Credit Appraisal and Credit Risk Management

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MANAGING CORE RISKS IN BANKING:

CREDIT RISK MANAGEMENT
Industry Best Practices

BANGLADESH BANK

CREDIT RISK MANAGEMENT
Industry Best Practices

PREPARED FOR:
BANGLADESH BANK

PREPARED BY:
FOCUS GROUP ON CREDIT & RISK MANAGEMENT

Team Co-ordinator: Team Members:

Sudhir Chandra Das Ali Reza Iftekhar Niaz Habib A.G. Sarwar Brian J. McGuire Naser Ezaz Bijoy

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INTRODUCTION: Risk is inherent in all aspects of a commercial operation, however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank’s dealings with or lending to corporates, individuals, and other banks or financial institutions. Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. Central to this is a comprehensive IT system, which should have the ability to capture all key customer data, risk management and transaction information including trade & Forex. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and dis- intermediation, it is essential that banks have robust credit risk management policies and procedures that are sensitive and responsive to these changes. The purpose of this document is to provide directional guidelines to the banking sector that will improve the risk management culture, establish minimum standards for segregation of duties and responsibilities, and assis t in the ongoing improvement of the banking sector in Bangladesh. Credit risk management is of utmost importance to Banks, and as such, policies and procedures should be endorsed and strictly enforced by the MD/CEO and the board of the Bank. The guidelines have been organised into the following sections: 1. POLICY GUIDELINES 1.1. 1.2. 1.3. 1.4. 1.5. Lending Guidelines Credit Assessment & Risk Grading Approval Authority Segregation of Duties Internal Audit

2. PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES 3. PROCEDURAL GUIDELINES 3.1. 3.2. 3.3. 3.4. Approval Process Credit Administration Credit Monitoring Credit Recovery

These guidelines were prepared and endorsed by senior credit executives from private sector, foreign and nationalized commercial banks operating in Bangladesh. They are intended for use in the corporate/commercial banking businesses. It is the expectation of Bangladesh Bank that these guidelines will be adopted, particularly for those institutions that have a high rate of non-performing loans and weak credit risk management procedures. Bangladesh Bank may, based on its regular examination of individual banks, enforce the specific adoption of these guidelines.

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Table of Contents

1. POLICY GUIDELINES 1.1. 1.2. 1.3. 1.4. 1.5. Lending Guidelines Credit Assessment & Risk Grading Approval Authority Segregation of Duties Internal Audit

5 5 6 11 12 12

2. PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES 2.1 2.2 Preferred Organisational Structure Key Responsibilities

13 13 13

3. PROCEDURAL GUIDELINES 3.1. 3.2. 3.3. 3.4. Approval Process Credit Administration Credit Monitoring Credit Recovery

15 15 16 17 19

4. APPENDICES

22 - 56

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1. POLICY GUIDELINES This section details fundamental credit risk management policies that are recommended for adoption by all banks in Bangladesh. The guidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks. 1.1 Lending Guidelines All banks should have established Credit Policies (“Lending Guidelines”) that clearly outline the senior management’s view of business development priorities and the terms and...
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