crg and project success

CRG &Project success 1

Chapter-1 Introduction


1.1 Origin of the report : As a mandatory educational requirement I have to get myself indulged in internship .My firm is Prime Bank Limited. From the first February, 2009 I have been working as an intern in PBL, Bangshal branch. So, this report is linked with my duties and responsibilities that I have to perform as a member of corporate credit team of PBLs Bangshal branch. 1.2 Background of the study: This report will be prepared on the basis of a research on the Credit Risk Grading (CRG) & Project Success. Risk is inherent in all aspects of a commercial banks operation; however one of the most significant risks a bank is exposed to is credit risk. CRG is a combination of both qualitative and quantitative instruments used to calculate a score representing the applicants probability of default and to sort borrowers into different default class. CRG is also needed for outstretching the available limit or renewal of the credit facility. With the world moving toward Basal II the need to introduce a Risk Grading System (RGS) for the banking industry became immensely essential. In 2003, Bangladesh Bank made the Core Risk Management Guidelines (CRMG) mandatory. For the first time CRMG was introduced for grading unclassified accounts. The CRMG however was not detailed enough for banks to fully implement a RGS. Therefore in January 2005, BIBM, was instruct by governor Bangladesh Bank to produce credit risk grading manual based on the core risks management guidelines. The CRGM is a mandatory replacement of Lending Risk Analysis (LRA) and will be applicable for all exposures (irrespective of amount) other then those covered under consumer and small Enterprises Financing prudential guidelines and also under the short- term agriculture and Micro- Credit. CRG 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

1.3 Objective of the study:


The purpose of this study is: Initially To analyze whether any significant relationship prevails between CRG and project success or not. Secondly To know the areas in which the CRG manual of Prime Bank differs from Bangladesh Bank guideline and to determine the impact of this phenomenon on risk grading. To find out the loopholes in the existing CRG practice of Prime Bank Limited. In a comparative analysis to locate the differences between the CRG process maintained by Prime Bank Limited and other P.C.Bs and to determine its impact on the risk grading. To provide an all inclusive list of recommendations to improve the CRG practice especially in Prime bank limited. 1.4 Methodology of the study: In this part of the report I will discuss about my way of data collection, designing of the questionnaire, sampling, data processing and my overall research design.a) Research Design:

The basic research design is case study research method. My research design roams around. Exploratory Research: This type of research was used to identify and define the problems related to the objective more precisely, to gain insights for developing approaches to problems. Diary Method: I kept a personal account of daily trainings, feelings, discussions, interactions when doing the classification, recognizing policies and guidelines.b) Data collection:

All the data was gathered personally under the guidance of Prof. Mahamood Osman Imam The interview of the experienced manager of Prime Bank Ltd. And Bandar steel mills mid level management was conducted in a friendly manner. Secondary data were acquired individually. Data were gathered form news papers, web-sites, books other related articles.


Type of collected Data:

Primary Data: Personal Observation (structured and undisguised) Content Analysis Personal Interviews Secondary Data: Internal Data: Information about the projects is taken from Banks database. Printed Publications Internet There are 2 questionnaire prepared for the report: External Data:

c.

Designing of the questionnaire: managers of a client.

one for the bankers engaged in CRG process another one is for the mid level The questionnaires are structured and undisguised. Both dichotomous questions and open-ended questions are embedded in questionnaire. Some answers are related with rating scale. Tabulation of answer was not needed. d. Sampling: To determine the relationship between CRG scores and project success the population of 26 customers of PBL Bangshal Br. was used. While determining the loopholes of PBL CRG process and for the comparative study I have used conveyance sampling method (chunk method). Because of the high volume of data that was needed for the analysis, I have done that. I was not concerned about the size of the sample because of lower possibility of sampling error. e) Data analysis:


While analyzing the CRG scores with the project success data multiple regression equation was formed. To do the analysis I have to take help from SPSS-12 software and STATA software. Hypothesis testing ( Z test, F-test, Chi-square test) was used to determine the significance level of regression co-efficient. Moreover, as success and failure are basically qualitative data for proper analysis, I have to use the logit model. 1.5 Scopes & Limitations of the study: 1. 47 corporate clients data was analyzed to determine the relationship between CRG scores and project success. But as these clients belong to PBL Bangshal Br. This analysis holds true exactly for Bangshal Br. Perhaps it is needed to be fine tuned in case of implementation in other Branchs client. 2. While I have determined the loopholes of PBL CRG scorning. I have used three samples taken from the population of 47. Non-sampling error may prevail there. 3. Vague and distortive information may be obtained while conducting the question and answer session with bankers. These can have impact on the quality of my recommendations. 4. Financial risk analysis was based on the un-audited financial statements of corporate clients. There is a higher chance of a lot of flaws and resulting errors. 5. Assumptions made about the opportunity costs of various types of business, tax rate can have some erroneous part. 6.CRG is a very broad topic and consists of many subtle things. It can not be restricted within boundaries; the whole world is debating on this issue. Thus it is nearly impossible to cover all the factors of CRG. So we set Prime Bank as the boundary for this report and tried to cover all the important effects.

1.6 Organization of the report:


I have organized my report by the following way: My report starts with a brief profile of PBL. The in the theoretical background portion, I have discussed about credit risk grading, its importance, its components and how it is implemented in Bangladesh. In my first analysis, I have tried to form a multiple regression equation, which can predict whether a prospective project will fail on succeed if some independent variable like financial risk scores, management risk scores, size of the business is known. Then, I have determined the area of differences in the B.B. CRG manual and PBL CRG manual and its possible impact on the risk grading and scoring. After that, by using samples I have tried to find out the loopholes that are present in PBLs CRG manual. At the last part of my analysis, I have prepared a comparative study based on the CRG practice in Bangladesh and the impact of changes in CRG manuals in terms of scoring and grading are embedded in the report. Finally, I have presented some recommendations to improve the CRG practice of PBL.


Chapter- 2 Company profile


2.1 Background of the bank: In the backdrop of economic liberalization and financial sector reforms, a group of highly successful local entrepreneurs conceived an idea of floating a commercial bank with different outlook. For them, it was competence, excellence and consistent delivery of reliable service with superior value products. Accordingly, Prime Bank Ltd. was created and commencement of business started on 17th April 1995. The sponsors are reputed personalities in the field of trade and commerce and their stake ranges from shipping to textile and finance to energy etc. As a fully licensed commercial bank, Prime Bank Ltd. is being managed by a highly professional and dedicated team with long experience in banking. They constantly focus on understanding and anticipating customer needs. As the banking scenario undergoes changes so is the bank and it repositions itself in the changed market condition. Prime Bank Ltd. has already made significant progress within a very short period of its existence. The bank has been graded as a top class bank in the country through internationally accepted CAMEL rating. The bank has already occupied an enviable position among its competitors after achieving success in all areas of business operation.


2.2 Mission of the corporation: By means of continuous improvement making PBL an efficient, market driven, customer focused institution with good corporate governance structure. 2.3 Vision of the corporation: To be the best PCB (Privatized commercial bank) in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management and profitability. 2.4 Principal activates of PBL: The principal activities of PBL are banking and related business. There are as follows: Corporate credit allocation: It includes the following: commercial loan, export financing, industrial financing, syndication financing, infrastructure financing. Retail Banking: There are 11 products for customers like home loan (Swapra Neer), consumer loan (Household durables), car loan, Doctors Loan, loan against salary, Education loan, marriage loan, CNG conversion loan, Hospitalization loan and any purpose loan. Credit card venture: PBL is a member of both worldwide accepted plastic money network MasterCard and visa. SME Lending: Four customized product are used to provide Loan to SMEs (i) Punji (capital Loan), (ii) Chalti rin (Working capital Loan), (iii) Moushumi (festival Loan), (iv) Digun rin (double loan). Islami Banking: Right now PBL has I shariah based Islami Banking Branch which are providing banking services in an Islam directed path. Import and export business: source of PBLs income. LC opening and risk assumption has become a major

Merchant Banking : Prime investment portfolio management service helps the individual and institutional investors to invest in the secondary market with the option to operate under both margin and non margin accounts. Treasury Function: It concentrated in funding operation, foreign exchange dealings, maintenance of CRR and SLR. Deposit: Deposit products are as follows:Contributory Savings Scheme, Monetary Benefit Deposit Scheme, Special Deposit Scheme, Education Savings Scheme, Fixed Deposit Scheme, Prime Bank Monetary Scheme, Prime Bank Insured Fixed Deposit Scheme, Savings Deposit Account, STD Account, Multi Currency Account,


Chapter- 6Loopholes in the PBLs CRG practice


Nothing but is constant. Obviously PBL authority has done a superb job by fine-tuning the CRG manual. But it is the implementation at the branch level that actually matters. Whether PBL Bangshal branch can properly assess a corporate client before sanctioning of the loan, whether the time to time adjustments are incorporated in the scoring due to changes in the risk assessments these are the million dollar questions. Moreover the timely coordination with the head office about the overall risk exposure is also a burning question. Although it seemed to be a better choice that very CRG grading manual provided by the PBL has some loopholes that I have observed during much research over that particular matter. To properly identify the loopholes my strategy is as follows: 1. Very first of all I will try to find out dismays in a high profile, very successful project of PBL. In spite of very high level of compliance and very good track record that client should not be awarded that much high. 2. Then two other projects will be evaluated where in spite of awarding comparatively better grades (PBLs grading is going to be compared with my grading) those projects actually failed as the borrower defaulted.

Case Study -1: Bandar Steel Industries LimitedBackground study: Bandar Steel Industries Limited is a mediocre steel mill. In Bangladesh steel market, Bandar steel industries limited is well renowned as a quality steel manufacturer of different grade of steel. It has two steel mills, one cost mill and one auto re-rolling mill. The company has six induction melting furnace, continuous casting machine and a fully automatic Re-rolling mill. The company has got a daily production of about 250 M.T of different grade of steel. The company is managed by very experienced management team who has a vast tenure of more than 20 years of experience under their belt. Quality is the major motto of the company. Marketing aspects: The customer is during business with wide and good market reputation. But 60% of the iron rod goods are sold on credit. 90% of the existing production capacity is in use and selling to the large market. Products are on demand and more profitable.


Competitive positioning: Strength: 1. Highly experienced directors 2. Higher equity participation. Weakness: 1. No maintenance of financials 2. No data about market share is available. Buying risk of Bandar: 1. Price hike of scrap in the international market 2. Fluctuation of dollar rate. 3. Non-availability of raw materials. Selling risk of Bandar: 1. Recovery of dues. 2. Price competition from rivals. Possible risks identified against proposal credit: 1. Change in the import policy. 2. Adverse fluctuation of foreign exchange. 3. Disruption in power and gas supply.

To determine the loopholes, now I am preparing my score sheet of Bandar Steel Industries Limited based on my observation of case files, prospects of Bandar, friendly interview with bankers and mid level manages of Bandar. To get a better insight in the steel industry I have a five forces competitive positioning model as prescribed by Porter. At first I will give score to the financial risk category based on my calculation obtained from the un-audited financial statements of Bandar Steel Industries Limited. (Appendix- 6)

Year 2006 S.N 1 1.1 1.1.1 1.1.2 1.2 1.2.1 1.2.2 1.3 1.3.1 1.3.2 1.3.3 1.3.4 1.4 1.4.1 1.4.2 Year 2007 S.N 1 1.1 1.1.1 1.1.2 1.2 1.2.1 1.2.2 1.3 1.3.1 1.3.2 1.3.3 1.3.4 1.4 1.4.1 1.4.2 Criteria Financial risk Leverage Debt equity ratio Debt total asset ratio Liquidity Current ratio Quick ratio Profitability ratio Operating profit Margin Net profit margin ROA ROE Coverage Interest coverage Debt- service coverage weight given 50% 10% 5% 5% 10% 5% 5% 20% 5% 5% 5% 5% 10% 5% 5% My parameter PBL's score Criteria Financial risk Leverage Debt equity ratio Debt total asset ratio Liquidity Current ratio Quick ratio Profitability ratio Operating profit Margin Net profit margin ROA ROE Coverage Interest coverage Debt- service Coverage weight given 50% 10% 5% 5% 10% 5% 5% 20% 5% 5% 5% 5% 10% 5% 5% My parameter PBL's score


My Score

Difference in score

0.615 0.381 0.963 0.367 6.58% 4.76% 14.89% 24.05% 3.625 2.91

3.5 4 4 3.25 0 2.5 3 5 3 3

4 4.25 3.25 2 0 3 3.25 5 5 5

0.5 0.25 -0.75 -1.25

0.5 0.25

2 2

My Score

Difference in score

1.297 0.565 1.219 0.189 13.43% 6.91% 12.75% 29.30% 2.06 0.53

3.5 4 3.5 3 0 2.5 3 5 3 3

3.25 4 3.5 0 3.25 3.25 3 5 5 0

-0.25

-3 3.25 1

2 -3

Year 2008 S.N 1 1.1 1.1.1 1.1.2 Criteria Financial risk Leverage Debt equity ratio Debt total asset ratio weight given 50% 10% 5% 5% My parameter PBL's score My Score Difference in score

0.862 0.463

3.25 4

3.5 4.25

0.25 0.25


In a summary Year 2006 2007 2008 PBL Score 31.25 30.5 31.75 My Score 34.75 30.25 38

To penetrate deeper into the industry risk analysis I have done a competitive five force model analysis of Bander Steel Industries limited. Implementation of five force forces competitive model: Here I will try to implement the very famous porters five forces completive model in steel industry in Bangladesh with a prime focus on Bander steel industries limited. Threat of new entrants: Because of Higher lead time, huge investment in capital intensive products, for a new firm it is a bit difficult to enter in this highly profitable industry. On the other hand, steel being a mass product, lack of differentiation, non existence of any strong brand, highly price sensitive products, foreign investors like TATA coming in the steel sector, has made the industry vulnerable to threat of new entrants. Decision: moderate level of threat of new entrants. Intra-industry rivalry: Advertisement and promotional are needed for only grade 60 and 40 deformed bar other than that for the overall industry the price competition is so fierce that every firm chooses the low cost strategy. The whole steel industry is very much priced sensitive. Decision: higher level of intra- industry rivalry. Threat of substitute goods: A better substitution of steel has not yet found. So, the threat from the substitute goods is scare. Decision: Minimal threat from substitute goods.


Bargaining power of buyers: as 40% of all the raw materials are purchased by trade link international limited, for Bandar steel industries the bargaining power of buyers is high. But as other buyers are disintegrated, purchase in small lots, steel being a core product has lowered the bargaining power of buyers. So the overall steel industry alone with Bandar steel industries faces a very favorable condition. Decision: Moderate level of bargain power. Bargaining power of suppliers: 80% of the materials are imported from overseas. From EMR (40%-50%) and from Jue (35%-40%) materials are imported. So, such concentrated suppliers have heightened the bargaining power of suppliers. As these raw materials (normally scrap) a product, and because scrap is not purchased in bulk, bargaining power of supplier is very high. Decision: higher bargaining power of suppliers. Overall decision: Bandar steel mills industries profitability position is vulnerable because profit rate is lower and its not going to sustain in the long run. Analysis of business/ industry risk factors: Based on The prepared competitive forces model, checking of the financial statements, my observation, now I will try to analyze business/ industry risk factors of Bandar Steel Mills Industries Ltd.1. Size of the business: During the last three years, Bandar Steel Mills Ltds sales had always

been 60 cores. So, Bandar Steel deserves 4 out of 4 in this risk category.2. Age of business: Md. Sirazul Islam the chairman has a vast experience of 31 years under

this belt. Md. Abdul Kalam the managing director and another director Harunor Rasid are working as director for 22 years. Because of the vast experience in this line of business for the last three years risk grading I am giving them 3 out of 3 because of superior age of the business.3. Business outlook: Although the overall industries international scenario was very rosy for

Bandar Steel Industries higher level of intra-industry revelry, higher bargaining power of suppliers have made the business outlook not that much promising. So, the mark assign is 1 because of Bandars slightly uncertain position.4.

Industry growth: Although due to the world wide recession the steel industrys rampant pace have slowed a bit. But steel the industry in enjoying an approximately 9% growth rate worldwide. Due to this good growth scenario I am assigning 2 out of 3 in this industry growth category.


5. Raw materials availability: 80% of Bandars raw materials are imported are imported from

overseas. Source of raw materials are India, Egypt, Hungary, Singapore, USA, Philippines, Kuwait, UK, Guyana. As, Bandar is partially import dependent I am allocating 1 out of 2 in this criteria.6. Market competition: Bandar is not a dominant player in the industry; rather it should be

termed as moderately competitive firm. Bandar steel industries have never been in the top 5 companies. The following list will prevail the name of the most dominant players of the industry: BSRM steel Ltd. Rahim steel re- rolling mills Ltd. Kabir steel re-rolling mills Ltd. Seema steel re-rolling mills Ltd. Basundhara steel 1st position 2nd 3rd 4th 5th

7. Entry/exit barrier: The level of entry is moderate ij this industry. But due to the special equipped machinery, capital intensive industry, the exit barrier is high. So, the overly entry/ exit barrier is average for Bandar Steel Mills Ltd. So, I am assigning an average parameter in this respect and marks allocated are 1 out of 2.

Analysis of management risk: Now based on the discussion with some of the mid level management team associates, and the thorough observation of the case study files kept in the bank record, I have tried to present an analysis of management risk of Bandar Steel industries Ltd. (Questionnaire - 1) 1. Experience: The following table will reveal the experience level of the directors: Name of the director Md. Sirazul Islam Md. Abdul kalam Md. Haronor Rasid Mrs. Parvin Seraj Experience (in years) 31 21 21 3

Although the spouse of the chairman had only a mediocre experience, the overall experience level of other director is highly admirable. For that reason I am assigning full 5 marks out of 5 in this criterion. 2. Track record: Because of strong reputation and fully focused commitment I am allocating 2 out of 2 in this criterion. 3. Second line/ succession: No ready succession is available as per I am concerned after friendly meeting with the mid level management. As the succession is highly in question, I am allocating 0 out of 3 in this criterion.


4. Team work: After friendly conversation with mid level management I was informed about the moderate level of teamwork that existed in the Bandar Steel Industries head office. The mid level management seemed to be fade up with the oppressive top management autocratic decision making and group collaboration chances are really very minimal. So, due to a moderate team work position, I am allocating Bandar 1 out of 2 in this criterion. Analysis of security risk: The analysis of security risk is fully based on my observation in this case file of Bandar Steel Mills Ltd that is kept in Prime Bank Ltd. i) Primary security coverage: All the credit facility available to Bandar steel industries Ltd is fully covered. Registered mortgage of loan (117, 279, 270, 67 decimal land with factory shed), building (500, 300, 300 katha land with 6 stories building each), machinery (shed machinery, continuous casting machine, heat chamber). Easily surpass the credit availed to Bandar steel industries limited. Moreover, 10% cash margin in LTR, bank guarantee, L/C Usage charge documents 1st charge on all fixed floating assets Fully inclusive primary security coverage has allowed me to assign Bandar Steel 4 out of 4. ii) Collateral coverage (property location): All the building under the registered mortgage coverage is situated in the municipal corporation (Banshri to be exact). Land and coverage that are under coverage are situated in the district of Narayangonj. IHS inspection service. Limited inspection assesses whether properties are suitable to accept as collateral in case the same are free from all encumbrances. I have observed the valuation procedure of IHS in case of land, machinery and buildings. The valuation agency takes all the possible risk factors into consideration while evaluating the collaterals. Moreover, distressed value analysis is also done by IHS. As I am fully satisfied with the collateral coverage of Bandar Steel Industries, I am assigning full 4 out of 4 in this risk category. iii) Support: Personal guarantee of directors and corporate guarantee (Bikrampur Re-Rolling Industries) are given to reduce the security risk. As personal guarantee with high net worth or strong corporate guarantee is prevalent here, I am assigning 2 out of 2 in this risk criterion. Analysis of relationship risk: While doing this analysis, I have depended on the friendly interview with some PBL Bangshal Branchs employee and a through inspection of the case files. 1. Account conduct : As, there is a faultless record of more than 3 years with Bandar I am assigning 5 out of 5 in this criteria. Very recently PBL, Bangshal Branch has decided to renew and broaden the credit limit of Bandar Steel Industries Limited.


2. Utilization of Limit : As, Bandar Steel Industries is utilizing more than 90% of its revolving and non revolving credit I am assigning 2 out 2 for Bandar in this criteria. 3. Compliance of Covenants: Some non compliance was prevalent. So, 1 out of 2 is the score. 4. Personal Deposit: No personal accounts of the very business sponsors / principals are maintained in the bank. So, because of no depository relationship I am assigning 0 to Bandar Steel Industry. Score of Bandar Steel Industries in Industry risk, management risk, and security risk and relationship risk criteria: Here, I am allocating scores to any analyzed firm based on the assumption that during 2006, 2007, and 2008 the industry, management, security and relationship position of Bandar was the same. Weight given My assigned S.N. Criteria (%) Score (%) 2 Business/ industry risk 2.1 Size of business 4 4 2.2 Age of business 3 3 2.3 Business outlook 2 1 Raw materials 2.4 availability. 2 1 2.5 Industry growth 3 2 2.6 Market completion 2 1 2.7 Entry/ exit barrier 2 1 Total score 18 13 3 3.1 3.2 3.3 3.4 Management risk Experience Track record Second line succession Team work Total score Security risk Primary security risk Collateral coverage Support (guarantee) Total score Relationship risk Account conduct Utilization of limit Compliance of

5 2 3 2 12

5 2 0 1 8

4 4.1 4.2 4.3

4 4 2 10

4 4 2 10

5 5.1 5.2 5.3

5 2 2

5 2 1


conveyance 5.4 Personal deposit Total score In a nutshell:Financial risk category score

1 10

0 8

Year

Other risk category score

My total score & risk grade

PBL's score & risk grade

Differenc e

2006 2007 2008

34.75 30.25 38

39 39 39

73.75 (MG/WL) 69.25 (MG/WL) 77 (ACCPT)

75.25 (ACCPT) 75.5(ACCPT ) 77.25 (ACCPT)

2 6.25 0.25

Table: difference between my scoring and risk grading with the PBLs

1. It is easily prevalent from the above table that, during year 2006, 2007, the PBLs risk grading significantly varied with my score sheet and the whole perception of Bandar Steel Industries as a creditor totally changes when we see that Bandar drops from the acceptable range to the marginal / watch list group. It is really a significant difference. 2. Although in numerical term in 2006, 2008 the difference is not that much huge but if we consider the risk grade position such a situation really awakens us. Loopholes in the PBLs CRG process: 1. Overdependence on the un-audited financial statements: Basically major clients run a family oriented business where accounting application had never got real attention; books of account are maintained pretty carelessly. Moreover, all the financial statements these firms submit before the sanctioning of loan are un-audited. These financial statements provide erroneous results. 2. Failure to understand impact of proper assessment of credit risk: In the management and industry risk assessment criteria I have found immense carelessness.. Many a times I have found scores are allocated at a random basis, without paying much attention to the need for industry analysis or internal analysis of the firm. 3. Distortive assessment: The authority that is responsible for calculating the ratios (financial ratios) many times is doing mistakes in calculation of ratios. Perhaps the definition of these ratios are unclear to him or perhaps he is trying to underestimate the financial risk category and overestimate the other four risk category and thereby offsetting the total score and risk grading. It everything goes ok then there should not be any significant difference between my calculated


ratios (financial) and PBLs financial ratios because we are using the same inputs and the inputs are of objective type. 4. Unprofessionalism to maintain long run relationship: In a friendly interview with the branchs employee it was revealed to me that bank is actually directing the customer about what should be its financial condition so that without any regulatory pressure the bank can avail loan to the customer. As Bandar is the prime customer, PBLs Bangshal Branch is trying heart and soul to keep its prime customer in respective of its all fake financial statements and perhaps ignoring the weakened financial position. 5. Overvaluation in the subjective criteria: After a more rigorous study in the industry and management risk section, it was revel to me that the bank is over scoring in the areas like team work succession, raw materials availability, perhaps, it was done to make Bandar Steel fall under acceptance range of credit worthiness in spite of the fact that the creditors actually falls in the watch list range of creditworthiness. 6. Indulgence of less than necessary time and effort: Very little time and is spent (I guess if any) to properly judge the management risk and industry risk position. Although it is a matter of few days to know about the management risk situation, no rigorous study was seen to know properly about the industry risk position. All the scores are assigned either on a random basis or from a little visionary point of view. In a way to further strengthen our position against the problems hidden in the PBLs CRG manual now I will discuss the project failures. Here, I am focusing on why Prime banks risk grading was unable to locate the problems in the credit seeking firms.


CASE STUDY -2: M/S Sadek enterprise and M/S Sayed Corporation

My first observed case is M/S Sadek Enterprise and M/S Sayed Corporation. It is a trading firm which sells CI sheet in the local market (appendix- 7). This corporation is the major defaulter of PBL Bangshal Br (Appendix- 8).

M/S Sadek enterprise and M/S Sayed Corporation Dated: 14.01.2007

S.N. 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 2 2.1 2.2 2.3 2.4 2.5 2.6 2.7

criteria financial risk debt- equity ratio dept- total asset ratio current ratio quick ratio operating profit margin net profit margin return on asset return on equity interest coverage debt coverage ratio industry/ business risk size of business age of business business outlook raw material availability industry growth market competition Entry / exit barrier total score management risk experience track record second line/ succession team work total score security risk primary security collateral coverage support (guarantee) total score relationship risk account conduct utilization of limit compliance on covenants personal deposit total score

weigh t 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%

actual parameter 7.02 0.875 0.81 0.485 18.10% 8% 10.50% 84.21% 1.76 1.84

score my CRG &Project success 22 obtaine assigned d score 0 3.5 3.25 0 2.5 3.25 3.25 3 3.25 2 0 3.5 3 2 3.5 3.25 3.25 3 5 4

4% 3% 2% 2% 3% 2% 2% 18%

3 crore > 10 years cause for concern fully import dependent Good (5%-10%) highly completive average

1 3 1 0.5 2 1 1

1 3 0 0.5 2 0 1

3 3.1 3.2 3.3 3.4

5% 2% 3% 2% 12%

more than 10 years marginal succession in question moderate

5 1 3 1

5 0 0 1

4 4.1 4.2 4.3

4% 4% 2% 10%

fully covered by underlying asset/ substantially cash covered R/M on municipal corporation/ prime area property personal guarantees or corporate guarantee with financial strength

4 4 1

4 4 1

5 5.1 5.2 5.3 5.4

5% 2% 2% 1% 10%

frequent past due irregular dealing in account less then 40% No compliance No depository relationship

5 2 1 0

0 0 0 0

59.25

53.75


Findings: 1. My assigned scores and given grades does not at all align with the scores and grade allocated by PBL. When I have discussed with the banks employee about this project failure they have told me that it was the 1999 flood which was the reason of the default. As, flood was fully uncertain and unavoidable natural calamity we can not incorporate these factors in the risk analysis of the corporate client. But what is the relationship between 1999s flood and loan sanctioning of 2007 seems to me very awkward. 2. But how the PBLs authority had availed credit to Sadek Enterprise and Sayed Enterprise seemed to be very ambiguous to me. A credit which belongs to a special mention category as per PBLs standards and substandard category under my observation, which does not have minimum standard of track record in terms of payment of the use, which had not maintained the minimum compliance standard were availed credit. 3. I do think that its not the creditworthiness of a client the very matter that a client is seeking credit that satisfies the PBLs authority.

CASE STUDY -3: Nafay Accessories IndustriesNow I am going to present credit risk grading position of the third client. It is Nefay Accessories industries limited. It is a local manufacturer of garments. (Appendix- 9) Nafay Accessories Industries


Dated: 12 January, 2007Score obtaine d 4.25 4.5 4.25 3.25 5 5 5 5 5 5 46.25 My assigned score 4.25 4.5 4.25 4 5 5 3.5 5 5 5 45.5

S.N. 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10

Criteria financial risk debt- equity ratio dept- total asset ratio current ratio quick ratio operating profit margin net profit margin return on asset return on equity interest coverage debt coverage ratio total score industry/ business risk size of business age of business business outlook raw material availability industry growth market competition Entry / exit barrier total score management risk experience track record second line/ succession team work total score security risk primary security collateral coverage support (guarantee) total score

Weight 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 50%

Actual Parameter 0.5 0.34 2.36 1.34 29.87 16.34 17.68 26.61 11.31 14.13

2 2.1 2.2 2.3 2.4 2.5 2.6 2.7

4% 3% 2% 2% 3% 2% 2% 18%

6.06 crore 3 years slightly uncertain partially import dependent Good (>5%-10%) highly completive easy

2 1 1.5 2 2 0 0 8.5

2 1 1 1 2 0 0 7

3 3.1 3.2 3.3 3.4

5% 2% 3% 2% 12%

6-10 years moderate succession in question very good

3 2 3 2 10

3 1 0 2 6

4 4.1 4.2 4.3

4% 4% 2% 10%

registered Hypo R/M on pourasava/ Samiurban area property personal guarantees or corporate guarantee with corporeity strength

3 3 2 8

3 3 2 8


5 5.1 5.2 5.3 5.4

relationship risk account conduct utilization of limit compliance on covenants personal deposit total score

5% 2% 2% 1% 10%

less then 3 years faultless acc. 75% some non-compliance no- depository relationship

4 1.5 1 0 6.5 79.25 Accpt

4 1.5 1 0 6.5 73 MG/WL

Grand Total

100%

In case of the second defaulter, once again my scores and risk grading differed significantly with PBLs assigned scores and risk grading. Findings: 1. While in between a friendly conversation with the PBLs credit granting authority I was informed that the reason behind such default was the managerial conflict between the partners of Nafay Accessories. 2. But keen observation in the PBLs score in the management risk criteria shows that for subjective criteria like track record, succession, team work PBLs risk grading authority had really flourished and they have allocated 12 out of 10 in these risk criteria (management), whereas my assigned mark was only 6 out of 12. 3. Moreover, the management also told us that it was the head office (credit granting division) which had recommended PBL to avail the credit and the branchs authority had to fulfill their recommendation. 4.Credit availing is highly influenced by the head offices autocratic power .Many a times, the branches just could not say NO to head office recommendation irrespective of the credit seeking firms poor risk grading and scores. 5. As PBL has to face immense competition with the local PCBs, they always try to avail credit to any credit seeking corporate client. I have not seen any non- continuance of renewal and recycling of credit of big corporate clients in spite of knowing the fact of gloomy business perspective. It is holding and keeping client for a long time perception that is perhaps increasing the number of defaulter in PBLs credit portfolio day by day.


Chapter- 7Comparative study of CRG manuals among PCBs

PCBs except Prime Bank Ltd. seemed very reluctant to fine-tune the prescribed CRG manual at their own position. I have selected two PCBs the Jamuna Bank ltd and The City Bank Ltd. with a view to go inside in to the real scenario of CRG which is practiced in different PCBs.


As, almost all PCBs are using the same CRG manual prescribed by B.B, the difference that exists between CRG practice in PBL and as per the B.B. prescription is under the scope of this analysis. We can easily attribute the following reasons behind such reluctance of the PCBs: 1. Most PCBS are taking credit risk grading before loan sanctioning at a mare imposed formality, they are still very reluctant to understand that this type of credit risk assessment tool will actually help them to reduce their default risk to a huge extent. 2. The high time and effort needed for properly evaluating a possible corporate client is a hidden reason. 3. Again in a highly competitive market where more than 50 commercial banks are searching for customers fiercely, each of the PCBs are trying to have a long-term relationship with their existing clients by means of re-rolling of credit and renewal of credit irrespective of their prospective and present gloomy situation. 4. All these reasons, along with in adept risk assessor who deals with the CRG practice with lower level of profession expertise has made the CRG implementation while availing corporate credit facility in PCB s a routine and not that much value increasing affair. Anyways, now I will try to show that how batter or how worse are the PCBs in incorporating the credit risk evaluation with their CRG practice. Once again I have chosen the second prime corporate client of PBL, Bangshal as the cornerstone of these comparative studies. Based on my analysis of Bikrampur re-rolling industries, interviews with the banker, management, case file analysis, I have assigned scores in the city banks and Jamuna Banks CRG manual. M/S Bikrompur Re-Rolling Mills Limited CRG score sheet 2008 Jamuna Bank Score(%) 11 11 12 5 39 City Bank score(%) 11 11 12 5 39

S.N. 1 1.1 1.2 1.3 1.4

criteria financial risk leverage liquidity profitability coverage total score

weight(%) 15 15 15 5 50

actual parameter 0.77 1.29 9.83 5.44

2 business & industry risk


2.1 2.2 2.3 2.4 2.5 2.6

size of business age of business business outlook industry growth market competition entry/ exit barrier total score management risk experience succession team work total score security risk primary security risk collateral coverage support (guarantee) total score

5 3 3 3 2 2 18

130 crore 19 years stable good moderate competitive difficult

5 3 2 2 1 2 15

5 3 2 2 1 2 15

3 3.1 3.2 3.3

5 more then 10 years 4 ready succession 3 very good 15

5 4 3 12

5 4 3 12

4 4.1 4.2 4.3

4 fully covered by underlying assets 4 R/M on municipal corporation 2 personal guarantee 10

4 4 2 10

4 4 2 10

5 relationship risk 5.1 account conduct 5.2 utilization of limit compliance of 5.3 conveyance 5.4 personal deposit total score more then 3 years acc. with 5 faultless record 2 0% 2 full compliance 1 no depository relationship 10 5 0 2 0 7 5 0 2 0 7

2007 Jamuna Bank Score(%) 12 12 12 5 41 City Bank score(%) 12 12 12 5 41

s.n. 1 1.1 1.2 1.3 1.4


Weight (%) 15 15 15 5 50




2.1 2.2 2.3 2.4 2.5 2.6

size of business age of business business outlook industry growth market competition entry/ exit barrier total score management risk experience succession team work total score

5 3 3 3 2 2 18

125 crore 18 years stable good moderate competitive average

5 3 2 2 1 1 14

5 3 2 2 1 1 14

3 3.1 3.2 3.3

5 more then 10 years 4 ready succession 3 very good 15

5 4 3 12

5 4 3 12

4 security risk 4.1 primary security risk 4.2 collateral coverage 4.3 support (guarantee) total score 5 relationship risk 5.1 account conduct 5.2 utilization of limit compliance of 5.3 conveyance 5.4 personal deposit total score

4 fully covered by underlying assets 4 R/M on municipal corporation personal guarantee with high net 2 worth 10

4 4 2 10

4 4 2 10

more then 3 years acc. with 5 faultless record 2 0% 2 full compliance 1 no depository relationship 10

5 0 2 0 7

5 0 2 0 7

2006 Jamuna Bank Score (%) 13 12 10 5 40 City Bank score(%) 13 12 10 5 40

s.n. 1 1.1 1.2 1.3 1.4


Weight (%) 15 15 15 5 50




2.1 2.2 2.3 2.4 2.5 2.6

size of business age of business business outlook industry growth market competition entry/ exit barrier total score management risk experience succession team work total score

5 3 3 3 2 2 18

117 crore 18 years slightly uncertain good moderate competitive average

5 3 1 2 1 1 13

5 3 1 2 1 1 13

3 3.1 3.2 3.3

5 4 3 15

more then 10 years ready succession very good

5 4 3 12

5 4 3 12

4 security risk 4.1 primary security risk 4.2 collateral coverage 4.3 support (guarantee) total score 5 relationship risk 5.1 account conduct 5.2 utilization of limit compliance of 5.3 conveyance 5.4 personal deposit total score In a nutshellyear

4 4 2 10

fully covered by underlying assets R/M on municipal corporation personal guarantee with high net worth

4 4 2 10

4 4 2 10

5 2 2 1 10

more then 3 years acc. with faultless record 0% some non-compliance no depository relationship

5 0 1 0 6

5 0 1 0 6

PBL's score & risk grade

JAMUNA Bank's score and risk grade

2006 2007 2008

75.25 (ACCPT) 75.5(ACCPT) 77.25 (ACCPT)

81 (ACCPT) 83(ACCPT) 83(ACCPT)

CITY Bank's score and risk grade 82 (ACCPT) 83(ACCPT) 83(ACCPT)

Findings: 1. In spite of the huge difference in criteria selection marks allocation at the end of the day risk grading remains the same for PBL, Jamuna Bank and City bank.


2. Perhaps the risk grades are not a true reflection of the subtle fine tunes made by PBL in their CRG manual. 3. In my opinion, the CRG manual practiced in PBL is superior in the quality in spite of its not seeming any significant impact. 4. For a proper evaluation of corporate client PBLs CRG manual can give us a better picture due its comparative better score allocation, inclusion of new criteria. 5. The static risk gradation can be explained by the mutually offsetting scores produced from the CRG manual of JBL, CBL and PBL in some of the major risk criteria. 6.There was a continual increase (although minor in magnitude) in the scoring as per JBL and CBL schedule in the financial risk criteria but the continual decrease in the relationship risk Scoring as per the JBL and CBL guideline has really offset the scenarios. 7. There had been a mixed perception in the evaluation of industry / business risk .Sometimes JBL and CBL was providing higher scores, sometimes it was PBL which was providing higher scores. 8. As there was no fine tuning in the security risk criteria score provided by JBL, CBL and PBL remained the same. 9. Highest level of deviation prevailed in the relationship risk criteria.


Chapter-8Conclusion and Recommendation


8.1Conclusion Although it has been highly told here and there about the need for credit risk management, safe credit portfolio management etc. but the hard and true fact is that in either home or in abroad productive and fruitful credit risk management is like finding the never land .Readers can easily correlate the most recent economic turmoil with the financial sectors unethical practices .The need for a better credit risk management process has now become a demand for all the mankind (perhaps I am soaring a bit high! ) Credit risk grading is a part and parcel of the overall credit appraisal process. It is also the most significant tool of evaluating a client in the pre-sanctioning phase .But it is really a matter of great regret that the CRG practice in Bangladesh is still a mere formality. Although there are a lot of chance of fine tuning the model, introducing more effective tools into the model no financial institution are actually trying to so. So in the very concluding part of my report I am just praying and hoping that true credit risk evaluation by means of a far effective CRG practice will be implemented in our country by the financial institutions on a mass scale as soon as possible.


8.2 Recommendation Undoubtedly PBLs CRG manual is a up gradation of B.B.s CRG manual and it is doing a world of good in assessing a client on a comparative basis, PBL is providing a better tool for evaluating the client. But as nothing is an unmixed blessing, there are still a few Loopholes in PBLs CRG manual. After a deep analysis of the loopholes that prevailed in PBLs CRG manual and backed by some theoretical concepts now I am in a position to provide a few recommendations that will be helpful in further strengthening PBLs position against successfully implementing its credit risk assessment procedure: 1) Financial risk calculation will be worthwhile if it is based on audited financial statements of the client. PBL may recruit employees who are specialized in generating facts out of the inaccurate financial statements. Industry risk analysis and management risk analysis are done without care in spite of the fact that 30% of the weight is allocated in this risk criterias. Risk assessor had to indulge more time and effort in assessing these two major risk criteria. Change in the year to year risk gradation never actually happened although there were abrupt shift in the risk position of the client. So, amendments if incorporated, changes if incorporated in the risk assessment are going to be very worthwhile. At times, credit sanctioning was imposed by the head office in spite of the clients poor risk grading. Branch should have more power in deciding whether to avail credit on not a client based on clients CRG scoring. Although, the long-nun relationship maintenance with a customer is very fruitful, at times it is the long-run relationship maintenance (irrespective of determination risk grading and gloomy situation) can become a major headache. At times, I have observed that customers were availed credit who belonged to a MG, SS category. For the sake of maintenance of a balanced credit portfolio, customers should not to be availed credit whose risk grading is below Accept range. More adept risk assessors mean better CRG process in practice. While asking the banks employees who are involved in the CRG process, they had made some recommendations. These are incorporated in my recommendations also ( Questionneir-2):

2)

3)

4)

5)

6)

7) 8)


i) ii) iii) 9)

Higher weight on profitability, security position. Less-weight on age of business, size of business Efficiency of the business should get more emphasis.

Trend analysis of clients key business ratio like (Leverage, profitability, coverage, Liquidity) will be a handful in properly evaluating a corporate client. So, if trend analysis is incorporated with higher weights it will be a handful.

10) As, business outlook is having only 3% of the total weight, the whole CRG process in significantly based on past data. Future business/industry outlook should be properly assessed and weights should be increased here to make the credit risk assessing process a futuristic affair. 11) If the existing loan product is priced and fine tuned on a risk-reward ratio basis, it will be highly worthwhile and CRG can play a major part in this type of fine tuning.

crg and project success

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