Icrrs Manual - Lecture notes 1 PDF

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Summary

The aim of credit risk management is to -adjusted rate of return by
maintaining credit risk exposure within acceptable levels. Banks need to manage the credit risk
inherent in the entire portfolio as well as the risk in individual borrower transaction. The
effective management of c...

Description

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1.1

Introduction

-adjusted ra te of return by The aim of credit risk management is to maintaining credit risk exposure within acceptab le levels. Banks need to manage the credit risk inherent in the entire portfolio as well a s the risk in individual borrower transaction. The effective managem ent of credit risk is a critical componen t of a comprehensive approach to r isk managemen t and ess ential to the long-term success of any banking organization. Since exposure to cred it ri sk continues to be the leading source of prob lems in banks, banks should have a keen awareness of the need t o identi fy, measure, monitor and con trol cred it risk as we ll as to determine that they hold adequate capit al agai nst these risks and they are adequat ely compensated for risks incurred. The Internal Credit Ri sk Rating System describes the creditworthiness of the borrower of a parti cular s ector based on the assessmen t criteria set for that sector. Si nce the leverage, liquidit y, profit ability, a s well as other quantitative and qualitative indicators vary signifi cantly fro m sector to sector, the ICRRS i s developed to ca librate such di versities into the rating system . Moreover, the relevan t and appropriate numbers of fi nancial ratios are u sed in Internal Credit Risk Rating S ystem for assessing the financial and credit strength of the borrowers. The set of the qualitative questionnaires used in t he process is also more robust. This will effecti vel y ensure that the borrowers from different sector s and i ndustries are assessed based on the unique characteristics of those sect ors . 1.2

Definit ion of Internal Cre dit Risk Rating System and Internal Credit Risk Rat ing

1.2.1 Internal Credit Risk Rati ng System refers to the sys tem to analyze a borrower's repaymen t abilit y based on information about a cust omer's f inancial condition including its liqui dit y, cash flow, profitabilit y, debt profile, market indicators , industry and operati onal background, management capab ilities, and other indicator s. 1.2.2 The summary indicator derived fro m the system will be called Internal Credit Risk Rati ng (ICRR) - a key reference for cred it risk assessment and decis ion making. 1.3

Use of Internal Credit R isk Rating System (ICRRS)

Internal Credit Ris k Rating Syst em will be an integral part of credit risk management for the banks. The key use s of this gui deli ne are as follows: a) To provide a granu lar, objecti ve, transparent, cons isten t fra mework for the b) To facilit ate the por tfoli o management activities. To assess the quality of individual borrower to help the banks to determi ne the quality of the credit portfo lio, line of business of the branch or the Bank as a whole. d) To be used for indi vidual credit selecti on, credit pricing, and setting cred it li mit and terms & condition s.

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1.4

Functions of Internal Credit R isk Rating System a) Internal Credit Risk Rating Syst em is a fully automat ed credit risk scoring system tha t cali brates the characteristi cs of differen t sector s and i ndust ries in one single model; b) To get t he appropriate rating and s core, the analyst shall select the appropriate sector or industry fro m the drop down lis t given in the top page of the template. If the right sector or industry is not select ed, t he rating w ill not reflect the unique characteristics of the particular sector or industry. c) If the borrower is i n multiple lines of business, the sector s hould be u sed assessing the line s of business generati ng the highest porti on of the revenue &/or profit . If no parti cular line of business can be singled out, the ICRRS should be conducted u si ng "other industry" - i f manufact uri ng, or "other s ervice" - if service.

1.5

General I nstructions a) Banks shall strictl y follow this guidelines and rating s ystem issued by Banglade sh Bank without making any change, extension, modificati on or deletion. b) The ICRRS sha ll be applicable for all expos ures (irrespecti ve of amount) excep t consumer l oans, small en terprises having total loans exposures less than BDT 50 (fifty) lac and small enterpri ses in manufactur ing having total loans expos ures less than BDT 1 (one) crore, short-term agri loans, micro-credit and lending to bank, NBFI and Insurance. c) The quantitative part of the ICRRS exerci se shall be conducted by a cred it officer/ an anal yst. The Relationship Manager/Branch Manager sha ll complet e the qualitative assessment part to generate the total scores. d) ICRRS shall be an integral part of the credit approval proce ss. e) The credit risk functi on of the bank is responsi ble for the accuracy and in tegrit y of t he rati ng as the second li ne of defense. f) The executive summary report of the ICRR score of the borrower s hall be approved and si gned by the Chief Risk Officer (CRO) and for those loans that are approved below the CRO level e.g. zona l office or branch off ice, the executive su mmary repor t of the ICRR score shall be approved and signed by the fina l approval au thority at that level. g) Banks s hall use the latest audited financial statements of the borrower for generati ng the quantitative rati ng under ICRRS. h) All credit proposals whether new, renewal or enhancemen t shall be gone through t he ICRR process and the ICRRS report shall be retained in the loan file.

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i) The Relationship Manager sha ll pass the approved ICRRS report t o the rel ated depart ment for updati ng it s MIS/record. j) Banks shall conduct the routine int ernal audit to check whether the Internal Credit Risk Rating System is functioning as per the in structions laid down in the guidelines. 1.6

Frequency of Credit Risk Scor ing ICRRS sha ll be conducted for a ll cred it propo sals including new, renewal and enhancement of the existing proposal; For existi ng credit relationship, the ICRRS s hall be reviewed at lea st annua lly at the ti me of annual/ regular credit rev iew.

1.7

Selected Sector s To ensure the current s yst em useful, t he following sect ors are s elected considering the size of exposures of banks in these indus tries: A. Industry 1. Ready Made Garments (RMG) 2. Textile (inc luding spinning, knitting, weavi ng) 3. Food and Allied Industries 4. Pharmaceutical 5. Chemical 6. Fertili zer 7. Cement 8. Ceramic 9. Ship Building 10. Ship Breaking 11. Jute Mills 12. Steel Engineer ing 13. Power and Gas 14. Ot her Industry B. Trade and Commerce C. Agro Base and Agro Processing D. Service 1. Housing and Cons truction 2. Hospit als and C linics

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3. Teleco mmunication 4. Ot her Serv ice 1.8

Internal Credit Risk Rat ing Scores

The ICRR consists of 4-notched rating system covering the Quantitati ve and Qualitative parameters. The rati ngs and score s are mentioned below: Scores Aggregate

Rating Excellent Good Marginal Unaccepta ble

1.9

3 tim es

5 4 3 1 0

0 time 1 time 2 ti me s 3 ti me s >3 tim es

4 3 2 1 0

Yes

1

No

0 7

> 10%

2

5%-10%

1

How many time s the borrower's loans was rescheduled/ restructured in last 3 years

Performance B ehav ior with Suppli ers/C reditor s Did The Borrower P ay Its Supplier s/ Creditors R egularly i n Last 1 Year Business and Indu stry Risk Sale s Growth Sales growth means annual sales growth. The formu la for calcul ating sa les growth is [(current year sales previous year sales)/ previous year sales]*100.

Le ss than 5% 0

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