Credit

Credit Risk
Risk Grading
Grading
Model
Model
Tauhidul Islam
16071 (BBA)
210 (MBA)

CreditRisk
RiskGrading
GradingModel
Model
Credit
toolfor
forcredit
creditrisk
riskmanagement
management
tool
basedon
onthe
thepre-specified
pre-specifiedscale,
scale,ititreflects
reflectsthe
the
based
underlyingcredit-risk
credit-riskfor
foraagiven
givenexposure
exposure
underlying
DEVELOPMENT OF THE SCORE CARD

199Lending
Risk
3 Analysis

Risk
200Grade
3 Score
Card

200Credit
Risk
5 Grading

Functions of CRG Model

Promote
safety
Measure Risk
Allow
Monitoring
optimize
returns

Use of CRG Model

CRG
Matrix

uniform standards to assess

the Credit
relevant for individual credit
selection & loan pricing
relevant for surveillance and
monitoring

Number & Short Name of Grades

in CRG
GRADING

SHORT NAME

NUMBER

Superior

SUP

Good

GD

Acceptable

ACCPT

Marginal/Watch

MG/WL

list
Special Mention

SM

Sub standard

SS

Doubtful

DF

Bad & Loss

BL

Process of Risk Grading

1.

Identifying All the Principal Risk Components

2.

Allocating Weightages to Principal Risk Components

3.

Establishing the Key Parameters

4.

Assigning Weight to Each of the Key Parameters

5.

6.

Inputting Data to Arrive at the Score on the Key

Parameters
Arriving at the Credit Risk Grading based on total
score obtained

Step 1: Identifying Principal Risk

Components

Step-2: Allocating Weightages to

Principal Risk Components
Principal Risk Components:

Weight:

Financial Risk

50%

Business/Industry Risk

15%

Management Risk

15%

Security Risk

10%

Relationship Risk

10%

Step-3: Establishing the Key

Parameters
Principal Risk
Components:
Financial Risk

Business/Industry Risk

Management Risk
Security Risk

Relationship Risk

Key Parameters:
Leverage, Liquidity, Profitability &
Coverage ratio.
Size of Business, Business Outlook,
Industry Growth,
Competition & Barriers to Business
(entry/exit)
Experience, Succession & Team Work.
Security Coverage, Collateral Coverage
and Support
Utilization of Limit, Account Conduct,
Compliance of covenants/conditions &
Personal Deposit

Step 4: Assigning Weightages to Each of

the Key Parameters
Principal Risk Components:

Key Parameters:

Weight:

Liquidity
Profitability
Coverage

15%
15%
5%

Total

50%

Principal Risk Components:

Key Parameters:

Weight:

Size of Business

5%

Business Outlook

3%

Industry growth

3%

Financial Risk

Business/Industry Risk

Market Competition 2%
Entry/Exit Barriers

2%

Total

15%

Principal Risk
Components:
Management Risk
Principal Risk
Components:

Security Risk
Principal Risk
Components:
Relationship Risk

Key Parameters:

Weight:

Experience
Succession
Team Work
Total

5%
5%
5%
15%

Key Parameters:

Weight:

Security coverage
Collateral coverage
Support
Total

4%
4%
2%
10%

Key Parameters:

Weight:

Utilization of limit
Account conduct
Compliance of covenants

3%
3%

/condition
Total

2%
10%

CRG based on total score

obtained
No
Risk Grading
.

Short
Name

Score

1 Superior

SUP

2 Good

GD

100% cash covered

Government guarantee
International Bank
guarantees
85+

3 Acceptable

ACCPT

75-84

4 Marginal/Watch list

MG/WL

65-74

5 Special Mention

SM

55-64

6 Sub-standard

SS

45-54

7 Doubtful

DF

35-44

8 Bad & Loss

BL

<35

Different Ccategories of Credit Risk Grading

Superior (SUP) 1
Credit facilities, which are fully secured i.e. fully cash
covered.
Credit facilities fully covered by government guarantee or
guarantee of a top tier international Bank.
Good (GD) -2
Strong repayment capacity, excellent liquidity and low
leverage
consistently strong earnings and cash flow.
Credit facilities fully covered by the guarantee of a top
tier local Bank.
Acceptable (ACCPT) -3
not as strong as GOOD Grade borrowers, but still
demonstrate consistent earnings, cash flow and have a
good track record.
Credit in this grade would normally be secured by

Marginal/Watch list (MG/WL) -4

an above average risk due to strained liquidity, higher than
normal leverage, thin cash flow and/or inconsistent earnings.
Weaker business credit & early warning signals of emerging
business credit detected
The borrower incurs a loss
Loan repayments routinely fall past due
Special Mention (SM) -5
potential weaknesses that deserve managements close
attention
Severe management problems exist
Facilities should be downgraded to this grade if sustained
deterioration in financial condition is noted (consecutive
losses, negative net worth, excessive leverage),
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.

Doubtful- (DF) 7
Full repayment of principal and interest is unlikely and the
possibility of loss is extremely high.
However, due to specifically identifiable pending factors,
such as litigation, liquidation procedures or capital
injection, the asset is not yet classified as Bad & Loss.
Bangladesh Bank criteria for doubtful credit shall apply.
Bad/Loss- (BL) -8
Credit of this grade has long outstanding with no progress
in obtaining repayment or on the verge of wind
up/liquidation.
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.
Bangladesh Bank guidelines for timely write off of bad
loans must be adhered to. Legal procedures/suit initiated.

Limitations of CRG Model:

Biasness
Manipulation of information
Complex procedure
Personal Judgement
Same weight for all types of organization
Efficient Employee needed
Static Analysis

Limitatiosn of CRG Model:

Biaseness
Manipulation of Information
Complex Process
Highly efficient Employe
Personal Judgment
Static Study
Equal Weight for all organization