Draft REport

Credit Risk Management (Study on Agrani Bank Limited)
Page 1

1.1 INTRODUCTION

After completion of 8 semesters in the BBA Program of the Faculty of Business Studies,
University of Dhaka, I prepared my Internship paper on Credit Risk Management of the
Pallabi Branch of Agrani Bank Limited prepared on the Credit Risk Management
(CRM) department of the bank. In the report it has gone through the standard operating
procedures carried out by the bank and understood them well. This paper has tried to
understand the regulatory compliance issues proposed by Bangladesh Bank (BB)
regarding credit management practices.

1.2 RATIONALE OF THE STUDY

In order to fulfill the requirement of the Internship program I chose Agrani Bank Ltd.
The Credit Risk Management (CRM) of Agrani Bank Ltd placed me to its Pallabi
Branch. The CRM department of Agrani Bank Ltd also assigned me a topic of the report
to be submitted .The topic of my report is Credit Risk Management of Agrani Bank
Limited. I have done my internship. During this period I tried to get familiarize myself
with the theoretical concept and practical process of CRM in ABL.

1.3 GENERAL OBJECTIVE OF THE REPORT

To bridge the gap between text book knowledge and real life.
To provide a thorough understanding of the Credit Risk Management Practice.
To show whether the Credit Risk Management Practice followed by ABL is in
compliance with Bangladesh Bank guidelines.
To discuss some core issues like Classification procedures and credit handling
procedures.

1.4 SPECIFIC OBJECTIVE OF THE REPORT

Understanding the various functions of Credit Department of Agrani Bank
Ltd.
Providing a review of the overall credit policy of Agrani Bank Ltd.
Identifying the credit approval and monitoring process of Agrani Bank Ltd.
Background of the Study


Page 2
Identifying the loan recovery procedures.
Evaluating the lending performance of Agrani Bank Limited.

1.5 SOURCES OF DATA & METHODOLOGY

To perform the study, data sources are to be identified and collected, they are to be
classified, analyzed, interpreted and presented in systematic manner and key points are
to be found out. This overall process of methodology is given in the form of flowchart
that has been followed in the study.

Figure 1.1: Flow chart of Methodology

Information collected to furnish this report is both from primary and secondary sources.

Primary Sources
Face-to-face conversation with respective officer and staff of the Branch.
Practical work exposures from the different desk of the department of the
branch covered.
Relevant files study as provided by the officers concerned.
Selection of the Topic
Identifying Data Sources

Collection of Data

Classification, Analysis, Interpretation and
Presentation of Data

Findings of the Study

Final Report Preparation


Page 3
Secondary Sources
Annual Report of Agrani Bank Ltd. 2012
Prospectus and other documents of Agrani Bank Ltd.
Prior research report
Website

1.6 LIMITATIONS

The following limitations are apparent in the report
Time is the first limitation as the duration of the program was of 45 days only.
Another limitation of this report is Banks policy of not disclosing some data and
information for obvious reason, which could have been very much useful.


Page 4

2.1: Background of the Bank
Agrani Bank is a state-owned commercial bank of Bangladesh established in 1972. Its
headquarter is situated at Motijheel in Dhaka, the capital city of Bangladesh. Agrani
Bank Limited, a leading commercial bank with 899 outlets strategically located in
almost all the commercial areas throughout Bangladesh, overseas Exchange Houses and
hundreds of overseas Correspondents, came into being as a Public Limited Company
on May 17, 2007 with a view to take over the business, assets, liabilities, rights and
obligations of the Agrani Bank which emerged as a nationalized commercial bank in
1972 immediately after the emergence of Bangladesh as an independent state. Agrani
Bank Limited started functioning as a going concern basis through a Vendors
Agreement signed between the ministry of finance, Government of the People's
Republic of Bangladesh on behalf of the former Agrani Bank and the Board of Directors
of Agrani Bank Limited on November 15, 2007 with retrospective effect from 01 July,
2007.

2.2: Mission, Vision & Values of the Bank
Mission:
Fusing ideas and lessons from best practice to explore new avenues to become
stronger, more efficient and competitive. Also apply information and
communication technology for the benefit of our customers and employees. And
invest to strengthen the future of the Bank.
Vision:
To become a leading bank of Bangladesh operating at international level of
efficiency, quality and customer service.
Values:
Agrani Bank believes in integrity, transparency, accountability and
professionalism to provide a high standard of service to all our customers and
stakeholders.

Organization Part


Page 5

2.3: Strategic Objectives
Winning at least 6.5 percent share of deposits and 5.5 percent share of loans and
advances of Bangladeshi market.
Gaining competitive advantages by lowering overall cost compared to that of
competitors.
Overtaking competitors by providing quality customer service.
Achieving technological leadership among the peer group.
Strengthening the Banks brand recognition.
Contributing towards the economic well-being of the country by focusing
particularly on SME and agricultural sectors.
Strengthening research capability for innovative products.

2.4: Ethical standards
1. Be Trustworthy
2. Keep an Open Mind:
3. Meet Obligations
4. Be Transparent
5. Be involved with the Community
6. Be Respectful
7. Be Environment Conscious


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2.5: Corporate Profile
Name of the Company Agrani Bank Limited
Chairman Khondoker Bazlul Hoque, PhD
Managing Director & CEO Syed Abdul Hamid, Chartered Accountant
Company Secretary Badal Chandra Dey
Legal Status Public Limited Company
Genesis Agrani Bank Limited has been incorporated on 17 May 2007 and taken
over the business, assets, liabilities, rights and obligations of Agrani
Bank with effect from 1 July 2007. Agrani Bank which initially
emerged as a Nationalised Commercial Bank (NCB) in 1972, following
The Bangladesh
Banks Nationalization Order, 1972 (President's Order No. 26 of 1972)
has now become a State Owned Commercial Bank (SCB) through a
vendor's agreement dated 15 November 2007.
Date of Incorporation 17 May 2007
Registered Office 9/ D Dilkusha Commercial Area, Dhaka 1000 Bangladesh
Authorized Capital Tk. 2500.00 Crore
Paid up Capital Tk. 991.29 Crore
Reserve & Retained Earnings Tk. 1006.20 Crore
Credit Rating by CRISL Particulars Long Term Short Term
Surveillance Rating 2011
(As Government Supported Entity)
AAA ST-1
(As State Owned Commercial Bank)
A+ ST-2
(As State Owned Commercial Bank)
A- ST-1
Outlook Positive
Date of Rating Declaration 06-09-2012
Number of Employees 13,890 (9,917 officers and 3,973 staffs)
Number of Branches 899
Number of Subsidiary
Companies
6
Phone-PABX +88-02-9566153-54, +88-02-9566160-69, +88-02-9566074-75
Website Website www.agranibank.org
E-mail agrani@agranibank.org
info@agranibank.org


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2.6: Achievements


Page 8
2.7: Highlights 2012


Page 9
Organization Part

3.1 Credit Risk Management

Credit risk is one of the major risks faced by the Bank. This can be described as potential losses
arising from the failure of a counter party to perform according to contractual arrangement with
the Bank. The failure may arise due to unwillingness of the counter party or decline in economic
condition etc. Hence, Agrani Bank Limited has designed its risk management to address all these
issues.

Risk Assessment: The primary factor determining the quality of the Banks credit portfolio is
the ability of each borrower to honor, on timely basis, all credit commitments made to the Bank.
This must be accurately determined by the authorized credit officers/executives prior to
approval. Therefore a thorough credit risk assessment shall be conducted prior to the sanction of
any credit facilities. Credit Risk Assessment process in the Bank shall be governed by the
following principles:

Assessment Frequency: A comprehensive credit Assessment (due Diligence) shall be conducted
before sanction of any loan. Thereafter, it will be done annually for all types of credits facilities
i.e. Demand loan, Continuous Loan and Term Loan.

Assessment Documentation: The result of the Credit Assessment shall have to be documented.
Initially, it will be originated by the relationship Officer of the branch and reassessed in
corporate banking Division and finally in credit Division. All evidences of credit assessment
have to be filed properly in the respective Credit File.

KYC policy: Banks KYC policy applicable for depositors shall also be applicable for
borrowing customers. In addition, before sanctioning any credit facility the concerned
relationship officer must physically visit the business premises of the customer, talk with
important personalities of the locality, collect information on the borrower from his / her existing
banker, if any and summarize all these information in the pre-sanction inspection report.

Accountability: The Relationship Manager (Presently Head of Branch) shall be the owner of the
customer relationship and be held responsible to ensure the accuracy of the entire credit
application /assessment document submitted for approval. He / She will be responsible for
conducting due diligence on the borrower, principals and guarantors.

Filling up Credit Assessment Document: Credit assessment document must be filled in with
accurate information in full. No field in the assessment document should be erased or
overlooked. If information is not available, concerned field should be filled in with Information
Not Available with proper justification.

Repayment Source: Repayment source of the borrower is to be validated in the Credit
Assessment Document by cash flow and other financial analyses. For such analyses, generally
Agrani Bank Credit Policy


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three years financials are to be reviewed. Loan amount and tenor must commensurate with the
repayment capacity of the borrower.

Credit Requirement: Credit requirement of the borrower must be assessed properly. The
relationship officer will apply prudence to find out actual credit requirement of the borrower and
place his/her findings in the Credit Assessment Document.

Risk Mitigating Factors: Risk inherent in a credit proposal shall have to be identified and
appropriate mitigating factors should be applied. These are to be summarized in the Credit
Assessment Document
Collateral: Collateral offered against a credit facility shall properly be valued and verified by the
concerned Officer and /or Manager and revalued and re-verified annually in the subsequent
period(s). In addition to the valuation of the Officer/Manager, the same collateral must be valued
and verified by an enlisted surveyor of the Bank.

Insurance Coverage: Adequacy and extent of insurance coverage must be assessed in the Credit
Assessment Document. Customers preference for not taking required insurance policy must be
justified properly and it must be mentioned as deviation insurer of the Bank. Adherence to
Policy.

Syndicated Loans: Proposal for syndicated loans shall be analyzed with respect to risk and
return in the same manner as directly sourced loans. In case of participation in a syndication deal,
Bank will independently assess the proposal and will not solely depend on the credit assessment
of the Lead Arranger.

3.2 Agrani Bank Credit Policy-Credit Principles

Agrani Bank Limited follows the following principles in credit disbursement:

Loan Deposit Ratio: Loans and advances shall normally be financed from customers deposit
and sometimes from capital fund of the Bank. Usually loans and advances shall not be extended
out of temporary fund or borrowing from money market.

Credit Quality: Credit facility shall be allowed in a manner so that credit expansion goes on
ensuring optimum asset quality i.e., Banks standard of excellence shall not be compromised.
Credit facilities will be extended to customers who will complement such standards.

Compliance: All credit extension must comply with the requirements of Banks Memorandum
and Articles of Association, Bank Company Act 1991 as amended from time to time, Bangladesh
Banks instruction circulars, guideline and other applicable laws, rules and regulations, Banks
Credit Risk Management Policy, Credit Manual and all relevant circulars in force.

Deviation: Any deviation from the internal policy of the Bank must be justified and well
documented. Specially, all credit assessment forms shall invariably include the deviations from
the policy, if any. However, no external regulations shall be compromised.


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Return: Credit operation of the Bank should contribute at optimum level within the defined risk
limitation. In other words, credit facilities should be extended in such a manner that each deal
becomes a profitable one so that Bank can achieve growth target and superior return on capital.

Repayment Capacity: Credit facilities will be extended to those customers who can make best
use of them thus helping maximize Banks profit as well as economic growth of the country. To
ensure achievement of this objective Bank will base lending decision mainly on the borrowers
ability to repay.

Diversification: The portfolio shall always be well diversified with respect to sector, industry,
geographical region, maturity, size, economic purpose etc. Concentration of credit shall be
carefully avoided to minimize risk.

Name Lending: The Bank shall carefully avoid name lending. Credit facility shall be allowed
absolutely on business consideration after conducting due diligence. No credit facility shall be
allowed simply considering the name and fame of the key person or corporate image of the
borrowing company. In all cases, viability of business, credit requirement, security offered, cash
flow and risk level will be professionally analyzed.

Single Customer Exposure Limit: Agrani Bank will always comply with the prevailing
banking regulations regarding Single Customer Exposure Limit set by Bangladesh Bank from
time to time. As per prevailing regulation, Bank will take maximum exposure (outstanding at
point of time) on a single customer ( Individual, Enterprise, Company, Corporate, Organization,
Group) for the amount not exceeding 35 percent of Banks total capital subject to the condition
that the maximum outstanding against funded facilities does not exceed 15 percent of the total
capital.

Large Loan: Credit facility to a single customer (Individual, Enterprise, Company, Corporate,
Organization, and Group) shall be treated as large loan if total outstanding amount against the
limit at a particular point of time equals or exceeds 10 percent of the total capital of the Ban

3.3 Operational and Performance Objectives

Monitoring and Control: To ensure the prudent conduct of the banks lending and investment
affairs, adequate control measures are to be maintained in critical areas of its lending and
investment operations. For this purpose, the segregation of potentially conflicting functions and
independent assessments of operations and the banks portfolio will be institutionalized.
Accounts will be monitored with a view to detecting early deterioration and appropriate
intervention.

Timely and Adequate Delivery of Assistance: The bank will respond to the needs of worthy
customers through the provision of timely and adequate financial assistance and advice.


Page 12
Minimum Cost and Efficient Delivery of Services: The profitability of the banks lending and
related service operations is of paramount importance, requiring the delivery of products and
services with maximum cost efficiency

Price Competitiveness and Service Quality: The competitive business environment requires
the bank to deliver its services at competitive rates and with the highest quality standards. Pricing
of services and financial products shall therefore be regularly addressed in order to assure that
the banks costs are covered and a reasonable return on its deployed capital is achieved.

Health of Risk Assets Portfolio: In the final analysis, the banks future profitability and welfare
is dependent on a base of healthy, earning assets. To this end, the bank shall manage its credit
and investment risks in a manner as to assure the banks stability and the attainment of
profitability and growth objectives.

3.4 Principal Guidelines

Eligibility Criteria: The banks criteria for loan and investment eligibility which are to be
strictly adhered to are the following:

If the borrower is and individual, a proprietary entity or otherwise a natural person, he/she/it
must be:
A citizen of Bangladesh
Of legal age, and
Of sound mind

If the borrower is a corporation, a limited company, or similar entity, it must be:
Organized, formed or incorporated under the laws of Bangladesh
In the case of foreign companies, authorized to borrow from local banks under the
guidelines of Bangladesh Bank, and
Authorized to do so by a resolution from its Board of Directors

The individual or corporate entity must be engaged (or prospectively propose to engage) in a
productive enterprise in the manufacturing, agro-based, extractive, export or service sectors

Basis for Approval of Loans and Investments

a) Viability: Financial assistance shall be granted only to those entities whose operations have
been evaluated as technically, commercially and financially viable.

b) Creditworthiness: In addition, applications for financial assistance may be granted only
when the entities and their principal proponents/management teams are deemed credit-worthy
(demonstrated by past repayment performance with the bank or other financial institutions,


Page 13
capability to absorb debt payments from sources external to the main business being applied for,
and general credit consciousness and responsibility.

c) Sufficiency: No funded or non-funded credit exposure may be granted unless it is sufficient,
together with the owners equity, to fully finance the proposed project or business requirements.

Leverage

The debt-to-equity ratio for organized business entities assisted by the bank should not exceed
60-40 (1.5:1) computed after the assistance. Exceptions to this guideline are exposures to the
retail segment (e.g., rural customers, employed individuals).

Security and Protective Requirements

a) In general, all forms of funded financial assistance shall be extended on a fully-secured basis,
where coverage of the banks exposure by acceptable tangible assets shall not at any time be less
than 1.5 times the principal exposure. Exceptions to this policy may be granted only:
i. In cases where loan products are designed to be unsecured; or
ii. By the Board of Directors upon the recommendation of the CRECOM

b) As a matter of principle, the bank should not participate in credit transactions where it shall
have an inferior security position compared to any other pre-existing or proposed new lenders.

c) In case of private limited companies, all the directors must execute a joint and several Deed of
Guarantee towards the performance of the terms and conditions of loan and other credit facilities.

3.5 Types of Acceptable Security

Well-identified land and landed property located in city corporations, municipalities, pourasava,
district and upazilla centers, commercial developments, industrial areas and other developed
areas, subject to the consent requirements applicable to the type of property.

Funds from these sources, as well as to provide a marginal spread which shall take care of the
banks administrative/overhead expenses and its profit.

Maturity


Page 14
The usual tenor for working capital loans shall not be more than 1 (one) year, except in the case
of permanent working capital where maximum of three years shall be allowed. Repayments for
medium and long term loans shall (depending on the cash flow capability of the entity) be made
over a period of between 3 (three) to 10 (ten) years inclusive of grace period.
Authorization
No officer or staff of the bank shall approve or otherwise commit the bank to any credit,
guarantee or investment without authorization. Furthermore, no officer or staff may make or
enter into any unauthorized arrangement(s) that would result in the rescheduling, restructuring or
exiting loan schedules or the postponement of the recovery of the banks loans or investments
without similar authorization. Any breach of this policy shall be treated as fraudulent and
criminal act, and shall be dealt accordingly.
Credit Assessment
A thorough credit and risk assessment should be conducted prior to the granting of loans. Credit
applications should include the following details:
Amount and types of loan proposed
Purpose of loans
Loan structure (Tenor, covenants, repayment schedule, interest)
Security arrangements
Account Monitoring & Recovery
Front office, that is, branch bears the primary responsibility for monitoring and recovering the
banks credit exposures, in accordance with the operating rules and procedures. Monitoring and
follow up activities should be intensified when the perceived credit risk of borrowers deteriorate,
based on the latest quarterly risk grade/classification.
The credit operation and administration unit of Head Office, on the other hand, will monitor the
performance of the various credit portfolios by analyzing the data base which it shall establish
and maintain on a current basis. Individual exposures in the banks portfolio will likewise be
classified in accordance with Bangladesh Bank guidelines.


Page 15

4.1Loans and Advances

The loans and advances of the Bank grew significantly in 2012. The total loans and
advances as on 31 December 2012 was Tk. 21,266.30 crore as against Tk. 19,408.56 crore
at the end of previous year, showing an increase of 9.57 percent. The advance portfolio
of the Bank is well diversified and covers funding to a wide spectrum of
business and industries including agro-based and agro-processing, ship breaking, steel
& engineering, paper & paper products, chemicals, construction, real estate and loans
under consumers credit schemes, various trading businesses, service-holders loan and
women entrepreneurs of the country.

Sector-wise position of loans and advances as on 31 December 2012,2011, 2010 and 2009
is shown below:
Amount in crore taka
Sector wise loans 2012 2011 2010 2009
Agriculture and fishery 864.64

740.13 694.33 643.18
Jute and jute goods 630.27 888.43 650.24 678.24
Transport, storage and communication 150.03 252.08 71.49 80.60
Ship breaking 219.71 95.48 79.11 73.37
Textile and RMG 2,675.42 1694.97 1269.09 1373.94
Food and allied industry 863.27 680.64 509.62 471.87
Construction and engineering 185.05 314.55 235.52 218.42
Pharmaceuticals and chemicals 298.07 427.65 320.19 296.95
Leather 364.10 534.81 464.47 440.49
Power and energy 1,180.42 195.73 72.48 6.94
Professional and services 182.27 131.03 93.02 86.27
Housing services 572.12 1473.82 1370.80 1126.98
Wholesale and retail trading 2,152.78 2687.16 2011.98 1865.92
Personal loan (staff loan and other
personal loan)
1,569.16 1379.19 1293.56 1169.36
Others 9,358.99 4829.95 3152.71 2803.70
Total 21,266.30 16325.62 12223.61 11336.23

Table 4.1: Sector-wise position of loans and advances

Scenario Analysis of Agrani Bank Limited


Page 16

4.2 Major Industrial Loan Sectors:

Major Industrial Loan Sectors in 2012 Agrani Bank Limited sanctioned loans in different
Sectors, the important ones of which are as follows:

Textiles (Spinning, Weaving, Dyeing, Knitting, Finishing)
Export-Oriented Garments Industry
Dairy and Poultry
Leasing
Land Developer
Fisheries
Bread and Biscuit
Rice and Flour Mills
Ice Mills
Forest and Allied
Pharmaceuticals
Transportation
Bricks
Hotel
Education and Poverty Alleviation
Small and Cottage Industries
Power Plant
Plastic and Rubber
Cement
Ceramic
Paper and Board Mills
Tanneries
Printing and Packaging
Engineering
Electrical and Electronics
Computer
Food and Allied
Chemicals
Hospitals and Clinics
Salt
Telecommunication
Filling Station
Glass and Glass ware
Commercial Building and Shopping Mall


Page 17

4.3 The matrix of advances of the Bank as on 31 December 2012 was as
follows:


Page 18

SWOT Analysis:

5.1 Strengths

1. Strong corporate identity
2. Strong employee bonding and belongings
3. Large network of branches
4. Strong financial performance and position
5. Experienced Management

5.2 Weaknesses

1. Lack of innovative products
2. Lack of motivation
3. Lack of experienced employees in junior level
.
4. 3 Opportunities

1. Huge and enthusiastic workforce
2. Introduction of online banking
3.

5.3 Threats

1. Upcoming banks
2. Modern banking services offered by other commercial banks

SWOT Analysis, Findings,
Recommendations and Conclusion


Page 19

Findings

1 Credit Related:

1. The loan acquiring procedure is a lengthy procedure and some customers do not
understand it properly.
2. The bank follows the guidelines of Bangladesh Bank in lending. But still sometimes
borrowers get loans from the bank who are not eligible.
3. The bank has credit recovery and monitoring unit. The recovery position is far better
than previous. But still there is a large amount outstanding and if the bank does not take
necessary steps to recover it then it would be a great problem for them.
4. Recently the credit position is monitored from time to time to find the defaulter and
necessary actions are taken against them to make the recovery quick.

2 Behavioral Areas:

1. Serves the customers with politeness.
2. Managers understand the value of the customers well and try to solve any difficulty
faced by them.

3 Operational Areas:

1. The service is not quick. Rather it sometimes annoys the customers
2. In some cases employees are not that much efficient
3. Agrani Bank Limiteds banking service is not arranged in such a way that provides
excellent service to its customers and employees.
4. The banks ATM service is not that much affluent. It is not still able to provide ATM
service to its customers completely and effectively.

4 Procedural Areas:

1. Procedures are not easy.
2. Many activities are done manually and it takes time to complete the paper works.

5 Technical Areas:
1. Although renovation has taken place but still many computers, softwares and
hardwares are outdated.
2. Security system is not good.


Page 20
Most Of the Branch bank is still lagging behind in computerization and the use of other
Information Technologies. Still they have to transfer data of other documents from branch to
branch or branch to Head Office through peons and others.

Recommendations

Lending guidelines of the bank should be made available to the borrowers so that they
can understand the procedures easily

Agrani Bank Limited should establish a strong network system with its branches to
transfer data easily and within a short time

The bank should provide more products and services to its customers

To make the process easy and quick, the whole system should be computerized and the
use of modern Information Technologies such as- internet, e-mail, fax etc. should be
increased

The bank has to adopt the most recent technologies to improve the quality of its services

A group of well-trained and expert personnel should be recruited who will render the
best service to the customers

The banks strategy should be arranged properly to provide better service

The working environment should be improved. All branches should be reorganized
and modernized

Conclusion

To conclude the report, it is imperative to mention that default loans and clients have
been a major problem for the banks. To reduce the problem of default or non-
performing loans, banks need to analyze each and every loan proposal carefully. There
are lending guidelines introduced by Bangladesh Bank. All the banks and other
financial institutions need to follow these guidelines strictly. Agrani Bank Limited has
started following the guidelines of Bangladesh Bank strictly. . In the end, it can be
remarked that the central financial authority as well as all the financial institutions have
to continuously analyze the overall environment, economic, social, business, cultural
and so on. Thus, they can manage the credit risk properly.

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Credit Risk Management (Study on Agrani Bank Limited)

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