credit risk grading manual

Credit Risk Grading Manual

1

CREDIT RISK

GRADING MANUAL

NOVEMBER, 2005

Credit Risk Grading Manual 2

CREDIT RISK GRADING MANUAL One of most significant risks a bank is exposed to is, what is generally termed as, ‘credit risk’. Since the largest slice of income generated by a bank and a major percentage of assets is subject to this risk, it is obvious that prudent management of this risk is fundamental to the sustainability of a bank. In 1993 Bangladesh Bank made the first regulatory move to introduce best practices in this area through the introduction of the Lending Risk Analysis (LRA) for all lending exposures undertaken by a bank in excess of Tk10 Million. The LRA forced banks to take a systemic approach towards risk analysis. LRA however made no attempt to introduce a Risk Grading System (RGS) for unclassified accounts. With the world moving towards Basle II the need to introduce a RGS for the industry is essential. In 2003, BB made the Core Risk Management Guidelines (CRMG) mandatory. The Credit Risk Management module in CRMG, for the first time, introduced the requirement of grading unclassified accounts. The CRMG however, was not detailed enough for banks to fully implement a RGS. Therefore in January 2004, BIBM was instructed by Governor Bangladesh Bank to produce a Credit Risk Grading Manual (CRGM) based on the Core Risks Management Guidelines. BIBM constituted a Focus Group for this purpose. The CRGM was completed and submitted to BB in Sept ’04. this was reviewed by a Industry Review Group (IRG) consisting of members from NCBs,. PCBs and FCBs involved specifically in the credit approval and corporate banking functions. The IRG met a number of times in august and September 2005 and gave their recommendations. These were discussed and suitable amendments made in the Guidelines. The CRGM is a mandatory replacement of the LRA and will be applicable for all exposures (irrespective of amount) other than those covered under Consumer and Small Enterprises Financing Prudential Guidelines and also under The Short-Term Agricultural and Micro - Credit. MUHAMMAD A. (RUMEE) ALI DEPUTY GOVERNOR October 2005.



Prepared for

Bangladesh Bank

Prepared By

Focus Group Members

Dr. Sujit R. Saha, Professor & Director (Training), Bangladesh Institute of Bank Management

Mr. Sudhir Chandra Das, DGM, Financial Institutions Department, Bangladesh Bank

Mr. Niaz Habib, Deputy Managing Director, United Commercial Bank Limited



Reviewed By

Review Committee Members

Mr. Mir Abdur Rahim, General Manager, DBI-1, Co-ordinator

Mr. Niaz Habib, DMD,UCBL, Member of Focus Group, Member

Mr. Dawood Ahmed Sikder, DGM, ICD, Janata Bank, Member

Mrs. Johora Bebe, EVP & HOC, One Bank Ltd, Member

Mr. Khurram Khan, Senior Credit Officer, SCB, Member

Mr. Mian Quamrul Hasan Chowdhury, DD, DBI-1, Member of CRMG, Member


Enclosed: MS Excel file named, CRG_Score_Sheet in CD ROM for use.

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……………………………………………………………………. 9 Superior - (SUP) – 1 ……………………………………………………………………………………. 9 Good - (GD) - 2…………………………………………………………………………………………. 9 Acceptable - (ACCPT) -3………………………………………………………………………………. 9 Marginal/Watchlist – (MG/WL) -4…………………………………………………………………… 9 Special Mention – (SM) – 5…………………………………………………………………………… 9 Substandard- (SS) – 6………………………………………………………………………………….. 10 Doubtful- (DF) – 7……………………………………………………………………………………….. 10 Bad & Loss - (BL) - 8..……………………………………………………………………………… 10

Regulatory Definition on Grading of Classified Accounts…………………………………… 10

How to Compute Credit Risk Grading………………………………………………….............. 12 Step I Identify all the Principal Risk Components ………………………………………………. 12

Flow chart- Credit Risk- Principal Risk & Key Parameters…………………………… 13 Step II Allocate weightages to Principal Risk Components…….……………………………… 14

Step III Establish the Key Parameters…………………………………………………………………. 14 Step IV Assign weightages to each of the Key Parameters……………………………………. 14 Step V Input data to arrive at the score on the key parameters…………………………… 15

Step VI Arrive at the Credit Risk Grading based on total score obtained…………………. 15

Credit Risk Grading Process……………………………………………………………………….. 16

Early Warning Signals (EWS)………………………………………………………………………. 17

Exceptions to Credit Risk Grading…………………………………………………………………18

Credit Risk Grading Review………………………………………………………………………… 18

MIS on Credit Risk Grading………………………………………………………………………… 19 Financial Spread Sheet………………………………………………………………………………. 19

Appendices……………………………………………………………………………………………… 20-42

Appendix-A Data Collection Check List………………………………………………………. 20-21 Appendix-B Limit Utilization Form…………………………………………………………….. 22-23 Appendix-C Credit Risk Grading Score Sheet……………………………………………… 24-27 Appendix-D Credit Risk Grading Form……………………………………………………….. 28-29 Appendix-E MIS Reports on Credit Risk Grading…………………………………………. 30-35 Appendix-F Financial Spread Sheet (FSS)………….………………………………………. 36-42


Preamble

Credit risk is the primary financial risk in the banking system. Identifying and assessing credit risk is

essentially a first step in managing it effectively. In 1993, Bangladesh Bank as suggested by Financial

Sector Reform Project (FSRP) first introduced and directed to use Credit Risk Grading system in the

Banking Sector of Bangladesh under the caption “Lending Risk Analysis (LRA)”. The Banking sector

since then has changed a lot as credit culture has been shifting towards a more professional and

standardized Credit Risk Management approach.

Credit Risk Grading system is a dynamic process and various models are followed in different countries

& different organizations for measuring credit risk. The risk grading system changes in line with

business complexities. A more effective credit risk grading process needs to be introduced in the

Banking Sector of Bangladesh to make the credit risk grading mechanism easier to implement.

Keeping the above objective in mind, the Lending Risk Analysis Manual (under FSRP) of Bangladesh

Bank has been amended, developed and re-produced in the name of “Credit Risk Grading Manual”.

The Credit Risk Grading Manual has taken into consideration the necessary changes required in order to

correctly assess the credit risk environment in the Banking industry. This manual has also been able to

address the limitations prevailed in the Lending Risk Analysis Manual.

All Banks should adopt a credit risk grading system outlined in this manual. Risk grading is a key

measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process.


INTRODUCTION

Credit risk grading is an important tool for credit risk management as it helps the Banks & financial

institutions to understand various dimensions of risk involved in different credit transactions. The

aggregation of such grading across the borrowers, activities and the lines of business can provide

better assessment of the quality of credit portfolio of a bank or a branch. The credit risk grading system

is vital to take decisions both at the pre-sanction stage as well as post-sanction stage.

At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or

not to lend, what should be the loan price, what should be the extent of exposure, what should be the

appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to

put a cap on the risk level.

At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of

review, periodicity of the grading, and other precautions to be taken.

Having considered the significance of credit risk grading, it becomes imperative for the banking system

to carefully develop a credit risk grading model which meets the objective outlined above.

The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank has been in

practice for mandatory use by the Banks & financial institutions for loan size of BDT 1.00 crore and

above. However, the LRA manual suffers from a lot of subjectivity, sometimes creating confusion to the

lending Bankers in terms of selection of credit proposals on the basis of risk exposure. Meanwhile, in

2003 end Bangladesh Bank provided guidelines for credit risk management of Banks wherein it

recommended, interalia, the introduction of Risk Grade Score Card for risk assessment of credit

proposals.

Since the two credit risk models are presently in vogue, the Governing Board of Bangladesh Institute of

Bank Management (BIBM) under the chairmanship of the Governor, Bangladesh Bank decided that an

integrated Credit Risk Grading Model be developed incorporating the significant features of the above

mentioned models with a view to render a need based simplified and user friendly model for application

by the Banks and financial institutions in processing credit decisions and evaluating the magnitude of

risk involved therein.

Bangladesh Bank expects all commercial banks to have a well defined credit risk management system

which delivers accurate and timely risk grading. This manual describes the elements of an effective

internal process for grading credit risk. It also provides a comprehensive, but generic discussion of the

objectives and general characteristics of effective credit risk grading system. In practice, a bank’s credit

risk grading system should reflect the complexity of its lending activities and the overall level of risk

involved.


DEFINITION OF CREDIT RISK GRADING (CRG)

• The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and

reflects the underlying credit-risk for a given exposure.

• A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of

risks associated with a credit exposure.

• Credit Risk Grading is the basic module for developing a Credit Risk Management system.

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.

USE OF CREDIT RISK GRADING

• The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a

common standardized approach to assess the quality of individual obligor, credit portfolio of a

unit, line of business, the branch or the Bank as a whole.

• As evident, the CRG outputs would be relevant for individual credit selection, wherein either a

borrower or a particular exposure/facility is rated. The other decisions would be related to

pricing (credit-spread) and specific features of the credit facility. These would largely constitute

obligor level analysis.

• Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing

the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.

NUMBER AND SHORT NAME OF GRADES USED IN THE CRG

• The proposed CRG scale consists of 8 categories with Short names and Numbers are provided

as follows:

GRADING SHORT NAME NUMBER 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


CREDIT RISK GRADING DEFINITIONS

A clear definition of the different categories of Credit Risk Grading is given as follows:

• Superior - (SUP) - 1

⇒ Credit facilities, which are fully secured i.e. fully cash covered. ⇒ Credit facilities fully covered by government guarantee. ⇒ Credit facilities fully covered by the guarantee of a top tier international Bank.

• Good - (GD) - 2

⇒ Strong repayment capacity of the borrower ⇒ The borrower has excellent liquidity and low leverage. ⇒ The company demonstrates consistently strong earnings and cash flow. ⇒ Borrower has well established, strong market share. ⇒ Very good management skill & expertise. ⇒ All security documentation should be in place. ⇒ Credit facilities fully covered by the guarantee of a top tier local Bank. ⇒ Aggregate Score of 85 or greater based on the Risk Grade Score Sheet

• Acceptable - (ACCPT) - 3

⇒ These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate

consistent earnings, cash flow and have a good track record. ⇒ Borrowers have adequate liquidity, cash flow and earnings. ⇒ Credit in this grade would normally be secured by acceptable collateral (1st charge

over inventory / receivables / equipment / property). ⇒ Acceptable management ⇒ Acceptable parent/sister company guarantee ⇒ Aggregate Score of 75-84 based on the Risk Grade Score Sheet

• Marginal/Watchlist - (MG/WL) - 4

⇒ This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment.

⇒ These borrowers have 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 ⇒ Account conduct is poor, or other untoward factors are present. ⇒ Credit requires attention ⇒ Aggregate Score of 65-74 based on the Risk Grade Score Sheet

• Special Mention - (SM) - 5

⇒ This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower.

⇒ 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), ⇒ An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.


• 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. ⇒ An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.

• 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. ⇒ An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.

• 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.

⇒ This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal procedures/suit initiated.

⇒ Bangladesh Bank criteria for bad & loss credit shall apply. ⇒ An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

REGULATORY DEFINITION ON GRADING OF CLASSIFIED ACCOUNTS Irrespective of credit score obtained by a particular obligor, grading of the classified names should be in line with Bangladesh Bank guidelines on classified accounts, which is extracted from “PRUDENTIAL REGULATIONS FOR BANKS: SELECTED ISSUES” (updated till August 07, 2005) by Bangladesh Bank are presently as follows:

Basis for Loan Classification: (A) Objective Criteria:

□ Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment will be treated as irregular just from the following day of the expiry date. This loan will be classified as Sub-standard if it is kept irregular for 6 months or beyond but less than 9 months, as `Doubtful' if for 9 months or beyond but less than 12 months and as `Bad & Loss' if for 12 months or beyond.

□ Any Demand Loan will be considered as Sub-standard if it remains unpaid for 6 months or

beyond but not less then 9 months from the date of claim by the bank or from the date of forced creation of the loan; likewise the loan will be considered as ‘Doubtful' and ‘Bad & Loss’ if remains unpaid for 9 months or beyond but less then 12 months and for 12 months and beyond respectively.

□ In case any instalment(s) or part of instalment(s) of a Fixed Term Loan is not repaid within the

due date, the amount of unpaid instalment(s) will be termed as `defaulted instalment'. In case of Fixed Term Loans, which are repayable within maximum 5 (five) years of time: - If the amount of `defaulted instalment' is equal to or more than the amount of instalment(s) due within 6 months, the entire loan will be classified as ‘Sub-standard’.


If the amount of 'defaulted instalment' is equal to or more than the amount of instalment(s) due within 12 months, the entire loan will be classified as ‘Doubtful’. If the amount of 'defaulted instalment' is equal to or more than the amount of instalment(s) due within 18 months, the entire loan will be classified as ‘Bad & Loss’. In case of Fixed Term Loans, which are repayable in more than 5 (five) years of time: -

□ If the amount of ‘defaulted instalment' is equal to or more than the amount of instalment(s) due within 12 months, the entire loan will be classified as 'Sub-standard.'

□ If the amount of ‘defaulted instalment' is equal to or more than the amount of instalment(s) due within 18 months, the entire loan will be classified as 'Doubtful'.

□ If the amount of 'defaulted instalment 'is equal to or more than the amount of instalment(s) due within 24 months, the entire loan will be classified as 'Bad & Loss'.

Explanation: If any Fixed Term Loan is repayable at monthly instalment, the amount of instalment(s) due within 6 months will be equal to the amount of summation of 6 monthly instalments. Similarly, if repayable at quarterly instalment, the amount of instalment(s) due within 6 months will be equal to the amount of summation of 2 quarterly instalments. (B) Qualitative Judgement: If any uncertainty or doubt arises in respect of recovery of any Continuous Loan, Demand Loan or Fixed Term Loan, the same will have to be classified on the basis of qualitative judgement be it classifiable or not on the basis of objective criteria. If any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities decreases or if the recovery of the loan becomes uncertain due to any other unfavorable situation, the loan will have to be classified on the basis of qualitative judgement . Besides, if any loan is illogically or repeatedly re-scheduled or the norms of re-scheduling are violated or instances of (propensity to) frequently exceeding the loan-limit are noticed or legal action is lodged for recovery of the loan or the loan is extended without the approval of the proper authority, it will have to be classified on the basis of qualitative judgement . Despite the probability of any loan's being affected due to the reasons stated above or for any other reasons, if there exists any hope for change of the existing condition by resorting to proper steps, the loan, on the basis of qualitative judgement, will be classified as 'Sub-standard'. But even if after resorting to proper steps, there exists no certainty of total recovery of the loan, it will be classified as ‘Doubtful' and even after exerting the all-out effort, there exists no chance of recovery, it will be classified as ' Bad & Loss' on the basis of qualitative judgement. The concerned bank will classify on the basis of qualitative judgement and can declassify the loans if qualitative improvement does occur. But if any loan is classified by the Inspection Team of Bangladesh Bank, the same can be declassified with the approval of the Board of Directors of the bank. However, before placing such case to the Board, the CEO and concerned branch manager shall have to certify that the conditions for declassification have been fulfilled. Note:

a) Any change in classification criteria provided by the Bangladesh Bank shall supersede this grading system for classified accounts.

b) An account may also be classified based on qualitative judgment in line with Bangladesh Bank guidelines.

c) A particular bank may have classification criteria stricter than Bangladesh Bank guidelines.


HOW TO COMPUTE CREDIT RISK GRADING

The following step-wise activities outline the detail process for arriving at credit risk grading.

Credit risk for counterparty arises from an aggregation of the following: Financial Risk Business/Industry Risk Management Risk Security Risk Relationship Risk

Each of the above mentioned key risk areas require to be evaluated and aggregated to arrive at an overall risk grading measure.

a) Evaluation of Financial Risk: Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow.

b) Evaluation of Business/Industry Risk: Risk that adverse industry situation or unfavorable business condition will impact borrowers’ capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share & poor industry growth.

c) Evaluation of Management Risk: Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work.

d) Evaluation of Security Risk: Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security & collateral, location of collateral and support.

e) Evaluation of Relationship Risk: These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship.

Step I : Identify all the Principal Risk Components


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CREDIT RISK

Financial Risk Management Risk Business/Industry Risk

Relationship RiskSecurity Risk

Leverage

Liquidity

Profitability

Coverage

Experience

Succession

Team Work

Business Outlook

Size of Business

Industry Growth

Market Competition

Barriers to Business

Account Conduct

Utilization of Limit

Compliance of Covenants/Condition

Personal Deposits

Security Coverage

Collateral Coverage

Support

Age of Business


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According to the importance of risk profile, the following weightages are proposed for corresponding principal risks. Principal Risk Components: Weight: Financial Risk 50% Business/Industry Risk 18% Management Risk 12% Security Risk 10% Relationship Risk 10%

Principal Risk Components: Key Parameters: Financial Risk Leverage, Liquidity, Profitability & Coverage ratio. Business/Industry Risk Size of Business, Age of Business, Business Outlook,

Industry Growth, Competition & Barriers to Business Management Risk Experience, Succession & Team Work. Security Risk Security Coverage, Collateral Coverage and Support. Relationship Risk Account Conduct ,Utilization of Limit, Compliance of

covenants/conditions & Personal Deposit.

Principal Risk Components: Key Parameters: Weight: Financial Risk 50%

⇒ Leverage 15% ⇒ Liquidity 15% ⇒ Profitability 15% ⇒ Coverage 5%

Business/Industry Risk 18% ⇒ Size of Business 5% ⇒ Age of Business 3% ⇒ Business Outlook 3% ⇒ Industry growth 3% ⇒ Market Competition 2% ⇒ Entry/Exit Barriers 2%

Management Risk 12% ⇒ Experience 5% ⇒ Succession 4% ⇒ Team Work 3%

Security Risk 10% ⇒ Security coverage 4% ⇒ Collateral coverage 4% ⇒ Support 2%

Relationship Risk 10% ⇒ Account conduct 5% ⇒ Utilization of limit 2% ⇒ Compliance of covenants

/condition 2% ⇒ Personal deposit 1%

Step III Establish the Key Parameters

Step IV Assign weightages to each of the key parameters.

Step II Allocate weightages to Principal Risk Components


After the risk identification & weightage assignment process (as mentioned above), the next steps will

be to input actual parameter in the score sheet to arrive at the scores corresponding to the actual

parameters.

This manual also provides a well programmed MS Excel based credit risk scoring sheet to arrive at a

total score on each borrower. The excel program requires inputting data accurately in particular cells

for input and will automatically calculate the risk grade for a particular borrower based on the total

score obtained. The following steps are to be followed while using the MS Excel program.

a) Open the MS XL file named, CRG_SCORE_SHEET b) The entire XL sheet named, CRG is protected except the particular cells to input data. c) Input data accurately in the cells which are BORDERED & are colored YELLOW. d) Some input cells contain DROP DOWN LIST for some criteria corresponding to the Key

Parameters. Click to the input cell and select the appropriate parameters from the DROP DOWN LIST as shown below.

e) All the cells provided for input must be filled in order to arrive at accurate risk grade. f) We have also enclosed the MS Excel file named, CRG_Score_Sheet in CD ROM for use.

The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor.

Number Risk Grading Short Name Score

1 Superior SUP 100% cash covered Government guarantee International Bank guarantees

2 Good GD 85+

3 Acceptable ACCPT 75-84

4 Marginal/Watchlist 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

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.


CREDIT RISK GRADING PROCESS Credit Risk Grading should be completed by a Bank for all exposures (irrespective of

amount) other than those covered under Consumer and Small Enterprises Financing

Prudential Guidelines and also under The Short-Term Agricultural and Micro - Credit.

For Superior Risk Grading (SUP-1) the score sheet is not applicable. This will be guided by the

criterion mentioned for superior grade account i.e. 100% cash covered, covered by government

& bank guarantee.

Credit risk grading matrix would be useful in analyzing credit proposal, new or renewal for

regular limits or specific transactions, if basic information on a borrowing client to determine the

degree of each factor is a) readily available, b) current, c) dependable, and d) parameters/risk

factors are assessed judiciously and objectively. The Relationship Manager as per Data

Collection Checklist as shown in Appendix-A should collect required information.

Relationship manager should ensure to correctly fill up the Limit Utilization Form as shown in

Appendix-B in order to arrive at a realistic earning status for the borrower.

Risk factors are to be evaluated and weighted very carefully, on the basis of most up-to-date

and reliable data and complete objectivity must be ensured to assign the correct grading. Actual

parameter should be inputted in the Credit Risk Grading Score Sheet as shown in Appendix–C.

Credit risk grading exercise should be originated by Relationship Manager and should be an on-

going and continuous process. Relationship Manager shall complete the Credit Risk Grading

Score Sheet and shall arrive at a risk grading in consultation with a Senior Relationship Manager

and document it as per Credit Risk Grading Form as shown in Appendix-D, which shall then be

concurred by the Credit Officer in consultation with a Senior Credit Officer.

All credit proposals whether new, renewal or specific facility should consist of a) Data Collection

Checklist, b) Limit Utilization Form c) Credit Risk Grading Score Sheet, and d) Credit Risk

Grading Form.

The credit officers then would pass the approved Credit Risk Grading Form to Credit

Administration Department and Corporate Banking/Line of Business/Recovery Unit for updating

their MIS/record.

The appropriate approving authority through the same Credit Risk Grading Form shall approve

any subsequent change/revision i.e. upgrade or downgrade in credit risk grade.


EARLY WARNING SIGNALS (EWS)

Early Warning Signals (EWS) indicate risks or potential weaknesses of an exposure requiring

monitoring, supervision, or close attention by management.

If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects

in the Bank’s assets at some future date with a likely prospect of being downgraded to classified

assets.

Early identification, prompt reporting and proactive management of Early Warning Accounts are prime

credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis.

Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential

that early identification and prompt reporting of deteriorating credit signs be done to ensure swift

action to protect the Bank’s interest. The symptoms of early warning signals as mentioned below are

by no means exhaustive and hence, if there are other concerns, such as a breach of loan covenants

or adverse market rumors that warrant additional caution, a Credit Risk Grading Form (Appendix-D) should be presented.

Irrespective of credit score obtained by any obligor as per the proposed risk grade score sheet, the

grading of the account highlighted as Early Warning Signals (EWS) accounts shall have the following

risk symptoms.

a) Marginal/Watchlist (MG/WL - 4): if -

Any loan is past due/overdue for 60 days and above.

Frequent drop in security value or shortfall in drawing power exists.

b) Special Mention (SM - 5): if -

Any loan is past due/overdue for 90 days and above

Major document deficiency prevails (such deficiencies include but not limited to;

board resolution for borrowing not obtained, sanction letter not accepted by client,

charges/hypothecation over assets favoring bank not filed with Registrar, Joint

Stock Companies, mortgage not in place, guarantees not obtained, etc.)

A significant petition or claim is lodged against the borrower.

The Credit Risk Grading Form of accounts having Early Warning Signals should be completed by the

Relationship Manager and sent to the approving authority in Credit Risk Management Department.

The Credit Risk Grade should be updated as soon as possible and no delay should be there in

referring Early Warning Signal accounts or any problem accounts to the Credit Risk Management

Department for their early involvement and assistance in recovery.


EXCEPTIONS TO CREDIT RISK GRADING Head of Credit Risk Management may also downgrade/classify an account in the normal course of

inspection of a Branch or during the periodic portfolio review. In such event, the Credit Risk

Grading Form will then be filled up by Credit Risk Management Department and will be referred to

Corporate Banking/Line of Business/Credit Administration Department/Recovery Unit for updating

their MIS/records.

Recommendation for upgrading of an account has to be well justified by the recommending

officers. Essentially complete removal of the reasons for downgrade should be the basis of any

upgrading.

In case an account is rated marginal, special mention or unacceptable credit risk as per the risk

grading score sheet, this may be substantiated and credit risk may be accepted if the exposure is

additionally collateralized through cash collateral, good tangible collaterals and strong guarantees.

These are exceptions and should be exceptionally approved by the appropriate

approving authority.

Whenever required an independent assessment of the credit risk grading of an individual account

may be conducted by the Head of Credit Risk Management or by the Internal Auditor

documenting as to why the credit deteriorated and also pointing out the lapses.

If a Bank has its own well established risk grading system equivalent to the proposed credit risk

grading or stricter, then they will have the option to continue with their own risk grading system.

CREDIT RISK GRADING REVIEW Credit Risk Grading for each borrower should be assigned at the inception of lending and should be periodically updated. Frequencies of the review of the credit risk grading are mentioned below;

Number Risk Grading Short Review frequency (at least)

1 Superior SUP Annually 2 Good GD Annually 3 Acceptable ACCPT Annually 4 Marginal/Watchlist MG/WL Half yearly 5 Special Mention SM Quarterly 6 Sub-standard SS Quarterly 7 Doubtful DF Quarterly 8 Bad & Loss BL Quarterly


MIS ON CREDIT RISK GRADING

Bank should have comprehensive MIS reports on credit risk grading to evaluate entire credit

portfolio of the Bank. Format of such MIS reports on credit risk grading has been presented

in Appendix - E.

⇒ Credit Risk Grading Report (Consolidated) ⇒ Credit Risk Grading Report (Branch Wise) ⇒ Credit Risk Grading Report (Branch & Risk Grade Wise) ⇒ Credit Risk Grading Report (Grade Wise Borrower List)

MIS reports as mentioned above should be prepared and circulated at least on a quarterly

basis. FINANCIAL SPREAD SHEET (FSS)

A Financial Spread Sheet (FSS) has been developed which may be used by the Banks while analyzing

the credit risk elements of a credit proposal from financial point of view.

The FSS is well designed and programmed software having two parts. Input and Output Sheets. The

financial numbers of borrowers need to be inputted in the Input Sheets which will then automatically

generate the Output Sheets. The Financial Spread Sheet (FSS) is attached as Appendix - F.


APPENDIX-A

DATA COLLECTION CHECK LIST


ABC BANK LIMITED- Dhanmondi Branch

DATA COLLECTION CHECK LIST

Documents/items required for Credit Risk Grading Required? YES NO

Obtained? YES NO

Company accounts for at least 3 years Bank statements for prior 12 months from previous bank (for new customer) Set of accounts for at least two competitors (if published) Industry average figures (If available) Financial projection required for: • Term loans; forecasts should be for the duration of the term loan. • New overdraft facilities-forecast should be for 12 months • Working capital estimation for new/renewal/enhancement of facility.

Financial Spread Sheet (FSS)

Customer Limit Utilization Form Current CIB Report of the Obligor Organization chart Biodata for – All Directors –Other key executives Head of operations/marketing

Copies of all reports on site visits made during the last 12 months. Valuations of securities/collateral offered Memorandum/articles of association/certificate of incorporation Business plan/Project Feasibility Report (required for start up company)

Receivables Aging

Client’s declaration of Stock/Inventory and Book Debts for the last 12 months

Trade License

TIN Certificate

Pending Item Checklist

Item Responsibility Due Date Status

_________________________ ______________________________ Relationship Manager (RM) Senior Relationship Manager (SRM)


APPENDIX-B

LIMIT UTILIZATION FORM


LIMIT UTILIZATION FORM

Borrower: XYZ Company Limited – Principal Branch Date:

Period: For the Period from ----------- to -------------- (12 months Actual/Projected)

Account Performance:

(Amount in ‘000’ Taka) Balance/Outstanding Nature of the Account Debit

Summation Credit

Summation

Maximum Minimum

Current Deposit Account N/A N/A X X Overdraft (OD) X X X X Cash Credit (CC) X X X X Term Loan N/A N/A X X Import Loan N/A N/A X X Local/Export Bills outstanding N/A N/A X X Guarantee N/A N/A X X

Account Volume: Facilities Total No. of transaction Amount in ‘000’ Taka Letter of Credits X X Guarantees X X Local/Export Bills Handled X X

Account Profitability:

(Amount in ‘000’ Taka) Nature of Account/Facility

Average Utilization

Rate of Interest

Interest Income

Commission

Other Revenue

Total

Current Account X X Overdraft/Cash Credit X X

SLC X X Term Loan X X Import Loan-Hypo X X Demand Loan-Hypo X X

Guarantees X X

LBDP/Export Bills Handled X X X X

Gross Earnings XXX XXX XXX XXX Less: Cost of Fund XX XX

Net Earnings XXX XXX XXX XXX Comment on Relationship/Earnings: Our earnings from borrower for the last year was BDT------------- and from Group BDT------- Our projected earnings from borrower for the next year will be BDT------ and Group BDT--- Account Turnover and utilization of limit during the last year was satisfactory.

_________________________ __________________________ Relationship Manager (RM) Senior Relationship Manager (SRM)


APPENDIX-C

CREDIT RISK GRADING SCORE SHEET


CREDIT RISK GRADING SCORE SHEET Reference No: Date:

Borrower: Group Name (if any): Branch: Industry/Sector: Date of Financials: Completed by: Approved by:

Aggregate Score: _________ Risk Grading: _________

Number Grading Short Score 1

Superior

SUP

Fully cash secured, secured by Government/International Bank

Guarantee 2 Good GD 85+ 3 Acceptable ACCPT 75-84 4 Marginal/Watchlist MG/WL 65-74 5 Special Mention SM 55-64 6 Substandard SS 45-54 7 Doubtful DF 35-44 8 Bad & Loss BL <35

Criteria Weight

A. Financial Risk 50% Parameter

Score

Actual Parameter

Score Obtained

1. Leverage: (15%) Debt Equity Ratio (×) - Times Total Liabilities to Tangible Net worth All calculations should be based on annual financial statements of the borrower (audited preferred).

Less than 0.25× 0.26× to 0.35 x 0.36× to 0.50 x 0.51× to 0.75 x 0.76× to 1.25 x 1.26× to 2.00 x 2.01× to 2.50 x 2.51× to 2.75 x More than 2.75×

15 14 13 12 11 10 8 7 0

2. Liquidity: (15%) Current Ratio (×) - Times Current Assets to Current Liabilities

Greater than 2.74× 2.50× to 2.74 x 2.00× to 2.49 x 1.50× to 1.99 x 1.10× to 1.49 x 0.90× to 1.09 x 0.80× to 0.89 x 0.70× to 0.79 x Less than 0.70×

15 14 13 12 11 10 8 7 0

3. Profitability: (15%) Operating Profit Margin (%) Operating Profit ×100 Sales

Greater than 25% 20% to 24% 15% to 19% 10% to 14% 7% to 9% 4% to 6% 1% to 3% Less than 1%

15 14 13 12 10 9 7 0

4. Coverage: (5%) Interest Coverage Ratio (×)-Times

Earning Before Interest & Tax (EBIT) Interest on debt

More than 2.00× More than 1.51× Less than 2.00× More than 1.25× Less than 1.50× More than 1.00× Less than 1.24× Less than 1.00×

5 4 3 2 0

Total Score–Financial Risk 50


Criteria Weight B. Business/Industry Risk

18%

Parameter

Score

Actual Parameter

Score Obtained

1. Size of Business (Sales in BDT crore) The size of the borrower’s business measured by the most recent year’s total sales. Preferably based on audited financial statements

> 60.00 30.00 – 59.99 10.00 – 29.99 5.00 - 9.99 2.50 - 4.99 < 2.50

5 4 3 2 1 0

2. Age of Business The number of years the borrower has been engaged in the primary line of business.

> 10 years > 5 - 10 years 2 - 5 years < 2 years

3 2 1 0

3. Business Outlook A critical assessment of the medium term prospects of the borrower, taking into account the industry, market share and economic factors.

Favorable Stable Slightly Uncertain Cause for Concern

3 2 1 0

4. Industry Growth

Strong (10%+) Good (>5% - 10%) Moderate (1% - 5%) No Growth (<1%)

3 2 1 0

5. Market Competition

Dominant Player Moderately Competitive Highly Competitive

2 1 0

6. Entry/Exit Barriers Difficult Average Easy

2 1 0

Total Score-Business/Industry Risk 18

Criteria Weight

C. Management Risk 12% Parameter Score

Actual Parameter

Score Obtained

1. Experience (Management & Management Team)

The quality of management based on the aggregate number of years that the Senior Management Team has been in the industry.

More than 10 years in the related line of business 5–10 years in the related line of

business 1–5 years in the related line of

business No experience

5 3 2 0

2. Second Line/ Succession

Ready Succession Succession within 1-2 years Succession within 2-3 years Succession in question

4 3 2 0

3. Team Work

Very Good Moderate Poor Regular Conflict

3 2 1 0

Total Score-Management Risk 12


Criteria Weight

D. Security Risk 10% Parameter Score

Actual Parameter

Score Obtained

1. Security Coverage (Primary)

Fully pledged facilities/substantially cash covered/Reg. Mortg, for HBL Registered Hypothecation

(1st charge/1st Pari passu charge) 2nd Charge/Inferior charge Simple hypothecation/negative lien

on assets. No security

4 3 2 1 0

2. Collateral Coverage (Property Location)

Registered Mortgage on Municipal Corporation/Prime area property. Registered Mortgage on

Pourashava/semi-urban area property Equitable Mortgage or No property

but plant & machinery as collateral Negative lien on collateral No collateral

4 3 2 1 0

3. Support (Guarantee)

Personal guarantee with high net worth or Strong Corporate Guarantee Personal Guarantees or Corporate

Guarantee with average financial strength No Support/Guarantee

2 1 0

Total Score- Security Risk 10

Criteria Weight E. Relationship Risk 10%

Parameter Score Actual Parameter

Score Obtained

1. Account Conduct

More than 3 (three) years accounts with faultless record Less than 3 (three) years accounts

with faultless record Accounts having satisfactory

dealings with some late payments Frequent Past dues & Irregular

dealings in account

5 4 2 0

2. Utilization of Limit (actual/projection)

More than 60% 40% - 60% Less than 40%

2 1 0

3. Compliance of Covenants / Conditions

Full Compliance Some Non-Compliance No Compliance

2 1 0

4. Personal Deposits The extent to which the bank maintains a personal banking relationship with the key business sponsors/principals.

Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits No depository relationship

1 0

Total Score-Relationship Risk 10 Grand Total- All Risk 100


APPENDIX-D

CREDIT RISK GRADING FORM


CREDIT RISK GRADING FORM Date:

Borrower: Branch: Incorporated: Legal Status: Client Since: Business: CIB date & status: Risk Grading Existing New Next Grading Review Date: Grade Score Existing New Credit Risk Grade Score Sheet Ref. No ----------------- & dated ---------------- enclosed.

Amount in ‘000 TK Facilities Limit Outstandings

Expiry/ Maturity

Days Past due

Interest Suspense

Provision Held

SLC/PAD LTR ULC/Acceptance Overdraft Cash Credit Demand Loan Term Loan Guarantee Total

Key Financials Period FYE December 2001 FYE December 2002 FYE December 2003 Sales Net Profit Current Ratio (X) Leverage (X) Operating Profit/Sales (%) Interest Coverage (X)

Query: Are we receiving Financials regularly? Monthly sales deposit receipt and adjustment by the Bank: (For last 6 months.)

Is client in business? What is happening to sister company cash flow? Do we have corporate guarantee? What is the risk grade of guarantor? Is loan documentation 100% OK? Are stock of client verified/When/What is the valuation? When last client/factory visit was made by RM and comment by RM? Is Registered Mortgage in place/ What is the value? Are all the approval conditions/covenants complied by borrower?

Reason for change (if any) in credit risk grading:

General comment by RM or Recommended action steps for upgrade if required:

_________________________ ___________________ Relationship Manager (RM) Senior Relationship Manager (SRM) GRADING APPROVAL

Credit Officer, CRM Senior Credit Officer, CRM


APPENDIX-E

MIS REPORTS ON CREDIT RISK GRADING


31

ABC BANK LIMITED CREDIT RISK GRADING REPORT (CONSOLIDATED)

AS ON DECEMBER 31, 2004

RISK GRADE NUMBER OF BORROWER

IN % LIMIT (TK IN ‘000)

IN % OUTSTANDING (TK IN ‘000)

IN %

SUPERIOR - 1 GOOD - 2 ACCEPTABLE - 3 MARGINAL/WATCHLIST- 4 SPECIAL MENTION - 5 SUB STANDARD - 6 DOUBTFUL - 7 BAD & LOSS - 8 TOTAL 100% 100% 100%


ABC BANK LIMITED XYZ BRANCH

CREDIT RISK GRADING REPORT (BRANCH WISE) AS ON DECEMBER 31, 2004

RISK GRADE NUMBER OF BORROWER

IN % LIMIT (TK IN ‘000)


IN %

SUPERIOR - 1 GOOD - 2 ACCEPTABLE - 3 MARGINAL/WATCHLIST- 4 SPECIAL MENTION - 5 SUB STANDARD - 6 DOUBTFUL - 7 BAD & LOSS - 8 TOTAL 100% 100% 100%


ABC BANK LIMITED CREDIT RISK GRADING REPORT (BRANCH & RISK GRADE WISE)

AS ON DECEMBER 31, 2004

BRANCH RISK GRADE NUMBER OF BORROWER IN % LIMIT (TK IN ‘000)


IN %

PRINCIPAL SUPERIOR - 1 GOOD - 2 ACCEPTABLE - 3 MARGINAL/WATCHLIST- 4 SPECIAL MENTION - 5 SUB STANDARD - 6 DOUBTFUL - 7 BAD & LOSS - 8 Sub Total (Principal Branch) AGRABAD SUPERIOR - 1 GOOD - 2 ACCEPTABLE - 3 MARGINAL/WATCHLIST- 4 SPECIAL MENTION - 5 SUB STANDARD - 6 DOUBTFUL - 7 BAD & LOSS - 8 Sub Total (Agrabad Branch) GRAND TOTAL 100% 100% 100%


34

ABC BANK LIMITED

CREDIT RISK GRADING REPORT (GRADE WISE BORROWER LIST) AS ON DECEMBER 31, 2004

CREDIT RISK GRADE:

BRANCH NAME OF BORROWER LIMIT

(TK IN ‘000)OUTSTANDING

(TK IN ‘000) CREDIT EXPIRY

PRINCIPAL AGRABAD TOTAL SUPERIOR GRADE

CREDIT RISK GRADE:

BRANCH NAME OF BORROWER LIMIT (TK IN ‘000)

OUTSTANDING (TK IN ‘000)

CREDIT EXPIRY

PRINCIPAL AGRABAD TOTAL GOOD GRADE

CREDIT RISK GRADE:



CREDIT EXPIRY

PRINCIPAL AGRABAD TOTAL ACCEPTABLE GRADE

CREDIT RISK GRADE:



CREDIT EXPIRY

PRINCIPAL AGRABAD TOTAL MARGINAL/WATCHLIST GRADE

SUP- 1

GD-2

ACCPT-3

MG/WL-4


CREDIT RISK GRADE:

BRANCH NAME OF BORROWER LIMIT

(TK IN ‘000)OUTSTANDING

(TK IN ‘000) CREDIT EXPIRY

PRINCIPAL AGRABAD TOTAL SPECIAL MENTION GRADE

CREDIT RISK GRADE:



CREDIT EXPIRY

PRINCIPAL AGRABAD TOTAL SUB STANDARD GRADE

CREDIT RISK GRADE:



CREDIT EXPIRY

PRINCIPAL AGRABAD TOTAL DOUBTFUL GRADE

CREDIT RISK GRADE:



CREDIT EXPIRY

PRINCIPAL AGRABAD TOTAL BAD & LOSS GRADE

SM-5

SS-6

DF-7

BL-8


APPENDIX-F

FINANCIAL SPREAD SHEET (FSS)

Auditor AUDITED AUDITED CO PREPAnalyst Zahid Zahid ZahidFYE Jun 30,2003 Jun 30,2004 Dec 31,2004Period 12 Mths 12 Mths 6 MthsAmount in (000) Taka in (000) Taka in (000) TakaDETAILED FINANCIALS REPORT

CURRENT ASSETS

Cash/Bank Balances 17,200 3,642 7,215L/C margin 1,521 0 9,169Fixed Deposits/Marketable Securities 0 0 0Acc. Receivables-Trade 17,709 96,226 30,744Accounts Receivable - Others

Goods-in-transit 158,928 0 8,486Inventory 181,298 319,579 243,758

Due from Affiliates - Current 140,000 140,000 140,000

FIXED ASSETSGross Fixed Assets 396 356 356Less: Depreciation 0 0 0

NON-CURRENT ASSETSDue from Principal, Emp & Affiliate 107,299 100,800 100,800Advance Income Tax 10,823 8,500 12,500Deferred Charges,Pre-pymts & Adv. 1,670 1,273 4,573

CURRENT LIABILITIES

Short Term Bank Borrowings 245,926 259,219 156,027Current Funded Portion of Term Debt (CMLTD)Account Payable - TradeAccrued Items 200 225 230Provision for Income Tax/Def. I/T Liabilities 14,643 17,186 0Advance PaymentDividends Payable

LONG TERM LIABILITIESTerm Loan 0 0 0

NET WORTHPaid up Capital 1,125 1,125 1,125Directors Loan(subordinated)Retained Earnings 374,950 392,621 400,219Reserves

BALANCE TRUE TRUE TRUE

Difference (if any) 0 0 0

XYZ COMPANY LTD - Gulshan Branch


Auditor AUDITED AUDITED CO PREPAnalyst Zahid Zahid ZahidFYE Jun 30,2003 Jun 30,2004 Dec 31,2004Period 12 Mths 12 Mths 6 MthsAmount in (000) Taka in (000) Taka in (000) Taka

INCOME STATEMENT

Gross Sales 942,725 804,072 410,676Less:VAT 0 0 0

Add: Other Operating Income

Less :Cost of Goods Sold 825,827 735,726 367,062

Less: Selling. Gen. & Admin. Expenses 9,793 7,745 3,745

Less: Depreciation 0 0 0Less: Interest Expense 24,014 25,744 12,271

Add: Other Income

Income Taxes 14,643 17,186 0

Cash Withdrawals/Dividend 31,000 0 20,000

BALANCE TRUE TRUE

Difference (if any) 0 0



Auditor AUDITED % AUDITED % CO PREP %Analyst Zahid TBS Zahid TBS Zahid TBSFYE Jun 30,2003 Jun 30,2004 Dec 31,2004Period 12 Mths 12 Mths 6 MthsAmount in (000) Taka in (000) Taka in (000) TakaDETAILED FINANCIALS REPORT

CURRENT ASSETS

Cash/Bank Balances 17,200 3 3,642 1 7,215 1L/C margin 1,521 0 0 0 9,169 2Fixed Deposits/Marketable Securities 0 0 0 0 0 0Acc. Receivables-Trade 17,709 3 96,226 14 30,744 6Accounts Receivable - Others 0 0 0 0 0 00 0 0 0 0 0 00 0 0 0 0 0 0Goods-in-transit 158,928 25 0 0 8,486 2Inventory 181,298 28 319,579 48 243,758 44

0 0Total Inventory 340,226 53 319,579 48 252,244 450 0 0 0 0 0 0Due from Affiliates - Current 140,000 22 140,000 21 140,000 25TOTAL CURRENT ASSETS 516,656 81 559,447 83 439,372 79

FIXED ASSETS 0 0 0Gross Fixed Assets 396 0 356 0 356 0Less: Depreciation 0 0 0 0 0 0NET FIXED ASSETS 396 0 356 0 356 0

NON-CURRENT ASSETS 0 0 0Due from Principal, Emp & Affiliate 107,299 17 100,800 15 100,800 18Advance Income Tax 10,823 2 8,500 1 12,500 2Deferred Charges,Pre-pymts & Adv. 1,670 0 1,273 0 4,573 10 0 0 0 0 0 0TOTAL NON-CURRENT ASSETS 120,188 19 110,929 17 118,229 21

0 0TOTAL ASSETS 636,844 100 670,376 100 557,601 100

Short Term Bank Borrowings 245,926 39 259,219 39 156,027 28Current Funded Portion of Term Debt (CMLTD) 0 0 0 0 0 0Account Payable - Trade 0 0 0 0 0 0Accrued Items 200 0 225 0 230 0Provision for Income Tax/Def. I/T Liabilities 14,643 2 17,186 3 0 0Advance Payment 0 0 0 0 0 0Dividends Payable 0 0 0 0 0 0TOTAL CURRENT LIABILITIES 260,769 41 276,630 41 156,257 28

LONG TERM LIABILITIES 0 0 0Term Loan 0 0 0 0 0 00 0 0 0 0 0 0TOTAL LIABILITIES 260,769 41 276,630 41 156,257 28

NET WORTH 0 0 0Paid up Capital 1,125 0 1,125 0 1,125 0Directors Loan(subordinated) 0 0 0 0 0 0Retained Earnings 374,950 59 392,621 59 400,219 72Reserves 0 0 0 0 0 00 0 0 0 0 0 00 0 0 0 0 0 0NET WORTH 376,075 59 393,746 59 401,344 72

TOTAL LIABILITIES & NET WORTH 636,844 100 670,376 100 557,601 100



Auditor AUDITED % AUDITED % CO PREP %Analyst Zahid Sales Zahid Sales Zahid SalesFYE Jun 30,2003 Jun 30,2004 Dec 31,2004Period 12 Mths 12 Mths 6 MthsAmount in (000) Taka in (000) Taka in (000) Taka

INCOME STATEMENT

Gross Sales 942,725 100 804,072 100 410,676 100Less:VAT 0 0 0 0 0 0Net Sales 942,725 100 804,072 100 410,676 100Add: Other Operating Income 0 0 0 0 0 0Total Sales Revenue 942,725 100 804,072 100 410,676 100Less :Cost of Goods Sold 825,827 88 735,726 92 367,062 89GROSS PROFIT/REVENUE 116,898 12 68,346 8 43,614 110 0 0 0 0 0 0Less: Selling. Gen. & Admin. Expenses 9,793 1 7,745 1 3,745 10 0 0 0 0 0 0TOTAL OPERATING PROFIT (EBITDA) 107,105 11 60,601 8 39,869 100 0 0 0 0 0 0Less: Depreciation 0 0 0 0 0 0Less: Interest Expense 24,014 3 25,744 3 12,271 30 0 0 00 0 0 0PROFIT BEFORE TAXES & EXTR ITEM 83,091 9 34,857 4 27,598 7Add: Other Income 0 0 0 0 0 00 0 0 0 0 0 0Income Taxes 14,643 2 17,186 2 0 00 0 0 0 0 0 0NET PROFIT 68,448 7 17,671 2 27,598 70 0 0 0 0 0 0Cash Withdrawals/Dividend 31,000 3 0 0 20,000 50 0 0 0TOTAL CHANGES IN RETAINED EARNINGS 37,448 4 17,671 2 7,598 2



FINANCIAL RATIOS Jun 30,2003 Jun 30,2004 Dec 31,2004% % %

GROWTH RATIOS:

Sales Growth, Sales% N/A -14.71 2.15Net Sales Growth, Composite % N/A -14.71 2.15Net Income Growth, % N/A -74.18 212.35Total Assets Growth, % N/A 5.27 -16.82Total Liabilities Growth, % N/A 6.08 -43.51Net Worth Growth, % N/A 4.70 1.93

PROFITABILITY RATIOS:

Gross Margin, Composite % 12.40 8.50 10.62SG & A, % 1.04 0.96 0.96Cushion (Gross Margin - SG&A), % 11.36 7.54 9.71Depreciation, Amortization, % 0.00 0.00 0.00Operating Profit Margin, % 11.36 7.54 9.71Interest Expense, % 2.55 3.20 2.99Operating Margin, % 8.81 4.34 6.72Net Margin, % 7.26 2.20 6.72Return on Assets, % 10.75 2.64 9.90Return on Equity, % 18.20 4.49 13.75Cash Withdrawal/Dividend Payout Rate, % 45.29 0.00 72.47

COVERAGE RATIOS:Interest Coverage (EBIT/Total Interest) 4.46 2.35 3.25Debt Ser.Coverage(EBITDA/Total Interest+CMLTD) 4.46 2.35 3.25

ACTIVITY RATIOS:

Receivables in Days 7 44 14Payables in Days 0 0 0Inventory in Days 150 159 125Sales/Total Assets (X) 1.5 1.2 1.5

LIQUIDITY RATIOS:

Working Capital 255,887 282,817 283,115Quick Ratio (X) 0.14 0.36 0.30Current Ratio (X) 1.98 2.02 2.81Sales/ Net Working Capital (X) 3.68 2.84 2.90

LEVERAGE RATIOS:

Total Liabilities/ Net Worth (X) 0.69 0.70 0.39Affiliate Exposure/Net Worth (%) 65.8 61.2 60.0Total Liabilities/(Net Worth-Affiliates) (X) 2.02 1.81 0.97



Auditor AUDITED CO PREPAnalyst Zahid ZahidFYE Jun 30,2004 Dec 31,2004Period 12 Mths 6 MthsAmount in (000) Taka in (000) Taka

CASH FLOW STATEMENT

Profit Before Tax After Extra Items 34,857 27,598 Add: Interest Expense 25,744 12,271 Add: Depreciation 0 0Add/Minus: Change in Deferred Taxes 2,543 -17,186

EBITDA Cash Flow 63,144 22,683

Less: Interest Expense -25,744 -12,271Less: Taxes -17,186 0Less: Dividends 0 -20,000

CF Before Investing Activities 20,214 -9,588

Less: Capital Expenditures 40 0

CF Before Working Capital Changes 20,254 -9,588

Plus/Minus: Change in Accts Receivable -78,517 65,482Plus/Minus: Change in Inventory 20,647 67,335Plus/Minus:Change in Prepaid Expense 2,720 -7,300Plus/Minus: Change in Accounts Payable 0 0Plus/Minus: Change in Accued Expenses 25 -5Plus/Minus: Change in Dividends Payable 0 0

Total Working Capital Changes -55,125 125,512

CF Before Intercompany Transaction -34,871 115,924

Plus/Minus: Inter Trade Rec from/to Affil. 6,499 0

CF Before Other B/S Movements -28,372 115,924

Plus/Minus: Other B/S Movements 0 0

Financing Needs/Surplus -28,372 115,924

Plus/Minus: ST Bank Debt 13,293 -103,192Plus/Minus: LT Bank Debt 0 0Total Financing 13,293 -103,192

CF after Financing -15,079 12,732Plus/Minus: Change In Cash -15,079 12,732



Reference No.: Date: 12-Mar-04Borrower Group Name (if any) 87Branch:Industry/SectorDate of Financials 31-Dec-03Completed byApproved by NIAZ HABIB

Number Grading Short1 Superior SUP2 Good GD3 Acceptable ACCPT4 Marginal/Watchlist MG/WL5 Special Mention SM6 Substandard SS7 Doubtful DF8 Bad/Loss BL

Criteria Weight Parameter Score Actual ParameterScore

ObtainedA. Financial Risk 50%1. Leverage: (15%) Less than 0.25× 15 0.53 12Debt Equity Ratio (×) - Times 0.26× to 0.35 x 14Total Liabilities to Tangible Net worth 0.36× to 0.50 x 13

0.51× to 0.75 x 12All calculations should be based on 0.76× to 1.25 x 11annula financial statements of the 1.26× to 2.00 x 10borrower (audited preferred) 2.01× to 2.50 x 8

2.51× to 2.75 x 7More than 2.75× 0

2. Liquidity: (15%) Greater than 2.74× 15 54.00 15Current Ratio (×) -Times 2.50× to 2.74 x 14Current Assets to Current Liabilities 2.00× to 2.49 x 13

1.50× to 1.99 x 121.10× to 1.49 x 110.90× to 1.09 x 100.80× to 0.89 x 80.70× to 0.79 x 7Less than 0.70× 0

3. Profitability: (15%) Greater than 25% 15 78.00% 15Operating Profit Margin (%) 20% to 24% 14(Operating Profit/Sales) X 100 15% to 19% 13

10% to 14% 127% to 9% 104% to 6% 91% to 3% 7Less than 1% 0

4. Coverage: (5%)

Interest Coverage Ratio (×) - TimesEarning before interest & tax (EBIT) More than 2.00× 5 10.00 5

Interest on debt More than 1.51× Less than 2.00× 4More than 1.25× Less than 1.50× 3More than 1.00× Less than 1.24× 2Less than 1.00× 0

Total Score- Financial Risk 50 47

55-6445-5435-44<35

Fully cash secured, secured by government 85+

75-8465-74


Aggregate Score:

Score

Risk Grading:

Good

Page 1 of 3

Reference No.: Date: 12-Mar-04Borrower


B. Business/ Industry Risk 18%1. Size of Business (in BDT crore) > 60.00 5 75.00 5

30.00 – 59.99 4The size of the borrower's business 10.00 – 29.99 3measured by the most recent year's 5.00 - 9.99 2total sales. Preferably audited numbers. 2.50 - 4.99 1

< 2.50 02. Age of Business > 10 Years 3 10 2

> 5 - 10 Years 2The number of years the borrower 2 - 5 Years 1engaged in the primary line of business < 2 Years 03. Business Outlook Favorable 3 Favorable 3Critical assesment of medium term Stable 2prospects of industry, market share Slightly Uncertain 1and economic factors. Cause for Concern 04. Industry Growth Strong (10%+) 3 No Growth (<1%) 0

Good (>5% - 10%) 2Moderate (1%-5%) 1No Growth (<1%) 0

5. Market Competition Dominant Player 2 Dominant Player 2Moderately Competitive 1Highly Competitive 0

6. Entry/Exit Barriers Difficult 2 Difficult 2Average 1Easy 0

Total Score- Business/Industry 18 12

C. Management Risk 12%1. Experience More than 10 years in the related 5 More than 10 years in the 5Quality of management based on total 5–10 years in the related line of 3# of years of experience of the senior 1–5 years in the related line of 2management in the Industry. No experience 02. Second Line/ Succession Ready Succession 4 Succession within 2-3 years 2

Succession within 1-2 years 3Succession within 2-3 years 2Succession in question 0

3. Team Work Very Good 3 Very Good 3Moderate 2Poor 1Regular Conflict 0

Total Score- Management Risk 12 10

Page 2 of 3

Reference No.: Date: 12-Mar-04Borrower


D. Security Risk 10%1. Security Coverage (Primary) Fully Pledged facilities/substantially

cash covered / Reg. Mortg. for HBL4 Registered Hypothecation (1st

Charge/1st Pari passu Charge)3

Registered Hypothecation (1st

Charge/1st Pari passu Charge)3

2nd charge/Inferior charge 2Simple hypothecation/Negative lien on assets

1

No security 02. Collateral Coverage (Property Location)

Registered Mortgage on Municipal corporation/Prime Area property

4 Registered Mortgage on Pourashava/Semi-Urban area

property

3

Registered Mortgage on Pourashava/Semi-Urban area property

3

Equitable Mortgage or No property but Plant and Machinery as collateral

2

Negative lien on collateral 1No collateral 0

3. Support (Guarantee) Personal Guarantee with high net worth or Strong Corporate Guarantee

2 Personal Guarantee with high net worth or Strong Corporate

Guarantee

2

Personal Guarantees or Corporate Guarantee with average financial strength

1

No support/guarantee 0Total Score- Security Risk 10 8E. Relationship Risk 10%1. Account Conduct More than 3 years Accounts with

faultless record5 More than 3 years Accounts

with faultless record5

Less than 3 years Accounts with faultless record

4

Accounts having satisfactory dealings with some late payments.

2

Frequent Past dues & Irregular dealings in account

0

2. Utilization of Limit More than 60% 2 65.00% 2(actual/projection) 40% - 60% 1

Less than 40% 03. Compliance of Covenants / Full Compliance 2 Full Compliance 2Conditions Some Non-Compliance 1

No Compliance 04. Personal Deposits Personal accounts of the key

business Sponsors/ Principals are maintained in the bank, with significant deposits

1 Personal accounts of the key business Sponsors/ Principals

are maintained in the bank, with significant deposits

1

No depository relationship 0Total Score- Relationship Risk 10 10

Grand Total - All Risk 100 87

Page 3 of 3