Risk-Based Lending

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Functions of Credit risk Grading
Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns. Good - (GD) - 2

Strong Bank
Very good Financials
Very good management skill & expertise.
Excellent operating environment
Strong capability for timely payment of financial commitments
Aggregate Score of 75-84 based on the Risk Grade Score Sheet Non-Bengali entrepreneurs and the public sector nearly monopolized economic activity in the Pakistan era. Of the very few Bengali business professionals active in East Pakistan fewer yet survived the war. Post independence Bangladesh therefore presented a unique set of opportunities and problems for the private sector. The good news was that without the stranglehold of the elite Pakistani business families the field was wide open for the development of a homegrown Bengali private sector; but the bad news was that both a capital base and an entirely new entrepreneurial class would have to be developed out of an economic vacuum. Capital formation rapidly occurred and the newly nationalized banks, awash in deposits, found themselves with a serious asset management problem because there were few professional entrepreneurial risk takers with business skills and proven track records to whom this capital could be made available under normal and prudent banking practice. To get the ball rolling, the government of Bangladesh (GOB) relaxed capitalization restrictions on banks and at the same time directed the state-owned banks to disregard normal credit requirements and to reach given loan portfolio targets on a timetable. The anticipated high default rate on these loans was considered to be the price of developing a private sector. In purely aggregate economic terms the experiment was successful. Liquidity excess soon turned into liquidity crisis as loan portfolios expanded; and thirty years after independence we find that growth in exports, manufacturing, construction, and agriculture is led by a robust private sector that owes its existence at least in part to this risky banking strategy. However, the price of developing the private sector turned out to be higher than anticipated because of very significant structural inefficiencies that may be enumerated as follows: 1.First, inexperienced and untrained individuals were at the helm of the nation's banks not only because there was a genuine shortage of trained personnel but also because middle management was populated with labor union influenced promotions and top management consisted of mostly unqualified political appointments. 2.Second, nationalization compromised accountability and turned banking into a political tool of the Ministry of Finance or MOF. The MOF became the owner, operator, regulator, and watchdog of the entire banking sector. 3.Third, the GOB financed the losses of state owned factories as "loans" from state owned banks. 4.Finally, corrupt bankers and political leaders took advantage of these weaknesses and the availability of default-able loans to enrich themselves at the expense of society without providing the risk bearing and private sector development that these defaults were supposed to engender. After almost three decades of easy credit, the program has developed a degree of inertia and is proving difficult to discontinue. An influential political and financial elite has come to expect default-able loans as a perquisite of political power. The default problem has rendered the domestic banks technically insolvent because almost half of their loan portfolio is in default and they do not have sufficient bank capital to absorb these losses. Corruption plays a role in...
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