Professional Documents
Culture Documents
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1.1 Origin
of the Report
BBA academic program is the building up to the theoretical knowledge about business administration which is the base of practical knowledge. For Example, in our 7th semester we are experiencing about the credit management system of an organization. Our course namely Credit Management introduces us how to manage the credit of an organization. For being practical knowledge, we select Summit Power Limited. And our key topic of study is Performance Evaluation and Credit Risk Management of Summit Power Limited. It was assigned to us by our course teacher, Md. Abdul Mannan. It was a challenge for us to complete a report on such an important topic. But we have completed this report successfully thanks to continuous supervision of our academic supervision Md. Abdul Mannan.
This report has been prepared based on Summit Power Ltd. All information is secondary and collected from Internet, Brochures, annual report etc. Based on this information ratio has been calculated. For the calculation of ratio has been calculated to measure the current position of the Summit Power Ltd. At the same time compare with the market performance.
The objective of the report is to provide a clear description of Summit Power Ltd. It also provides an exposure of practices of different activities of Summit Power Ltd. Observing the existing rules for Credit Risk management policy and fulfilling the partial requirement of BBA program is another objective of the report. We have completed our report on Summit Power Ltd. And this report is about this organization. As one of the main objectives of report is to gather practical experience on credit risk management system, we have tried to put some of the experiences that we have learnt from our report.
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To analysis the pros and cons of the conventional ideas about credit operation of Summit Power Ltd. To have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management of Summit Power Ltd. To analyze the credit risk management system of the Summit Power Ltd. under the guideline of the Bangladesh Bank (BB). To analyze the credit performance of SPL based on ratio analysis, SWOT
To present an overview of Summit Power Ltd. To appraise the performance of Summit Power Ltd. To apprise financial performance of Summit Power Ltd. To identify the problems of Summit Power Ltd. To recommend/ remedial measures of the development of Summit Power Ltd.
The scope of credit risk management is vast and wide. Basically, this report is composed with two parts: Policy guideline and analysis. The policy guideline part includes the general procedures and techniques of credit risk management and the guideline imposed by the Bangladesh Bank. The analysis part includes how actually the SPL follows and practices credit risk management system. Together these statements give-
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A proper and clear idea about the credit risk management techniques. The practice of credit risk management by the commercial bank of Whether the banks are success or not through using the credit risk
1.5 Source
of information
Information collected to furnish this report is both from primary and secondary in nature. We collected primary information by direct conversation with the credit officers. Sources of secondary information were Annual Report of SPL. We also studied different books on Finance and Credit and searched through Internet for more information.
In spite of having the wholehearted effort, there exits some limitations. The
Lack of in-depth knowledge and analytical ability for writing such report. Inadequacy and lack of availability of required Current data and official Limitation of time was a major constraint in making a complete study, due Lack of comprehension of the respondents was the major problem that As being students, it also created some problems as we were unable to
secrecy. to time limitation. created a lot of confusion regarding verification of conceptual question. acquire hands-on-experience in all the departments, due to the organizations policy of maintaining secrecy and also because we did not get the opportunity in all the departments.
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1.7 Methodology
For preparing the Report, the following methodology is adopted
This Report is an exploratory and descriptive one in nature. Among primary and secondary source most of the data has been collected from the secondary sources.
1)
Primary sources of information: Face to face conversation with the officials. Secondary sources of information:
1) 2)
Credit Policy Manual of the Banks. Prudential Guidelines on Credit Risk Management issued by Bangladesh Bank. Annual report of SPL. www.bangladesh-bank.org/ www.summitpower.org
3) 4) 5)
Analysis:
The following analysis have been done to measure the credit performance of the SPL Credit Risk Analysis following credit risk grading manual. Ratio analysis, SWOT analysis,
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2.1
Summit Power Ltd. is the pioneer in the private sector power production field in Bangladesh. Summit Power is the largest local Independent Power Producer. SPL is also the first power generating company to be listed in the local stock exchanges. Summit Power Limited (SPL), a company Summit Group, is the first Bangladeshi Independent Power Producer (IPP) in Bangladesh and until now the only local company in private electricity generation and supply business providing power to national grid. SPL was incorporated in Bangladesh on March 30, 1997 as a Private Limited Company. On June 7, 2004 the Company was converted to Public Limited Company under the Companies Act 1994.
Summit Group is one of the leading investment and industrial business house in Bangladesh. The major sectors in which the group is currently investing in include power generation, port such as container freight station, tank terminal, shipping, property development, construction, civil & hydro engineering & trading. The sponsors of Summit group are interested in infrastructure sectors in Bangladesh and abroad. This has led to the establishment of the first barge mounted power plant in Bangladesh namely Khulna Power Co. Ltd, Liquefied Petroleum Gas (LPG) plant in gas starved area at Mongla Bagerhat, 54 km long gas pipeline of 30 inches diameter from Ashugonj to Hobiganj, Container Freight Station in Chittagong etc. The company is also exploring energy markets in Sri Lanka and Vietnam which have emerging energy sector open to investment. Summit Power Limited has successfully established in the year 2001 three power plants each with 11 MW capacities for sale of electricity to Rural Electrification Board (REB) under build, own and operate basis at Savar, Narsingdi, and Comilla. The company has already expanded its total generation capacity to 105 MW. Summit Power Limited is going to implement another four power plants totaling a capacity of 110 MW through its two subsidiary companies Summit Uttaranchol Power Company Limited and Summit Purbanchol Power Company Limited.
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Local Summit Group and US General Electric (GE) signed an agreement on Thursday with IDLC to receive $115 million from the World Banks Investment Promotion Facilitation Fund to implement two 341-megawatt power projects in Bibiyana. On the same day, the two companies signed another deal with Janata Bank and Industrial and Infrastructure Development Finance Company (IIDFC) to raise Tk 1,500 crore through zero-coupon bonds. This fund will be pumped into the Meghnaghat dual fuel 335MW power project. Summit was awarded the Bibiyana gas-fired projects and the Meghnaghat power project about four months back. The Bibiyana projects will need $560 million (Tk 3,920 crore) and Meghnaghat Tk 2,100 crore investment. The Thursdays deal ensures a large part of financing for these three power projects expected to begin production in early 2013 of the cheapest electricity costing less than Tk 2 per kilowatt hour. Summit Group Chairman Muhammed Aziz Khan said Janata Bank and IIDFC would provide Summit with Tk 1,500 crore against a sanction of Tk 2,100 crore financing. The remaining Tk 600 crore is deducted as advance interest for the next four years. As infrastructure like this has long gestation periods, zero-coupon bonds enable companies to implement these projects with an optimised cash flow. The bonds carry a 5 percent discount and 12 percent convertible to the shares of Summit Meghnaghat Power Company at net asset value of the company.
Summit Power Ltd has recently become the lowest in yet two more power tenders, Syedpur 100MW power plant and Shantahar 50MW power plant. Reports say the prime minister signed the work award orders on January 21.
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2.3 Mission
To expand the company into a power generation capacity to the tune of 1000 MW, which is 20% of the electricity requirement of Bangladesh. Summit Power Limiteds motto: "Empowering Bangladesh, we can & we will."
2.4 Vision
their personal, social economic development.
To provide quality and uninterrupted electricity to vast majority of rural Bangladesh for
2.5 Objective
customers Efficient utilization of capital, machines, material and human resources Continuous management improvement of customer satisfaction and
resource
2.6 Projects
(a) Ashulia Power Plant:
This project was set up to provide electricity for Dhaka Palli Bidyut Samity under
15-years Power Purchase Agreement (PPA) with Rural Electrification Board (REB). An implementation agreement has also been signed with the government of Bangladesh (GoB). After signing expansion agreements with REB and GoB, Summit Power has increased
this plants production capacity by 33.75 MW with the total output being 45 MW.
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Credit Risk Grading of Summit Power ltd After signing expansion agreements with REB and GoB, Summit power has increased this plants production capacity by 24.30 MW with the total output being 35 MW.
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Directors
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2.8Management Committees:
.
Audit Committee Mr. Abbas Uddin Ahmed Mr. Tauhidul Islam, Managing Director Ms. Ayesha Aziz Khan, Director(Finance) Mr. A.N.M Tariqur Rashid, Executive Director(P&D) Mr. Mahmud Hasan FCMA, Financial Controller Executive Committee Mr.Tauhidul Islam, Managing Director Mr. Md. Latif Khan, Director Ms. Ayesha Aziz Khan, Director (Finance) Dr. Mirza Khairuzzaman, Senior Executive Director Mr. A.N.M Tariqur Rashid, Executive Director(P&D) Mr. Mahmud Hasan FCMA, Financial Controller Purchase Committee Mr. Md. Latif Khan, Director Mr. Tauhidul Islam, Managing Director Mr. A.N.M Tariqur Rashid, Executive Director(P&D) Mr. Mahmud Hasan FCMA, Financial Controller Technical Committee Mr. A.N.M Tariqur Rashid, Executive Director(O&M) Mr. Solaiman Patwary, General Manager (O&M) Mr. Abdus Sobhan, General Manager (P&D) Md. Nazrul Islam Khan, Manager (E&I) Mr. A.K.M. Asadul Alam Siddique, Plant Manager Operation &smp; Maintenance Committee Mr. Faisal Karim Khan Mr. A.N.M Tariqur Rashid, Executive Director(O&M) Mr. Solaiman Patwary, General Manager (O&M) Md. Nazrul Islam Khan, Manager (E&I) In charge of Plants
Chairman Member Member Member Member Chairman Member Member Member Member Member Chairman Member Member Member Chairman Member Member Member Member Chairman Member Member Member Member
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Credit Risk Grading of Summit Power ltd Dr. Mirza Khairuzzaman, Senior Executive Director A.N.M. Tariqur Rashid, Executive Director Md. Solaiman Patwary, General Manager (Operation & Maintenance) Md. Abdus Sobhan, General Manager (Planning & Development) Mahmud Hasan FCMA, Financial Controller & Company Secretary Md. Nazrul Islam Khan, Manager (Electrical & Instrumentation) Mr. A.K.M. Asadul Alam Siddique, Plant Manager, Comilla Power Plant Commander M Emdadul Haque, (E), psc, BN (Retd) Md. Sirajul Islam, Plant Manager,Narshingdi Power plant Md. Nazmul Hasan, Plant Manager, Rupganj Power Plant Md. Fazle Elahi Khan, Plant Manager, Jangalia Power Plant
April 1, 2001 June 08,2001 June 07, 2004 January 13, 2005
March 29, 2005
June 19,2005 June 25, 2005 June 28, 2005 June 28, 2005
August 27, 2005 October 03, 2005 October 23, 2005 November 10,2005 November 15,
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Signing of Project Agreements for expansion at Savar with REB & GOB
Commercial operation at Comilla expansion project Commercial operation at Madhabdi expansion project Incorporation of the Summit Purbanchol Power Company Limited (99%
subsidiary of Summit Power Limited) 2007 Incorporation of the Summit Uttaranchol Power Company Limited (99% August 15, subsidiary of Summit Power Limited) Increase the Authorized Share Capital of the Company (SPL) through EGM for issuance of Rights Share at the ratio of 5:4 Signing of Project Agreements with REB, BPDB 7 GOB to implement total 110 MW power plants (04 nos) through its two subsidiary companies. Commercial Operation at Savar expansion project 2007 September 29, 2007 October 11, 2007 December 04, 2007
Basic Information Of current Year: Authorized Capital in BDT (mn) Paid-up Capital in BDT (mn) Reserve & Surplus in BDT (mn) : : : 10000.0 3034.0 1184.17
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8%
Capital structure
21%
Authorized Capital in BDT* (mn) Paid-up Capital in BDT* (mn) Reserve & Surplus in BDT* (mn) 71%
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total assets total liability paid up capital net profit shareholder equity
Turnover: SPL has a upword turnover history over the last five year. It indicates this company is operated with smothness.
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Assests:
SPL strategically go ahead with a conception of increasing the total assets of it. The following table and graph show it clearly.
Year 2009 2008 2007 2006 2005
1174 10121.1
642.55 6707.12
478.59 4097.69
253.79 2782.7
385.63 1588.23
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1510.03 698.52
945.86 460.21
586.62 268.1
310.16 175.1
283.89 174.21
Gross Profit Ratio: SPL showed a mixed performance for gross profit ratio. It shows performance over the capital. Following table and graph shows it clearly.
Year 2009 2008 2007 2006 2005
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52.98
54.43
51.07
53.08
54.49
24.59
26.48
23.34
29.96
33.43
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Return on total assets shows how effectively an organization works with its assets. In this consideration SPL is not successful. Since over the last five years it is declining the Return on total assests. The details are given below:
Year 2009 2008 2007 2006 2005
Return on total Assets 12 10 Taka (mn) 6 4 2 0 2009 2008 2007 Year 2006 2005 8 Return on total Assets (%)
31.41
25.71
31.25
25.66
37.33
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P/E (tk)
Taka (mn)
Price Earning Ratio (P/E) 60 50 40 30 20 10 0 2005 2006 2007 Year 2008 2009 Price Earning Ratio (P/E)
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3.1 Overview :
Credit is the heart of bank.The success and failure of bank depends largely on efficient handling of their fund.In the past i.e.70 to 80 years ago credit was simple because at that time lenders personally knew the borrowers.As commerce and industry grew, the activities of credit management have changed. In the past, credit management was only concerned about the protection of lenders own funds but in the modern banking lenders are not concerned about the protection of their own funds but also concerned with the future of the industry which borrowers own and the protection of borrowers fund.In credit management , a credit officer has to do a lot of works. For deciding to grant credit, he has to apply his common sense. Commonsense like, what he has to ensure the safety if ha wants to invests his own fund. For investing own funds one has to ensure the (1) Safety of his own money; (2) recovery of his own money; and (3) actual help to others in time of need (Srinivasa 1986,1). Like own funds, in making granting decision , a credit officer should satisfy himself/herself about the safety , recovery of his funds, and needs of the borrowers. In granting decision, a credit officer should be careful because a little bit of unconsciousness and ignorance can lead to heavy losses to the bank. This knowledge of lending cannot be taught nor learnt by reading a expertise book but by ones own experience and commonsense and helping attitude (Srinivasa 1986,2).
Credit derived from Latin word credo means I believe, and usually define as the ability to buy with a promise to pay, or the ability to obtain title to, and receive goods for enjoyment in the present although payment is deferred to a future date.
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Credit is the provision of financial accommodation to a person, in return for a promise to repay it at some future date. It may be extended as cash, or supply of goods or services. The former type of credit is called lender credit and later is referred as vendor credit is, it enables a person to spend in excess of his/her actual
means in present.
In the simplest form, management is the process of getting things done by others. In
the broader concept, management involves various systematic plan and actions to achieve the goal of the organization. Credit management is the process of accomplishing various tasks relating to deciding grant or not granting credit to others, determination of terms and conditions, proper documentation, frequent monitoring and reviewing the performance of borrowers and taking necessary steps to ensure smooth recovery of credit which ensure profit maximization of the bank. Bank in the developing countries often do not have a well developed credit
management process and the main deficiencies of this are : The absence of written policies.
The absence of portfolio concentration limits excessive centralization or decentralization of landing authority. Poor industry analysis. A cursory financial analysis of borrowers. An excessive reliance on collateral. Infrequent customer contact. The inadequate checks and balance in the credit process. Absence of loan supervision. A failure to improve collateral position as credit deteriorates. Poor control on loan documentation. Excessive overdraft lending. Incomplete credit files. The absence of asset classification and loan loss provisioning standards, and
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A failure to control and audit the credit process effectively (Diana and Clayton 1997, 32).
Credit management task starts from making strategic targets for credit markets and
end with recovery of credit. Broadly credit management involves the following main steps : First, one must determine priority sectors he/she is interested to lend and prohibited sectors he/she is not interested to lend (Credit policy formulation), Second, one must determine which borrowers are likely to pay their debt (Credit investigation and analysis). Third, one must decide how much credit he/she is prepare to extend in each borrower (Credit approval). Fourth, he/she must decide what evidence he/she need of indebtedness (Documentation. Fifth, after ha/she has granted credit, he/she has the problem of collecting the money when its becomes due. How does he/she keep track of payments ? (Monitoring, review, and loan recovery). By analyzing the above steps, the study identifies the following steps in credit management : Strategic plan for target credit markets. Credit policy formulation. Client request/relationship marketing. Loan interviewing. Credit investigation. Credit analysis. Preparation of credit analysis report/preparation of proposal. Loan sanction, loan structuring, loan negotiation. Loan documentation. Loan disbursement. Loan monitoring/review.
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management has been the rapid and tremendous growth of industry and commerce. When business was mostly under the control of a sole proprietor and relatively small in size, the approval of credit was simple and personal matter.50 to 70 years ago, it was customary that lenders were to visits market once or twice in a year. At that time borrowers were personally known to lenders, the size of business was small and for a number of years bookkeepers were in controls of the credit management task. With the pace of development of commerce, the personal relationship was lost and some other basis was needed to manage commerce credit. It was logical that the task should fall on someone within the company. As commerce and industry grew, it becomes apparent that the work of bookkeeper credit man would have to dividend. Parallel to the commercial and industrial developments of the last couple of centuries a high degree of administrative efficiency has been attained through better organization and specialization. With the organization of the national association of credit management in U.S.A in 1896 and several other developments supported the significance of professional credit management. Improved source of credit information; better accounting methods, redefinition of the techniques of financial statement analysis recognized the professional character of credit work. Significant relationships of credit to business finance , production , marketing and financial operations of the business sought out credit work as group and need an increased number of highly qualified people. The complexity of modern day business and the need for specialization created this condition, and it fostered the status held by todays credit managers.
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Now credit management has moved up to the status of an established business group, with prerogatives, responsibilities, standards and ethics.
Gupta (1995) recommended thirteen aspects for a good lending policy. The
1. Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve and what signatures are required) 2. Credit granting Process. 3. Lines of responsibility in making assignments and reporting information within the loan department. 4. Operating procedures for soliciting, reviewing, evaluating and making decision on customer loan applications. 5. Lines of authority within the bank, detailing who is responsible for maintaining and reviewing the banks credit files, and 6. A discussion of the preferred procedures for detecting, analyzing, and working out problem loan situation.
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From scholarly literature, the study develops the following flow chart of credit management Flow chart of CM Strategic plan for target market Credit policy formulation
Client interview Credit investigation Credit analysis, purpose, business, Management figure, Credit rating Credit analysis report Credit approval Credit structuring, Pricing, Repayment Credit negotiation (Tenor, Pricing, Repayment, Security and others Documentation Credit disbursement Internal Audit Credit monitoring and review Handling problem credit Recovery of credit
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What is the likelihood that the counterparty will default on its obligation either over the life of the obligation or over some specified horizon, such as a year? Calculated for a one-year horizon, this may be called the expected default frequency. Credit exposure:
In the event of a default, how large will the outstanding obligation be when the default occurs? Recovery rate:
In the event of a default, what fraction of the exposure may be recovered through bankruptcy proceedings or some other form of settlement? When we speak of the credit quality of an obligation, this refers generally to the counterparty's ability to perform on that obligation. This encompasses both the obligation's default probability and anticipated recovery rate.
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4.2 Principles of Credit risk management: While financial institutions have faced difficulties over the years for a multitude
of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. Banks need to manage the credit risk inherent in the entire portfolio as well as the
risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. A prudent Banker should always adhere to the following general principles of Background, Character and ability of the borrowers Purpose of the facility, Term of facility, Safety, Security, Profitability, Source of repayment, Diversity. Since exposure to credit risk continues to be the leading source of problems in banks world-wide, banks and their supervisors should be able to draw useful lessons from past experiences. Banks should now have a keen awareness of the need to identify, measure, monitor and control credit risk. While the exact approach chosen by individual supervisors will depend on a host of factors, including their on-site and off-site supervisory techniques and the degree to which external auditors are also used in the supervisory function. A further particular instance of credit risk relates to the process of settling financial transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the principal amount of the transaction. Even if one party is simply late in settling, then the other party may incur a loss relating to
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Credit Risk Grading of Summit Power ltd missed investment opportunities. Settlement risk thus includes elements of liquidity, market, operational and reputational risk as well as credit risk.
Business Risk
Security Risk
Industry Risk
Company Risk
Supply Risk
Sales Risks
Management Risk
Performance Risk
Resilience Risk
Management Competency
Management Integrity
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Credit Risk Grading of Summit Power ltd Chart No-1: Flow chart of different Credit Risk
Tools used in Credit risk management Some tools used in credit risk management, like credit analysis, credit exposure, loan classification. These are describes below:
In the qualitative analysis the bank usually analyze the 5 Cs of the customer The loan officer must be convinced that the customer has a well-defined purpose for requesting bank credit and a serious intention to repay. If the officer is not sure exactly why the customer is requesting a loan, this purpose must be clarified to the banks satisfaction. To determine the character of the borrower, banker must investigate the following: Customers past payment records. Experience of other lenders with the customer. Purpose of loan. Customers track record in forecasting business or personal income. Credit Rating
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a)
Capacity:
The loan officer must be sure that the customer requesting credit has the authority to request a loan and the legal standing to sign a binding loan agreement. Therefore the bank needs the following information: a) Identify of customer and guarantors. Description of history, legal structure, owners, nature of operation, products and Copies of resolution, partnership agreements, and other legal document Cash:
Here the loan officers analyze that whether they have ability to generate enough cash, in the form of cash flow, to repay the loan or not. b) Conditions:
The loan officer and credit analyst must be aware of recent trends in the borrowers line of work or industry and how changing economic conditions might affect the loan. To assess the situation the following points should be taken into consideration: a) Customers current position industry and expected market share. Customers performance vis--vis comparable firms in the same nature of Sensitivity of customer and industry to business cycles and changes in technology. Labor market condition of customers product, impact of inflation on the industry. Long run industry or job outlook. Regulations, political and environmental factors affecting the customer and / or Collateral:
business or industry.
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Credit Risk Grading of Summit Power ltd In assessing the collateral aspect of a loan request, the loan officer must ask, does the borrower possess adequate net worth or own enough quality assets to provide adequate support for the loan? The loan officer is particularly sensitive to such features as the age, condition, and degree of specialization of the borrowers assets. Bank has to consider: (i) Ownership of assets, Vulnerability of assets to obsolete Liquidation and degree in specialization of value of assets Liens, encumbrances and restrictions against property held Leases and mortgages issued against property and equipment Guarantees and warranties issued to others Banks relative position as creditors in placing a claim against borrowers assets Quantitative Analysis
Using Quantitative analysis refers to the analysis of financial statement ratios to know the past performance of a company. Some of the key ratios which serve as a tool for financial analysis are classified as 1) Financial Ratio 2) Turnover Ratio 3) Profitability Ratio Financial Ratio Financial ratios indicate about the financial position of the company. A company is deemed to be financially sound if it is in a position to carry on its business smoothly and meet its obligations-both long-term as well as short term-without strain. Some of the important financial ratios are: Fixed Asset Ratio, Current Ratio, Quick Ratio, Debt Equity Ratio etc. Turnover Ratio The turnover ratios indicate the efficiency with which the capital employed is rotated. They are also known as Activity or efficiency ratio. The overall profitability of the business depends on the turnover i.e. the speed at which the capital employed in the business rotates. The higher the rate of rotation, the greater the profitability. Some important turnover ratios are: Fixed Assets Turnover Ratio, Working Capital Turnover ratio etc. Profitability Ratio
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Credit Risk Grading of Summit Power ltd Profitability is an indication of the efficiency with which the operations of the business are carried on. Poor operational performance may indicate poor sales and hence poor profits. Bankers look at the profitability ratio as an indicator whether or not the firm/company earns substantially more than it pays interest for the use of borrowed funds and whether the ultimate repayment of their debt appears reasonably certain. The important profitability ratios are: Overall Profitability Ratio, Gross Profit Ratio, Net Profit Ratio etc. (ii) Credit Risk Grading
Credit risk grading is an important part of credit analysis for credit risk management as it helps the banks & financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch. At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level. At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. 4.5 Benefit of credit risk management: Maximize the value of your risk-management activities. Effective credit portfolio management is critical to the financial health of any company. This means setting the right credit amount and terms at account origination and, on revolving lines of credit, determining the right credit-line adjustments to profitably grow and retain existing customers. 1. 2. 3. 4. Gain a competitive advantage Maximize the portfolio profitability Make appropriate risk-reward decisions Gain more control and insight
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Credit Risk Grading of Summit Power ltd 5. 6. Manage existing customers Maximize collections effectiveness
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demonstrate consistent earnings, cash flow and have a good track record.
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Credit Risk Grading of Summit Power ltd This grade warrants greater attention due to conditions affecting the borrower, the These borrowers have an above average risk due to strained liquidity, higher than Weaker business credit & early warning signals of emerging business credit The borrower incurs a loss. Loan repayments routinely fall past due. Account conduct is poor, or other untoward factors are present. Credit requires attention. Aggregate Score of 65-74 based on the Risk Grade Score Sheet. Special Mention - (SM) - 5 This grade has potential weaknesses that deserve managements close attention.
industry or the economic environment. normal leverage, thin cash flow and/or inconsistent earnings. detected.
If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Severe management problems exist. Facilities should be downgraded to this grade if sustained deterioration in An Aggregate Score of 55-64 based on the Risk Grade Score Sheet. Substandard - (SS) - 6 Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Bangladesh Bank criteria for sub-standard credit shall apply. An Aggregate Score of 45-54 based on the Risk Grade Score Sheet. Doubtful - (DF) - 7 Full repayment of principal and interest is unlikely and the possibility of loss is However, due to specifically identifiable pending factors, such as litigation, Bangladesh Bank criteria for doubtful credit shall apply.
financial condition is noted (consecutive losses, negative net worth, excessive leverage),
extremely high. liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.
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Credit Risk Grading of Summit Power ltd An Aggregate Score of 35-44 based on the Risk Grade Score Sheet. Bad & Loss - (BL) - 8 Credit of this grade has long outstanding with no progress in obtaining repayment Prospect of recovery is poor and legal options have been pursued. Proceeds expected from the liquidation or realization of security may be awaited.
The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal procedures/suit initiated. Bangladesh Bank criteria for bad & loss credit shall apply. An Aggregate Score of less than 35 based on the Risk Grade Score Card.
At least top twenty-five clients/obligors of the Bank may preferably be rated by an outside credit rating agency.
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Step II: Allocate weights to Principal Risk Components According to the importance of risk profile, the following weights are proposed for corresponding principal risks. Principal Risk Components: Financial Risk Business/Industry Risk Management Risk Security Risk Relationship Risk Weight: 50% 18% 12% 10% 10%
Step III : Establish the Key Parameters Principal Risk Components Financial Risk Key Parameters: Leverage, Liquidity, Profitability & Coverage ratio Business/Industry Risk Size of Business, Age of Business, Business Outlook, Industry Growth, Competition & Barriers to Business. Management Risk Security Risk Experience, Succession & Team Work. Security Coverage, Collateral Coverage and Support. Relationship Risk Account Deposit. Table 7: Establishing key parameter in credit risk grading Conduct, Utilization of Limit,
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Step IV
Business/Industry Risk
Management Risk
Relationship Risk
After the risk has been identified & weights assignment process (as mentioned above), the next steps will be to input actual parameter in the score sheet to arrive at the scores corresponding to the actual parameters.
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Step V: Arrive at the Credit Risk Grading based on total score obtained The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor. Number 1 Risk Grading Superior Short Name SUP Score 100% cash covered Government guarantee International Bank guarantees 85+ 75-84 65-74 55-64 45-54 35-44 <35
2 3 4 5 6 7 8
Good Acceptable Marginal/Watch list Special Mention Sub-standard Doubtful Bad & Loss
GD ACCPT MG/WL SM SS DF BL
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Date:
S h o r t
Score
1 2 3 4 5 6 7 8
Superior Good
Acceptable
Fully cash secured, secured by Government/International Bank Guarantee 85+ 75-84 65-74 55-64 45-54 35-44 <35
Criteria
Weight
Score Parameter
50%
Actual Parameter
Score Obtained
Debt Equity Ratio () - Times Total Liabilities to Tangible Net worth All calculations should be based on annual financial statements of the borrower (audited preferred).
Less than 0.25 0.26 to 0.35 x 0.36 to 0.50 x 0.51 to 0.75 x 0.76 to 1.25 x 1.26 to 2.00 x 2.01 to 2.50 x 2.51 to 2.75 x More than 2.75
15 14 13 12 11 10 8 7 0
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3. Profitability: (15%) Operating Profit Margin (%) Operating Profit 100 Sales
Interest on debt
50
Criteria
Weight
Parameter
Score
Actual Parameter
Score Obtained
The size of the borrowers business measured by the most recent years total sales. Preferably based on audited financial statements 2. Age of Business The number of years the borrower has been engaged in the primary line of business.
> 60.00 30.00 59.99 10.00 29.99 5.00 - 9.99 2.50 - 4.99 < 2.50 > 10 years > 5 - 10 years 2 - 5 years < 2 years
5 4 3 2 1 0 3 2 1 0
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3. Business Outlook
A critical assessment of the medium term prospects of the borrower, taking into account the industry, market share and economic factors. 4. Industry Growth 5. Market Competition
Favorable Stable Parameter Slightly Uncertain Cause for Concern Strong (10%+) Good (>5% - 10%) Moderate (1% - 5%) No Growth (<1%) Dominant Player Moderately Competitive Highly Competitive Difficult Average Easy
3 2 Score 1 0 3 2 1 0 2 1 0 2 1 0 18
Actual Parameter Score Obtained
6. Entry/Exit Barriers
Criteria
C. Management Risk
Weight
12 %
Parameter More than 10 years in the related line of business 510 years in the related line of business 15 years in the related line of business No experience Ready Succession Succession within 1-2 years Succession within 2-3 years Succession in question Very Good Moderate Poor Regular Conflict
Score 5 3 2 0 4 3 2 0
Actual Paramete r
Score Obtained
1. Experience
(Management & Management Team)
The quality of management based on the aggregate number of years that the Senior Management Team has been in the industry. 2. Second Line/ Succession
3. Team Work
3 2 1 0 12
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Weight 10%
Score Parameter Fully pledged facilities/substantially cash covered/Reg. Mortg, for HBL Registered Hypothecation (1st charge/1st Pari passu charge) 2nd Charge/Inferior charge Simple hypothecation/negative lien on assets. No security Registered Mortgage on Municipal Corporation/Prime area property. Registered Mortgage on Pourashava/semi-urban area property Equitable Mortgage or No property but plant & machinery as collateral Negative lien on collateral No collateral Personal guarantee with high net worth or Strong Corporate Guarantee Personal Guarantees or Corporate Guarantee with average financial strength No Support/Guarantee 4 3 2 1 0
4 3 2 1 0
3. Support (Guarantee)
1 0 10
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Weight 10%
Parameter More than 3 (three) years accounts with faultless record Less than 3 (three) years accounts with faultless record Accounts having satisfactory dealings with some late payments Frequent Past dues & Irregular dealings in account More than 60% 40% - 60% Less than 40% Full Compliance Some Non-Compliance No Compliance
Score 5 4 2 0
2 1 0 2 1 0 1
Personal accounts of the key business Sponsors/ Principals are The extent to which the bank maintained in the bank, with maintains a personal banking significant deposits relationship with the key business No depository relationship sponsors/principals. Total Score-Relationship Risk Grand Total- All Risk
0 10 100
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The overall performance of SPL is in line with the first generation of electricity company. Besides, the SPL has been facing decline trend in some of the performance parameters compared to its previous performance up to 30th June 2009.However, some of the parameters has again shown upward trend in 31st August 2008 performance. The overall Performance of the SPL is analyzed below: 6.1 CREDIT RISK GRADING SCORE SHEET Of SUMMIT POWER Ltd as the financial performance 2009-2010:
Reference No: Borrower: Group Name (if any): Branch: Industry/Sector: Date of Financials: Completed by: Approved by:
Number
Risk Grading:
___Good______
Grading
S h o r t
Score
1 2 3 4 5 6 7 8
Superior Good
Acceptable
Fully cash secured, secured by Government/International Bank Guarantee 85+ 75-84 65-74 55-64 45-54 35-44 <35
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Criteria
Weight
Score Parameter
50%
Actual Parameter
Score Obtained
Less than 0.25 0.26 to 0.35 x Debt Equity Ratio () - Times 0.36 to 0.50 x Total Liabilities to Tangible Net 0.51 to 0.75 x worth 0.76 to 1.25 x 1.26 to 2.00 x All calculations should be based 2.01 to 2.50 x on annual financial statements of 2.51 to 2.75 x the borrower (audited preferred). More than 2.75 2. Liquidity: (15%) Greater than 2.74 2.50 to 2.74 x Current Ratio () - Times 2.00 to 2.49 x Current Assets to Current 1.50 to 1.99 x Liabilities 1.10 to 1.49 x 0.90 to 1.09 x 0.80 to 0.89 x 0.70 to 0.79 x Less than 0.70 3. Profitability: (15%) Greater than 25% Operating Profit Margin (%) 20% to 24% 15% to 19% Operating Profit 10% to 14% 100 7% to 9% Sales 4% to 6% 1% to 3% Less than 1% 4. Coverage: (5%) More than 2.00 Interest Coverage Ratio () More than 1.51 Less than Times 2.00 More than 1.25 Less than Earning Before Interest & Tax (EBIT) 1.50 Interest on debt More than 1.00 Less than 1.24 Less than 1.00 Total ScoreFinancial Risk
15 14 13 12 11 10 8 7 0 15 14 13 12 11 10 8 7 0 15 14 13 12 10 9 7 0 5 4 3 2 0
1.27
10
0.89
25%
15
50
38
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Parameter
Actual Parameter
Score Obtained
The size of the borrowers business measured by the most recent years total sales. Preferably based on audited financial statements 2. Age of Business The number of years the borrower has been engaged in the primary line of business. 3. Business Outlook A critical assessment of the medium term prospects of the borrower, taking into account the industry, market share and economic factors. 4. Industry Growth 5. Market Competition
> 60.00 30.00 59.99 10.00 29.99 5.00 - 9.99 2.50 - 4.99 < 2.50 > 10 years > 5 - 10 years 2 - 5 years < 2 years Favorable Stable Slightly Uncertain Cause for Concern Strong (10%+) Good (>5% - 10%) Moderate (1% - 5%) No Growth (<1%) Dominant Player Moderately Competitive Highly Competitive Difficult Average Easy
5 4 3 2 1 0 3 2 1 0 3 2 1 0 3 2 1 0 2 1 0 2 1 0 18
169
13
Favorable
20%
6. Entry/Exit Barriers
18 Actual Paramete r 13
Criteria
C. Management Risk
Weight Parameter
Score 5 3 2 0
Score Obtained 5
1. Experience
More than 10 years in the related line of business 510 years in the related The quality of management based line of business on the aggregate number of years 15 years in the related that the Senior Management line of business Team has been in the industry. No experience
(Management & Management Team)
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3. Team Work
3 2 1 0 12 Score
Very Good
Parameter Fully pledged facilities/substantially cash covered/Reg. Mortg, for HBL Registered Hypothecation (1st charge/1st Pari passu charge) 2nd Charge/Inferior charge Simple hypothecation/negative lien on assets. No security Registered Mortgage on Municipal Corporation/Prime area property. Registered Mortgage on Pourashava/semi-urban area property Equitable Mortgage or No property but plant & machinery as collateral Negative lien on collateral No collateral Personal guarantee with high net worth or Strong Corporate Guarantee Personal Guarantees or Corporate Guarantee with average financial strength No Support/Guarantee 4 3 2 1 0
4 3 2 1 0 Plant & machinery as collateral Personel guarantee whith high net worth or strong Corporate Gurrantee 7 1
3. Support (Guarantee)
1 0 10
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Weight 10%
Parameter More than 3 (three) years accounts with faultless record Less than 3 (three) years accounts with faultless record Accounts having satisfactory dealings with some late payments Frequent Past dues & Irregular dealings in account More than 60% 40% - 60% Less than 40% Full Compliance Some Non-Compliance No Compliance
Score 5 4 2 0
Actual Score Parameter Obtained More than 3 years accounts with faultless record 5
2 1 0 2 1 0 1
>60%
Full Compliance
2 1
Personal accounts of the key business Sponsors/ Principals are The extent to which the bank maintained in the bank, with maintains a personal banking significant deposits relationship with the key business No depository relationship sponsors/principals. Total Score-Relationship Risk Grand Total- All Risk
0 10 100
10 85
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Strength
Summit Power is the largest local Independent Power Producer. Satisfactory and superior asset and service quality. Good internal capital generation. Diversified product lines. Experienced, expert and efficient management team especially in credit department. Quality risk assessment tools. Strong policy and guideline Reputation in Stock market Environmental stewardship 13 Strong financial performance Strong market position
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Moderate MIS Moderate corporate unable to fulfill the demand of power Weak Liquidity Position Dependence On Purchased Power Limited Hydroelectric Generation
Dependency on Coal
Weaknesses
Opportunities
Creation of brand image New product innovation Government support Efficient utilization of capital, machines, material and human resources Summit power is interested in infrastructure sectors in Bangladesh Focus on Renewable Energy Implementation of New Technologies 14 Increasing Demand for Electricity Increased Market competition Regulatory Obligations Legal Proceedings Seasonal Variations and Climate Conditions Economic Slowdown in Bangladesh
Threat
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7.1 Findings
following Findings have been found.
By analyzing the credit risk and their performance in last financial year the
According to the credit risk grading score, SPL achieved 85 out of 100 which indicate a sound business operation in current financial year. As per Credit Risk Grade, SPL is categorized in group of Good. SPL is one of the leading companies in Electricity & Power sector. The annual turnover of SPL is around increased by double. Paid up capital is increased by 400 million of SPL. So it is a good point to consider as increasing growth of SPL. The current ratio of SPL in financial year is 0.89. It indicates a less amount of current assets considering the Ideal ratio. They are very much strong in capital adequacy and asset quality, but their liquidity management was not good in the last five years. The profitability ratio indicates that in last five years SPLs profitability condition was good. The credit policy of SPL is very restrictive and defensive. As a result, its loan management is very constructive. The expansion of business activity in current years indicates the successive period of this is continuing. In last five years the maximum portion of total income of SPL comes from the selling the power and electricity which is very demanded commodity for the public concern.
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7.2 Recommendation .
At first the SPL should find out the way to Reduce its bad loan amount further, to improve is loan performance quality. SPL holds huge reserves and fund that are not utilized. As a result, huge opportunity cost is incurred by SPL. So, it should be utilized more its reverse money in productive sector.
SPL should give more emphasize on liquidity management in a balanced way. SPLs training programs can encourage their trainees to seek additional education including computer classes, accounting, MBA programs and foreign language instruction. So the training should be fully fledged. Due to the unwanted increase of the oil price the world economy as well as Bangladesh economy is facing a big challenging situation. So the SPL is recommended to very careful to sanction further new plants and power stations. An industry wise integrated Credit Risk Grading system should be developed. So that risk can measure for different industry of business. Power sector is a large plant and long projected activities so it moves by a team effort. So, strong co-ordination with the related divisions and departments is very important SPL is a leading company in Bangladesh for power sector, and there have a lot of chances for expanding business in this sector. Bangladesh Government also facilitates more in this sector for improving the power sector. So, it can a good chance for SPL for optimizing its business. The above recommendations will be advantageous for the commercial banks if these are attained in case of credit risk management. As a result nonperforming
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loan will be reduced as well as the financing will steer the wheel strongly in the economy of Bangladesh.
7.3 Conclusion .
Credit risk management practices in Bangladesh are not well developed. Now NCBs & PCB have significant amount of Bad loans and non performing loan. Even though Bangladesh Bank have taken various steps to minimize credit risk in NCBs and PCBs. The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank has been in practice for mandatory use by the Banks & financial institutions for loan size of BDT 1.00 crore and above. However, the LRA manual suffers from a lot of subjectivity, sometimes creating confusion to the lending Bankers in terms of selection of credit proposals on the basis of risk exposure. Meanwhile, in 2003 end Bangladesh Bank provided guidelines for credit risk management of Banks wherein it recommended, the introduction of Risk Grade Score Card for risk assessment of credit proposals. Since the two credit risk models are presently in vogue, the Governing Board of Bangladesh Institute of Bank Management (BIBM) under the chairmanship of the Governor, Bangladesh Bank decided that an integrated Credit Risk Grading Model be developed incorporating the significant features of the above mentioned models with a view to render a need based simplified and user friendly model for application by the Banks and financial institutions in processing credit decisions and evaluating the magnitude of risk involved therein. further the most important guidelines on Managing Core Risk in Banking developed by the focus group under the auspices of Bangladesh bank already implemented within the given deadline, have made new dimension in the whole banking arena. Following implementation of guidelines on credit risk management, entire credit operation has been streamlined with maintaining separate demarcation among the department under credit risk management.
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Bibliography
1. Annual Report- 2005, 2006, 2007, 2008, 2009 of The SPL. 2. SPL website: http://www.summitpower.org 3. Summit group: www.summitgroupbd.com
4. Research Methodology, By-Richard Daniel & John Morgan, Published in USA, 2005 By International Research Institute of Minnesota. 5. Prudential guidelines of credit risk management.
6. Managing core risks in Banking : Credit Risk Management-Published by:
Bangladesh Bank-2005 7. Bangladesh Bank circular and guidelines-BRPD Circular No.18 dated 11.12.2008 8. Credit Risk Grading Manual_ Introduced by Bangladesh Bank, November 2005 9. Annual Term paper of Bangladesh Bank-2007 10.
11.
Economic Term paper of Bangladesh-2007 Bangladesh Bank Website. http://www.bangladesh-bank.org/ Guidelines of Basel-II implementation, By Bangladesh Bank-2009 Yahoo : http://www.yahooanswer.com/ Goggle : http://www.google.com.bd/ Wikipedia : http://en.wikipedia.org/wiki/Main_Page Essentials of Managerial Finance by Scoot Besley & Eugene F. Brigham
Ask : www.ask.com
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