In NCC Bank the non-performing loan is very low (below 3%) and the recovery unit isyet to be formed. But for personal loan program, Personal Banking Division has arecovery unit. 5.11 Incentive Program: The BBk guideline also encourages Banks to introduceincentive programs for the Recovery Unit Account Managers to bring down the NONPerforming Loans (NPLs) NCC Bank Limited currently has no incentive program as it does not have any RecoveryUnit. 06 CONCLUSION AND RECOMMENDATION A banker cannot sleep well with bad debts in his portfolio. The failure of commercial banks occurs mainly due to bad loans, which occurs due to inefficient management of theloans and advances portfolio. Therefore any banks must be extremely cautious about itslending portfolio and credit policy. So far NCC Bank Limited has been able to manage itscredit portfolio skillfully and kept the classified loan at a very lower rate ---thanks goes tothe standard and stringent credit appraisal policy and practices of the bank.But all things around us are changing at an accelerating rate. Today is not like yesterdayand tomorrow will be different from today. Given the fast changing, dynamic globaleconomy and the increasing pressure of globalization, liberalization, consolidation anddisintermediation, it is essential that NCC bank limited has a robust credit risk management policies and procedures that are sensitive to these changes. To improve therisk management culture further, NCC bank limited should adopt some of the industry best practices that are not practiced currently. These areNCC Bank should have a clear written lending guideline. The lending guideline shouldinclude Industry and Business Segment Focus, Types of loan facilities, Single Borrower and group limit, Lending caps, Discouraged Business Types, Loan Facility Parametersand Cross boarder Risk.It should adopt a credit grading system All

facilities should be assigned a risk grade.And the borrowers risk grades should be clearly stated on credit application.Approval authority should be delegated to individual executives rather than ExecutiveCommittee/ Board to ensure accountability. This system will not only ensure

accountability of individual executives but also expedite the approval process.All lending functions should be segregated in the following way * Credit Approval / Risk Management* Relationship Management / Marketing* Credit AdministrationThe segregation of duties will improve the knowledge levels and expertise in eachdepartment.The organization structure should have to be changed to put in place the segregation of the Marketing/ Relationship Management function from Approval / Risk Management /Administration function.The responsibilities of the key persons of the above function must also be clearlyspecified. An Early Alert Account system should be introduced to have adequate monitoring,supervision or close attention by management.( An early Alert Account is one that hasrisk and potential weaknesses of a material nature)There should be a Recovery Unit to manage directly accounts with sustaineddeterioration. To encourage Recovery Unit incentive program may also introduced. Appendix-1