1.

1 Origin of the Report Masters of Business Administration (MBA) Course requires a three months attachme nt with an organization followed by a report assigned by the supervisor in the o rganization and endorsed by the faculty advisor. As I am already working for Dha ka Bank Limited (DBL), I took the opportunity to do my internship in my own orga nization. My organizational supervisor Mr. Syed Abdul Quader, Senior Assistant V ice President and Manager of Islampur Branch asked me to conduct a study on Comp arative Analysis between Bangladesh Bank s Best practices guidelines and Dhaka Ban k Limited existing credit policy. My faculty supervisor Mr. Shama-e-zaheer, lec turer of Institute of Business Administration, University of Dhaka, also approve d the topic and authorized me to prepare this report as part of the fulfillment of internship requirement. 1.2 Background of the Report Last year Bangladesh Bank undertook a project to review the global best practice s in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four 'Focus Groups' were formed with partici pation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Ba nks with representatives from the Bangladesh Bank as team coordinators to look i nto the practices of the best performing banks both at home and abroad. These fo cus groups identified and selected five core risk areas and produce a document t hat would be a basic risk management model for each of the five 'core' risk area s of banking. The five core risk areas are as followsa) b) c) d) e) Credit Risks; Asset and Liability/Balance Sheet Risks; Foreign Exchange Risks; Internal Control and Compliance Risks; and Money Laundering Risks.

Bangladesh Bank in one of it s circular (BRPD Circular no.17) advised the commerci al banks of Bangladesh to put in place an effective risk management system by De cember, 2003 based on the guidelines sent to them. I am working in the Credit Department of Dhaka Bank Limited, Islampur Branch. In this report, I will try to make a comparative analysis between Bangladesh Bank s suggested best practices guideline for managing credit risk and Dhaka Bank Limit ed existing credit policy . 1.3 Objective of the Report The study has been undertaken with the following objectives: ? To analysis the pros and cons of the conventional ideas about credit operation of a Bank. ? To have better orientation on credit management activities specially credit po licy and practices, credit appraisal, credit-processing steps, credit management , financing in various sector and recovery, loan classification method and pract ices of DHAKA Bank Limited (DBL). ? To compare the existing credit policy of Dhaka bank limited with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh. ? To identify and suggest scopes of improvement in credit management of DBL. ? To get an overall idea about the performance of DHAKA Bank Ltd. ? To fulfill the requirement of the internship program under MBA program 1.4 Scope of the Report The study would focus on the following areas of DHAKA Bank Limited. ? Credit appraisal system of DHAKA Bank Limited.

? Procedure for different credit facilities. ? Portfolio (of Loan or advances) management of DHAKA Bank Limited. ? Organization structures and responsibilities of management. Each of the above areas would be critically analyzed in order to determine the e fficiency of DBL s Credit appraisal and Management system. 1.5 Sources of Information Information collected to furnish this report is both from primary and secondary in nature. The secondary information was collected from the different publicatio n, and books. For collecting books and periodicals I have used the following lib rary: IBA Library BIBM Library Bangladesh Bank Library 1.6 Methodology of the Report The following methodology will be followed for the study: Both primary and secondary data sources will be used to generate this report. Pr imary data sources are scheduled survey, informal discussion with professionals and observation while working in different desks. The secondary data sources are annual reports, manuals, and brochures of Dhaka Bank limited and different publ ications of Bangladesh Bank. To identify the implementation, supervision, monitoring and repayment practiceinterview with the employee and extensive study of the existing file was and pra ctical case observation were done. 1.7 Limitation of the Report This report will only consider credit risks of Dhaka Bank limited. It will not c over ? ? ? ? Asset and liability/ balance sheet risk. Foreign Exchange Risk Internal control And compliance risk Money laundering Risk.

1.8 Report Organization This report is divided in five sections. The following section is the organizati on part i.e. this section will give an overview of Dhaka Bank Limited. In sectio n iii, Credit management policy and practice of DBL is critically analysed follo wed by Bangladesh Bank s Best practice guideline for credit management in section iv. Section v deals with findings and recommendations. 2.0 AN OVERVIEW OF DHAKA BANL LIMITED (DBL) Dhaka Bank Limited is the leading private sector bank in Bangladesh offering ful l range of Personal, Corporate, International Trade, Foreign Exchange, Lease Fin ance and Capital Market Services. Dhaka Bank Limited is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailore d solutions for business needs, global reach in trade and commerce and high yiel d on investments, assuring Excellence in Banking Services. 2.1 Background of Dhaka Bank Limited Dhaka Bank Limited is a scheduled bank that was incorporated under the Companies Act 1994, started its operation on July 1995 with a target to play the vital ro

le on the socio-economic development of the country. Aiming at offering commerci al banking service to the customers door around the country, the Dhaka Bank limit ed established 20 branches up-to this year. This organization achieved customers confidence immediately after its establishment. Within this short time the bank has been successful in positioning itself as pro gressive and dynamic financial institution in the country. This is now widely ac claimed by the business community, from small entrepreneur to big merchant and c onglomerates, including top rated corporate and foreign investors, for modern an d innovative ideas and financial solution. 2.2 Capital Base Authorized Capital: BDT 1000.00 million. Paid up Capital : BDT 531.07 million (as on 31.12.2003) 2.3 Mission Statement To be the premier financial institution in the country providing high quality pr oducts and services backed by latest technology and a team of highly motivated p ersonnel to deliver Excellence in Banking. 2.4 Slogan Excellence in Banking 2.5 Motto The Bank will be a confluence of the following three interests: Of the Bank : Profit Maximization and Sustained Growth. Of the Customer : Maximum Benefit and Satisfaction. Of the Society : Maximization of Welfare. 2.6 Objectives ? Be one of the best banks of Bangladesh. ? Achieve excellence in customer service next to none and superior to all compet itors. ? Cater to all differentiated segments of Retail and Wholesale Customers. ? Be a high quality distributor of product and services. ? Use state-of the art technology in all spheres of banking. 2.7 Values Customer focus Integrity Team Work Respect for individual Quality Responsible citizenship 2.8 Workforce Total number of employees stood at 568 as on December 31, 2003. 2.9 Branches Dhaka Bank limited has 19 conventional Branches and 2 Islamic Banking Branches. Among total of 21 Branches, 13 branches are located in Dhaka City, 4 branches ar e located in Chittagong. The other 4 branches are located in Sylhet, Narsingdi,

Narayangonj, Sirajgonj each. The registered office (Head Office) of Dhaka Bank L imited is at Biman Bhavan, 100 Motijheel C/A, Dhaka-1000. 2.10 Management Information System Since its journey as commercial Bank in 1995 Dhaka Bank Limited has been laying great emphasis on the use of improved technology. It has gone to online operatio n system since 2003. And the new Banking Software Flexcube is under process of i nstallation. As a result the bank will able to give the services of internation al standards. 2.11 Correspondent Relationship The Bank established correspondent relationships with a number of foreign banks, namely American Express Bank, Bank of Tokyo, Standard Chartered bank, Mashreq B ank, Hong Kong Shanghai Banking Corporation, CITI Bank NA-New York and AB Bank L td. The Bank is maintaining foreign exchange accounts in New York, Tokyo, Calcut ta, and London. The bank has set up letter of credit on behalf of its valued cus tomers using its correspondents as advising and reimbursing Banks. The Bank main tains a need based correspondent relationship policy, which is gradually expandi ng. The number of Foreign Correspondents is 406. 2.12 Organization Structure 2.13 Departments of DBL If the jobs are not organized considering their interrelationship and are not al located in a particular department it would be very difficult to control the sys tem effectively. If the departmentation are not fitted for the particular works there would be haphazard situation and the performance of a particular departmen t would not be measured. Dhaka Bank Limited has does this work very well. Differ ent departments of DBL are as follows: ? ? ? ? ? ? ? ? ? Human Resources Division Personal banking Division Treasury Division Operations Division Computer and Information Technology Division Credit Division Finance & Accounts Division Financial Institution Division Audit & Risk Management Division

2.14 Human Resources Management of DBL Dhaka Bank Limited recognizes that a productive and motivated work force is a pr erequisite to leadership with it s customers, it s shareholders and in the market it serves. Dhaka bank treat every employee with dignity and respect in a supportiv e environment of trust and openness where people of different backgrounds can re ach their full potential. The bank s human resources policy emphasize on providing job satisfaction, growth opportunities, and due recognition of superior performance. A good working envir onment reflects and promotes a high level of loyalty and commitment from the emp loyees. Realizing this Dhaka Bank limited has placed the utmost importance on co ntinuous development of its human resources, identify the strength and weakness of the employee to assess the individual training needs, they are sent for train ing for self-development. To orient, enhance the banking knowledge of the employ ees Dhaka Bank Training Institute (DBTI) organizes both in-house and external tr aining.

2003 2002 Human Resources 803 602 Training Expenses Tk.19,08,894/ Tk.15,79,443/

The remuneration is very competitive in comparison with industry average. Beside these the recruitment procedure is comprehensive. 2.15 Product and Services The product and services that are currently available are given below: 2.15.1 Depository Product Dhaka Bank Limited is now offering different types product for mobilizing the sa vings of the general people. Deposit Product Current Deposit Saving deposit Account STD Account Fixed Deposit Excel Account Foreign Currency Deposit Account NFCD Non Resident Foreign Currency Account 2.15.2 Interest Rate paid to different Deposit liabilities:

Serial Application Up-to Tk. 50 Lac 50 Lac & above 1 FDR for 1 months 5.50% 5.50% 2 FDR for 3 months 8.25% 8.50% 3 FDR for 6 months 8.50% 8.75%

4 FDR above 1 year 8.75% 9.00% 5 STD Account 4.50% 4.50% 6 Savings Account 6.00% 6.00% 2.15.3 Loan Product The Dhaka bank is offering the following loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and ha ve good return to the investment as well as satisfy the client. The loan and adv ance products are: Personal Loan Scheme Lease Finance Term Loan Small & Medium Enterprise loan Working Capital Financing Import Financing Export Financing Syndicate Loan Industrial Financing 2.15.4 Personal Banking Products ATM Card Service Credit Card Services Excel Account for Executives 2.16 Financial Performance of DBL The Dhaka Bank Limited is one of the most successful private sector commercial b ank in our country, though it started its operation only nine years back. It has achieved the trust of the general people and made reasonable contribution to th e economy of the country by helping the people investing allowing credit facilit y. 2.16.1 Profit Dhaka Bank Limited registered a operating profit of Tk. 509.60 million as of 31 December, 2003.Provision for tax for the year amounted to Tk. 240.61 million wit h a net profit of Tk. 269.01 million compared to 2.16.2 Capital Dhaka Bank Limited commenced its operation with an authorized capital of Tk. 1,0 00.00 million with paid up capital of Tk. 100.00 million. The paid up capital of the bank amounted to 531.07 million as on December 31, 20 03. The total equity (capital & reserve) of the bank as on December Stood at Tk. 1209.97 million. The Capital Adequacy Ratio is 10.88% as on December 31, 2003wh

ich exceed the stipulated requirements for banks in Bangladesh. 2.16.3 Deposits As of December 2003 Total deposits of the bank stood at Tk. 16850.83 million exc luding call as against Tk. 14964.01 million excluding call of the previous year. Table 2: Deposit of DBL Tk in million Year Deposit 2002 14960 2003 16850 2.16.4 Loan and Advances The Bank recorded a 14.94% growth in advances with a total loans and advances po rtfolio of Tk. 12886.68 million at the end of December 2003 compared to Tk. 11.2 11.39 million in 2002. Dhaka Bank is making loan and advances in different areas. The bank continues to explore and diversify its loan distribution with the objective of efficient use of resources and take utmost precaution to safeguard it. DBL also participated in a syndicated loan. Table 4: Loans & Advances of DBL Tk in million Year Loans & Advances 2002 11210 2003 12880 HomeInternship ReportPrivate Bank Credit Risk Management Policy With Bangladesh Bank - Dhaka Bank Limited Private Bank Credit Risk Management Policy With Bangladesh Bank - Dhaka Bank Lim ited By Super AdminPublished 24 September 2006Internship ReportRating: Unrated THE ORGANIZATION - 4 2.16.5 International Trade International Trade is an important constituent of the business portfolio of the bank. The import value stood at Tk. 19079.40 million in 2003 with a growth of 2 .05% over the volume of 18696.70 million in 2002. On the other hand, export incr eased by 12.90% in the year 2003. Total export volume of the bank amounted to 69 00.60 million in 2003 compared to Tk. 6110.20 million in the previous year. 2.16.6 Investment Banking:

Lease finance, Hire purchase and Capital Market Operation besides investment in Treasury Bills and Prize Bonds constitute the investment basket of DBL. The inve stment portfolio made up of Government Securities and Shares and Debentures of d ifferent listed companies stood at Tk. 2046.10 million in 2003 indexing a 4.91% increase over Tk. 1950.28 million in the previous year. DHAKA BANK AT A GLANCE: 1999-2003 Financial Highlights. ( Figures in million Taka )

1999 2000 2001 2002 2003 Authorised Capital 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 Paid up Capital 275.88 275.88 303.47 379.34 531.07 Reserve Funds & Other Reserve 62.42 170.73 357.67 516.11 678.90 Shareholders' Equity (Capital & Reserve) 338.30 446.61 661.14 895.45 1,209.97 Deposits (Base & Bank) 7,503.26 10,749.41 17,705.85 16,854.01 18,365.83 Advances 3,843.35 5,414.86

10,245.65 11,211.39 12,886.69 Investments 557.95 813.73 1,274.46 1950.28 2,046.10 Import Business 9,075.80 13,827.90 17,649.10 18,696.70 19,079.40 Export Business 3,299.30 6,494.00 6,182.50 6,110.20 6,900.60 Guarantee 530.09 887.80 2,123.09 1,579.09 1,515.90 Total Income 859.36 1,203.30 1,925.55 2,384.81 2,283.37 Total Expenditure 691.51 947.64 1,472.31 1,955.03 1,773.75 Operating Profit 230.15 330.75 561.69 628.21 632.55 Profit before Tax 167.85 255.66 453.24 429.78 509.62

Profit after Tax 94.64 173.17 290.39 234.31 269.01 Fixed Assets 6.01 21.85 32.84 105.67 87.45 Total Assets (excl. contra) 9,606.79 11,646.44 19,125.19 3.1 Overview The word credit comes from the Latin word Credo meaning I believe . It is a lender s tr ust in a person s/ firm s/ or company s ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of ano ther in return for promise to pay such goods or services at some specified time in the future. For a bank, it is the main source of profit and on the other hand , the wrong use of credit would bring disaster not only for the bank but also fo r the economy as a whole. The objective of the credit management is to maximize the performing asset and t he minimization of the non-performing asset as well as ensuring the optimal poin t of loan and advance and their efficient management. Credit management is a dyn amic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio is not only constitute the banks asset structure but also a vital factor of the bank s success. The overall success in credit management depe nds on the banks credit policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance. Therefore, while analyzing the credit manage ment of DBL, it is required to analyze its credit policy, credit procedure and q uality of credit portfolio. 3.2 Credit Policy of DBL One of the most important ways, a bank can make sure that its loan meet organiza tional and regulatory standards and they are profitable is to establish a loan p olicy. Such a policy gives loan management a specific guideline in making indivi dual loans decisions and in shaping the bank s overall loan portfolio. In Dhaka Ba nk Limited there is perhaps a credit policy but there is no credit written polic y. 3.3 Credit Principles In the feature, credit principles includes the general guidelines of providing c redit by branch manager or credit officer. In DHAKA Bank Limited they follow the following guideline while giving loan and advance to the client. ? Credit advancement shall focus on the development and enhancement of customer relationship.

? All credit extension must comply with the requirements of Bank s Memorandum and Article of Association, Banking Company s Act, Bangladesh Bank s instructions, other rules and regulation as amended from time to time. ? Loans and advances shall normally be financed from customer s deposit and not ou t of temporary funds or borrowing from other banks. ? The bank shall provide suitable credit services for the markets in which it op erates. ? It should be provided to those customers who can make best use of them. ? The conduct and administration of the loan portfolio should contribute with in defined risk limitation for achievement of profitable growth and superior retur n on bank capital. ? Interest rate of various lending categories will depend on the level of risk a nd types of security offered. 3.4 Global Credit Portfolio limit of DBL The features which deals with how much total deposits would be used as lending t he proportion of long term lending, customer exposure, country exposure, proport ion of unsecured facility etc. the most notable ones are: ? The aggregate of all cash facility will not be more than the 80% of the custom ers deposit ? Long term loan must not exceed 20% of the total loan portfolio. ? Facilities are not allowed for a period of more than 5 (Five) years. ? Credit facilities to any one customer group shall not normally exceed 15% of t he capital fund or TK. 100 crores 3.5 Types of Credit Credit may be classified with reference to elements of time, nature of financin g and provision base. 3.5.1 Classification on the basis of time: On the basis of elements of time, bank credit may be classified into three heads , viz. Continuous loans: These are the advances having no fixed repayment schedule but have an date at wh ich it is renewable on satisfactory performance of the clients. Continuous loan mainly includes "Cash credit both hypothecation and pledge" and "Overdraft". Demand loan: In opening letter of credit (L/C), the clients have to provide the full L/C amou nt in foreign exchange to the bank. To purchase this foreign exchange, bank exte nds demand loan to the clients at stipulated margin. No specific repayment date is fixed. However, as soon as the L/C documents arrive, the bank requests the cl ients to adjust their loan and to retire the L/C documents. Demand loans mainly include Payment against Documents, "Loan against imported merchandise (LIM)" and " Later of Trust Receipt".

Term loans: These are the advances made by the bank with a fixed repayment schedule. Terms l oans mainly include "Consumer credit scheme", "Lease finance"," Hire purchase", and "Staff loan". The term loans are defined as follows: Short term loan: Upto 12 months. Medium term loan: More than 12 months & up to 36 months Long term loan: More than 36 months. 3.5.2 Classification on characteristics of financing: Funded Non-funded ? Overdraft er of Credit ? Loan nk Guarantee ? Consumer Credit ? LTR ? PAD ? Cash Credit (Pledge & Hypo) ? Staff Loan ? Term Loan ? Packing Credit * Lett * Ba

The varieties used by DBL are briefly described below with the common terms and condition. Banks generally offer different kinds of credit facilities to the cus tomers. The credit facilities of DBL may be broadly classified into five categories. The y are as follows: ? ? ? ? ? Loans Cash Credit Overdraft Bills purchased and discounted Consumer Credit/ personal loan

They are discussed below accordingly. 3.5.2.1 Loan In case of loan the banker advances a lump sum for a certain period at an agreed rate of interest. The entire amount is paid on an occasion either in cash or by crediting in his current account, which he can draw at any time. The interest i s charged for the full amount sanctioned whether he withdraws the money from his account or not. The loan may be repaid in installments or at expiry of a certai n period. Loan may be demand loan or a term loan. Eligibility: loans are normally allowed to those parties who have either fixed s ource of income or who desire to pay it in lum sum. Interest Rate: 12%-15% per annum (Quarterly paid). 3.5.2.2 Cash Credit

In Cash credit, banker specifies a limit called the cash credit limit, for each customer, up to which the customer is permitted to borrow against the security o f tangible assets or guarantees. Cash credit is given through the cash credit a ccount. The purpose of cash credit is to meet working capital need of traders, f armers and industrialists. Cash credit in true sense is against pledge of goods. Cash credit is also allowe d against hypothecation of goods. In case of hypothecation the ownership and pos session of the goods remain with the borrower. By virtue of the hypothecation ag reement bank can take possession of the goods hypothecated, if the borrower defa ults. Rate of Interest: 12%-14%. Renew System: it is renewed in periodic basis (yearly). 3.5.2.3 Overdraft Overdraft are those drawings which are allowed by the banker in excess of the ba lance in the current account up to a specified amount for definite period as arr anged for. These advances are secured The loan holder can freely draw money from this account up to the limit and can deposit money in the account off course, t his loan has an expiry date after which renewal or enhancement is necessary for enjoying such facility. Any deposit in the OD account is treated as repayment o f loan. Interest is charged as balance outstanding on quarterly basis. Overdraft facilities are generally granted to businessmen for expansion of their business , against the securities of stock-in-trade, shares, debenture, Government promis sory notes, fixed deposit, life insurance policies etc. 3.5.2.4 Bills purchased and discounted Banks grant advances to their customers by discounting bill of exchange or pro-n ote. 3.5.2.5 Personal Loan (Consumer Credit Scheme) Objectives : The objectives of this loan are to provide essential household durable to the fi xed income group (Service Holders) and other eligible borrowers. Car loan, loan for house renovation, vacation loan, marriage loan and loan for household equipm ent well as entertainment products are governed by personal loan program. The To tal amount of loans along with the duration in which these loans taken, need to be repaid is given below: Type of Product Loan Amount (Tk) Lac Tenure 1. Vehicle Up to 7.00 4 to 5 years 2. Household items for Businessman 1.00 2 years 3.Household items for Service holders

Up to 3.00 2 to 3 years 4. Others Special Considerations Special Considerations Personal loan is given under personal guarantee of the borrower and another thir d parson known to the borrower. As this loan is collateral free the rate of inte rest is little bit high such as 15% to 18%. There is also a processing fee of 1. 5% taken at the time of disbursement of the loan. 3.6 Credit Ratification Authority of DBL: Credit decisions are heart of all credit works. Generally branch manager and the credit in-charge of a branch are held responsible for appraising of a loan prop osal. The customer request for credit limit and the credit officer prepares a cr edit memo and send it to the head office, credit division. After taking all the relevant information from the branch the head office credit division sent the cr edit memo to the credit committee. Credit committee of DBL is comprised of Manag ing Director and other top-level executives, that is, DMDs and EVPs. If credit c ommittee is convinced about the merit of the proposal then it is sent the broad of directors. The board is final authority to approve or decline a proposal. The whole process takes a month or more. In DBL broad meeting occurs once in every week. 3.7 Credit Evaluation Principles Some principles or standards of lending are maintained in approving loans in ord er to keep credit risk to a minimum level as well as for successful banking busi ness. The main principles of lending are given below: 3.7.1 Liquidity: Liquidity means the availability of bank funds on short notice. The liquidity of an advance means it repayment on demand on due date or after a short notice. Th erefore, the banks must have to maintain sufficient liquidity to repay its depos itors and trade off between the liquidity and profitability is must. 3.7.2 Safety: Safety means the assurance of repayment of s to make money but safety should never be re the safety of loan. The borrower should erson of good character & capacity as well e number of security from borrower. 3.7.3 Profitability: Banking is a business aiming at earning a good profit. The difference between th e interest received on advances and the interest paid on deposit constitutes a m ajor portion of the bank income, Besides, foreign exchange business is also high ly remunerative. The bank will not enter into a transaction unless a fair return from it is assured. 3.7.3 Intent: Banks sanction loans for productive purpose. No advances will be made by bank fo r unproductive purposes though the borrower may be free from all risks. distributed loans. Bank is in busines sacrificed for profitability, To ensu be chosen carefully. He should be a p as bank must have to maintain eligibl

3.7.4 Security: The security offered for an advance is an insurance to fall bank upon incases of need. Security serves as a safety value for an unexpected emergency. Since risk factors are involved, security coverage has to be taken before a lending. 3.7.5 National interest: Banking industry has significant roll to play in the economic development of a c ountry. The bank would lend if the purpose of the advances can contribute more t o the overall economic development of the country. 3.8 Pre-disbursement Compliance When the credit proposal are approved the credit officer must have to be ensured that the disbursement of the credit facilities must comply with the directions written in the credit policy and circular made by time to time along with checki ng all the following terms and conditions. ? The officer of Loan Administration must collect the acceptance of the customer s of the terms and conditions on the duplicate copy of the sanctioned advice. ? They will thoroughly examine and ensure that the subject credit facility does not contradict to any law, rules and regulation of the country, Bangladesh Bank and ? Deed of the Mortgage and power of the Attorney to be drafted and executed unde r the Supervision of the Bank s Legal Advisor. ? Lawyers certificate to the effect that all the legal formalities (Equitable/ R egistered Mortgaged) has been properly created on the land and building in favor of the bank & bank has acquired the effective title of the property. ? Registered power of attorney has been collected form the borrower (contractor) assigning the work order favoring the DBL and the power of attorney has been re gistered with the work order given agency and they have agreed that they will is sue all the cheques favoring DBL. ? The legal documents of the vehicle have been obtained. ? Collection of the satisfaction certificate in respect of all the documents bot h legal and banking from the lawyer. ? Entry has been made in the Safe -in and Safe-out register and the documents a re preserved. After being satisfied all the above terms and conditions the credit in-charge wi ll disburse the loan amount to the client. 3.9 Documentation of the Loan: Documentation is obtaining such agreement where all the terms and condition and securities are written and signed by the borrower. It specifies rights and liabi lities of both the banker and the borrower. In documentation each type of advanc es requires a different set of documents. It also differs with the nature of sec urities. The documents should be stamped according to the stamp Act. There are n o hard and fast rules of documentation and it varies from bank to bank. Generall y, the documents are taken in the case of a secured advance by DBL: i. Demand promissory note: Here the borrower promises to pay the loan as and whe

n demand by bank to repay the loan. ii. Letter of arrangement. iii. Letter of continuity. iv. Letter of hypothecation of goods and capital machinery. v. Stock report: This report is used for OD and CC. In this report, information about the quality and quantity of goods hypothecated is furnished. vi. Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of Board of Directors of the company owning the la nded. vii. Personal guarantee of the owners of the property. viii. Guarantee of all the directors of the company. ix. Resolution of the board of directors to borrow fund to execute documents and completes other formalities x. Form no. XVII/XIX for filling charges with the register of joint stock compan ies under relevant section. xi. Letter of Revival xii. Letter of lien for advance against FDR. 3.10 Security against Advances: The different types of securities that may be offered to a banker are as follows : (a) Immovable property (b) Movable property i. Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, wage earner development bond. ii. Fixed Deposit Receipt iii. Shares quoted in the Dhaka Stock Exchange and Chittagong Stock Exchange. iv. Pledge of goods v. Hypothecation of goods, produce and machinery vi. Fixed assets of manufacturing unit. vii. Shipping documents. 3.10.1 Relation between Advance with the Security Types of advance Securities Loans

Lien or various kinds of Sanchaya patras, Govt. Securities, FDR, Collateral of immovable property, shares quoted in stock exchange Overdraft Pledge or hypothecation of machinery, land and building on which machinery are installed, stock in trade, goods products and merchandise. Bills purchased Bills itself 3.10.2 Modes of Charging Security: A wide range of securities is offered to banks as coverage for loan. In order to make the securities available to banker, in case of default of customer, a char ge should be created on the security. Creating charge means making it available as a cover for advance. The following modes of charging securities are applied i n the Dhaka Bank Limited. 3.10.2.1 Lien A lien is right of banker to hold the debtor s property until the debt is discharg ed. Bank generally retains the assets in his own custody but sometimes these goo ds are in the hands of third party with lien marked. When it is in the hand of t hird party, the third party cannot discharge it without the permission of bank. Lien gives banker the right to retain the property not the right to sell. Permis sion from the appropriate court is necessary. Lien can be made on moveable goods only such as raw materials, finished goods, shares debentures etc. 3.10.2.2 Pledge Pledge is also like lien but here bank enjoys more right. Bank can sell the prop erty without the intervention of any court, incase of default on loan, But for s uch selling proper notice must be given to the debtor. To create pledge, physica l transfer of goods to the bank is must. 3.10.2.3 Hypothecation In this charge creation method physically the goods remained in the hand of debt or. But documents of title to goods are handed over to the banker. This method i s also called equitable charge. Since the goods are in the hand of the borrower, bank inspects the goods regularly to judge it s quality and quantity for the ma ximum safety of loan. 7.10.2.4 Mortgage: Mortgage is transfer of interest in specific immovable property. Mortgage is cre ated on the immovable property like land, building, plant etc. Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by r egistration of the mortgage deed. Another method called equitable mortgage is al so used in bank for creation of charge. Here mere deposit of title to goods is s ufficient for creation of charge. Registration is not required. In both the case s, the mortgage property is retained in the hank of borrower. 3.10.2.5 Trust Receipt Generally goods imported or bought by bank's financial assistance are held by ba nk as security. Bank may release this lien / pledge these goods against trust re ceipt. This means that the borrower holds goods in trust of the bank, trust rece ipt arrangement is needed when the borrower is going to sell this goods or proce

ss it further but borrower has no sufficient fund to pay off the bank loan. Here proceeds from any part of these goods are deposited to this bank. 3.10.2.6 Advance against Work-Order Advances can be made to a client to perform work order. The following points are to be taken into consideration. The client s management capability, equity strength, nature of scheduled work and feasibility study should be judiciously made to arrive at logical decision. If t here is a provision for running bills for the work, appropriate amount to be ded ucted from each bill to ensure complete adjustment of the liability within the p ayment period of the final bill besides assigning bills receivable, additional c ollateral security may be insisted upon. Disbursement should be made only after completion of documentation formalities and fulfillment of arrangements by the c lient to undertake the contract. The progress of work under contract is reviewed periodically. 3.10.2.7 Advance against Approved Shares: Credit facilities to extend against shares will be called Investment Scheme again st Shares . Advance may be allowed against shares of companies listed with the Sto ck Exchange Ltd. Subject to margin or may other restrictions imposed by Banglade sh Bank/Head Office of the bank from time to time. Value of shares & margin shou ld be worked out as per guidelines issued from time to time by Bangladesh Bank / Head Office of the bank. 3.10.2.8 Advance against Fixed Deposit Receipts: Advance against Fixed Deposit Receipt will be subject to credit Restrictions imp osed from time to time by Head Office / Bangladesh Bank. Scrutinize the Fixed De posit Receipts with regard to the following points. a) The Fixed Deposit Receipt is not in the name of minor. b) It is discharged by the depositor on revenue stamp of adequate value & his si gnature is verified. c) Creation of liability on Fixed Deposit issued in joint names by any one of th e depositors is regular. d) If the Deposit Receipt is offered as a security for allowing advances, a lett er of lien shall be obtained from the depositors, on the appropriate form. e) If the Deposit Receipt has been issued by the branch-allowing advance, lien a gainst that specific Deposit Receipt to be marked in the fixed Deposit Register of the branch. f) The discharged receipt, the letter of lien duly verified by the issuing branc h & the letter confirming registration of the lien on the deposit receipts shall be kept along with other documents under safe custody of the bank. 3.11 Credit Monitoring and Review: It is the last step in credit policy and procedure framework of DBL. Credit moni toring and review is very important, because it ensures proper utilities and rep ayment of bank fund. Credit monitoring and review feature of DBL is concerned wa s assessing the quality of different type of loan. Periodic review and follow up should, inter-alia aims at ensuring:

? That conduct (Turnover, regularity of repayment etc) of the borrowing accounts during the period under review has been satisfactory or as expected. ? The account is not having excess over limit ? The terms and condition of the sanctioned letter are strictly followed. ? The value of the collateral security is adequate. ? There is not any unfavorable situation in market, economy and political condit ions, which may endanger the reliability of the borrower account. ? The analysis of the borrowers business performance and comparison of the proj ected and actual to find any deviations. ? Apparent profitability from the loans 3.12 Classification of the Loan on the Basis of Security For internal use, banks classify the loan and advance on the basis of how much t he bank is secured in respective of the loan: Table 1 Classification on the basis of security Security 2003 2002 Debts considered good in respect of which the bank is fully secured Tk.9,164,399,974 Tk. 8,905,717,569 Debts considered good for which bank holds no other security than the debtors pe rsonal security Tk.1,912,967,379 Tk.1,422,195,631 Debts considered good and secured by the personal security of one or more partie s in addition to the personal security of the debtor. Tk, 1302,949,636 Tk824,412,906

3.13 Objective Basis of Classification In classifying the loan and advance there are four classes in the loan review pr acticed in Dhaka Bank Limited. They are as follows: 3.13.1Unclassified: The loan account is performing satisfactorily in the terms of its installments a nd no overdue is occurred. This type of loan and advances are fall into this cla ss. 3.13.2 Substandard: This classification contains where irregularities have been occurred but such ir regularities are temporarily in nature. To fall in this class the loan and advan

ce has to fulfill the following factor.

Category of Credit Time overdue (irregularities)

Substandard S-T Agri & Micro Credit 3 months & above but less than 6 months. Continuous loan Demand Loan Un-recovered for 3 months & above but less than 6 months from the date of the l oan is claimed.

Fixed Term loan Repayable within 5years: If the overdue installment equals or exceeds the amoun t repayable within 6 months. Repayable more than 5years: If the overdue installment equals or exceeds the amo unt repayable within 12 months.

The main criteria for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the bank. These accounts will require close supervision by management to ensure that the situation does n ot deteriorate further. 3.13.3 Doubtful: This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but can not be quantifiable at thi s stage. Moreover if the state of the loan accounts fall under the following cri terion can be declared as doubtful loan and advance. Category of Credit Time overdue (irregularities)

Doubtful S-T Agri & Micro Credit 6 months & above but less than 12 months. Continuous loan

Demand Loan Un-recovered for 6 months & above but less than 12 months from the date of the loan is claimed.

Fixed Term loan Repayable within 5years: If the overdue installment equals or exceeds the amoun t repayable within 12 months. Repayable more than 5years: If the overdue installment equals or exceeds the amo unt repayable within 18 months. 3.13.4 Bad and Loss: A particular loan and advance fall in this class when it seems that this loan an d advance is not collectable or worthless even after all the security has been e xhausted. In the following table the criteria to be fulfilled to fall in this ca tegory are summarized: Category of Credit Time overdue (irregularities)

Bad and Loss S-T Agri & Micro Credit Not recovered within more than 12 months. Continuous loan Demand Loan Un-recovered more than 12 months from the date of the loan is claimed.

Fixed Term loan Repayable within 5years: If the overdue installment equals or exceeds the amoun t repayable within 18 months. Repayable more than 5years: If the overdue installment equals or exceeds the amo unt repayable within 24 months.

3.14 Qualitative Judgment Basis of Classification Beside the above-mentioned objective criteria, Dhaka Bank Limited has other few qualitative judgment for classifying the loan and advance. This judgement totall

y depends on the Branch Manger and or the Head office credit division. Whether a ny continuous credit, demand loan, fixed term loan are classified or not on the basis of the above mentioned objective criterion but if there is any doubt or un certainty as regarding their recovery then the loan can be classified on the bas is of the Qualitative Judgment. The qualitative factors that are considered in D haka Bank Limited are as follows: ? Borrower sustains a loss of capital. ? Significant decrease in the value of the security. ? Weakening of bank s position as creditor due to any reason whatsoever. ? Diversification of the funds to uses other than the facility for which the cre dit was approved. ? Incorrect information supplied by the borrower or bankruptcy of the borrower. ? Credit is rescheduled frequently or the rules of rescheduling are violated or a suit is filed for the recovery of the credit. Last year the classification of the loan and advance of Dhaka Bank Limited were like this Table: Classification position last three years. Year Unclassified Substandard Doubtful Bad 2002 10940 12 5 250 2003 12470 200 20 200 Tk in million

3.15 Management of Delinquent Client When a problem loan is detected the responsible branch manager takes the correct ive action and tries to minimize the loan losses allowing different facilities t o the client. The steps practice in Dhaka Bank Limited to manage the delinquent loan are: ? Persuasion: This is the first step practiced in the DBL to mange the problem l oan. ? Negotiation: If the persuasion failed, the loan officer negotiates a plan of a ction with the borrower to try to extract both the bank and the borrower from po ssible loss. This calls for certain sacrifices on the part of the bank and borro

wer in their mutual interest. ? Litigation: If after rescheduling the loan and or failed to negotiate with the delinquent client, DBL go for taking legal action against the delinquent client to recover the loan. 3.16 Provisioning Specific Provision: Head office credit division prepares a list of credit accounts, which are consid ered to be totally or partially be unrecoverable & keeps a provision against the outstanding loans. Rate of Provisioning Dhaka Bank Limited in the time of loan provisioning to get the real picture of t he income mainly follow the Bangladesh Bank guideline. The rate of provisioning used in DBL is summarized in the following table. Table 4: Rate of provisioning Class Short Term Agriculture credit. All other credit Rate of Provisions Unclassified (UC) 5% 1% Substandard (SS) 5% 20% Doubtful 5% 50% Bad or Loss 100% 100% 3.17 Credit Appraisal System The function of commercial banks to collect deposit from the common people and t o invest deposited money in different sectors for overall development of the eco nomy of the country. So the banks have to be very much careful in credit apprais al. The person who is primarily held responsible for appraising a loan proposal in Dhaka Bank limited is called the credit officer. The most important measure of appraising a loan proposal is safety of the projec t. Safety is measured by the borrower and repaying capacity of him. The attitude of the borrower is also an important consideration, liquidity means the inflow of cash into the project in course of its operation. The profit is the blood for any commercial institution. Before approval of any loan project the bank author ity has to be sure that the proposed project will be a profitable venture. Profi

tability is assessed from the projected profit and loss statement. The security is the only tangible remains with the banker. Securing or collateral it is accep ting must be easy to sell and sufficient to cover the loan amount. But bank cann ot sanction loan by only depending on collateral. The sources of repayment of th e project should be a feasible one. During sanctioning any loan bank has to be a ttentive about diversification of risk. All money must not be disbursed amongst a small number of people. In addition any project must be established for the na tional interest and growth. Commercial banks and financial institutions intermediate between lenders and bor rowers. These financial intermediaries collect deposit and disburse it as loan a nd advance to the individual people, business, commercial, industrial entity. Th e loan and advance should be given to them who has the certain and predicted cas h flow to repay the credit. If the relationship manager fail to analyze the clie nts viability of repaying the loan and the projects cash flow possibility of def ault may arise due to the fact. So the importance of APPRAISAL, in sanctioning t he loan, is the key to identify the borrowers ability, expertise, efficiency, in dustry analysis, business performance to ensure the recovery of the credit along with the good supervision, monitoring and the relationship. In a word it can be said that the purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate security. At the time of credit proposal the bank has to come to an acceptable c ompromise between over caution and under caution. 3.18 Guiding Principle of Credit appraisal of DBL for Credit Officer: To determine the worth of a client, the following conceptual exercises should be undertaken. There are no fixed and set methods to perform credit marketing, and scope for application of individual judgment/ perception always plays over set rules in such work. For example, drop in revenue of a contractor may indicate th e client s failure to get work, or it may be due to adaptation of policy to do hig her margin quality jobs. 3.18.1 Industry Information: Gather and evaluate industry information, where the client is, which may be done in the following aspects: 3.18.1.1 Determine the price behavior Of the product/ service of the client. Rec ords of prices can reveal trend, fluctuations through various lengths of Time in short run/ long run. From the records it should be determined whether The Product/ Service has short term jump in demand and hence in price in the inc rease / decrease. The effect of such Short Term Increase /Decrease of demand on Sales Volume and Profitability Short Term has to be understood and measured, viz ., fluctuation range, fluctuation cycle duration, vis-a-vis clients cost/ revenu e, etc. Examples of such products would be Winter clothing, non-essential items like ice cream, fast food, cars, and other luxury items. 3.18.1.2Substitutability of the product. If the Product is easily substitutable , then price rise in Dhaka will influence customers to the other, often market t olerance for short run fluctuation ' for such product is very low. Example of th is situation may be Paper for Plastic, tea for coffee, etc. 3.18.1.3 Diversity of source of procurement. If there are very few sources of pr ocurement, price fluctuations are often Wider. Example of this is seen in steel sheet trading.

3.18.1.4 Market pact to set price It often happens to specialized trade centers, to either protect against unhealthy competition, or drive out competition, in w hich case pricing may be in stress. Existence of monopolist/ oligopolist as clie nt's competitors may Signal prDBLem. 3.18.1.5 Item for which taste changes very fast. Such industry is susceptible quick change in taste, sharp competition, large in vestment. Examples could be toy industry, office furniture, fashion design Of clothing, etc.

.18.1.6 The class of the country is important to note, when there is dependence on foreign countries for import/ export.

In poorer countries/ or in countries with unstable political environment, Prici ng of procurement / sale is more sensitive to political turmoil, natural disaste rs (flood / storm / earth quake) in the short run for cars, non-essential foods like baby food (branded baby serial), etc.

Basic food and clothing demand may not be dented much. Forei country's dependence of Aid /Grant / Investment may influence certain ind ustry such as building materials like cement rod, therefore scrap vessel, etc. Major construction like bridge over river, establishment of large scale producti on industry of items like fertilizer, car, etc. may influence purchase capacity of consumers, govt. etc. Some points to carefully watch in case of dependency on foreign market may be: (a) Currency fluctuation, (b) Festival Depression/ Boost in market demand, (c) Development of other country competition, (d) Government intervention in stock market, etc. High dependency on technology, which may change suddenly. t echnology, which may in Dhaka country may not be as popular in ano ther country), in which case

Examples could be computers/ electronics, unfamiliar brands (popular brand in D haka country may not be as popular in another country), in which case large pile up of inventory may result in pricing stress at the least. 3.18.1.7 Possible hazard Some industries are associated with risk of hazard, such as mining, asbestos pl ant, industrial boiler, pressurized gas filling, nuclear plant, isotope for medi cal industry, building construction, etc. Such industry may require lot of safet y inspections, certifications, insurance etc., shortage of which may result in s erious consequence-, or heavy cost at the least.

3.18.1.8 Long Term Look Quality of a relationship account may deteriorate due to long run replacement of technology, in computer industry, printing industry, me dicine plant, etc. Deep stage of business cycle, world depression, etc. may caus e raise in expenditure. Demography, change in population of consumer group may i nfluence business, examples may be education, cars, insurance, baby food, travel , medicare, etc. Client in industry facing sun-set, may eventually become ill qu ality.

3.18.2 Management Capabilities: There is no set rules to quantify/ confirm management's intentions/ capabilities . Nevertheless, different aspects of the management of the client have to be men tally perceived and recorded on best judgment/ effort basis. Management informat

ion can be gathered and evaluated in the following angles: 3.18.2.1 Significance of management profile evaluation. Survey of relationship g one ill reveals that for many cases, the management was evaluated liberally. Len ders should take management profile of a company very seriously. After all, it i s the management who moves the business whether in the right or in the wrong dir ection. If, as lender, we do not like the Management now, we certainly will not like it when we will ask them to repay. 3.18.2.2 Integrity This is the prime important criterion. There are no set rules for testing this, however, information/ comments from competitors, creditors, b usiness associations/ clubs, etc. are indicative of the client's integrity. 3.18.2.3 Single trouble management One man show, Autocratic attitude, Lack of delegation, Inappropriate positioning of people in different responsibilities, Lack of personnel to act as second line of defense, or succession. Much entrepre neurial attitude, (willing to do several start up projects at a time, constant i nterest in new projects), etc. 3.18.2.4 Experience of owner. It is important that the owner, the key men have t horough knowledge of the works of the sub- ordinates. Lack of experience always results in over dependence on subordinates, and inadequate guidance/ management ability. 3.18.2.5 Information System. External: Existence of a well established net work of market information is essential for any business, other wise a company loses its touch with the ground Sales team ca n be a good source of information for market dynamics for retail/ whole sale bus iness. Relationship with competitors/ customers is another source. Use of published information is also very useful. Internal: Current and on going information system on inventory/ receivable control, financ ial figures, etc. should be established and correctly interpreted, lack of skill to interpret-data may result in under utilization/ misinformation all together.

3.18.3 Financial Strength: (C) Accounts /Financial information should be evaluated in the following directi ons: 3.18.3.1 Accounting Policy. It should be marked as change of policy may effect o n the profitability/ leverage, etc.

3.18.3.2 Auditor s qualification. Often qualifications are not clearly expressed w hich may have much impact on the financials. 3.18.3.3 Other bank s limits/ outstandings. This should be determined and ensured that client made full disclosure. Existence of other financing facilities is to be netted out from total finance r equirements of the client, otherwise over financing, hence over-trading becomes a serious risk. 3.18.3.4 Modus operandi of the business/ deal, vis--vis facilities to be provided . This has to be matched. Care should be exercised to distinguish between curre nt and term requirements, permanent working capital requirement is often errDhak aously financed by short term Loan, often client's intuition is taken for determining finance requirements, te mporary / seasonal raise in requirement is often mistaken for regular requiremen t, or not at all accommodation. Such mistakes lead to financial mismanagement on the client's part as well as on the part of the financier.

3.18.4 Documentation and Execution of facilities:

3.18.4.1 Credit / Lending is incomplete withoutproper documentation. Improper documentation can be really frustrating in times of trouble with the c lient. 3.18.4.2 Examples of documents to take particularly take care of. Sanction Letter and Acceptance by client, Correspondence with Credit Administra tor/ Lawyer, Security documents -(Lien ,hypothecation, etc.). Undertakings by client, Legal documents (loan agreements, indemnification's, application for facilities, partnership deed, Memo & Article of Associations, registrations with ministry, licenses, specialized authorizations, etc.), Amendments to any documents, Ensure safe custody of the documents, etc. Any terms and conditions should not left as just acceptance of sanction letter, it should be put down in noting through Undertakings, explanation letters, etc. 3.18.4.3 Follow through. Follow-up of clients facilities movements are integral part of relationship management. Examples of points to follow may be as under: STRL: Swings of total outstanding. Look out for larger than usual debits / credits. Look out for cheque returns. Reason for such should be obtained and documented. Fixed Loans: Relationship officer should maintain his/ her own schedule of dates when payment is due. Look out for any deferrals, reasons should be documented, proper approval should be obtained and filed. .

Should determine need /justification and obtain proper approval mfor any change in installment amounts if approached by client. Bills, L/Cs: Check for unusual items. Short profit making tendency in experimental trade besi de regular line of business often put the operational cycle of clients in jeopar dy. Larger L/Cs than usual should be looked at carefully, often it may result in sto ck pileup. Change in frequently in extension and retirement of TR may be indicative. Cancellation of L/Cs may indicate prDBLem in procurement on the exporter's part/ or fund shortage of funds on the client's part. Usage of LBD should be monitored 3.18.5 Review/ Renewal:

3.18.5.1 On going. Relationship client is to be reviewed as an on going process. Client should be contacted on need as well as on routine basis. 3.18.5.2 Annual review. Dhaka a year (or interi Performance of the client must be thoroughly reviewed to justify continuation of relationship. Up to date financial statements, fresh credit reports from other banks, statisti cs of utilization of facilities with own and other banks should be reviewed, fac ilities requirement should also be reviewed and like wise renewed/ (canceled if necessary)

3.18.6 Socio-economic: A very important job of the relationship officer is to follow up and maintain in formation on the client, the business/ industry environment, politico-economic d evelopments within the country of operations as well as globally to look out for early signals of emergence of problems. The following may be some guidance for such follow up: 1. Financial: Adverse tern in sales and/ or profit, Deviation from planned/ forecasted results, Interim losses, Decline/ apprecia tion in returns, Lowering of liquidity, Unusual / Lager ove rdrafts, larger swings, Other cash income (amount and timing), Deviation from us ual borrowing circle, Qualified Auditor s' comments, Diversion of f und, Delay in submi ssion of financial information.

Breaches in terms and conditions of finance, etc. 2. Business Unplanned divestiture of funds, Over-trading, Cash drain to subs idiaries, Fall in market s hare, Involvement in l itigation by client, Unplanned failur e to invest in capital expenditure or R&D, Over reliance on single product, or customer, etc. 3. Management Key management departure, Key man's long sickness, accidents, High personnel attrition (particularly in management), Too high optim ism, excessive life style, usually such attitudes are Displayed in d eep crisis., Inefficient st aff remain un-removed, etc. 4. Industry Excess capacity/ supply, Deregulation ( causing rise in competition), Change in mark et norms/ trading patterns, Fast change in technology, Week existence within the industry (in such situation clients tend to cover against weaknesses by making large funds available to the company), Market rumors (though must not be taken as facts, deserve due attention as quite often these a re early indications of trouble) 5. External Observation of stock market up-down, Changing finan ce market (rise and fall in base rate of central bank, treasury bond issue by go vt. or major financing company, etc. within country of operations or abroad) Trade inquiry feed back on client, Change in lend er group, Devaluation of company stocks, Dependency on stronger currency import, Adverse regula

tory, political, economic changes.

3.18.7

Overall Portfolio Management:

The term means managing total exposure on different clients, in different indust ries of product or service, enjoying different types of facilities. The manageme nt may take into consideration the following 3.18.7.1 Market shares of different clients within Dhaka industry, sizes of diff erent industries within country of operation.

Relationship personnel should have fair idea of the market sizes in the country of operations at least. He/ she should follow the strategy of the senior manage ment to maintain total exposure on each industry within limit defined by such st rategy. Exposure on individual client should also be planed. Quality of portfolio should also be determined by classification policy and shou ld try to improve it. Cross financing clients within the portfolio may result in higher control. Change in strategy /policy of portfolio should be executed by increase or decrea se of exposure in specified fields. 3.19.1 Application for loan:

Applicant applies for the loan in the prescribed form of bank. The purpose of th is forms is to eliminate the unwanted borrowers at the first sight and select th ose who have the potential to utilize the credit and pay it back in due time. 3.19.2 Getting Credit information: Then the bank collects credit information about the borrower from the following sources: 1. Personal Investigation 2. Confidential report from other bank/ Head office/Branch/Chamber of commerce 3. CIB report from central bank 3.19.3 Scrutinizing and Investigation: Bank then starts examination that whether the loan applied for is complying with its lending policy. If comply, than it examines the documents submitted and the credit worthiness. Credit worthiness analysis, ie. analysis of financial condit ions of the loan applicant are very important. Then bank goes for Lending Risk A nalysis (LRA) and spreadsheet analysis, which are recently introduced by Banglad esh Bank. According to Bangladesh Bank rule, LRA and SA is must for the loan exc eeding Dhaka core. If these two analyses reflect favorable condition and documents submitted for th e loan appears to be satisfactory then, bank goes for further action. 3.19.4 Existing process of handling loans: The process of sanctioning loans is as follows: 3.19.5 The C s of Good & Bad Loan: The Branch manager of DBL try to judge the possible client based on some criteri a. These criteria are called the C s of good and bad loans. These C s are described below: 3.19.5.1 Character The outcome of analyzing the character is to have overall idea about the integri ty, experience, and business sense of the borrower. Two variables; Interaction/i nterview, and Market Research are used to analyze the character of the borrower. 1. Interaction/interview: the indicators are a) Prompt and consistent information supply, information given has not been foun d false (Willingness to give information). b) CIB also reveals business character. c) Willingness to give owns stake/equity & collateral to cover. d) Tax payer. 2. Market Research: a) Information on business is verified. b) Dealing with supplier and or customer as supplier is also a kind of lender; t he payment character can also be verified. 3.19.5.2 Capital

For identifying the capital invested in the business can be disclosed using the following indicators. a) Financial Statements b) Receivable, Payable, statements to practically assess the business positions. Net worth through financial statements or from declaration of Assets & Liabilit ies. 3.19.5.3 Capacity (Competence) Capability of the borrower in running the business is highly emphasized in the t ime of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiently, effectively and profitably. The indicators help to identify the capacity of the borrower. a) Entrepreneurship skills i.e. risk taking attitude shown by equity mobilizatio n. b) Management competencies both marketing and products detail, ability to take d ecision. c) Resilience or shock absorption: Connection, Back up (if first time falls seco nd lines come to help.) 3.19.5.4 Collateral Make sure that there is a second way out ive the credit decision. 3.19.5.5 Cash Follow: Cash flow is the vital factor that is used to identify whether the borrower will have enough cash to repay the loan or advance. Cash keeps the liquidity to ensu re repayment. The relationship manager try to identify the annual cash flow from the submitted statements. 3.19.5.6 Conditions: Understanding the business and economic conditions can and will change after the loan is made. 3.19.5.7 Complacency: Do not rely on past history to continue. Stay alert to what can go wrong in any loan. 3.19.5.8 Carelessness: Remember that documentation, follow-up and consistent monitoring are essential t o high quality loan portfolios. 3.19.5.9 Communication: Share credit objectives and credit decision making both vertically and laterally within the bank. 3.19.5.10 Contingencies: Make sure that you understand the risks, particularly the downside possibilities and that you structure and price the loan consistently with that understanding. 3.19.5.11 Competition: of a credit, but do not allow that to dr

Do not get swept away by what others are doing. 3.20 Credit Query: The loans and advance department gets a form filled up by the party seeking a lo t of information. The typical credit query form is attached in the appendix iii. The Financial Sector Reform Project (FSRP) has designed the LRA package, which p rovides a systematic procedure for analyzing and quantifying the potential credi t risk. Bangladesh Bank has directed all commercial bank to use LRA technique fo r evaluating credit proposal amounting to Tk. 10 million and above. The objectiv e of LRA is to assess the credit risk in quantifiable manner and then find out w ays & means to cover the risk. However, some commercial banks employ LRA techniq ue as a credit appraisal tool for evaluating credit proposals amounting to Tk. 5 million and above. Broadly LRA package divides the credit risk into two categor ies, namely Business risk Security risk. A detail interpretation of these risk and the procedure for evaluating the credi t as follows 3.21.1 Business risk: It refers to the risk that the business falls to generate sufficient cash flow t o repay the loan. Business risk is subdivided into two categories. 3.21.2 Industry risk. The risk that the company fails to repay for the external reason. It is subdivid e into supplies risk and sales risk. 3.21.3 Supplies risk: It indicates that the business suffers from external disruption to the supply of imputes. Components of supplies risk are as raw material, Labor, power, machine ry, equipment, factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then assessing the risk of disruption of supplies of each ite m. 3.21.4 Sales risk: This refers to the risk that the business suffers from external disruption of sa les. Sales may be disrupted by changes to market size, increasing in competition , change in the regulation or due to the loss of single large customer. Sales ri sk is determined by analyzing production or marketing system, industry situation , Government policy, and competitor profile and companies strategies. 3.21.5 Company risk: This refers to the risk that the company fails for internal reasons. Company ris k is subdivided into company position risk and Management risks. 3.21.6 Company position risk: Within an industry each and every company holds a position. This position is ver y competitive. Due to the weakness in the company's position in the industry, a company is the risk for failure. That means, company position risk is the risk o

f failure due to weakness in the companies position in the industry. It is subdi vided into performance risk and resilience risk. 3.21.7 Performance risk: This risk refers to the risk that the company s position is so weak that it will b e unable to repay the loan even under Favor able external condition. Performance risk assessed by SWOT(Strength, Weakness, Opportunity and Threat) analysis, Tre nd analysis, Cash flow forecast analysis and credit report analysis (i.e. CIB re pot from Bangladesh Bank). 3.21.8 Resilience risk: Resilience means to recover early injury, This refers to risk that the company f alls due to resilience to unexpected external conditions. The resilience of a co mpany depends on its leverage, liquidity and strength of connection of its owner or directors. The resilience risk is determined by analyzing different financia l ratio, flexibility of production process, shareholders willingness to support the company if need arise and political and private affiliation of owners and ke y personnel. 3.21.9 Management risk: The management risk refers to the risk that the company fails due to management not exploiting effectively the company s position. Management risk is subdivided i nto management competence risk and integrity risk. 3.21.10 Management competence risk: This refers to the risk that falls because the management is incompetent. The c ompetence of management depends upon their ability to manage the company's busin ess efficiently and effectively. The assessment of management competence depends on management ability and management team work. Management ability is determine d by analyzing the ability of owner or board of the members first and then key p ersonnel for finance and operation. Management team work is determined by analyz ing management structure and its strength and weakness. 3.21.11 Management integrity risk: This refers to the risk that the company fails to repay the loan amount due to l ack of management integrity. Management integrity is a combination of honesty an d dependability. Management integrity risk is determined by assessing management honesty, which requires evaluating the reliability of information supplied and then management dependability. 3.21.12 Security risk: This sort of risk is associated with the realized value of the security, which may not cover the exposure of loan. Exposure means principal plus outstanding in terest. The security risk is subdivided into two major heads i.e. security contr ol risk and security cover risk. 3.21.13 Security control risk: This risk refers to the risk that the bank falls to realize the security because of bank's control over the security offered by the borrower i.e. incomplete doc uments. The risk of failure to realize the security depends on the difficulty in obtaining favorable judgement and taking possession of security. For analyzing the security control risk the credit office is required to verify documentation to ensure security protection, documentation completeness, documentation integri

ty and proper insurance policy. He/she also conducts site visit to verify securi ty existence. Assessment of security control risk requires analyzing the possibi lity of obtaining favorable judgement and analyzing the case with which the bank could take the possession and liquidate the securities. 3.21.14 Security cover risk: This refers to the risk that the realized value of security is less than exposur e. Security cover risk depends on speed of realization and liquidation value. Fo r analyzing security cover risk, the official requires assessing the power of th e customer to prolong the legal process and to analyze the market demand for the security For assessment of security control risk, the officials times the time that would require to liquidate the security and assess the risk and estimates t he security value at liquidation and assess the risk. Before completing the LRA form, the relationship manager collects data specially industry specific from published sources and company specific data that not usu ally published., by personally visiting the company. After collecting the necess ary data he/ she prepares financial spreadsheet. This spreadsheet provides a qui ck method of assessing business trend & efficiency and helps to assess the borro wer ability to pay the loan Obligation. Financial spreadsheet includes balance s heet, income statement, cash flow statement and ratios for the purpose of financ ial statement analysis. Through analyzing data and collected information, the co ncerned official completes the LRA form and all scores are transferred to the sc oring matrix to find the overall risk of lending. The overall matrix provides fo ur kinds of lending risk for decision making viz. (I) Good (ii) Acceptable (iii ) Marginal and (iv) Poor. The bank does not provide any credit request having an over all risk as marginal" and " Poor" without justification. All credit applic ation rated "Poor" shall require the approval of the Board of Directors regardle ss of purpose tenor or amount. Therefore bank can minimize the dangers regarding the bad loan and advances through using the LRA. 4.0 INDUSTRY BEST PRACTICES AS SUGGESTD BY BBK 4.1 POLICY GUIDELINES This section details fundamental credit risk management policies that are recomm ended for adoption by all banks in Bangladesh. The guidelines contained herein o utline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks. 4.1.1 Lending Guidelines All banks should have established Credit Policies ( Lending Guidelines ) that clearl y outline the senior management s view of business development priorities and the terms and conditions that should be adhered to in order for loans to be approved . The Lending Guidelines should be updated at least annually to reflect changes in the economic out look and the evolution of the bank s loan portfolio, and be di stributed to all lending/marketing officers. The Lending Guidelines should be ap proved by the Managing Director/CEO & Board of Directors of the bank based on th e endorsement of the bank s Head of Credit Risk Management and the Head of Corpora te/Commercial Banking. (Section 2.1 of these guidelines refers) Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of loans that do not comply with Lending Guidelines should be restricted to the bank s Head of C redit or Managing Director/CEO & Board of Directors. The Lending Guidelines shou ld provide the key foundations for account officers/relationship managers (RM) t o formulate their recommendations for approval, and should include the following :

??Industry and Business Segment Focus The Lending Guidelines should clearly iden tify the business/industry sectors that should constitute the majority of the ba nk s loan portfolio. For each sector, a clear indication of the bank s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Con struction: Shrink). This will provide necessary direction to the bank s marketing staff. ??Types of Loan Faciliti The type of loans that are permitted should be clearly indicated, such as Workin g Capital, Trade Finance, Term Loan, etc. ??Single Borrower/Group Limits/Syndication Details of the bank s Single Borrower/Group limits should be included as per Bangl adesh Bank guidelines. Banks may wish to establish more conservative criteria in this regard. Appendix-3.4.3 provides brief description of financing under syndi cated arrangement. ??Lending Caps Banks should establish a specific industry sector exposure cap to avoid over con centration in any one industry sector. ??Discouraged Business Types Banks should outline industries or lending activities that are discouraged. As a minimum, the following should be discouraged: Military Equipment/Weapons Finance Highly Leveraged Transactions Finance of Speculative Investments Logging, Mineral Extraction/Mining, or other activity that is Ethically or Environmentally Sensitive Lending to companies listed on CIB black list or known defaulters Counter parties in countries subject to UN sanctions Share Lending Taking an Equity Stake in Borrowers Lending to Holding Companies Bridge Loans relying on equity/debt issuance as a source of repayment.

??Loan Facility Parameters Facility parameters (e.g., maximum size, maximum tenor, and covenant and securit y requirements) should be clearly stated. As a minimum, the following parameters should be adopted: - Banks should not grant facilities where the bank s security position is inferior to that of any other financial institution. - Assets pledged, as security should be properly insured. - Valuations of property taken as security should be performed prior to loans be ing granted. A recognized 3rd party professional valuation firm should be appoin ted to conduct valuations. ??Cross Border Risk Risk associated with cross border lending. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligations. Distin guished from ordinary credit risk because the difficulty arises from a political event, such as suspension of external payments - Synonymous with political & sovereign risk - Third world debt crisis For example, export documents negotiated for countries like Nigeria. 4.1.2 Credit Assessment & Risk Grading

4.1.2.1 Credit Assessment A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of th is assessment should be presented in a Credit Application that originates from t he relationship manager/account officer ( RM ), and is approved by Credit Risk Manag ement (CRM). The RM should be the owner of the customer relationship, and must b e held responsible to ensure the accuracy of the entire credit application submi tted for approval. RMs must be familiar with the bank s Lending Guidelines and sho uld conduct due diligence on new borrowers, principals, and guarantors. It is es sential that RMs know their customers and conduct due diligence on new borrowers , principals, and guarantors to ensure such parties are in fact who they represe nt themselves to be. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summaries the results of the RMs risk assessment and include , as a minimum, the following details: Amount and type of loan(s) proposed. Purpose of loans. Loan Structure (Tenor, Covenants, Repayment Schedule, Interest) Security Arrangements

In addition, the following risk areas should be addressed: - Borrower Analysis. The majority shareholders, management team and group or aff iliate companies should be assessed. Any issues regarding lack of management dep th, complicated ownership structures or intergroup transactions should be addres sed, and risks mitigated. - Industry Analysis. The key risk factors of the borro wer s industry should be assessed. Any issues regarding the borrower s position in t he industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition sh ould be identified. - Supplier/Buyer Analysis. Any customer or supplier concentration should be addr essed, as these could have a significant impact on the future viability of the b orrower. - Historical Financial Analysis. An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is plac ed on a corporate guarantor, guarantor financial statements should also be analy sed. The analysis should address the quality and sustainability of earnings, cas h flow and the strength of the borrower s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. - Projected Financial Performance. Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower s future financial performance shoul d be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insuffic ient to repay debts. - Account Conduct. For existing borrowers, the historic performance in meeting r epayment obligations (trade payments, cheques, interest and principal payments, etc) should be assessed. - Adherence to Lending Guidelines. Credit Applications should clearly state whet her or not the proposed application is in compliance with the bank s Lending Guide lines. The Bank s Head of Credit or Managing Director/CEO should approve Credit Ap plications that do not adhere to the bank s Lending Guidelines. - Mitigating Factors. Mitigating factors for risks identified in the credit asse

ssment should be identified. Possible risks include, but are not limited to: mar gin sustainability and/or volatility, high debt load (leverage/gearing), oversto cking or debtor issues; rapid growth, acquisition or expansion; new business lin e/product expansion; management changes or succession issues; customer or suppli er concentrations; and lack of transparency or industry issues. - Loan Structure. The amounts and tenors of financing proposed should be justifi ed based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower s repayment ability. - Security. A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance cove rage should be assessed. - Name Lending. Credit proposals should not be unduly influenced by an over reli ance on the sponsoring principal s reputation, reported independent means, or thei r perceived willingness to inject funds into various business enterprises in cas e of need. These situations should be discouraged and treated with great caution . Rather, credit proposals and the granting of loans should be based on sound fu ndamentals, supported by a thorough financial and risk analysis. Appendix iv contains a template for credit application. 4.1.2.2 Risk Grading All Banks should adopt a credit risk grading system. The system should define th e risk profile of borrower s to ensure that account management, structure and pric ing are commensurate with the risk involved. Risk grading is a key measurement o f a Bank s asset quality, and as such, it is essential that grading is a robust pr ocess. All facilities should be assigned a risk grade. Where deterioration in ri sk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit App lications. The following Risk Grade Matrix is provided as an example. The more conservative risk grade (higher) should be applied if there is a differ ence between the personal judgement and the Risk Grade Scorecard results. It is recognized that the banks may have more or less Risk Grades, however, monitoring standards and account management must be appropriate given the assigned Risk Gr ade: Risk Rating Grade Definition Superior Low Risk (Grade 1) Facilities are fully secured by cash deposits, gover nment bonds or a counter guarantee from a top tier international bank. All secur ity documentation should be in place. Good Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong . The borrower should have excellent liquidity and low leverage. The company sho uld demonstrate consistently strong earnings and cash flow and have an unblemish ed track record. All security documentation should be in place. Aggregate Score of 95 or greater based on the Risk Grade Scorecard. Acceptable Fair Risk (Grade3) Adequate financial condition though may not be abl e to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flo w and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would nor mally be secured by acceptable collateral (1st charge over stocks / debtors / eq uipment / property). Borrowers should have adequate liquidity, cash flow and ear nings. An Aggregate Score of 75-94 based on the Risk Grade Scorecard.

Marginal - Watch list (Grade 4) Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. The se borrowers have an above average risk due to strained liquidity, higher than n ormal leverage, thin cash flow and/or inconsistent earnings. Facilities should b e downgraded to 4 if the borrower incurs a loss, loan payments routinely fall pa st due, account conduct is poor, or other untoward factors are present. An Aggre gate Score of 65-74 based on the Risk Grade Scorecard. Special Mention (Grade 5) Grade 5 assets have potential weaknesses that deserve management s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (con secutive losses, negative net worth, excessive leverage), if loan payments remai n past due for 30-60 days, or if a significant petition or claim is lodged again st the borrower. Full repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grad e Scorecard. Substandard (Grade 6) financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Lo ans should be downgraded to 6 if loan payments remain past due for 60-90 days, i f the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interes t can still be taken into profits. An Aggregate Score of 45-54 based on the Risk Grade Scorecard. Doubtful and Bad (non-performing) Grade 7 full repayment of principal and intere st is unlikely and the possibility of loss is extremely high. However, due to sp ecifically identifiable pending factors, such as litigation, liquidation procedu res or capital injection, the asset is not yet classified as Loss. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days, and i nterest income should be taken into suspense (non-accrual). Loan loss provisions must be raised against the estimated unrealizable amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on all non-performin g loans, and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the requi rements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. An Aggregate Score of 35-44 based on the Risk Grade Scorecard Loss (non-performing) Grade 8 Assets graded 8 are long outstanding with no prog ress in obtaining repayment (in excess of 180 days past due) or in the late stag es of wind up/liquidation. The prospect of recovery is poor and legal options ha ve been pursued. The proceeds expected from the liquidation or realization of se curity may be awaited. The continuance of the loan as a bankable asset is not wa rranted, and the anticipated loss should have been provided for. This classifica tion reflects that it is not practical or desirable to defer writing off this ba sically worthless asset even though partial recovery may be effected in the futu re. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard At least top twenty-five clients/obligors of the Bank may preferably be rated by an outside credit rating agency. The Early Alert Process should be completed in a timely manner by the RM and for warded to CRM for approval to affect any downgrade. After approval, the report s hould be forwarded to Credit Administration, who is responsible to ensure the co rrect facility/borrower Risk Grades are updated on the system. The downgrading o

f an account should be done immediately when adverse information is noted, and s hould not be postponed until the annual review process. 4.1.3 Approval Authority The authority to sanction/approve loans must be clearly delegated to senior cred it executives by the Managing Director/CEO & Board based on the executive s knowle dge and experience. Approval authority should be delegated to individual executi ves and not to committees to ensure accountability in the approval process. The following guidelines should apply in the approval/sanctioning of loans: ??Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation ret ained in CRM. ??Delegated approval authorities must be reviewed annually by MD/CEO/Board. ??The credit approval function should be separate from the marketing/relationshi p management (RM) function. ??The role of Credit Committee may be restricted to only review of proposals i.e . recommendations or review of bank s loan portfolios. ??Approvals must be evidenced in writing, or by electronic signature. Approval r ecords must be kept on file with the Credit Applications. ??All credit risks must be authorized by executives within the authority limit d elegated to them by the MD/CEO. The pooling or combining of authority limits shoul d not be permitted. ??Credit approval should be centralised within the CRM function. Regional credit centres may be established, however, all large loans must be approved by the He ad of Credit and Risk Management or Managing Director/CEO/Board or delegated Hea d Office credit executive. ??The aggregate exposure to any borrower or borrowing group must be used to dete rmine the approval authority required. ??Any credit proposal that does not comply with Lending Guidelines, regardless o f amount, should be referred to Head Office for Approval ??MD/Head of Credit Risk Management must approve and monitor any cross border ex posure risk. ??Any breaches of lending authority should be reported to MD/CEO, Head of Intern al Control, and Head of CRM. ??It is essential that executives charged with approving loans have the relevant training and experience to carry out their responsibilities effectively. As a m inimum, approving executives should have: - At least 5 years experience working in corporate/commercial banking as a relat ionship manager or account executive. - Training and experience in financial statement, cash flow and risk analysis. - A thorough working knowledge of Accounting. - A good understanding of the local industry/market dynamics. - Successfully completed an assessment test demonstrating adequate knowledge of the following areas: o Introduction of accrual accounting.

o o o o o o o o o

Industry / Business Risk Analysis Borrowing Causes Financial reporting and full disclosure Financial Statement Analysis The Asset Conversion/Trade Cycle Cash Flow Analysis Projections Loan Structure and Documentation Loan Management.

??A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals declined stating reasons thereof should be reported by CRM to the CEO/MD. 4.1.4 Segregation of Duties Banks should aim to segregate the following lending functions: - Credit Approval/Risk Management - Relationship Management/Marketing - Credit Administration The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgment of credit proposals. 4.1.5 Internal Audit Banks should have a segregated internal audit/control department charged with co nducting audits of all departments. Audits should be carried out annually, and s hould ensure compliance with regulatory guidelines, internal procedures, Lending Guidelines and Bangladesh Bank requirements. The appropriate organizational structure must be in place to support the adoptio n of the policies detailed in Section 1 of these guidelines. The key feature is the segregation of the Marketing/Relationship Management function from Approval / Risk Management / Administration functions. Credit approval should be centrali zed within the CRM function. Regional credit centers may be established, however , all applications must be approved by the Head of Credit and Risk Management or Managing Director /CEO /Board or delegated Head Office credit executive. 4.2.1 Preferred Organizational Structure The following chart represents the preferred management structure: 4.2.2 Key Responsibilities The key responsibilities of the above functions are as follows. Credit Risk Management (CRM) ??Oversight of the bank s credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking, personal banking, & treasury operations. ??Oversight of the bank s asset quality. ??Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been m ade.

??To approve (or decline), within delegated authority, Credit Applications recom mended by RM. Where aggregate borrower exposure is in excess of approval limits, to provide recommendation to MD/CEO for approval. ??To provide advice/assistance regarding all credit matters to line management/ RMs. ??To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively. Credit Administration: ??To ensure that all security documentation complies with the terms of approval and is enforceable. ??To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral, and is properly assigned to the bank. ??To control loan disbursements only after all terms and conditions of approval have been met, and all security documentation is in place. ??To maintain control over all security documentation ??To monitor borrower s compliance with covenants and agreed terms and conditions, and general monitoring of account conduct/performance. Relationship Management/Marketing (RM) ??To act as the primary bank contact with borrowers. ??To maintain thorough knowledge of borrower s business and industry through regul ar contact, factory/warehouse inspections, etc. RMs should proactively monitor t he financial performance and account conduct of borrowers. ??To be responsible for the timely and accurate submission of Credit Application s for new proposals and annual reviews, taking into account the credit assessmen t requirements outlined in Section 4. 1.2.1 of these guidelines. ??To highlight any deterioration in borrower s financial standing and amend the bo rrower s Risk Grade in a timely manner. Changes in Risk Grades should be advised t o and approved by CRM. ??To seek assistance/advice at the earliest from CRM regarding the structuring o f facilities, potential deterioration in accounts or for any credit related issu es. Internal Audit/Control ??Conducts independent inspections annually to ensure compliance with Lending Gu idelines, operating procedures, bank policies and Bangladesh Bank directives. Re ports directly to MD/CEO or Audit committee of the Board. This section outlines of the main procedures that are needed to ensure complianc e with the policies contained in Section 1.0 of these guidelines. 4.3.1 Approval Process The approval process must reinforce the segregation of Relationship Management/ Marketing from the approving authority. The responsibility for preparing the Cre

dit Application should rest with the RM within the corporate/commercial banking department. Credit Applications should be recommended for approval by the RM tea m and forwarded to the approval team within CRM and approved by individual execu tives. Banks may wish to establish various thresholds, above which, the recommen dation of the Head of Corporate/Commercial Banking is required prior to onward r ecommendation to CRM for approval. In addition, banks may wish to establish regi onal credit centres within the approval team to handle routine approvals. Execut ives in head office CRM should approve all large loans. The recommending or approving executives should take responsibility for and be h eld accountable for their recommendations or approval. Delegation of approval li mits should be such that all proposals where the facilities are up to 15% of the bank s capital should be approved at the CRM level, facilities up to 25% of capit al should be approved by CEO/MD, with proposals in excess of 25% of capital to b e approved by the EC/Board only after recommendation of CRM, Corporate Banking a nd MD/CEO. The following diagram illustrates the preferred approval process:

Credit Application Recommended by RM/ Marketing

Zonal Credit Officer (ZCO)

Head of Credit & Head of Corporate Banking (HOBC)

Managing Director

Executive Committee/ Board 1. Application forwarded to Zonal Office for approved/decline 2. Advise the decision as per delegated authority (approved /decline) to recomme nding branches. A monthly summary of ZCO approvals should be sent to HOC and HOC B to report the previous months approvals sanctioned at the Zonal Offices. The H OC should review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank policies. 3. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for endorsement, and Head of Credit (HOC) for approval or onward recommendation. 4. HOC advises the decision as per delegated authority to ZCO 5. HOC & HOCB supports & forwarded to Managing Director 6. Managing Director advises the decision as per delegated authority to HOC & HO

CB. 7. Managing Director presents the proposal to EC/Board 8. EC/Board advises the decision to HOC & HOCB ** Regardless of the delegated authority HOC to advise the decision (approval/de cline) to marketing department through ZCO Recommended Delegated Approval Authority Levels HOC/CRM Executives Managing Director/CEO EC/Board all exceed Up to 15% of Capital Up to 25% of Capital 25% of Capital

Appeal Process Any declined credit may be re-presented to the next higher authority for reasses sment/approval. However, there should be no appeal process beyond the Managing D irector. 4.3.2 Credit Administration The Credit Administration function is critical in ensuring that proper documenta tion and approvals are in place prior to the disbursement of loan facilities. Fo r this reason, it is essential that the functions of Credit Administration be st rictly segregated from Relationship Management/Marketing in order to avoid the p ossibility of controls being compromised or issues not being highlighted at the appropriate level. Credit Administration procedures should be in place to ensure the following: 4.3.2.1 Disbursement: ??Security documents are prepared in accordance with approval terms and are lega lly enforceable. Standard loan facility documentation that has been reviewed by legal counsel should be used in all cases. Exceptions should be referred to lega l counsel for advice based on authorization from an appropriate executive in CRM . ??Disbursements under loan facilities are only be made when all security documen tation is in place. CIB report should reflect/include the name of all the lender s with facility, limit & outstanding. All formalities regarding large loans & lo ans to Directors should be guided by Bangladesh Bank circulars & related section of Banking Companies Act. All Credit Approval terms have been met. 4.3.2.2 Custodial Duties: ??Loan disbursements and the preparation and storage of security documents shoul d be centralized in the regional credit centers. ??Appropriate insurance coverage is maintained (and renewed on a timely basis) o n assets pledged as collateral. ??Security documentation is held under strict control, preferably in locked fire proof storage. 4.3.2.3 Compliance Requirements: ??All required Bangladesh Bank returns are submitted in the correct format in a timely manner.

??Bangladesh Bank circulars/regulations are maintained centrally, and advised to all relevant departments to ensure compliance. ??All third party service providers (valuers, lawyers, insurers, CPAs etc.) are approved and performance reviewed on an annual basis. Banks are referred to Bang ladesh Bank circular outlining approved external audit firms that are acceptable . 4.3.3 Credit Monitoring To minimise credit losses, monitoring procedures and systems should be in place that provide an early indication of the deteriorating financial health of a borr ower. At a minimum, systems should be in place to report the following exception s to relevant executives in CRM and RM team: ??Past due principal or interest payments, past due trade bills, account excesse s, and breach of loan covenants; ???Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM an d the RM team for timely follow-up. ???Timely corrective action is taken to address findings of any internal, extern al or regulator inspection/audit. ???All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually. Computer systems must be able to produce the above information for central/head office as well as local review. Where automated systems are not available, a man ual process should have the capability to produce accurate exception reports. Ex ceptions should be followed up on and corrective action taken in a timely manner before the account deteriorates further. Refer to the Early Alert Process (sect ion4.3.3.1). 4.3.3.1 Early Alert process: An Early Alert Account is one that has risks or potential weaknesses of a materi al nature requiring monitoring, supervision, or close attention by management. I f these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Bank s credit position at some future date with a likely prospect of being downgraded to CG 5 or worse (Impaired stat us), within the next twelve months. Early identification, prompt reporting and proactive management of Early Alert A ccounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis. An Early Alert report should be completed b y the RM and sent to the approving authority in CRM for any account that is show ing signs of deterioration within seven days from the identification of weakness es. The Risk Grade should be updated as soon as possible and no delay should be taken in referring problem accounts to the CRM department for assistance in reco very. Despite a prudent credit approval process, loans may still become troubled. Ther efore, it is essential that early identification and prompt reporting of deterio rating credit signs be done to ensure swift action to protect the Bank s interest. The symptoms of early alert are by no means exhaustive and hence, if there are other concerns, such as a breach of loan covenants or adverse market rumors tha t warrant additional caution, an Early Alert report should be raised.

Moreover, regular contact with customers will enhance the likelihood of developi ng strategies mutually acceptable to both the customer and the Bank. Representat ion from the Bank in such discussions should include the local legal adviser whe n appropriate. An account may be reclassified as a Regular Account from Early Alert Account sta tus when the symptom, or symptoms, causing the Early Alert classification have b een regularized or no longer exist. The concurrence of the CRM approval authorit y is required for conversion from Early Alert Account status to Regular Account status . 4.3.4 Credit Recovery The Recovery Unit (RU) of CRM should directly manage accounts with sustained det erioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to trans fer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendatio n of CRM and Corporate Banking. Whenever an account is handed over from Relation ship Management to RU, a Handover /Downgrade Checklist should be completed. The RU s primary functions are: ??Determine Account Action Plan/Recovery Strategy ??Pursue all options to maximize recovery, including placing customers into rece ivership or liquidation as appropriate. ??Ensure adequate and timely loan loss provisions are made based on actual and e xpected losses. ??Regular review of grade 6 or worse accounts. The management of problem loans (NPLs) must ated strategy together with the adequacy of d. A process should be established to share nce of credit losses in order to update the 4.3.4.1 NPL Account Management All NPLs should be assigned to an Account Manager within the RU, who is responsi ble for coordinating and administering the action plan/recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Corporate Banking/Relationship Mana gement may be sought, it is essential that the autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented. 4.3.4.2 Account Transfer Procedures Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action (RFA) and a handover /downgrade checklist should be completed by the RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the cu stomer, and prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR should be approved by the Head of Credit, and copied to the Head of Corporate Banking and to the Branch/office where the loan was originally sanctioned. This initial CLR should highlight any documentation issues, loan st ructuring weaknesses, proposed workout strategy, and should seek approval for an y loan loss provisions that are necessary. Recovery Units should ensure that the following is carried out when an account i s classified as Sub Standard or worse: be a dynamic process, and the associ provisions must be regularly reviewe the lessons learned from the experie lending guidelines.

??Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate executives within CRM. ??CIB reporting is updated according to Bangladesh Bank guidelines and the borro wer s Risk Grade is changed as appropriate. ??Loan loss provisions are taken based on Force Sale Value (FSV). ??Loans are only rescheduled in conjunction with the Large Loan Rescheduling gui delines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored. ??Prompt legal action is taken if the borrower is uncooperative. 4.3.4.3 Non Performing Loan (NPL) Monitoring On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the R U Account Manager to update the status of the action/recovery plan, review and a ssess the adequacy of provisions, and modify the bank s strategy as appropriate. T he Head of Credit sho uld approve the CLR for NPLs up to 15% of the banks capita l, with MD/CEO approval needed for NPLs in excess of 15%. The CLR s for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Bo ard. 4.3.4.4 NPL provisioning and Write Off The guidelines established by Bangladesh Bank for CIB reporting, provisioning an d write off of bad and doubtful debts, and suspension of interest should be foll owed in all cases. These requirements are the minimum, and Banks are encouraged to adopt more stringent provisioning/write off policies. Regardless of the lengt h of time a loan is past due, provisions should be raised against the actual and expected losses at the time they are estimated. The approval to take provisions , write offs, or release of provisions/upgrade of an account should be restricte d to the Head of Credit or MD/CEO based on recommendation from the Recovery Unit . The Request for Action (RFA) or CLR reporting format should be used to recomme nd provisions, write-offs or release/upgrades. The RU Account Manager should determine the Force Sale Value (FSV) for accounts grade 6 or worse. Force Sale Value is generally the amount that is expected to b e realized through the liquidation of collateral held as security or through the available operating cash flows of the business, net of any realization costs. A ny shortfall of the Force Sale Value compared to total loan outstandings should be fully provided for once an account is downgraded to grade 7. Where the custom er in not cooperative, no value should be assigned to the operating cash flow in determining Force Sale Value. Force Sale Value and provisioning levels should be updated as and when new information is obtained, but as a minimum, on a quar terly basis in the CLR. Following formula is to be applied in determining the required amount of provisi on: 1. Gross Outstanding XXX 2. Less: (i) Cash margin held or Fixed Deposits /SP under lien. XXX ) (ii) Interest in Suspense Account )

( ( XXX

3. Loan Value (For which provision is to be created before considering estimated realizable value of other security/collateral held) 4. Less: Estimated salvage value of security/collateral held (See Note below) Net Loan Value XXX

XXX ( XXX )

Note: The amount of required provision may, in some circumstances, be reduced by an estimated realizable forced sale value of (i.e. Salvage Value) of' any tangi ble collateral held (viz: mortgage of property, pledged goods / or hypothecated goods repossessed by the bank, pledged readily marketable securities etc). Hence , in these situations, it will be advisable to evaluate such collateral, estimat e the most realistic sale value under duress and net-off the value against the o utstanding before determining the Net Loan value for provision purposes. Conserv ative approach should be taken to arrive at provision requirement 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 Accoun t Managers to bring down the Non Performing Loans (NPLs). The table below shows an indicative incentive plan for RU account managers: Recovery as a % of Principal plus interest Recommended Incentive as % of net recovery amount If CG 7-8 if written off 76% to 100% 1.00% 2.00% 51% t0 75% 0.50% 1.00% 20% to 50% 0.25% 0.50% 5.0 COMPLIANCE OF BBK GUIDELINES BY DHAKA BANK LIMITED In the previous sections of this report we have critically analysed Dhaka Bank s e xisting credit risk management system as well as Bangladesh Bank s best practices guidelines for managing credit risk. Comparing Dhaka Bank s current credit risk ma nagement system with the BBK best practices guideline we see that Dhaka Bank lac ks 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 D haka Bank limited has no written credit policy though it follows some policy. A s there is no written credit policy, branch managers sometimes get confused whet her to go with a project or not.

Thus Dhaka Bank limited should have a lending guideline available in every branc hes so that credit officers can take quick decision whether to accept or reject a project. The lending guideline should include the followingIndustry 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 DBL, but there is no risk grading system applied here. It should adopt a credit risk grading system to ensure account management, structure and pricing are commensu rate with the risk involved. 5.3 Approval Authority: In Bangladesh Bank s guideline it is written that Approval authority should be delegated to individual executives and not to committees to ensure accountability in approval process . But in Dhaka Bank limited we see that every credit goes to the board via credit committee. As a result, wastage of tim e occurs and no one is held accountable for a bad loan. 5.4 Segregation of Duties: According to Bangladesh Bank Guideline Banks should a im to segregate the following lending functions to improve the knowledge levels and expertise in each department: - Credit Approval/ Risk Management - Relationship Management/ Marketing - Credit Administration But in Dhaka Bank limited there is no such depertmentation or segregation of dut ies. In small branches of DBL only single loan officer do all the jobs like loan marketing, risk assessing and credit administration. 5.5 Internal Audit: Dhaka Bank limited has a segregated internal audit/ control department charged with conducting audit of all departments as suggested by Bang ladesh bank guideline. 5.6 Preferred Organizational Structure: Currently Dhaka Bank does not follow the preferred management structure as suggested by BBk guideline. The key feature i n the preferred management structure is the segregation of Marketing/ Relationsh ip function from 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 f or their recommendations and approval . The recommended delegated approval authori ty levels are as follows Head of Credit/CRM Executives Managing Director/ CEO EC/ Board up to 15% of capital Up to 25% of capital All exceed 25% of capital

But in Dhaka 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 be strictly segregated from relationship management/ marketing. As a result the possibility of controls being compromised or issues not being highlighted at th e appropriate level can be avoided. The credit administration has the following

functionsDisbursement Custodial duties Compliance requirement In Dhaka Bank credit officers under supervision of Branch Credit In-charge or Ma nager also carry out all the three functions of credit administration. But Credi t Marketing and administration is yet to be segregated. 5.9 Credit Monitoring: To minimize credit losses, monitoring procedures and syst ems should be in place that provides an early indication of the deteriorating fi nancial health of a borrower. Early identification, prompt reporting and proacti ve management of Early Alert Accounts are prime credit responsibilities of all r elationship Managers. An early Alert Account is one that has risks or potential weakness of a material nature requiring monitoring, supervision or close attenti on by management. In Dhaka Bank credit monitoring is also done by credit In charge or branch manag ers. As a result Early Alert Accounts do not get that much attention as needed. 5.10 Credit Recovery: According to BBk guideline the recovery unit (RU) of CRM s hould directly manage accounts with sustained deterioration. On a quarterly basi s, a Classified Loan review (CLR) should be prepared by the RU Account Manager t o update the action/ recovery plan, review and assess the adequacy of provisions , and modify as appropriate. In Dhaka Bank the non-performing loan is very low (below 3%) and the recovery un it is yet to be formed. But for personal loan program, Personal Banking Division has a recovery unit. 5.11 Incentive Program: The BBk guideline also encourages Banks to introduce inc entive programs for the Recovery Unit Account Managers to bring down the NON Per forming Loans (NPLs) Dhaka Bank Limited currently has no incentive program as it does not have any Re covery Unit. 06 CONCLUSION AND RECOMMENDATION A banker can not sleep well with bad debts in his portfolio. The failure of comm ercial banks occurs mainly due to bad loans, which occurs due to inefficient man agement of the loans and advances portfolio. Therefore any banks must be extreme ly cautious about its lending portfolio and credit policy. So far Dhaka Bank Lim ited has been able to manage its credit portfolio skillfully and kept the classi fied loan at a very lower rate ---thanks goes to the standard and stringent cred it appraisal policy and practices of the bank. But all things around us are changing at an accelerating rate. Today is not like yesterday and tomorrow will be different from today. Given the fast changing, d ynamic global economy and the increasing pressure of globalization, liberalizati on, consolidation and disintermediation, it is essential that Dhaka bank limited has a robust credit risk management policies and procedures that are sensitive to these changes. To improve the risk management culture further, Dhaka bank lim ited should adopt some of the industry best practices that are not practiced cur rently. These are ? Dhaka Ban should have a clear written lending guideline. The lending guideline should include Industry and Business Segment Focus, Types of loan facilities, S ingle Borrower and group limit, Lending caps, Discouraged Business Types, Loan F

acility Parameters and Cross boarder Risk. ? It should adopt a credit grading system All facilities should be assigned a ri sk grade. And the borrowers risk grades should be clearly stated on credit appli cation. ? Approval authority should be delegated to individual executives rather than Ex ecutive Committee/ Board to ensure accountability. This system will not only ens ure accountability of individual executives but also expedite the approval proce ss. ? All lending functions should be segregated in the following way * Credit Approval / Risk Management * Relationship Management / Marketing * Credit Administration The segregation of duties will improve the knowledge levels and expertise in eac h department. ? The organization structure should have to be changed to put in place the segre gation of the Marketing/ Relationship Management function from Approval / Risk M anagement / Administration function. ? The responsibilities of the key persons of the above function must also be cle arly specified. ? 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 has risk and potential weaknesses of a material nature) ? There should be a Recovery Unit to manage directly accounts with sustained det erioration. To encourage Recovery Unit incentive program may also introduced.