Credit Risk Grading Manual

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CREDIT RISK GRADING MANUAL

BANK

JUNE, 2007

Credit Risk Grading Manual - BANK

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CREDIT RISK GRADING MANUAL - BANK

Bangladesh Bank vide its BRPD Circular No.18 dated December 11, 2005 advised all Banks to implement Credit Risk Grading for their borrowing clients as per Credit Risk Grading Manual.

The Credit Risk Grading Manual released earlier was applicable only in case of lending to commercial clients. The area which required to be focused was how to risk rate an obligor if it is a Banking Company or a Non-Banking Financial Institution.

Basel II compliance also calls for risk rating of the obligor, which includes all clients like commercial, banking and non-banking financial institution.

Keeping the above objective in mind, Credit Risk Grading Manual for Bank has been developed.

The Credit Risk Grading Manual for Bank was completed and reviewed by a review committee consisting of members from NCBs, PCBs and FCBs who are specifically involved in credit approval function. Special thanks to Mr. Niaz Habib, Deputy Managing Director, United Commercial Bank Limited for his endeavor and time in preparing this guidelines.

This “Credit Risk Grading Manual – Bank” is now made mandatory and will be applicable for all exposures extended to a Bank by a Bank.

Md. Nazrul Huda Deputy Governor June 2007.

Credit Risk Grading Manual - BANK

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Credit Risk Grading Manual - BANK

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Credit Risk Grading Manual - BANK

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Table of Contents
Contents Page

Preamble………………………………………………………………………………………….......... 6 Introduction………………………………………………………………………………….............. 7 Definition of Credit Risk Grading (CRG)………………………………………………………… 8 Functions of Credit Risk Grading ……………………………………………………………….... 8 Use of Credit Risk Grading………………………………………………………………………….. 8 Number and Short Name of Grades Used in the CRG……………………………………….. 8 Credit Risk Grading Definitions……………………………………………………………………. Superior - (SUP) - 1 ……………………………………………………………………………………. Good - (GD) - 2…………………………………………………………………………………………. Acceptable - (ACCPT) -3………………………………………………………………………………. Marginal/Watchlist - (MG/WL) - 4………………………………………………………………… Special Mention - (SM) - 5…………………………………………………………………………… Sub standard - (SS) - 6 …………………………………………………………………………….. Doubtful - (DF) - 7 ………………………………………………………………………………….. Bad & Loss – (BL) - 8 ……………………………………………………………………………….. 9 9 9 9 10 10 11 11 11

Regulatory Credit Risk Grading of the Bank…………………………………………………… 11 How to Compute Credit Risk Grading of a Bank………………………………….............. Step I Identify all the Principal Risk Components (Quantitative & Qualitative)...……. Step II Allocate weightages to Principal Risk Components…….……………………………… Flow chart- Credit Risk- Principal Risk & Key Parameters…………………………… Step III Establish the Key Parameters…………………………………………………………………. Financial Spread Sheet (FSS)…………………………………………………………………. Step IV Assign weightages to each of the Key Parameters……………………………………. Step V Input data to arrive at the score on the key parameters…………………………… Step VI Arrive at the Credit Risk Grading based on total score obtained…………………. 12 12 12 13 14 17 17 17 18

Credit Risk Grading Process……………………………………………………………………….. 18 Early Warning Signals (EWS)………………………………………………………………………. 19 Exceptions to Credit Risk Grading………………………………………………………………… 20 Credit Risk Grading Review………………………………………………………………………… 21 MIS on Credit Risk Grading………………………………………………………………………… 21 Appendices……………………………………………………………………………………………… 22-45 Appendix-A Appendix-B Appendix-C Appendix-D Appendix-E Appendix-F Financial Spread Sheet - BANK (FSS)………………………………………. 22-29 Credit Risk Grading Score Sheet - BANK………………………………….. 30-35 Data Collection Checklist - BANK…………………………………………… 36-37 Limit Utilization Form - BANK...……………………………………………….. 38-39 Credit Risk Grading Form - BANK….…………………………………………. 40-41 MIS Reports on Credit Risk Grading - BANK.……………………………. 42-45

Enclosed: MS Excel file named, CRG - Score Sheet - Bank in CD ROM for use. Credit...
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