CREDIT RISK MANGEMENT OF TRUST BANK LIMITED

Credit Risk management of Trust Bank Limited

Submitted To:
Mr. Abdullah Al Mahmud Lecturer Department of Banking University of Dhaka

Submitted By:
K.M. Faridur Rahman Id No: 12-007
Department of Banking University of Dhaka

Submission Date: 1st January, 2010

January 01, 2010

Mr. Abdullah Al Mahmud Lecturer Department of Banking University of Dhaka

Subject: Submission of term paper on Credit Risk Management of Trust Bank Limited. Dear Sir, With best respect and honor, I would like to inform you that I have completed my internship term paper on Credit Risk Management of Trust Bank Limited". It is immense pleasure for me to place the same before you. I have tried my best to prepare this term paper in consistence with the optimal standard under your valuable direction. I made every endeavor to prepare this dissertation and tried my level best to accumulate relevant and insightful information. It is a great experience for me to work on this topic. I have tried to make the term paper vivid and comprehensive within the scheduled time and limited resources. Thanking you for your kind supervision. Sincerely yours,

K.M. Faridur Rahman Id No: 12-007

Department of Banking University of Dhaka

ACKNOWLEDGEMENT

I am grateful to Mr. Abdullah AL Mahmud for providing me guidance in preparing this term paper. I am also indebted to my supervisor in TBL, Mr. Md. Nurul Hasnat, VP & Manager and Mr. Mir Hossain, AVP, TBL, Karwan Bazar branch, Dhaka. I am also thankful to the individuals who extended their supporting hand in manifold ways to me, they are: Md. Enayet Karim, officer, TBL, Karwan Bazar branch. Mrs. Mahrukh Zaman, officer, TBL, Karwan Bazar branch Mrs. Kaniz Fatema, officer, TBL, Karwan Bazar branch S.M. Nizam Uddin Ripon, junior officer TBL, Karwan Bazar branch Md. Shah Nur Islam, junior officer TBL, Karwan Bazar branch

Above all, I am thankful to Almighty Allah, from whom I got the courage and the ability to work on this term paper.

Executive Summary
Credit risk management is a dynamic 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. The objective of the credit risk management is to maximize the performing asset and the minimization of the non-performing asset as well as ensuring the optimal point of loan and advance and their efficient management. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolios not only constitute the banks asset structure but also a vital factor of the banks success. The overall success in credit management depends on the banks credit policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance. Therefore, while analyzing the credit management of CBL, each risk managers or risk officers are required to analyze its credit policy, credit procedure and quality of credit portfolio. This term paper points out the various functions and activities of Credit risk management and also explains the basic framework of regulations and policies regarding Credit risk management, that are exist in Bangladesh. Government role to minimize the credit risk is extensively highlighted in this term paper. This term paper divided into eight chapters, chapter three and four reflects the policy and guideline of credit risk management, tools used to manage and measure credit risk, Loan classification, provisioning etc. While chapter five reflects the credit risk management practices follow by the Trust bank limited: Its Loan classification, provisioning, loan monitoring, supervision, follow-up and review-Early alert process. Credit recovery and NPL account management- legal and non legal measures for recovery of loans. Through analysis sections, it has been tried to explain that the effective monitoring and judgmental decisions for credit granting may improve an institutions overall financial health and thus may help to reduce the percentage of classified loans. In fine, this term paper contains some findings and recommendations, which may be helpful for the Bank.

Table of Content
Page
Acknowledgement i

Executive summary
1.0. Introduction 1.1.

ii 1-4 1 1 1 2 2 3 3 ) 5 6 7 8 9 9 10 11 12 13 15 16-27 16 5-15

(Chapter 1)

Origin of the Term paper of the Term paper

1.2. Background 1.3. Rationale 1.4. Objective 1.5. Scope

of the Term paper of the Term paper

of the Term paper of the Term paper

1.6. Limitations

1.7.Methodology 2.0. Organizational 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7.

Profile (Chapter 2

Background of the TBL At present Trust Bank Ltd Mission, Vision, positioning statement, Value Board of Directors Capital and Reserves Ownership Structure Milestone in the development of TBL Structure

2.8. Management 2.9. At 2.10. 2.11. 3.0.

a Glance the Financial condition of the TBL Products of the TBL Credit Rating Term paper of the TBL

Credit Risk Management-A brief description ( Chapter 3)

3.1. Credit

Risk Management

3.2. Principles 3.3. Internal 3.4. Basel 3.5. Tools

of Credit Risk Management

17 18 21 21 26 26 28-48

and External Risk factor of CRM

II and its implication Used in CRM of CRM

3.6. Benefit 3.7.Basel 4.0.

Accord II implementation in Bangladesh banking sector

Bangladesh Banks Policy & Guideline for Credit Risk Management ( Chapter 4)
4.1. Policy

Guideline

28 28 30 39 41 41 41 43 43 44 44 46

4.1.1. Lending Guideline 4.1.2. Credit Assessment and Risk grading 4.1.3. Approval Authority 4.1.4. Segregation of duty 4.1.5. Internal Audit 4.1.6. Loan classification and provisioning
4.2. Procedural 4.2.1. 4.2.2. 4.2.3. 4.2.4.

Guideline Approval Process Disbursement Credit Monitoring Credit Recovery

5.0. Credit

Risk Management Practice By Trust Bank Ltd (Chapter 5) Procedure of Trust Bank

49-73 49

5.1. Lending

5.2. Credit

Approval Authority in TBL to the Appraisal of a credit proposal 53 56 57 61 63 63

51

5.3. Mechanism 5.4. Credit 5.5. Risk

Risk Grading Score

factor and management perception regarding risk of Credit Distribution of TBL

5.6. Mechanism 5.7.Loan 5.8. Loan 5.9. Early 5.10. 5.11. 6.0. Analysis

-Pricing Method used by the TBL Classification of the TBL Warning Department of TBL

66 67

Monitoring and follow-up of loans and advances of TBL Credit Recovery and NPL account management- legal and non legal 71 and Findings (Chapter 6) Analysis Analysis 79 80 87

74-91 74

6.1. Ratio

6.2. SWOT 6.3. Trend

Analysis Rating Analysis

6.4. CAMEL

6.5. Regression 7.0.Findings

89 92-94 92 93 95 96 97-109 97

and Recommendation (Chapter 7)

7.1.Findings 7.2.Recommendation 8.0. Conclusion

(Chapter 8)

Bibliography Appendix Appendix-A: Data Collection Check List

Appendix-B: Credit Risk Grading Score sheet Appendix-C: Credit Risk Grading Form Appendix-D: Some basic data for Ratio calculation Appendix-E: Basic measures for CAMEL Rating and Rating range & Score Appendix-F: The Result of the Regression Analysis (MS-Excel output) 106

98 104

106 109

List of Tables
Page

Table 1: Capital and Reserve of TBL Table 2: The pattern of shareholding along with name wise details of directors Table 3: Milestone in the development of the company Table 4: At a glance the five years Financial condition of TBL Table 5: The products of the TBL Table 6: Credit rating term paper of the TBL Table 7: Establishing key parameter in credit risk grading Table 8: Credit Risk Grading matrix Table 9: Percentage of different provision against types of loan Table 10: Credit approval authority in TBL Table 11: Financial ratio for performance analysis Table 12: SWOT analysis Table 13: Trend of different loans and advances & provision Table 14: The last five years CAMEL rating of TBL Table 15: Loan Disbursement & Net Income of TBL over 5 years. Table 16: Loan disbursement and estimated profit
89 39

9 9 10 12 15
15

37

43 52 74 79 80 88

90

List of Graphs & CHARTS

Page Graph 1: Five years Current Ratio of TBL Graph 2: Cash Ratio of the TBL Graph 3: Debt to Equity Ratio Graph 4: Time interest earn ratio Graph 5: (%) of total asset provided by the creditor. Graph 6: Return on asset of TBL over last 5 years Graph 7: Price Earning Ratio of TBL Graph 8: Earning per share of TBL among the last five years Graph 9: Last 5 years Return on equity ratio of TBL Graph 10: Return on investment ratio Graph 11: Last 5 years Credit deposit ratio of TBL Graph 12: Capital adequacy ratio Graph 13: Trend of total loan disbursed over the last five year. Graph 14: Trend of unclassified loan over last five years of TBL. Graph 15: Trend of SMA loan in Last 5 years of the TBL Graph 16: Trend of classified loans of the TBL Graph 17: Sub-standard loans of the TBL in last five year Graph 18: Doubtful loans and advances of TBL in last 5 year. Graph 19: Bad loans and advances of TBL in last 5 year. Graph 20: Trend of unclassified loan to total loan 77 78 78 78 81 81 81 82 82 82 83 83 77 77 76 76 75 75 75 76

Graph 21: SMA loan to total loan ratio of TBL Graph 22: Trend of Classified loan to total loan of TBL Graph 23: Bad loan/ Total loan ratio of TBL in last 5 year. Graph 24: Provision against loans and advances Graph 25: Loan ratio of TBL in last five year. Graph 26: Regression Line of Loan Disbursement on Net profit Chart 1: Flow chart of different Credit Risk

83 84 84 85 86 90 19

LIST OF ABBREVIATION
LRA -Lending Risk Analysis

BB-Bangladesh Bank CRM-Credit Risk Management SMA - Special Mention Account NPL - Non Performing Loan FSS - Financial Spread Sheet KYC - Know Your Customer CIB - Credit Information Bureau CRG - Credit Risk Grading RM - Risk Manager/ Relationship Manager CRM - Credit Risk Management SME - Small & Medium Enterprise TBL- Trust Bank Ltd CRGM- Credit Risk Grading Manual PD- Probability of Default LGD- Loss Given Default EAD- Exposure at Default EAS - Early Alert System SS- Substandard DF- Doubtful Loan BL- Bad Loan