Credit Risk Management Practice in Banks: A Study on Basic Bank
Limited
Prepared ByMD. Jamal HossainID: 16-050
March 2014An Internship Report presented in partial Fulfillment
of the Requirements for the BBA program at University of Dhaka
Department of Banking & InsuranceUniversity of Dhaka
Internship Report onCredit Risk Management Practice in Banks: A
study on BASIC Bank Limited
Submitted to:Mr. Raad Mozib LalonLecturerDept. of Banking and
InsuranceUniversity of DhakaSubmitted by:MD. Jamal HossainID:
16-050Dept. of Banking and InsuranceUniversity of Dhaka
Date of Submission: 6th March, 2014
March 6, 2014 Mr. Raad Mozib LalonLecturerDept. of Banking and
InsuranceUniversity of Dhaka
Subject: Submission of Internship Report on Credit Risk
Management Practice in Bank: A Study on BASIC Bank Limited.
Dear Sir,With due respect, I would like to submit my internship
report on Credit Risk Management Practice in Bank: A Study on Basic
Bank Limited, Bangladesh. I have completed my internship report as
part of the course requirement of BBA program under your
supervision. It has been a worthwhile experience for me undertaking
such a report work to get exposure to the real life of a banking
organization. I am grateful for your guidelines and directions. I
tried to put my best effort for the preparation of this report.
Hereby, I hope that you would be kind and generous enough to accept
my sincere effort and oblige thereby. It will be my pleasure to
answer any clarification regarding this report.
Sincerely yours,MD Jamal HossainID: 16-050
Certificate of the Supervisor
To Whom It May ConcernThis is to certify that the internship
report on Credit Risk Management Practice in Bank: A Study on BASIC
Bank Limited for the degree of Bachelor of Business Administration
(BBA) major in Banking & Insurance from University of Dhaka
carried out by MD Jamal Hossain, Id # 16-050 under my supervision.
No part of the internship report has been submitted for any degree,
diploma, title, recognition before.
Mr. Raad Mozib LalonLecturerDepartment of Banking and
InsuranceUniversity of Dhaka
DeclarationI do hereby solemnly declare that the work presented
in this Internship Report titled Credit Risk Management Practice in
Bank: A Study on BASIC Bank Limited is an original work done by me
under the supervision of Mr. Raad Mozib Lalon, Lecturer, Department
of Banking & Insurance, and University of Dhaka.
No part of this report has been previously submitted to any
other University/ College/ Institution/ Organization for any
academic certificate/ degree/ diploma/ qualification.The work I
have presented does not breach any existing copyright and no
portion of this copied from any work done earlier for a degree or
otherwise. I further undertake to indemnify the Department against
any loss or damage arising from breach of the forgoing obligation,
if any.
MD Jamal HossainId # 16-050Department of Banking &
InsuranceFaculty of Business StudiesUniversity of Dhaka
AcknowledgementFirst and foremost, I would like to express my
deep gratitude to the almighty Allah for giving me the ability to
complete the report within the due time and without any major
tribulations. I would like to express heartiest gratitude to my
academic supervisor Mr. Raad Mozib Lalon for his important
suggestions, excellent guidelines and supervisions for preparing
this internship report on Credit Risk Management Practices in
Banks: A study on Basic Bank Limited. I would also like to give
thanks to Mr. Abdus Sattar Khan, AGM, Uttara Branch, BASIC Bank
Limited for his kind concern and consideration regarding my
academic requirements as my external supervisor. Also I express
special gratitude to all the other employees of Uttara branch of
BRAC Bank Limited who have shared their knowledge regarding banking
with me. Finally, I would like to convey my gratitude to my
parents, teachers, friends and many others who extend their support
to prepare the report.
Executive SummaryCredit risk is one of the most vital risks for
any commercial bank. Credit risk arises from the failure of the
borrower to pay the installments of the loan regularly. It may
arise from either an inability or an unwillingness to perform in
the pre-commitment contracted manner. The real risk from credit is
the deviation of portfolio performance from its expected value. The
credit risk of a bank is also effect the book value of a bank. The
more credit of a particular is in risk, the more probability of a
bank to be insolvent. Globally, more than 50% of total risk
elements in Banks and Financial Institution (FI) s are credit risk
alone. Thus managing credit risk for efficient management of a FI
has gradually become the most crucial task. Credit risk management
encompasses identification, measurement, matching mitigations,
monitoring and control of the credit risk exposures.
In my whole report, I was working on the credit risk Management
of BASIC Bank Limited. I have collected last five year financial
data of BBL about credit risk management. In my analysis I have
showed a comprehensive overview about CRM in different phase of my
report. First, I have showed the importance, advantage, challenges
and process of CRM. Then I have described about the CRM practice
and performance of BBL. Finally, I analyze the impact of CRM on
banks financial performance. I have used Ms Excel to analyze the
data. I have also used SPSS software to compare relationship
between CRM and banks profitability. After analysis and discussion
I have identified the summary of my researchs findings. I have also
given some recommendations about CRM for the company.
After analyzing the financial data, I like to conclude that BBL
is one of the most promising banks in our country. According to its
CRM performance, the level credit risk of BBL is in moderate level.
However, it has the ability to reduce the credit risk possibility
and keep it in lower level.
List of AbbreviationsBBLBASIC Bank LimitedSSSubstandard
CARCapital Adequacy RatioDFDoubtful
FIFinancial InstitutionBLBad and Loss
NPLNon Performing LoanSAMSpecial Asset Management
NPLRNon Performing Loan RatioSMASpecial Mention account
ROAReturn on AssetsSMESmall medium enterprise
TLTotal LoanDPDDays Past Due
CRMCredit Risk ManagementEEAEarly Alert Account
BBBangladesh BankLLPRLoan Loss Provision Ratio
GOBGovernment of BangladeshMSEMean Square Error
SSISmall Scale IndustriesLANLocal Area Network
CRABCredit Rating Agency of Bangladesh LimitedNGONon-Government
Organization
Table of Contents
Chapter NamePage No
1.0 Introductory Discussion. 1.1 Introduction. 1.2 Background of
the Study. 1.3 Rationale of the Study. 1.4 Objective of the Study
1.5 Methodology of the Study... 1.6 Limitation of the Study... 1.7
Structure of the Report ...2.0 Review of Literature.3.0
Organizational Overview 3.1 Company Profile of BBL 3.2 Function of
BBL. 3.3 Mission of BBL... 3.4 Vision of BBL 3.5 Technology......
3.6 Risk Management... 3.7 CRAB Rating...... 01-
050202020304050506-0809-1210101111111112
Table of Contents
Chapter NamePage No
4.0 Theoretical Framework of CRM 3.1 What is Credit Risk
Management?. 3.2 Why CRM is Important?. 3.3 Advantage of CRM. 3.4
Challenges of CRM 5.0 Process of CRM in Banks 5.1 Credit Processing
/ Approval.. 5.2 Credit Approval/ Sanction.. 5.3 Credit
Documentation. 5.4 Credit Administration 5.5 Disbursement.. 5.6
Monitoring & Control of Individual Credit 5.7 Monitoring the
Overall Credit Portfolio. 5.8 Classification of Credit... 5.9
Managing Problem/ Credit Recovery.
13- 151414151516-23171819202121222223
Table of ContentsChapter NamePage No
6.0 CRM Practice in BASIC Bank 6.1 Credit Risk Policy of BBL..
6.2 Credit Risk Management Department. 6.3 Credit Risk Management
Wings .... 6.4 Credit Approval of BBL. 6.5 Credit Collection of BBL
6.6 Classification and Loss Recognition Policy 6.7 Provisioning
Procedure of BBL. 6.8 Loan Rescheduling.. 6.9 Bad Portfolio
Recovery...7.0 CRM Performance of BASIC Bank 7.1 Trend Analysis....
7.2 Ratio Analysis.8.0 The Impact of CRM on Banks Profitability 8.1
Overview of the Research... 8.2 Previous Research about this
Topic.... 8.3 Sample Selection and Model Specification ... 8.4 Data
Input and Regression Line. 8.5 Result of Research and
Interpretation
24-3325262627282931323334-39353840-474141424344
Table of Contents
Chapter NamePage No
9.0 Findings Summary, Recommendation and Conclusion 9.1 Summary
of Findings.. 9.2 Recommendation.... 9.3 Conclusion..Bibliography
and References:Appendix:48- 51495051
List of TablesTable No.Table TitlePage No.
1.1Structure of the Report5
3.1BASIC Bank at a glance12
5.1CRM Process in Banks17
6.1Credit Collection steps in BASIC Bank28
6.2Loan Classification30
6.3Rate of Loan Provisioning31
6.4Rescheduling of Demand and Continuous Loan32
7.1Standard Loan of BASIC Bank38
7.2NPL Loan of BASIC Bank39
8.1Description of Model Variables42
8.2Inputted data for SPSS43
8.3Summary of Regression analysis44
8.4Summary of coefficient analysis45
8.5Summary of ANOVA Test46
List of FiguresFigure No.Figures TitlePage No.
5.1Credit Approval Process18
5.2Credit Documentation Process19
List of GraphsGraphs No.Figures TitlePage No.
7.1Total Loans & Advances trend of BBL.35
7.2Trend of Non Performing Loan of BBL36
7.3Trend of Unclassified Loans of BBL36
7.4Trends of Provisions for Classified Loans37
7.5Standard Loan to Total Loans Ratio38
7.6NPL to Total Loans Ratio39
8.1Multiple Regression line43
51
Chapter: 01Introductory Discussion
1.1 Introduction: Risk is the element of uncertainty or
possibility of loss that prevail in any business transaction in any
place, in any mode and at any time. In the financial arena,
enterprise risks can be broadly categorized as Credit Risk,
Operational Risk, Market Risk and Other Risk. Credit risk is the
possibility that a borrower or counter party will fail to meet
agreed obligations. Globally, more than 50% of total risk elements
in Banks and Financial Institution (FI) s are credit risk alone.
Thus managing credit risk for efficient management of a FI has
gradually become the most crucial task. Credit risk management
encompasses identification, measurement, matching mitigations,
monitoring and control of the credit risk exposures. As a leading
bank of Bangladesh, Basic Bank Limited has a fully functioning
department to perform the crucial task of Credit Risk Management
(CRM).1.2 Background of the Study:This research study is not only a
way for getting acknowledged about the efficiency in managing
credit risk of Bangladeshi Banks, but also a conclusive reference
for studying how CRM practices helps to increase profitability and
long term sustainability of that banks. I will conduct my study
under the close supervision of my academic supervisor who will
consistently monitor my progress and recommend any steps taken with
a view to rectifying the errors occurred during my study on
proposed research proposal. For conducting this research, I have to
collect secondary data relating to the financial status of Basic
Bank Ltd from the year 2008 to 2012.
1.3 Rationale of the study:To complete my graduation program
from the Department of Banking & Insurance, University OF
Dhaka, I joined in BASIC Bank Limited as an Intern. For fulfill my
internship my report will be on Credit Risk Management practice in
Bank: A Study on BASIC Bank Limited. I have been recommended by the
Supervisor of my department to work about Credit Risk Management.
1.4 Objective of the study:The indispensible objective of this
research is to examine how bank of Bangladesh especially Basic Bank
Ltd is efficient in practicing credit risk management throughout
its operation. Moreover there are some other subordinated as well
as principal objectives regarding CRM of Banks as revealed
below:
To get cognizant about how much a bank especially my selected
bank named Basic Bank Ltd is efficient in consistently practicing
credit risk management. To know the importance and advantages of
CRM on the perspective of banking institutions. To identify the
standard process of credit risk management used by banking
organization. To analysis the credit risk policy used by a bank
specially my selected BASIC Bank Ltd. To know about what kinds of
challenges are likely to faced by both the Bangladesh Bank and
others commercial banks in adopting credit risk management
practices. To scrutinize that how CRM practice impact on banks
profitability and sustainability. To identify the functions of
different wings as well as the whole department of CRM. To analyze
how a bank make decision for a credit disbursement. To know how a
bank collect the loan from its customers. To identify how a bank
classify the loan category according to guideline of Central Bank.
To know how a bank keep provision for the classified loan. To
analyze how and when a bank reschedule a loan agreement. To analyze
how Banks go after for a default loans. To identify the
effectiveness of Banks to recover their bad portfolio.
1.5 Methodology of the Study:
Research Type:This is a descriptive research which is relevant
to an inquisitive study as it requires some analysis on the
efficient management of banks credit risk as well as the crystal
clear concepts on how the CRM affect banks profitability and
sustainability. Types of Data:Primary Sources: The primary source
of information is based on my practical experience of three months
long internship at Uttara Branch of Basic Bank Ltd.Secondary
Sources: The secondary source of information is based on official
website, Annual report, operation manual of Credit Risk Management
and annual report of Basic bank, Bangladesh bank website as well as
related different other websites, books etc. Data analysis
Tools:After collecting the relevant data, I will conduct the
relevant analysis of data consisting of both statistical analysis
and financial analysis as mention below:Statistical tools for
analysis: The statistical tools that will be used for the purpose
of deriving various relationships among various variables
considered under research are given below: Trend Analysis Multiple
regression analysis Testing HypothesisFinancial Analysis: For
conducting the financial analysis I will utilize the ration
analysis and other important financial analysis to identify the
efficiency of CRM practices of Bangladeshi Banks.1.6 Limitations of
the study: On the way of preparing this report, I have faced
following problems that may be termed as the limitation of the
study: Banks policy of not disclosing some sensitive data and
information for obvious reason posed an obstacle to prepare more
informative report. Personal limitations like inability to
understand some official terms, office decorum etc. created a few
problems.
1.7 Structure of the Report:Table 1.1: Structure of the
ReportChapter No Chapter Name
Chapter 1 :Introductory Discussion
Chapter 2 :Literature Review
Chapter 3 :Organizational Overview
Chapter 4 :Theoretical Framework of CRM
Chapter 5 :Process of CRM in Banks
Chapter 6 :CRM Practice in BASIC Bank Limited
Chapter 7 :CRM Performance of BASIC Bank Limited
Chapter 8 :The Impact of CRM on Banks Profitability
Chapter 9 :Summary of Findings, Recommendation and
Conclusion
Chapter: 02Review of Literature
Credit Risk Management and Risk based Supervision in Banks has
been the subject of study of many Agencies and Researchers and
Academicians. There is a treasure of literature available on the
subject. A careful selection of relevant material was a formidable
task before starting the research. Efforts have been made to scan
the literature highly relevant to the Context.
Rajagopal (1996) made an attempt to overview the banks risk
management and suggests a model for pricing the products based on
credit risk assessment of the borrowers. He concluded that good
risk management is good banking, which ultimately leads to
profitable survival of the institution. A proper approach to risk
identification, measurement and control will safeguard the
interests of banking institution in long run.Froot and Stein (1998)
found that credit risk management through active loan purchase and
sales activity affects banks investments in risky loans. Banks that
purchase and sell loans hold more risky loans (Credit Risk and Loss
loans and commercial real estate loans) as percentage of the
balance sheet than other banks. Again, these results are especially
striking because banks that manage their credit risk (by buying and
selling loans) hold more risky loans than banks that merely sell
loans (but dont buy them) or banks that merely buy loans(but dont
sell them).
Treacy and Carey (1998) examined the credit risk rating
mechanism at US Banks. The paper highlighted the architecture of
Bank Internal Rating System and Operating Design of rating system
and made a comparison of bank system relative to the rating agency
system. They concluded that banks internal rating system helps in
managing credit risk, profitability analysis and product
pricing.
Bagchi (2003) examined the credit risk management in banks. He
examined risk identification, risk measurement, risk monitoring,
and risk control and risk audit as basic considerations for credit
risk management. The author concluded that proper credit risk
architecture, policies and framework of credit risk management,
credit rating system, and monitoring and control contributes in
success of credit risk management system.
Muninarayanappa and Nirmala (2004) outlined the concept of
credit risk management in banks. They highlighted the objectives
and factors that determine the direction of banks policies on
credit risk management. The challenges related to internal and
external factors in credit risk management are also highlighted.
They concluded that success of credit risk management require
maintenance of proper credit risk environment, credit strategy and
policies. Thus the ultimate aim should be to protect and improve
the loan quality.
Khan, A.R. (2008) illustrates that Credit risk is one of the
most vital risks for any commercial bank. Credit risk arises from
non performance by a borrower. It may arise from either an
inability or an unwillingness to perform in the pre-commitment
contracted manner. The real risk from credit is the deviation of
portfolio performance from its expected value. The credit risk of a
bank is also effect the book value of a bank. The more credit of a
particular is in risk, the more probability of a bank to be
insolvent.
Banerjee, Prashanta K., & Farooqui Q.G.M. (2009) said that
the objective of the credit management is to maximize the
performing asset and the minimization of the non-performing asset
as well as ensuring the optimal point of loan and advance and their
efficient management. The lending guideline should include Industry
and Business Segment Focus, Types of loan facilities, Single
Borrower and group limit, Lending caps. It should adopt a credit
grading system .All facilities should be assigned a risk grade.
Rose, Peter S. (2001) examined that for most banks, loans are
the largest and most obvious source of credit risk; however, other
sources of credit risk exist throughout the activities of a bank,
including in the banking book and in the trading book, and both on
and off the balance sheet. Banks are increasingly facing credit
risk (or counterparty risk) in various financial instruments other
than loans, including acceptances, interbank transactions, trade
financing, foreign exchange transactions, financial futures, swaps,
bonds, equities, options, and in the extension of commitments and
guarantees, and the settlement of transactions.
Chapter: 03Organizational Overview
3.1 Company Profile of BASIC Bank Limited:Bangladesh Small
Industries and Commerce Bank Limited, popularly known as BASIC
Bank, is a state-owned scheduled bank. However, it is not a
nationalized Bank. It is a bank-company and operates on the lines
of a private bank. The very name Bangladesh Small Industries and
Commerce Bank Limited is indicative of the nature of the bank. It
is a blend of development and commercial banks.BASIC Bank
registered under the Companies Act 1913. It was incorporated under
this Act on the 2nd of August 1988. The bank started its operation
from the 21st of January 1989. It is governed by the banking
Companies Act 1991. The bank was established as the policy makers
of the country felt the urgency for a bank in the private sector
for financing Small Scale Industries (SSIs). At the outset, the
bank started as a joint venture enterprise of the BCC Foundation
with 70 percent shares and the government of Bangladesh (GOB) with
the remaining 30 percent shares. The BCC Foundation being
nonfunctional following the closure of the BCCI, the government of
Bangladesh took over 100 percent ownership of BASIC on 4th June
1992. Thus the Bank is state owned. However, the Bank is not
nationalized; it operates like a private bank as before.3.2
Functions of BASIC Bank: Term loans to industries especially to
small-scale enterprises. Full-fledged commercial banking service
including collection of deposit, short term trade finance, working
capital finance in processing and manufacturing units and financing
and facilitating international trade. Technical support to Small
Scale Industries (SSls) in order to enable them to run their
enterprises successfully. Micro credit to the urban poor through
linkage with Non- Government Organizations (NGOs) with a view to
facilitating their access to the formal financial market for the
mobilization of resources.
3.3 Mission of BASIC Bank: To provide best development and
commercial banking services to the common people of Bangladesh and
provide special support to the small scale business enterprises.3.4
Vision of BASIC Bank: Provide the best banking services to all
kinds of people and contribute for economic development of the
country.3.5 Technology of BASIC:BASIC bank has its own software
developed in 1991. Local area network (LAN) has been installed in
Head office and 15 branches of the bank. Wide area network (WAN)
has been set up between Head office and branches using X.28 leased
line of BTTB. As continuous up gradation of technology its Gulshan
branch, Dhaka, Zindabazar branch, Sylhet, Rangpur Branch, Rajshahi
branch has become online few years ago. 3.6 Risk Management:In
banking business, no reward can be expected without risk.
Management of BASIC Bank has established a formal program for
managing the business risk faced by the bank. BASIC bank is very
much cautious about its investment. Every loan proposal is placed
under careful scrutiny before approval. Board of Directors approval
is necessary for the proposal of large amount of loans. Internal
audit team and recovery team exercise close monitoring on every
loan transaction. Management regularly reviews the banks overall
assets and liabilities structure and makes necessary changes in the
mix asset/liabilities of balance sheet. The Bank also has a
liquidity policy to ensure financing flexibility to cope with
unexpected future cash demand. The Bank takes necessary action to
avoid foreign exchange risk which is called as exposure.
3.7 CRAB Rating: Credit Rating Agency of Bangladesh Ltd. (CRAB)
has assigned long term rating BBB1 as Stand Alone Rating and A2 as
Government Support Rating and short term rating ST-3 for the year
2012.Commercial Banks rated 'BBB' in the long term have adequate
capacity to meet their financial commitments. However, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the Commercial Banks in higher-rated
categories. Commercial Banks rated ST-3 in the short term category
are considered to have below average capacity for timely repayment
of obligations, although such capacity may impair by adverse
changes in business, economic or financial conditions. Commercial
Banks rated in this category are characterized with satisfactory
level of liquidity, internal fund generation and access to
alternative sources of funds is outstanding.Table 3.1: Basic Bank
at a GlanceNameBASIC Bank Limited
Date of IncorporationAugust 2, 1998
Date of Inauguration of OperationJanuary 21, 1989
Head officeSena kalian Bhaban (6th floor), 195, Motijeel,Dhaka
1000, Bangladesh
Number of Branches68
Service providedDeposit scheme, credit facility and foreign
exchange service
Authorized capitalTk. 5000.00 million
Paid up capitalTk. 2946.98 million
OwnershipGovernment of Bangladesh
Banking software usedKASTLE core
Technology usedMembers of SWIFT
SWIFTBKSIBDDH
[email protected]
Websitewww.basicbanklimited.com
Chapter: 04Theoretical Framework of CRM
4.1 What is Credit Risk Management (CRM)?Credit risk is most
simply defined as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance with
agreed terms and conditions. The objective of Credit Risk
management is to minimize the risk and maximize banks risk adjusted
rate of return by assuming and maintaining credit exposure within
the acceptable parameters. The Credit Risk Management department is
responsible for upholding the integrity of the Banks risk/return
profile. It ensures that risks are properly assessed, and that
risk/return decisions are made accurately and transparently. The
overall success in credit management depends on the banks credit
policy, portfolio of credit, monitoring, supervision and follow-up
of the loan and advance. Therefore, while analyzing the credit risk
management of a bank, it is required to analyze its credit policy,
credit procedure and performance regarding credit risk
management.
4.2 Why CRM is important for Banking Institutions?The importance
of credit risk management for banking is tremendous. Banks and
other financial institutions are often faced with risks that are
mostly of financial nature. These institutions must balance risks
as well as returns. For a bank to have a large consumer base, it
must offer loan products that are reasonable enough. However, if
the interest rates in loan products are too low, the bank will
suffer from losses. In terms of equity, a bank must have
substantial amount of capital on its reserve, but not too much that
it misses the investment revenue, and not too little that it leads
itself to financial instability and to the risk of regulatory
non-compliance.
The risks of losses that result in the default of payments of
the debtors are a kind of risks that must be expected. Because of
the exposure of banks to many risks, it is only reasonable for bank
to keep substantial amount of capital to protect its solvency and
to maintain its economic stability. The second Basel Accords
provides statements of its rules regarding the regulations of that
come with lending and investment practices, banks must assess the
risks. Credit risk management must play its role then to help banks
be in compliance with Basel II Accord and other regulatory bodies.
To manage and assess the risks faced by banks, it is important to
make certain estimates, conduct monitoring, and perform reviews of
the performance of the bank. However banks are into lending and
investing practices, it is relevant to make reviews on loans and to
scrutinize and analyze portfolios. Loan reviews and portfolio
analysis are crucial then determining the credit and investment
risks. The credit risk management system used by many banks today
has complexity; however it can help in the assessment of risks by
analyzing the credits and determining the probability of defaults
and risks of losses. Credit risk management for banking is a very
useful system, especially if the banks are in line with the
survival of banks in the business world.4.3 Advantages of Credit
Risk Management: First: the awareness of possible threats.This also
includes identification of possible loss of assets. In that way,
the bank can have back up funds in case they lose an asset. The
manager can also highlight how difficult it will be if a large loan
default and affect the performance of bank. Effective credit risk
management improves the current and future financial performance.
When a threat occurs, its important for all departments to come
together and deal with it. Risk management prevents a department
from isolation. Its divide the authority of function across the
whole organization.4.4 Challenges of Credit Risk Management: Cost:
The CRM practice will shell out cash from the bank funds. Banks
will have to improve their cash generating tactics in order to
provide means fortrainingand maintenance for something that hasnt
happened yet. Training:The time spentfor development and research
will have to be allocated for training to ensure proper execution
of risk management. Motivation:Employees needs to be motivated in
every moment to deal with the credit risk.
Chapter: 05Process of CRM in Bank
Credit risk management process should cover the entire credit
cycle starting from the origination of the credit in a financial
institutions books to the point the credit is extinguished from the
books (Morton Glantz, 2002). It should provide for sound practices
in:Table 5.1: CRM Process in banksCredit Risk Management
Process
5.1Credit processing/appraisal
5.2Credit approval/sanction
2.3Credit documentation
5.4Credit administration
5.5Disbursement
5.6Monitoring and control of individual credits
5.7Monitoring the overall credit portfolio
5.8Credit classification and
5.9Managing problem credits/recovery
5.1 Credit Processing/Appraisal:Credit processing is the stage
where all required information on credit is gathered and
applications are screened. Credit application forms should be
sufficiently detailed to permit gathering of all information needed
for credit assessment at the outset. In this connection, financial
institutions should have a checklist to ensure that all required
information is, in fact, collected. Financial institutions should
set out pre-qualification screening criteria, which would act as a
guide for their officers to determine the types of credit that are
acceptable. For instance, the criteria may include rejecting
applications from blacklisted customers. These criteria would help
institutions avoid processing and screening applications that would
be later rejected.
5.2 Credit-approval/Sanction:A financial institution must have
in place written guidelines on the credit approval process and the
approval authorities of individuals or committees as well as the
basis of those decisions. Approval authorities should be sanctioned
by the board of directors. Approval authorities will cover new
credit approvals, renewals of existing credits, and changes in
terms and conditions of previously approved credits, particularly
credit restructuring, all of which should be fully documented and
recorded. Prudent credit practice requires that persons empowered
with the credit approval authority should not also have the
customer relationship responsibility.Approval authorities of
individuals should be commensurate to their positions within
management ranks as well as their expertise. Depending on the
nature and size of credit, it would be prudent to require approval
of two officers on a credit application, in accordance with the
Boards policy. The approval process should be based on a system of
checks and balances. Some approval authorities will be reserved for
the credit committee in view of the size and complexity of the
credit transaction. Depending on the size of the financial
institution, it should develop a corps of credit risk specialists
who have high level expertise and experience and demonstrated
judgment in assessing, approving and managing credit risk. An
accountability regime should be established for the decision-making
process, accompanied by a clear audit trail of decisions taken,
with proper identification of individuals/committees involved. All
this must be properly documented.
Figure 5.1: Credit Approval Process[footnoteRef:2] [2: Source:
(Credit Approval Process and Credit Risk Management, 2005,
Oesterreichische National bank)]
5.3 Credit Documentation:Documentation is an essential part of
the credit process and is required for each phase of the credit
cycle, including credit application, credit analysis, credit
approval, credit monitoring, and collateral valuation, and
impairment recognition, foreclosure of impaired loan and
realization of security. The format of credit files must be
standardized and files neatly maintained with an appropriate system
of cross-indexing to facilitate review and follow up.The Bangladesh
Bank will pay particular attention to the quality of files and the
systems in place for their maintenance. Documentation establishes
the relationship between the financial institution and the borrower
and forms the basis for any legal action in a court of law.
Institutions must ensure that contractual agreements with their
borrowers are vetted by their legal advisers.Credit applications
must be documented regardless of their approval or rejection. All
documentation should be available for examination by the Bangladesh
Bank. Financial institutions must establish policies on information
to be documented at each stage of the credit cycle. The depth and
detail of information from a customer will depend on the nature of
the facility and his prior performance with the institution. A
separate credit file should be maintained for each customer. If a
subsidiary file is created, it should be properly cross-indexed to
the main credit file.Financial institutions should maintain a
checklist that can show that all their policies and procedures
ranging from receiving the credit application to the disbursement
of funds have been complied with. The checklist should also include
the identity of individual(s) and/or committee(s) involved in the
decision-making process (Morton Glantz, 2002).
Figure 5.2: Credit Documentation Process
5.4 Credit Administration:Financial institutions must ensure
that their credit portfolio is properly administered, that is, loan
agreements are duly prepared, renewal notices are sent
systematically and credit files are regularly updated. An
institution may allocate its credit administration function to a
separate department or to designated individuals in credit
operations, depending on the size and complexity of its credit
portfolio (Credit Risk Management: Industry Best Practices 2005,
Bangladesh Bank). A financial institutions credit administration
function should, as a minimum, ensure that: Credit files are neatly
organized, cross-indexed, and their removal from the premises is
not permitted; The borrower has registered the required insurance
policy in favor of the bank and is regularly paying the premiums;
The borrower is making timely repayments of lease rents in respect
of charged leasehold properties; Credit facilities are disbursed
only after all the contractual terms and conditions have been met
and all the required documents have been received; Collateral value
is regularly monitored; The borrower is making timely repayments on
interest, principal and any agreed to fees and commissions;
Information provided to management is both accurate and timely;
Responsibilities within the financial institution are adequately
segregated; Funds disbursed under the credit agreement are, in
fact, used for the purpose for which they were granted. back office
operations are properly controlled; The established policies and
procedures as well as relevant laws and regulations are complied
with; and
5.5 Disbursement:Once the credit is approved, the customer
should be advised of the terms and conditions of the credit by way
of a letter of offer. The duplicate of this letter should be duly
signed and returned to the institution by the customer. The
facility disbursement process should start only upon receipt of
this letter and should involve, inter alia, the completion of
formalities regarding documentation, the registration of
collateral, insurance cover in the institutions favor and the
vetting of documents by a legal expert. Under no circumstances
shall funds be released prior to compliance with pre-disbursement
conditions and approval by the relevant authorities in the
financial institution.
5.6 Monitoring and Control of Individual Credits:To safeguard
financial institutions against potential losses, problem facilities
need to be identified early. A proper credit monitoring system will
provide the basis for taking prompt corrective actions when warning
signs point to deterioration in the financial health of the
borrower. Examples of such warning signs include unauthorized
drawings, arrears in capital and interest and deterioration in the
borrowers operating environment (Morton Glantz, 2002). Financial
institutions must have a system in place to formally review the
status of the credit and the financial health of the borrower at
least once a year. More frequent reviews (e.g at least quarterly)
should be carried out of large credits, problem credits or when the
operating environment of the customer is undergoing significant
changes.In broad terms, the monitoring activity of the institution
will ensure that: Funds advanced are used only for the purpose
stated in the customers credit application; Financial condition of
a borrower is regularly tracked and management advised in a timely
fashion; Borrowers are complying with contractual covenants;
Collateral coverage is regularly assessed and related to the
borrowers financial health; The institutions internal risk ratings
reflect the current condition of the customer;5.7 Monitoring the
Overall Credit Portfolio (Stress Testing):An important element of
sound credit risk management is analyzing what could potentially go
wrong with individual credits and the overall credit portfolio if
conditions/environment in which borrowers operate change
significantly. The results of this analysis should then be factored
into the assessment of the adequacy of provisioning and capital of
the institution. Such stress analysis can reveal previously
undetected areas of potential credit risk exposure that could arise
in times of crisis (Morton Glantz, 2002). Possible scenarios that
financial institutions should consider in carrying out stress
testing include: Significant economic or industry sector downturns;
Adverse market-risk events; and Unfavorable liquidity
conditions.Financial institutions should have industry profiles in
respect of all industries where they have significant exposures.
Such profiles must be reviewed /updated every year. Each stress
test should be followed by a contingency plan as regards
recommended corrective actions. Senior management must regularly
review the results of stress tests and contingency plans. The
results must serve as an important input into a review of credit
risk management framework and setting limits and provisioning
levels (Morton Glantz, 2002). 5.8 Classification of credit:Credit
classification process grades individual credits in terms of the
expected degree of recoverability. Financial institutions must have
in place the processes and controls to implement the board approved
policies, which will, in turn, be in accord with the proposed
guideline. They should have appropriate criteria for credit
provisioning and write off. International Accounting Standard 39
requires that financial institutions shall, in addition to
individual credit provisioning, assess credit impairment and
ensuing provisioning on a credit portfolio basis. Financial
institutions must, therefore, establish appropriate systems and
processes to identify credits with similar characteristics in order
to assess the degree of their recoverability on a portfolio
basis.Financial institutions should establish appropriate systems
and controls to ensure that collateral continues to be legally
valid and enforceable and its net realizable value is properly
determined. This is particularly important for any delinquent
credits, before netting off the collaterals value against the
outstanding amount of the credit for determining provision. As to
any guarantees given in support of credits, financial institutions
must establish procedures for verifying periodically the net worth
of the guarantor.
5.9 Managing Problem Credits/Recovery:A financial institutions
credit risk policy should clearly set out how problem credits are
to be managed. The positioning of this responsibility in the credit
department of an institution may depend on the size and complexity
of credit operations. The monitoring unit will follow all aspects
of the problem credit, including rehabilitation of the borrower,
restructuring of credit, monitoring the value of applicable
collateral, scrutiny of legal documents, and dealing with
receiver/manager until the recovery matters are finalized.The
collection process for personal loans starts when the account
holder has failed to meet one or more contractual payment
(Installment). It therefore becomes the duty of the Collection
Department to minimize the outstanding delinquent receivable and
credit losses. This procedure has been designed to enable the
collection staff to systematically recover the dues and identify /
prevent potential losses, while maintaining a high standard of
service and retaining good relations with the customers. It is
therefore essential and critical, that collection people are
familiar with the computerized system, procedures and maintain
effective liaison with other departments within the bank
(Prudential regulations for consumer financing 2004, Bangladesh
Bank).
Chapter: 06CRM Practice in BASIC Bank Ltd
6.1 Credit Risk Policy of BASIC Bank Limited: In order to
minimize credit risk, BASIC Bank Limited has formulated a
comprehensive credit policy according to Bangladesh Bank Core Risk
Management guidelines. Credit policy of the Bank provided for the
separation of the credit approval function from business, marketing
and loan administration function. Credit policy of BBL recommended
through credit assessment and risk grading of all clients at the
time of approval and portfolio review. Credit policy also provides
the guidelines of required information for credit assessment,
marketing strategy, approval process, loan monitoring, early alert
process, credit recovery, NPL account monitoring, NPL provisioning
and write off policy, etc. The board of directors reviews the
credit policy of the bank annually. BASIC Bank credit principle:1.
Aggregate loans and advances shall not exceed ten times the Banks
net worth or 65% of customers deposits whichever is lower.2. Within
the aggregate limit of loans and advances as mentioned in (1)
above, 50% of lending will be to small industry sector in
accordance with prescribed norms of the Government and the Central
Bank in terms of the Banks objectives with 50% to the commercial
sector.3. No term loans will be approved for the commercial sector.
Exceptions will be rare and will require approval of the Executive
Committee.4. All lending will be adequately secured with acceptable
security and margin requirements as laid down by the Head Office
Credit Committee.5. The Bank shall not incur any uncovered foreign
exchange risk (currency exposure) in the lending of funds.6. The
Bank shall not incur any risk of exposure in respect of unmatched
rates of interest on funding of loans and advances beyond 15% of
outstanding loans and advances.7. End-use of working capital
facilities will be closely monitored to ensure lending user for the
purpose for which they were advanced. Loans and advances shall be
normally funded from customers deposits of a permanent nature, and
not out of short term temporary funds or borrowings from other
banks or through short term money market operations.6.2 Credit Risk
Management Department: Considering the key elements of Credit Risk
the bank has segregated duties of the officers/ executives involved
in credit related activities. Separate division for Corporate, SME,
Retail and Credit Cards have been formed which are entrusted with
the duties of maintaining effective relationship with the
customers, marketing of credit products, exploring new business
opportunities etc. For transparency in the operations during the
entire credit year four teams have been set up. Those are: Credit
Approval Team Asset Operations Department Recovery Unit Impaired
Asset Management In credit management process, Sales Teams of the
Corporate, Retail, SME, AND Credit Cards business units book the
customers; the Credit Division does thorough assessment before
approving the credit facility. Asset Operations Department ensures
compliance of all legal formalities, completion of all
documentation, and security of the proposed credit facility and
finally disburses the amount. The Sales Team reports to the
Managing Director & CEO through their line, the Credit Division
reports to the Managing Director & CEO, while the Asset
Operations Department reports to the Deputy Managing Director &
COO. This arrangement has not only ensured segregation of duties
and accountability but also helps in minimizing the risk of
compromise with quality of the credit portfolio. 6.3 Credit Risk
Management Wings: Credit Risk Management Department of BASIC Bank
Limited conducted their functions by six wings. Those are:
Wholesale Credit Retail Underwriting SME Underwriting Central
Collection Unit 6.4 Credit Approval of BASIC Bank Limited: Approval
Authorities of the individual and Corporate Loans: The approval
authority of individual loan is mainly done by the credit officer
in a branch. However, the authorities of corporate loan mainly
consist of I. Head of Credit, Wholesale Banking & Medium
Business II. Chief Credit Officer. III. Managing Director & CEO
IV. Board Due to large ticket size of loan facility, most of the
proposals received by Wholesale Credit team is approved by the
Board of Directors.
Lending criteria for general loan: To evaluate a general loan
proposal, Credit team apply the General 5Cs which are- Character
Capacity Capital Conditions Collateral
Lending Criteria for SME and Corporate loan:1. Entrepreneur: The
promoter or entrepreneur of the proposed project should be
creditworthy.2. Viability of the Project: The project should be
viable from organizational, technical, commercial, financial and
economic points of view. The project should be technically sound
and environment-friendly. Technology transfer in case of borrowed
know-how ought to be ensured. Building should be well planned and
well constructed. Market prospect and potential for the product has
to be fully assured at competitive prices. There should be
reasonable debt equity ratio as determined by the Bank on
individual case basis. Debt service coverage ratio should be at
least 2.5 times at the optimum level of production. IRR should
preferably be not less than 20 percent.
6.5 Credit Collection of BASIC Bank Limited: Collection
Processes: Customers are provided with an Offer Letter or Banking
Arrangement letter during Loan disbursement where the total payment
mood and loan details are described. When a customer fails to
fulfill the agreed terms or misses the required payment, the
account then enters collections. Collection department is
responsible for collecting the overdue amount from the delinquent
customers. There are different stages involved in collection after
an account enters delinquency till regularization of the account by
recovering the overdue. Basically collection can be broadly divided
into four stages which are servicing, locating, collecting and
cancellation & write-off. The aging of an account in
collections is with reference to the days since missed payment.
Collection Steps:Table 6.1: Credit Collection Steps of BASIC
Bank[footnoteRef:3] [3: Source: (Prudential regulations for
consumer financing 2004, Bangladesh Bank)]
Days Past Due (DPD)Collection Action
1-14Letter, Follow up & Persuasion over phone
15-291st Reminder letter & Sl. No. 1 follows
30-442nd reminder letter + Single visit
45-59
3rd reminder letter Group visit by team member Follow up over
phone Warning on legal action by next 15 days
60-89
Call up loan Final Reminder & Serve legal notice legal
proceedings begin
90 and above
Telephone calls/Legal proceedings continue Collection effort
continues by officer & agent Letter to different
banks/Association
6.6 Classification & Credit Loss Recognition Policy:
The objective of this policy is to ensure timely recognition of
credit losses and consistent application of policies across all
businesses.
Impaired Accounts:The term "impaired accounts" encompasses all
accounts classified as risk grades- Sub Standard (SS), Doubtful
(DF), and Bad & Loss (BL). Such cases would normally be
transferred to the Special Assets Management (SAM) team and/or
Collections Team for remedial management. But, Managing Director
may uniformly decide when classified account will be transferred to
SAM. All accounts risk graded SS, DF & BL exhibit some degree
of impairment are collectively termed "Impaired Accounts"/Non
Performing Assets.
Sub Standard Accounts: Any 180 (Days Past Due) DPD account
and/or as per guidelines of Bangladesh Bank. Doubtful Accounts: Any
270 DPD account (minimum) and/or as per guidelines of Bangladesh
Bank. Bad & Loss Accounts: Any 360 DPD account (minimum) and/or
as per guideline of Bangladesh Bank. Special Mention Accounts:
Though Special Mention Accounts are not classified as impaired
account under present rules of Bangladesh Bank, but such accounts
are most likely to be turned into impaired accounts. Any 90 DPD
account must be risk graded as SMA as per existing Bangladesh Bank
Policies.
Table 6.2: Loan ClassificationTypes of Facility
Loan Classification
SMASub StandardDoubtfulBad & Loss
Overdue PeriodProvision (%)Overdue PeriodProvision (%)Overdue
PeriodProvision (%)Overdue PeriodProvision (%)
Continuous Loan90 Days or more5%6 months or more but less than 9
months20%9 months or more but less than 12 months50%12 months or
more100%
Demand Loan90 days or more5%
6 months or more but less than 9 months20%9 months or more but
less than 12 months50%12 months or more100%
Term Loan up to 5 years90 days or more
5%6 months or more but less than 12 months20%12 months or more
but less than 18 months50%18 months or more100%
Term Loan over 5 years90 days or more
5%12 months or more but less than 18 months20%18 months or more
but less than 24 months50%24 months or more100%
Short Term Agricultural & Micro Credit90 days or more
5%12 months or more but less than 36 months5%36 months or more
but less than 60 month5%60 months or more100%
6.7 Provisioning Procedures of BASIC Bank:
General Provisions :A specific debt provision must be assessed
and raised as soon as accounts are classified as SMA, SS, DF, and
BL. The specific provision raised should be at least the minimum
amount as per provisioning requirement of Bangladesh Bank.
Table 6.3: Rate of Loan ProvisioningBusiness UnitRate of
Provision
UCSMASSDFBL
ConsumerHouse Building & Professional2%5%20%50%100%
Other than House Building & Professional5%5%20%50%100%
Small & Medium Enterprise2%5%20%50%100%
Short term Agricultural Credit & Micro Credit5%-5%5%100%
All others1%5%20%50%100%
Specific Provisions:Specific provisions are raised against a
specific account, or any portion thereof, which based on known
facts, conditions and values of eligible security, interest
suspense, is considered to be uncollectible.
6.8 Loan Rescheduling: Rescheduling of Term Loans:The loans
which are repayable within a specific time period under a
prescribed repayment schedule are treated as Term Loans. For
rescheduling such loans following policies will be followed:
Application for first rescheduling will be considered only after
cash payment of at least 15% of the overdue installments or 10% of
the total outstanding amount of loan, whichever, is less;
Rescheduling application for the second time will be considered
after cash payment of minimum 30% of the overdue installments or
20% of the total outstanding amount of loan, whichever, is
less;
Rescheduling of Demand and Continuous Loan:The loans which can
be transacted without any specific repayment schedule but have an
expiry date for repayment and a limit are treated as Continuous
Loan. In addition, the loans which become repayable after those are
claimed by the bank are treated as Demand Loans. If any contingent
or any other liabilities are turned to forced loan (i.e. without
any prior approval as regular loan) those also are treated as
Demand Loans. For rescheduling of Demand and Continuous Loans, the
rates of down payment shall be as under:
Table 6.4: Rescheduling of Demand & Continuous LoanAmount of
Overdue LoanRates of Down payment
Up to Tk.1.00 (one) crore15%
Tk. 1.00(one) crore to Tk. 5.00 (five) crore10% (but not less
than Tk.15.00 lac)
Tk. 5.00(five) crore and above5% (but not less than Tk.50.00
lac)
6.9 Bad Portfolio Recovery of BASIC Bank Limited: Special Asset
Management- SME and Retail Banking:The role of SAM is to recover
the Banks bad portfolio. SAM deals with Banks non-performing loans
through legal persuasion/procedure and facilitates external and
internal recovery forces to maintain Banks portfolio at risk (PAR)
at a steady position. File Transfer: Files transfer to SAM from SME
when the loan reaches at DPD 180. SAM receives the file from Retail
when the loan reaches at DPD 360. Legal Notice: Legal notice issued
to SME at DPD 145 and for Retail at DPD 360, SAM-S&R would
arrange to serve 1st legal notice for warning the default borrower
to adjust the total outstanding and 2nd legal notice would be
served after bouncing the cheque or before litigation. Write- off
Management: BASIC Bank has a specific Write-off policy developed
based on Bangladesh Bank circulars. SAM takes initiative to
write-off bad portfolios as per policy if following criteria
satisfied, a) Classification status will be Bad/Loss (BL) b) 100%
provided c) Litigated (under any kind of Law of the land).
Special Asset Management & Credit Inspection - Wholesale
Banking & Medium Business: Credit Inspection: Credit Inspection
through file and field level area deals with all matters relating
to credit inspection, ensuring compliance of BBL policy towards
credit granting process, corporate portfolio review and physical
inspection of client's premise and filesEarly Alert Account (EAA):
Early Alert Process is an effective tool & technique that help
BBL in detecting any deterioration in corporate and medium
enterprise clients account and trigger Banks problem accounts at an
early stage so that proper attention can be given to avoid any
losses.
Chapter: 07CRM Performance of BASIC Bank Ltd (Trend and Ratio
Analysis)
7.1 Trend Analysis: Trend analysis is a forecasting technique
that relies primarily on historical time series data to predict the
future. For this research report the trends are discussed for the
credit related factors like total loan disbursements, position of
unclassified and classified loans amount etc.
Total Loans and advance Trend:
Graph 7.1: Total Loans & Advances trend of BBL.
The above graphical representation indicates that the amount of
total loans and advance of BBL in the year of 2008 to 2012 was
respectively BDT 2726.91, 2926.15, 4634.15, 5688.47, & 8595.57
Taka (crore). Over the five years from the year 2008 to 2012 almost
all the years the amount of loans and advance has been increased.
So it can be said that there is an increasing trend or upward trend
over the last five years in the total loan facility provided by the
BBL.
Trend of Classified loans (NPL):
Graph 7.2: Trend of Non Performing Loan of BBL
According to above graph, the NPL of BBL is in an increasing
trend. From year 2008 to 2011 the NPL increased in a steady rate.
However in 2012 the NPL amount is very high. This shows the
inefficiency of CRM in the year of 2012.
Trend of Unclassified loan (Standard):
Graph 7.3: Trend of Unclassified Loans of BBLIn the graph, it
seems that the unclassified loans trend for 5 years is not very
fluctuated; overall it was increasing in a steady rate. In the NPL
trend section, I describe that high amount of NPL shows CRM
efficiency in 2012, but this graph shows that the NPL is very high
because the loan disbursement amount was large.
Provision against Classified Loans & Advances:
Graph 7.4: Trends of Provisions for Classified LoansFrom the
above graph we can see there are an increasing trend in the
provision for classified loans and advance of the BBL among the
last five years. That means in the last five years they emphasized
more on classified loans and advances. We see that in the year 2008
the amount of provision for classified loans and advances was 41.58
crore taka and in the next year the amount was 52.33 crore. The
provision amount was higher in 2012, which was tk. 174.9 crore.
7.2 Ratio Analysis:Here, I will analyze the CRM performance of
BASIC Bank using some ratios of Standard and NPLs loans because I
think ratio is the best tools for analyzing any types of
performance of a financial institutions. Standard Loan to Total
Loans Ratio:
Table 7.1: Standard Loan of BASIC Bank
(2008-2012)[footnoteRef:4] [4: 3 Data source: Annual Report of
BASIC Bank (2008-2012)]
YearAmount of Standard Loan (Taka)Total Loans and Advance
(Taka)Ratio of Standard Loans to total loans and advance (Taka)
2008256042458292726913118093.89 %
2009276173601302926153434294.38 %
2010438488670944634151350494.62 %
2011539890969405688475788594.91 %
2012782700328928595576241191.05 %
Graph 7.5: Standard Loan to Total Loans RatioFrom the above
figure of ratio of Standard Loan to Total Loans and Advances of
BASIC Bank Ltd., we can see that in year 2012the ratio declined
.Otherwise in other four years the ratio increases than the
previous year. Non Performing Loan to Total Loans Ratio:
Table 7.2: NPL Loan of BASIC Bank (2008-2012)[footnoteRef:5] [5:
4 Data source: Annual Report of BASIC Bank (2008-2012)]
YearAmount of NPL (Taka)Total Loans and Advance (Taka)Ratio of
NPL to total loans and advance (Taka)
20081666143915272691311806.11 %
20091644498230292615343425.62 %
20102493173427463415135045.38 %
20112895434176568847578855.09 %
20127693040736859557624118.95 %
Graph 7.6: NPL to Total Loans RatioFrom the above figure, it can
easily be understand that from 2009 to 2011 the NPL to total loans
ratio was in steady rate. However, in 2012 this ratio increases
marginally higher than the previous years. The main reason of this
increase is the recent credit scam of BASIC bank limited.
Chapter: 08The Impact of CRM on Banks Profitability (Statistical
Analysis)
8.1 Overview of the research:The overall objective of this
particular research is to investigate the impact of credit risk
management on banks profitability. To find the relationship between
these two elements, I select one dependent variable and three
independent variables. Then I conduct multiple regression analysis
with the variables. Throughout the research, I focus on the main
objective; however, I have tried to fulfill some specific objective
too. The specific objectives are to: Determine the extent to which
non performing loans affect banks profitability. Investigate the
impact of loan loss provisions on banks profitability. Determine
whether banks capital adequacy contributes to banks
profitability.
8.2 Previous Research about This Topic:There have been debate
and controversies on the impact of credit risk management and banks
financial performance. Over the few decades, many scholars carried
out extensive studies on this topic and produced mixed results;
while some found that credit risk management impact positively on
banks financial performance, some found negative relationship and
others suggest that other factors apart from credit risk management
impacts on banks performance. Specifically, Kargi (2011) found in a
study of Nigeria banks from 2004 to 2008 that there is a
significant relationship between banks performance and credit risk
management. He found that loans and advances and non performing
loans are major variables that determine asset quality of a bank.
Kithinji (2010) analyzed the effect of credit risk management
(measured by the ratio of loans and advances on total assets and
the ratio of non-performing loans to total loans and advances on
return on total asset in Kenyan banks between 2004 to 2008). The
study found that the bulk of the profits of commercial banks is not
influenced by the amount of credit and non performing loans. The
implication is that other variables apart from credit and non
performing loans impact on banks profit.8.3 Sample Selection and
Model Specification:The sample data is gathered from the annual
report of BASIC bank (2008-2012). For the analysis, I consider
return on asset as dependent variable, and non performing loan
ratio, loan loss provision and capital adequacy ratio as
independent variables. So the model of this equation will be:ROA =
a + b1* NPLR + b2*LLPR + b3*CAR . (1)
Table 8.1: Description of Model VariablesVariableDescription
ROA ( Return on Asset)It is the ratio of net operating profit
that a company earns from its business operations in a given period
of time to the amount of the companys total asset. It is a good
indicator of Banks Profitability.
NPLR ( Non Performing Loan Ratio)The ratio of nonperforming loan
to total loan is known as NPLR. It is a good indicator of Credit
risk management.
LLPR ( Loan Loss Provision ratio) The ratio of amount of
provision to the total classified loan. It is an indicator of
credit risk management efficiency.
CAR ( Capital Adequacy Ratio)This is the index regulatory
authorities use to determine the optimum amount of money that a
bank must have to be able to take certain levels of risk
endangering deposits funds, or its existence
8.4 Data Input and Regression Line:Table 8.2: Inputted data for
SPSSYearROANPLRLLPRCAR
20081.304.5924.7612.02
20091.414.8335.3313.48
20101.244.8332.809.41
20111.404.3837.0510.13
2012.038.2233.2310.05
Graph 8.1: Multiple Regression line
8.5 Result of research and Interpretation:
Regression Analysis:
Table 8.3: Summary of Regression analysis (Appendix 1)Name of
TestResult
R.999
R2.998
Adjusted R2.991
SSE.05464
Coefficient of correlation (R): In this table, the value of R =
0.999 expresses that there is a high degree of positive
relationship between the dependent variable ROA and the independent
variables NPLR, LLPR and CAR. If the independent variables increase
at that point this will result in the dependent variable increase
accordingly. So it can be said that, credit risk management affect
on banks profitability.
Coefficient of determination (R2): The term R Square is the
multiple coefficient of determination interpreted as the proportion
of variability in the dependent variable that can be explained by
the estimated multiple regression equation. Hence, when multiplied
by the 100, it can be interpreted as the percentage of the
variability in Gross Premium that can be explained by the estimated
regression equation. Here R2 = 0.998 (99.8 % expressed in
percentage) indicates 99.8% of the variability in obtained ROA is
explained by the independent variables LLPR, NPLR and CAR.
Adjusted R Square: If a variable (say for NPLR) is added to the
model, R Square = 0.991 becomes larger even if the added variable
is not statistically significant. The Adjusted R Square compensated
for the number of independent variables in this model.
Standard Error of Estimate: Standard Error of Estimate shows how
much error or variability stands between the estimated result and
actual forecasted result. Here the value is 0.0564 that show the
amount of variability of our estimated result and the actual result
of the observation.
Coefficients Analysis:
Table 8.4: Summary of coefficient analysis (Appendix 2)Name of
TestResult
Constant2.195
NPLR-.353
PPLR.010
CAR.041
From this table, we got the parameters of the regression line.
Here, the constant a is 2.195 and the slopes b1, b2 and b3 are
-.353, .010 and .041 respectively. From these data the regression
equation can be constructed as:
ROA = 2.195 + (-.353*NPLR) + .10 LLPR + .041 CAR
The equation implies that a unit change in the independent
variable NPLR causes the dependent variable ROA to change by an
amount of -.353 when LLPR and CAR are constant. As b1 is negative,
this movement of the dependent variable ROA with the independent
variable NPLR will be in the negative direction. That is when the
amount of NPLR will increase, ROA will decrease and vice versa. The
equation also implies that a unit change in the independent
variable LLPR causes the dependent variable ROA to change by an
amount of .010 when NPL and CAR are constant. As b2 is positive,
this movement of the dependent variable ROA with the independent
variable NPLR will be in the positive direction. That is when the
amount of LLPR will increase, ROA will increase and vice versa.
In the equation we get the other coefficient of net regression
as 0.041. This indicates that when NPLR and LLPR are constant, ROA
will change by 0.041 with a unit change in CAR the movement of
these two variables will be also in the same direction as the
LLPR.
ANOVA Test:
Table 8.5: Summary of ANOVA Test (Appendix 3)Name of
TestResult
MSR0.462
MSE0.003
F154.620
Sig.0.059
The F-test is used to determine whether a significant
relationship exists between dependent variable named ROA and the
set of all independent variables such as NPLR, CAR and LLPR; F-test
is referred to the test of overall significance.
In this ANOVA model, the hypothesis for the F-test involves the
parameters of the regression models:
Ho (Null Hypothesis): 1 = 0 H1 (Alternative Hypothesis): 1 0
If H0 is rejected, I have enough evidence to deduce that two of
the parameters are not equal to zero and that overall relationship
between ROA, NPLR, LLPR and CAR are significant. However, if H0 is
accepted, I do not have the sufficient evidence to deduce that a
significant relationship exists between dependent and independent
variables.
If H0 is accepted, MSR provides an unbiased estimate of 2, and
the value of MSR or MSE becomes larger. To determine how large
values of MSR/MSE must be to reject H0, I make use of the fact that
if H0 is true and the assumptions about the multiple regression
model are valid, the sampling distribution of MSR/MSE is an
F-distribution with p degrees of freedom in the numerator and
(n-p-1) in the denominator . The summary of F- test is given below:
F = MSR/MSE = 0.462/.003 = 154.620
Significance of aptitude test: At a significance level of .05
any independent variable having a significant level around .05 will
regard as significant. In our aptitude test significance level of
0.059 is significant.
Significance of overall model: At a significant level of .05 the
overall model will be significant if the F ratio is large enough
and the significance level is around .05. In our test the F ratio
is 154.620 which is large enough to describe the overall test and
the significance level is .059 which is close to .05. So we can
conclude that the overall relationship is significant.
Here we accept alternative hypothesis. Thus there is a
relationship between ROA and the credit risk management.
Chapter: 09Findings Summary, Recommendation and Conclusion
8.1 Summary of Findings:
Credit risk is an investors risk of loss arising from a borrower
who does not make payments as promised. Such an event is called
default. Other terms for credit risk are default risk &
counterparty risk. The importance of credit risk management for
banking is tremendous because Banks and other financial
institutions make profit from their credit disbursement. So it is
very important for banks and other financial institution to manage
credit risk properly. Effective CRM helps to increase the present
and future financial performance of a bank. The main challenges of
CRM are additional cost for training and employee motivation. The
process of CRM contains several elements such as Credit processing,
Approval, Documentation, Administration, Disbursement, Monitoring
Credit classification and Credit recovery etc. The BBL follows the
rules and regulation given by the Bangladesh Bank in practicing
Credit risk management. It generally focuses on industrial credit
policy rather than general credit. The CRM department of BBL
includes approval, operation, and recovery and asset management
unit. BBL recover its bad portfolio by using some recovery methods
such as file transfer, legal notice, write off management, early
alert account and credit inspection etc. The level of credit risk
of BBL is in moderate level. The amount of total loans,
unclassified loans and classified loans is in increasing trend.
BASIC Bank maintains good amount provision against the classified
loans. The NPLR and STLR ratio is in good level for BBL. The
relationship between CRM and Banks profitability is positive.
Therefore, it can be said that effective CRM can contributes on
Banks financial performance.
8.2 Recommendations:
BBL should have a clear written guideline for CRM. The lending
guideline should include Industry & Business segment focus,
types of loan facilities, single borrower & group limit,
lending caps, discouraged business types, loan facility parameters,
and cross border risk. It should adopt a credit grading system in
which all facilities should be assigned a risk grade & the
borrowers risk grades should be clearly stated on credit
application. Approval authority should be delegated to individual
executives rather than Executive Committee/ Board to ensure
accountability. This system will not only ensure accountability of
individual executives but also expedite the approval process. The
organization structure should have to be changed to put in place
the segregation of Marketing / Relationship Management function
from approval / Risk Management / Administration function. The
employees of BBL should carefully check the customers KYC form, and
take enough collateral before providing them loan. BBL should
follow the CRG model provided by the Bangladesh Bank. BBL should
keep as much as provision against the loans. BBL should lessen the
NPL ratio low by the proper management of loan. BBL should provide
better training to the employees about CRM.
8.3 Conclusion:To conclude the report, it is imperative to
mention that default clients have been a major problem for the
banking financial institutions for long and the financial
institutions have been trying to minimize the default problem all
along. The Bangladesh Bank has been striving to assist the
financial institutions to get out of the default risk problem and
formulating policies for that purpose. As a continuance to this,
Bangladesh Bank has been providing directives when and where it
seems to be necessary.As a leading financial institution of
Bangladesh, BASIC Bank Limited has been maintaining its operation
in a smooth way. Though the bank faced many problems, its
experience in the field of corporate and proper lending policy make
it very much cautious about the risk. A very skillful and
technically enriched CRM department is always working with its full
capacity to analyze the risk of its products and services. So far
it has proved itself as a successful organization in assessing risk
and thus takes care of it.The main purpose of this paper is to show
about the CRM practice of banks. It describes about the theoretical
framework, importance, process, advantage and challenges of CRM. It
also describes the CRM practice and performance of BBL. Finally it
tries to find if there is a relationship between CRM performance
and banks profitability. All these analysis is described on the
perspective of BASIC Bank limited, Bangladesh.
Bibliography & References:1. Annual Report of BASIC Bank
Limited (2008-2012)2. Bagchi S K (2003), Credit Risk Management A
Panacea or Conundrum?, SBI Monthly Review, Vol. 42, No. 10, pp.
497-504.3. Banerjee, Prashanta K., & Farooqui Q.G.M. (2009),
Credit Management in Banks-BIBM4. Bangladesh-bank.org. 2013. CREDIT
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Kargi, H. S. (2011), Credit risk and the Performance of Nigeria
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Appendix:Appendix 1: (Summary of Regression Analysis)Model
Summary
ModelRR SquareAdjusted R SquareStd. Error of the EstimateChange
Statistics
R Square ChangeF Changedf1df2Sig. F Change
1.999a.998.991.05464.998154.62031.059
a. Predictors: (Constant), CAR, PPL, NPLR
Appendix 2: (Summary of Coefficient Analysis)Coefficientsa
ModelUnstandardized CoefficientsStandardized
CoefficientstSig.Correlations
BStd. ErrorBetaZero-orderPartialPart
1(Constant)2.195.3256.758.094
NPLR-.353.018-.962-19.865.032-.991-.999-.921
PPL.010.006.0811.707.337-.003.863.079
CAR.041.017.1172.378.253.379.922.110
a. Dependent Variable: ROA
Appendix 3: (Summary of ANOVA Analysis)ANOVAb
ModelSum of SquaresdfMean SquareFSig.
1Regression1.3853.462154.620.059a
Residual.0031.003
Total1.3884
a. Predictors: (Constant), CAR, PPL, NPLR
b. Dependent Variable: ROA