YANGON UNIVERSITY OF ECONOMICS

DEPARTMENT OF COMMERCE

MASTER OF BANKING AND FINANCE PROGRAMME

CREDIT RISK MANAGEMENT PRACTICES ON LOAN

PERFORMANCE OF KANBAWZA BANK LIMITED

KAY KHAING OO

MBF (Day) - 1st Batch

DECEMBER, 2019
 CREDIT RISK MANAGEMENT PRACTICES ON LOAN
PERFORMANCE OF KANBAWZA BANK LIMITED

A thesis submitted as a partial fulfillment towards the requirement for the

degree of Master of Banking and Finance (MBF)

Supervised by Submitted by

Daw Khin Nwe Ohn Kay Khaing Oo

Associate Professor MBF-23

Department of Commerce MBF (Day 1st Batch)

DECEMBER, 2019
 ABSTRACT

The thesis was focused on the study of credit risk management practices on loan
in KBZ Bank and its effect. Two major objectives of the study are to identify the credit
risk management practices on Loan in KBZ Bank and to examine the effect of credit risk
management practices on loan performance in KBZ Bank. This research used both
primary data and secondary data. The primary data collected by face to face data
collection method. Survey was conducted by using structured questionnaires and used
descriptive analysis. The data is analyzed by using SPSS software version 22 to obtain
data. In this study, Multiple Linear Regression analysis was used. The questionnaires
have been distributed to 50 respondents from Credit Functions of KBZ Bank. The study
shows that a positive and significant correlation between loan performance and credit risk
management practices in KBZ Bank. From this study, the correlation analysis shows that
the KBZ bank should do more practices in credit risk monitoring. KBZ Bank should do
that credit risk management is the most important contribute to the success and the
financial stability of the bank and an understanding of risk management practices help
reduce the losses and also cost.

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 ACKNOWLEDGEMENTS

First of all, I would like to express my deep gratitude to Professor Dr. U Tin Win,
Rector of Yangon University of Economics and Professor Dr. Daw Nilar Myint Htoo,
Pro-rector for giving me an opportunity to attend the Master course and to do this thesis
as partial fulfillment toward the requirement of Master of Banking and Finance (MBF)
program.
I am also heartily thankful to Professor Dr. Daw Soe Thu, Head of Department of
Commerce and Director of Master of Banking & Finance Program, Yangon University of
Economics for her great encouragement and contribution to MBF Program and great care
and give valuable advice all the time to students.
I am deeply thankful to my supervisor Daw Khin Nwe Ohn, Associate Professor,
Department of Commerce, Yangon University of Economics for giving me beneficial
opportunity as her candidate and sharing her precious experiences, kind supervision,
stimulating suggestion and invaluable advice in writing this research paper. Without her
guidance and help I will not accomplish this task.
I would also like to specially thank my respected professors and lectures who
imparted their time and valuable knowledge during the course of my study at the Yangon
University of Economics.
My special deepest thanks to the Board of Director, managers and staffs of KBZ
Bank for their kind supports for sharing knowledge and all the information needed in this
study.
I wish to thanks all the classmates of MBF Day 1st Batch for allowing altogether
and sharing spirit of friendship during the learning period. I convey special acknowledge
to all teachers for sharing their valuable knowledge and experience during their lecture
time. Without the encouragement, support and assistance of a number of people and
organizations, I would not have been achieved for study.

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 TABLE OF CONTENTS

Page
ABSTRACT i
ACKNOWLEDGEMENTS ii
TABLE OF CONTENT iii
LIST OF TABLES v
LIST OF FIGURES vi
LIST OF ABBREVIATIONS vii
CHAPTER (1) INTRODUCTION 1
1.1 Rationale of the Study 2
1.2 Objective of the Study 4
1.3 Scope and Method of the Study 4
1.4 Organization of the Study 4

CHAPTER (2) THEORETICAL BACKGROUND 5

2.1 Definition of Risk and Risk Management 5
2.2 Types of risks faced by banks 6
2.3 Important of Credit Risk Management in Banking 8
Industry
2.4 Credit Risk Management Practices in Banking Industry 8
2.5 Conceptual Framework of the study 12

CHAPTER (3) BACKGROUND STUDY OF KANBAWZA BANK 13

3.1 Profile of KANBAWZA Bank 13

3.2 Organization Structure of Kanbawza Bank 14
3.3 Type of Lending Products by Kanbawza Bank 15
3.4 Credit Risk Assessment and Management Practices in 19
Kanbawza Bank
3.5 Non-performing Loan Classification by CBM 19
Regulation

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CHAPTER (4) EFFECT OF CREDIT RISK MANAGEMENT PRACTICES
ON LOAN PERFORMANCE OF KANBAWZA BANK

4.1 Research Design 22

4.2 Demographic Characteristic of the Respondents 23
4.3 Types of Risks encountered by KBZ Bank Loan 26
4.4 Assessment of the Reliability of the Scale 28
4.5 Credit Risk Management Practices on Loan in 29
Kanbawza Bank
4.6 Summary Analysis on the Credit Risk Management 34
Practices
4.7 Loan Performance of KBZ Bank 35
4.8 Effect of Credit Risk Management Practices on Loan 36
Performance of Kanbawza Bank

CHAPTER (5) CONCLUSION 38

5.1 Findings 38
5.2 Recommendation 39
5.3 Limitation and Future Study 40

REFERENCES

APPENDIX-A

APPENDIX-B

APPENDIX-C

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 LIST OF TABLES

Table No. Pages

3.2 Classification of Loan/Advances and Specific Provision 20

4.1 Respondents by Gender 23
4.2 Respondents by Age Group 24
4.3 Respondents by Educational Level 24
4.4 Respondents by Designation 25
4.5 Respondents by Working Experience 26
4.6 Type of risks encountered by KBZ Bank on Loan 26
4.7 Results of Cronbach’s Alpha Value 28
4.8 Credit Risk Identification Practices 30
4.9 Credit Risk Analysis/Measurement Practices 31
4.10 Credit Risk Control Practices 32
4.11 Credit Risk Monitoring Practices 33
4.12 Summary of Credit Risk Management Practices on Loan 34
Performance of KBZ Bank
4.13 Loan Performance of KBZ Bank 35
4.14 Effect of Credit Risk Management Practices on Loan 37
Performance of KBZ Bank

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 LIST OF FIGURES

Figure No. Page

2.1 Conceptual Framework of the Study 12

3.1 Kanbawza Bank Organization Chart 14
4.1 Type of risks encountered by KBZ Bank on Loan 27

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 LIST OF ABBREVIATIONS

CBM Central Bank of Myanmar

KBZ Kanbawza Bank
SME Small and Medium Enterprises
JICA Japan International Cooperation Agency
MIS Management Information System
CGI Corporate Guarantee Insurance
SB Smart Branches
CRE Commercial Real Estate

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 CHAPTER 1
INTRODUCTION

The financial sector in Myanmar, the privately owned commercial banks are
increasing rapidly in the past two decades since 1992. Myanmar banking sector
comprises the Central Bank of Myanmar (CBM) which was established following the
Central Bank of Myanmar Law in 1990, 4 other state-owned banks, and 25 domestic
private banks and 13 foreign bank representatives’ offices. Commercial Banks are
financial institutions and play a very important role is an economy with the primary
function of carrying out financial intermediation- this implies that they accept
deposits from customers with extra funds and loan out the money to customers with a
funding gap.
The functions of banking are acceptance of deposits, supply loans and
financial service to their customers. The bank unfold is that the distinction between
what the interest a bank should pay to get the funds and also the rate the bank charges
on the loan. Therefore, the number of loans that can make will have a great impact on
the profit and loss made by the bank. Commercial loans area unit loans created to
individuals trying to begin or expand a business. For commercial banks to minimize
loan losses, they must develop a credit risk management system. Credit risk
management involves various steps namely, credit risk identification, measurement,
controlling and finally credit monitoring. Credit risk identification involves singling
out of the risks associated with a particular credit.
Credit risk arises from potential changes within the credit quality of a
recipient. The financial institution should identify the risk of loss that it considers that
the obligor is unlikely to pay its credit obligations in full or the obligor is more than
ninety days overdue on any material credit obligation. Credit risk measurement
involves the process of credit rating, scoring. Credit Rating is an account that is done
with the primary objective being to determine whether the account after the expiry of
a given period would remain a performing asset, i.e. it will continue to meet its
obligations as and when they arise. The credit rating exercise seeks to predict whether
the borrower will have the capability to honor his or her financial commitments in the
future. In reality, there are no mathematical models that can predict accurately the
future capability of a borrower to meet his/her financial obligations. Next, a
commercial bank should undertake credit monitoring. The financial institution should

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assign specific individuals for monitoring the credit portfolio including ensuring
information is disseminated to those responsible for taking corrective action and
assigning adequate reserves for loan losses. An effective monitoring system will
ensure that the financial institution understands the current financial condition of the
borrower, monitors compliance with the existing terms and conditions, assesses
collateral concerning the borrower’s current condition, identifies non-performing
accounts and enforces proper classification and loan loss provisioning. Lastly,
establishments ought to use numerous techniques of mitigating credit risk. The most
common area unit collaterals, guarantees and netting off of loans against deposits of
an equivalent counter-party.
The nature of banking is strongly related to the management and controls of
the risks. The main risks to which banks are subject, namely market risk, liquidity
risk, credit risk, and operational risk. Among the types of banking risks, credit risk is
the biggest threat that the banks have to present. To prevent credit risk, the bank use
the multiple credit risk management. Credit risk management is an important aspect
of a bank’s success and ensures that a lending institution will not take on more risks
than it can handle.

1.1 Rationale of the Study

Credit risk is the risk of loss due to a debtor’s non-performance of a loan or

other line of credit. Credit risk is defined as the risk arising from the uncertainty of a
borrower/counterparty’s ability to perform its contractual obligations such as the
repayment of a loan and the potential loss that the lender may suffer if the borrower
fails to meet its obligations. Credit risk might stem from each on- and off-balance
sheet transactions. Besides loans, a bank is also exposed to credit risk from other
financial instruments and transactions such as trade finance products and acceptances,
foreign exchange, derivatives such as financial options, currency and interest rate
swaps, bonds, options, financial commitments, and guarantees.

Poor or weak appraisal of loans is one of the major reasons for delinquencies.
Before giving any loan, the client’s repaying capacity, the status of business and cash
flows must be assessed. This helps in taking loan decisions that whether a client
should be given a loan and about an appropriate volume of the loan. A poor appraisal
can lead to loans going to unworthy clients or disbursement of the higher amount of

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loans. Loans given beyond repaying capability puts clients in stress things as they are
doing not have enough financial gain to repay installments leading to delinquencies
(Karanja G Gladys, 2017).

Most of the banks that used to lend to enterprises that are able to offer
immovable assets as collateral are now lending to individuals, corporate bodies and
enterprises without any form collateral. As a result of this, most banks ended up with
a high default rate and yet even with collateral, some banks are unwilling to provide
lending due to the risk that collateral might are utilized in multiple borrowing.

Nowadays banks are lending with an unsecured lending method (CGI) to SME
Business in Myanmar. CGI is included as one of bank lending policies. In this system,
the businessman can apply for a loan from the bank without collateral after he or she
has bought guarantees from the bank. Banks have to buy full guarantees from
Myanmar Insurance that is owned by the Ministry of Planning and Finance. If the
businessperson had defaults for several reasons and also the client couldn't pay back
the borrowed cash, the Myanmar Insurance can come simply 60 % of the loan to the
bank. Therefore, a bank is going to take a 40% loss. So, the working risk of CGI is
going to be 40% as well. Thus, this system is not fully secure.

Therefore, if banks are lending with this unsecured lending method, banks
need credit risk management practices must be carefully made. It also prevented
becoming Default Status. Start-up business also faces challenges when trying to
access credit facilities because such ventures have no historical financial statements to
confirm credit history. Credit risk management is a critical component of a
comprehensive approach to risk management as whole and essential to long-term
success of a banking organization. It helps reduce bank losses. Credit risk
management is very important to banks as it is an integral part of the loan process. It
minimizes bank risks, adjusted risk rate of return by maintaining credit risk exposure
with view of shielding the bank from adverse effects of credit risk. Bank are
successful when the risks they take are reasonable, controlled and within their
financial resources and competence (Machiraju, 2008). Credit risk management is
very essential in optimizing the loan performance of commercial banks. This
motivated the carrying out of this study is to focus on the credit risk management
practices used by KBZ on Loans.

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1.2 Objective of the Study

This study is constructed by the following objectives:

(1) To identify the credit risk management practices on loan in KBZ Bank
(2) To analyze the effect of credit risk management practices on loan
performance of KBZ Bank.

1.3 Scope and Method of the Study

The study focuses on the effect of credit risk management practices on loan
performance of KBZ Bank. There are various credit risk management practices at
banks. In this study, it focuses on the credit risk management on loans. For more
understanding, primary data and secondary data are collected. For the collection of
primary data, it includes the use of predetermined questionnaires to 50 numbers of
employees, 42% among total 118 employees who are working at Credit Functions in
KBZ Bank and secondary data was collected from the previous research papers,
internet web sites and other relevant texts.

1.4 Organization of the Study

This study consists of five chapters. Chapter 1 includes Introduction,

Rationale, Objective, Scope, Methodology and Organization of the Study. Chapter 2
covers the theoretical background of the study. Chapter 3 discusses background study
of KBZ Bank. Chapter 4 includes the analysis of credit risk management practices on
loan performance of KBZ Bank. And Chapter 5 is findings, suggestions and future
study are described.

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 CHAPTER 2
THEORETICAL BACKGROUND

This chapter is about the theoretical background of the study. In order to study
and understand the term of “risk management”, especially in case of banking, risk and
risk management has to be defined first. Theoretical about types of risks faced by
banks, important of credit risk management and how to manage the credit risks in
banking industry from theoretical background to specific framework are presented.

2.1 Definition of Risk and Risk Management

With the ongoing transaction of economy from developing to a developed

economy, the economy is going through an overall change. The financial sector,
especially the banking sector, is the most emerging sector in the economy and is the
passing through a lot of changes. The advent of Liberalization, Globalization, and
Privatization has led to rising global competition, usage of modern technology,
innovative products, increasing deregulation and contemporary delivery channels. All
this has brought the banking sector to the forefront of risk and hence risk
management.

Risk can be defined as the chance or probability of deviation from the

expected result. In other words, risk is anything that creates hindrance in the way of
achievement of certain objective which has a possibility of loss; the loss can be
financial nature or nonfinancial nature like loss of image or goodwill, etc. Risk arises
due to internal or external factors which can be caused due to change in economic,
social, political, legal environment and lack of information considering some change.

Risk management is the proactive strategy to plan, lead, organize and control a
wide variety of risks that are faced by an organization’s daily and long-term
functioning. In other words, it is a measure that is used for identifying, analyzing,
controlling and then responding to the particular risk.

Risk is an exposure to a transaction with loss, which occurs with some

probability and which can be expected, measured and minimized. Risk in financial
institution results from variations and fluctuations in assets or liabilities or both in
income from assets or payments and liabilities or in the outflows and inflows of cash.

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In recent times, banks are facing various types of risks that financial intermediaries
are exposed to in the course of their business (Mareshah Dutt, 2018).

2.2 Types of Risks faced by banks

The very working nature of banks has the threat of risks involved in it. The
main role of a bank is that of an intermediately between the ones having resources and
the ones in need of resources. The basic challenge of banks is to understand the
different types of risk and to learn managing them. The different types of risk faced
by a bank are as follows:

2.2.1 Financial Risk

Financial risk can be defined as any risk which results from any business
transaction undertaken by a bank, which is exposed to a potential loss. Financial risk
can be further categorized into credit risk, market risk.

(a) Credit Risk

Credit risk is the risk of default on a debt that may arise from a borrower
failing to make the required payments. In the context of banking, credit risk can be
defined as the potential of a bank borrower or counterparty to fail to meet its
obligation according to the agreed terms. In a majority of banks, loans are the largest
source of credit risk. The credit risk is all borne by the lenders and leads to serious
problems. Credit risk is inherent to the business of lending funds to the operations
linked closely to market risk variables (Mareshah Dutt, 2018).

(b) Market Risk

Market risk may be defined as the possibility of loss to bank on account of

movement in market prices. It is affected by movements in equity, interest rate
markets, currency change rates and commodity prices. Market risk is the risk to the
bank’s earnings and capital due to changes in the market level of interest rate or prices
of securities, foreign exchange and equities, as well as volatilities of those prices
(Mareshah Dutt, 2018).

2.2.2 Nonfinancial Risk

Nonfinancial risks are those risks which affect the bank’s business growth,
marketability of its products and services, etc. These types of risks arise on account of

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management failures, competitions, non-availability of suitable product and services,
external factors, etc. In nonfinancial risk, basic consideration is given to operation risk
and strategic risk.

(a) Operation Risk

According to the Basel Committee for Banking Supervision, operational risk

is “the risk of loss resulting from inadequate or failed internal processes, people and
system (poor IT background), or external events”. Operational risk also includes legal
risk, which is defined as the risk of losses due to lawsuits or fines arising from legal,
administrative and other proceedings, and from the violation of contractual or legal
obligations. Includes compliance risk in the part referring to the risk of losses that will
be in the future due to the imposition of measures and penalties, the risk of losses due
to failure of operations in accordance with the regulations, standards, codes and
internal rules, and the risks associated with anti-money laundering and terrorist
financing.

Operational risk is the risk of actual loss or incorrect presentation of profit due
to errors in data entry, data processing, evaluation and posting data. Operation risk is
the risk of property loss due to unaffected business activities, violation of the internal
control system or fraud in transaction and unforeseen risk in operation. Operation risk
is also mentioned as arising of risk in process of Bank’s activities operation.

(b) Strategic Risk

Strategic risk is the risk that arises from the inability to implement appropriate
business plans, strategies, decisions with regard to adaptabilities and changing
business environment. Strategic risk affects the overall mission of the company. Risks
arising from the possible consequences of strategic decisions taken by the
organization and also arise from the way that an organization is strategically
positioned within environment.

2.3 Importance of Credit Risk Management in Banking Industry

Lending has been and still is the mainstay of financial institutions and this is
more true to emerging economies of developing countries where capital markets are
not well developed. To most of the transition economies, lending activities have been
a controversial and difficult matter. It has been recognized that in order to reduce loan

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losses, therefore, credit risk, it is essential for financial institutions to have effective
credit risk management systems in place. Given the uneven information that exists
between lenders and borrowers, financial institutions must have a mechanism that
ensures that they not only evaluate default risk that is unknown to them in order to
avoid adverse selection but also that can evolve in order to avoid moral hazards. An
effective system that ensures reimbursement of loans by borrowers is essential in
managing uneven data issues and in reducing the amount of loan losses, thus the long
term success of any banking organization. Credit risk management is important in
optimizing the performance of financial institutions.

The goal of credit risk management is to maximize a bank's risk-adjusted rate

of return by maintaining credit risk exposure among acceptable parameters. Banks
have to be compelled to manage the credit risk inherent within the entire portfolio yet
because the risk in individual credits or transactions. Banks ought to additionally
think about the relationships between credit risk and alternative risks. The effective
management of credit risk could be an important element of a comprehensive
approach to risk management and essential to the long success of any banking
organization (Karanja, 2012).

2.4 Credit Risk Management Practices in the Banking Industry

Over the recent years, the financial services sector has encountered challenges
for several reasons, but many of those challenges can be linked to bad lending, poor
risk management, or the lack of agility in adapting to changing economic scenarios.
The process of risk management at any enterprise is aimed at developing preventative
methods in order to avoid loss or events that would harm the company. Banking
operations associate with the issue of risk; it’s inevitable. In the simplest way
possible, the risk is an uncertainty of a situation or event that may happen in the future
and for banks, it’s the uncertainty of an outcome of business investments.

The primary aim of credit risk management is to require calculated exposures

among outlined parameters in order that the general method optimizes the bank’s risk-
adjusted rate of return. Since vulnerability to credit continues to be the prime risk
factor for the financial industry worldwide, banks should take special initiatives in
strategizing comprehensive measures to identify, monitor, and control the inherent
risks in lending as best as they can. The best practices outlined in this article address

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the issue of credit risk management are(1) credit risk identification, (2) credit risk
Measurement/Analysis, (3) credit risk Control/Mitigation and (4) credit risk
Monitoring.

2.4.1 Credit Risk Identification Practices

Credit Risk Identification is vital for effective risk management. Commercial

banks to manage credit risks facing them effectively, they need to know and identify
these credit risks. The first step in credit risk identification is the implementation of
the credit risk management function to establish crucial observation areas inside and
outside the corporation. The use of Credit policies to establish a framework for
lending and reflect an institution’s credit culture and ethical standards. To be
effective, policies should be communicated during a timely fashion, be enforced
through all levels of the organization by acceptable procedures and revised
sporadically in light of fixing circumstances (Karanja, 2012).

2.4.2 Credit Risk Measurement/Analysis Practices

The lending decision is based on an evaluation of the firm’s financial position

and its future prospects, in a process known as credit risk analysis. It consists of
estimating the probability that a borrower fails to return its credit in accordance with
the terms agreed (probability of default) and the expected loss that the bank would
incur in case of default (loss given default). The process involves an estimation of the
firm’s future cash flow and of the value of the assets that could be provided as
collateral or security for the credit in the event of default (Guimon, 2005).

Financial Statement rule is a lending rule which places emphasis on evaluating

information from the firm’s financial Statements. The decision to lend and terms of
the contract are principally based on the strengths of the firm’s balances sheet.
Financial statement loaning is best suited to comparatively clear corporations with
certified audited financial statements. Thus, it is likely to be the rule of Choice for
lending to large firms. But when adapting this rule for small firms, the firms must be
ones with long histories, relatively transparent transactions and strong audited
financial statements (Berger and Udell, 2001). Credit-Scoring Rule involves attaching
heavy statistical weights to the financial conditions and history of the principal owner
given that the credit worthiness of the owner and that of the firm are closely related
for most small businesses (Feldman 1997, Mester 1997). Credit scores usually include

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financial characteristics from both the business and the business owner. Credit scoring
model is used to identify credit risks and mitigating factors, evaluating borrower
viability and growth potential, assessing entrepreneurial capabilities, determining
financing requirements and earnings for the bank, monitoring loan performance risks
in crisis situations, and structuring facilities based on credit score ratings. Scoring
systems utilize data regarding the standard 5Cs of credit.

Relationship Lending Rule applies where the lender bases the decision to lend
in substantial part on propriety Information about the firm and its owner through a
variety of contacts over time. This Information is obtained through the provision of
loans (Berger and Udell, 1995) and deposits and other financial products (Nakamura
1993). Additional information may also be gathered through other members of the
local community, Such as suppliers and customers, who may give specific
information about the firm owner or general information about the business
environment in which they operate. Importantly, the information gathered over time
has significant value beyond the firms’ financial statements, Collateral and credit
scores. This data helps the connection loaner manage data opacity higher than
potential transaction-based lenders. However, relationship lending involves the role of
agents in gathering information and this could add extra costs to the banks. There is
still a gap in the empirical literature as to how to determine how relationship lending
works and how the organizational structure of the banks aids their ability to deliver. It
is also necessary to determine how recent changes in the economic environment are
likely to affect the availability of credit to small businesses.

2.4.3 Credit Risk Control/Mitigation Practices

These tools used to control credit risk include the use of Covenants, use of
adequate collateral, and use of personal guarantors, use of savings /deposit accounts
and also insurance against default. Continual participation in the credit risk
management policy and strategies. Peer or group lending as commonly known,
mitigates credit risk by evading the risk of lending without collateral, over a large
number of borrowers within the group acts as insurance cover for the institution.
Those members of the group who have not received the loans become agents of the
bank in debt collection so that they can have access to their loans also. The Credit
Officers work is transferred to the group which has to do overtime here, because they

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have interest. Group Savings might act as guarantee rather than formal collateral
(Karanja, 2012).

2.4.4 Credit Risk Monitoring Practices

Monitoring is the last step in the credit risk management process. Effective
risk management needs reporting and reviewing the structure to make sure that risks
are effectively known assessed and acceptable controls and responses are in place.
After the loan is approved, the loan should be continuously watched over. These
monitoring practices include keeping track of borrowers’ compliance with credit
terms, identifying early signs of irregularity, conducting periodic valuation of
collateral and monitoring timely repayments. Commercial banks need to often
monitor the status of borrowers and re-evaluate individual credits and commitments,
and their ratings. Reliance on unviewed credits can lead to a serious undetected
deterioration of the credit portfolio.

Accordingly, the credit risk management programme of each institution must

include procedures governing the regular formal review and, where applicable.
Because of their frequent contact with borrowers, Credit officers are during a position
to discover changes in a very borrower’s operations or economic condition. This
permits these officers to identify potential issues before they will be discovered by
freelance credit reviewers. Accordingly, credit review systems must ensure that a
credit officer is monitoring credit quality and, where applicable. The objective of
effective credit review systems include: ensuring that the institution is aware of
borrowers current financial condition; ensuring that collateral security is adequate and
enforceable relative to borrowers’ current circumstances; making certain that credits
are in compliance with their covenants and margins; providing early identification and
classification of potential problem credits; and providing current data concerning the
standard of the loan portfolio (Karanja, 2012).

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2.5 Conceptual Framework of the Study

This study determined the effect of credit risk management practices on loan
performance of KBZ Bank based on the conceptual framework. As shown in figure
below, there are four independent variables that constitute credit risk management
practices. The dependent variable is loan performance of KBZ Bank. The four
independent variables directly affect the performance of the banks.

Figure (2.1) Conceptual Framework

Independent Variables Dependent Variables

Credit Risk Management Practices

Credit Risk Identification

 Past Repayment Record
 Computing loan ratios
 Relationship with bank

Credit Risk Analysis/Measurement

 Estimate impact and frequency Loan performance of
of each identified risk factor KBZ Bank
 Credit Scoring  Preventing
 Use of 5C’s of credit occurrence of non-
performance loan
 Reduce the credit
Credit Risk Control/Mitigation default risks
 Use of covenants  Predict accurately
 Use of collateral the future capability
 Related group lending  Mitigate the non-
performing loan and
loan losses
Credit Risk Monitoring
 Contact with customers
 Follow up customer a/c
 On site visit
 Updating credit file
Source: Adopted from Wachira, Alexander Kinyuai, 2017

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 CHAPTER 3
BACKGROUND STUDY OF KANBAWZA BANK
This chapter aims to examine the profile of KANBAWZA Bank including
background of the bank, organization structure of KBZ Bank and identify the lending
products and type of risks encountered by loans in KBZ Bank Limited.

3.1 Profile of KANBAWZA Bank

Kanbawza Bank is one of the Myanmar private-owned banks that opened on

1st July 1994 in Taunggyi, the capital of Shan State in accordance with the financial
institution of Myanmar Law 1990. In late 1990, Kanbawza Bank took over the high
management level and he reformed the banking business organization structure into
the biggest private banks in Myanmar. In April 2000, KBZ headquarters was
relocated to Yangon, the business capital of Myanmar. At present, KBZ Bank has
more than 414 branches across the country with nearly 690 ATMs and over 190
currency exchange counters. In November 2011, the Central Bank of Myanmar
granted an Authorized Dealer License (ADL) to KBZ Bank as the first step to operate
a foreign banking business. KBZ Bank will maintain continuous growth in the
financial industry along with the development of Myanmar.

Kanbawza Bank establishes with a vision to be recognized as the bank of the

first choice in Myanmar, is renowned for its banking prudence, sound customer
relationship, quality customer service and generous donation to worthy causes related
to education, health and social sectors. The Motto of the Kanbawza is ‘Strength of
Myanmar”. Specifically, the bank aims to support the economic objectives of the
Nation, integrating both internal and external sources of capital to promote
investments for the higher growth-rate of the private sector development, and to
provide necessary and effective banking facilities and services to the public.

Kanbawza Bank’s Vision is to become Myanmar’s premier bank with a wide

variety of products and services for commercial and private customers. Kanbawza
Bank’s Mission is to ensure the highest level of customer satisfaction and trust by
providing excellent banking services, to ensure the highest level of customer
satisfaction and trust by providing excellent banking services, to continuously
improve the quality of our financial services by investing in innovative technology
and enhancing human capital, to offer rewarding career opportunities and promote

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staff accountability at all levels and to act as a responsive corporate citizen by
combining commercial pursuit, fair business ethic and socially responsible behavior.
Kanbawza Bank embraces the core values are teamwork and Cooperation, Honesty,
Enthusiasm, Mutual Trust and Respect, Integrity, Leadership, and Dedication.

3.2 Organizational Structure of KANBAWZA Limited

There are many departments and branches in KBZ Bank. Each department has
Head of that department and each branch has branch manager. KBZ Bank Limited is
established Board of Director and senior management team.
Figure (3.1) Interim KBZ Organization Chart

Advisory Chairman Emeritus

Panel (Patron)

Board of Director

Deputy CEO Deputy CEO Deputy CEO

Functions Function Value Center Function

Value Center Value Center
-Sales -Legal & -Secured -Finance
-Corporate/FI -Human -Virtual Compliance Consumer -Risk
-Deposit/ Resources Branch -Audit -Treasury -Credit
Wealth -Share -Trade -Technology -Cash
-SME/Agent Services Finance -Marketing -Special Assets
Banking -Payroll -Corporate -SB
-Unsecured -Transactional
Affairs (Emerging 600)
Consumer Banking
-Operations -Domestic
-SB (KMY) -SB (Big 28)
Remittance
-CRE

Source: KBZ Bank Ltd, Organization Chart Report, 2018

According to new organization structure, U Aung Ko Win is announced as

Chairman Emeritus. In senior management structure, U Mya Than is new Chairman
of KBZ Bank Ltd. There are two Vice Chairmen, one independent director, one non-
executive director and one executive director in KBZ Bank Board of Directors. The
new board of directors assumed their roles and functional responsibilities starting

14
from April 1st 2018. These are seventeen value centers and eleven functions under
KBZ Bank organization structure.
They are Corporate/Financial Institution loans, Deposit/Wealth, SME/Agent
Banking, Unsecured Consumer, Treasury, Cash, Special Assets, Smart Branches
(Emerging 600) and Domestic Remittance. Moreover, there are eleven functions
which are Finance, Risk, Credit, Legal & Compliance, Audit, Technology, Marketing,
Corporate Affairs, Sales, Human Resources and Shared Services. Three Deputy CEOs
make management of their respective Value Centers and Function. Figure (3.1)
presents the organization chart of KBZ bank.

3.3 Type of Lending Products by KANBAWZA Bank

KBZ Bank mainly classified the loans into four broad classes; defined by the
purpose of the loans and based on the loan amount, namely Corporate Loans, SME
Loans, Hire-purchase Loans, and Mortgage Loans.

3.3.1 Corporate Loans

These loans are classified by the amount of the loans, nature of the borrower’s
business and purpose of the loan. Corporate loans are defined as all loans over 1
Billion. In this type of corporate loan, the customer can apply various types of loans
on their loan need such as Overdraft, Loan and Term Loan. If the customer wants to
apply the Loan product, he/she will need to open a current account. After allowing the
loan, the loan limit will be approved by the credit admin department. The tenor of the
loan is usually a one-year term loan but in some special cases such as to owners of
large enterprises. Loans can be received for up to 3 years as term loans. The amount
of interest is calculated based on the disburse amount.

Loan interest is paid on the total approved amount and Overdraft interest is
paid on the amount used. The current interest rate for the loans is 3% interest plus
CBM rate (CBM rate is currently 10% per annum). In some case, the security of the
customer is not covered the applied loan and that borrower deemed his/her risk rating
is high, the bank will be charge 16% interest rate for that customer. Most of the
customers used overdraft rather than take out the loan. The reason of the popularity
may be because interest is calculated on the basis of the number of days the overdraft
is made. Overdraft is also done on a one-year short term basis and interest rate for
overdraft is 13 percent per annum.

15
3.3.2 Small and Medium Enterprise Loans (SME Loans)

KBZ Bank offers different types of SME loans to attain property growth and
development for Myanmar SMEs. For these KBZ Bank SMEs mean permanent
employees minimum 5 up to 600, initial capital minimum 50 million kyats up to 1,000
million kyats and the loan amount is defined as including all loans from the proposed
lower limit 10 Million kyats to 1 Billion kyats. SME Lending method is a cash flow
base. KBZ approved a 1-year loan requiring monthly payments of principal and
interest in such amount that the principal outstanding paid down by 25% at 1-year
maturity. The loan can be new for 1 more year, requiring the same interest and
principal payment every month, so that the original loan had been paid down by 50%
in the second year’s maturity. The loan can then be renewed along with the same
terms for 2 more times until full payoff after 4 years.

In general terms, a business loan can be categorized into three broad classes;
defined by the purpose of the loan (i) SME Term Loan for (Business) Expansion, (ii)
SME (OD) for working capital and (iii) JICA Two-Step Loan Credit Tenor. For OD
and Term-Loan Products, banks are lending from their own fund and two-step loans
are lending from another fund (JICA).

(i) SME (Term-Loan) for Business Expansion Loan

Business Expansion loan (Term Loan) is to provide financing for investment

in fixed assets such as purchasing new machineries, factory construction, factory
renovation, restaurant expansion and more. SME (Term-Loan) can help to reduce the
final lump sum repayment burden, as needs monthly principal and interest repayment.

(ii) SME (Overdraft) for Working Capital Loan

Working capital needs for business operations can apply SME (OD) in KBZ
Bank. For example, purchasing raw material (or) using business expansion. The
business process can be better and smoother as SME (OD) needs only monthly
interest repayment upon the actual principal amount used, and the principal repayment
needs at the end of maturity.

16
(iii) JICA Two Step Loan

JICA Two-Step Loan can get longer-term (up to 5 years) with a lower interest
rate, borrowers can implement their Business Plan and Expansion Plan for their
business growth. JICA Two-Step Loan can be applied for capital Investment needs
such as building a manufacturing plant, warehouse, buying machinery and vehicles.
Customers can apply for JICA Loan from Kanbawza Bank, to be more successful
business and for the capital investment required to buy fixed assets. The loan of the
credit tenor is up to 5 years and with low-interest rate (8.5% per annual). JICA Two-
step Loans with maximum loan amount up to 500 Million to SMEs Business excludes
these sectors (1) Farmers eligible for borrowing from Myanmar Agricultural
Development Bank, (2) Real Estate, (3) Finance and Insurance, (4) Precious Metal
dealing, (5) Bars and Pubs, (6) Amusement, entertainment (expect for tourism), (7)
Weapons, ammunition, or (8) any other sector harmful to the social stability (to be
judged by working committee). Any other sector harmful to the social stability (to be
judged by working committee).

3.3.3 Hire Purchase Loans

Hire Purchase is a service provided by KBZ Bank for the account holders,
SME Business owners, and Organizations alike to pay for goods in installations over a
while with a required down payment of 30-50 percent. This service is eligible for
individuals or organizations to hire purchase products/items by paying only 30% –
50% (down payment) initially and paying the remainder (depending on the
product/item) throughout a period fixed by the bank. The credit terms differ
depending on the goods purchased. Types of products for Hire Purchase are
Condominium, computers and electronics, cell phones and other communication
devices, automobiles and motorbikes, heavy machines, agricultural tractor and
machinery, gold and jewelry, furniture and medical equipment. Loan Tenor is up to 5
years and the interest rate for the first years for 9% and another four years for 5%.

3.3.4 Mortgage/Housing Loans

Currently, KBZ Bank is lending Mortgage Loan as a new product of the loan.
New lending Mortgage Loan is a monthly installment payment program that is
convenient and affordable financial option to fulfill financing needs. Bank offer to
purchase a residence of choice as per requirements; condominium, apartment, and

17
land property. Loan tenor is up to 25 years and various types of interest plans to the
customer in KBZ Bank. For the interest plan (A), good performance customer,
Interest will be charged 13% for the first year and will drop 0.5% for each consecutive
following year up to 11% if the customer can show good performance. Interest will be
charged 11% flat rate till customers can show good performance. The minimum loan
value must be 15 million MMK. Interest will be changed to 13% when the customer
makes default at any stage. Customers will have the right to apply this promotion plan
after a one-year interest paid with 13% again.

For the interest plan (B), LTV ratio, loan to value (assessor’s recommended
value) ratio is less than or equal 60%, interest will be charged 12%. If the customer
can show good performance, interest will be charged 11% after 3 years. The
minimum loan value must be at least 50 million MMK. Interest will be charged 13%
when the customer makes default. Customers will have the right to apply this
promotion plan after a one-year interest paid with 13%. For the interest plan (C),
Income versus Monthly payment, If the monthly repayment of the customer for the
home loan is less than or equal of 30% of his/her monthly net income, interest will be
charged on 12%. If the customer can show good performance, interest will be charged
11% after 3 years. The minimum loan value must be at least 30 million MMK.
Interest will be charged 13% when the customer makes default. Customers will have
the right to apply this promotion plan after a one-year interest paid with 13%.

For the interest plan (D), prepared installment, if the customer makes prepaid
installment (for 2 months), interest will be charged with 12% for the first 3 years and
if the customer can show good performance, interest will be charged 11% after 3
years. Interest will be charged 13% when the customer makes default. Customers will
have the right to apply this promotion plan after a one-year interest paid with 13%. If
the customers are newly married couples and if they have a regular income, interest
will be charged 12% for the first 3 years and if they can show good performance,
interest will be charged 11% after 3 years. The minimum loan value must be 20
million MMK. The interest rate will be changed to 13% when customers make default
during credit terms. Customers will have the right to apply this promotion plan after a
one-year interest paid with 13%.

18
3.4 Credit Risk Assessment and Management Practices in KBZ Bank

The risks are calculated on the borrower’s ability to repay the loan. To assess
the risk credit risk the bank looks at the five C’s of the borrower. The five C’s are
credit history, capacity to repay, capital, the loan condition, and associated collateral.
KBZ has a dedicated department only for assessing the credit risk of its current and
potential consumers.

Credit default risk is the risk of loss which arises from the debtor being
unlikely to repay the amount in full or when the debtor is more than 90 days past is
the due date of credit payment, it gives rise to credit default risk. The Credit default
risk impacts all the sensitive transactions which are based on credit like loans,
derivatives or securities. Credit default risk is also checked by banks before approving
the loan.

Credit facilities are heavily secured with physical collateral as land, building
and machinery and personal guarantors. KBZ Bank also requires that they have
operated a Deposits/Savings accounts for a period of six to twelve months before
availing credit facilities to them. This is an effective tool for monitoring the cash flow
of the business. Personal guarantors are used in lending when the collateral pledged is
not enough to cover the security, in most banks the guarantor is an account holder
with the lender. Due to the help of technology businesses can now analyze the data
quickly and assess customers' risk profiles.

3.5 Non-performing Loan Classification by CBM Regulation

According to the central bank of Myanmar Notification No (17/2017), a bank

shall make adequate provisions for impairment of loans, advances and other assets on
and off-balance sheet whatever the impairment occurs. The specific provisions for the
impairment are to be made against all outstanding balance (principle and interest) of
the loans and advances, not just the past due portion. KBZ bank classifies and makes
specific provisions in the following manner:

19
Table (3.2) Classifications of Loans/ Advances and specific provisions

Sr. Classification of Provisions on shortfall

Days past due
No. Loans/Advances in security value
(a) Standard 30 days past due 0%
(b) Watch 31 to 60 days past due 5%
(c) Substandard 61 to 90 days past due 25%
(d) Doubtful 91 to 180 days past due 50%
(e) Loss Over 181 days past due 100%
Source Data: CBM Notification No. (17/2017) (July 7th 2017)
Standard Loan: When the loan is repaid in due time as determined in the
contract (at the maturity date) and the financial position of the borrower is sound and
payment is made in accordance with the term of the loans. The bank is to classify
those loans as standard loans.

Watch Loan: The financial position of the borrower is currently adequate but
potential weakness exist and if not corrected, will result in a deterioration of the
borrower’s financial position at a future time and principal or interest are delinquent
for a period from 31 days to 60 days from the due date, those loans are defined as
Watch loans.

Sub-standard Loan: When loans not adequately secured, the borrowers financial
position is not satisfactory, the principal or interest has not been repaid for a period of
61 to 90 days from the due date, there is no transaction (exception of interest and bank
charges) for a period of 61 to 90 days in the customer’s account, such loans are
defined as Sub-standard loans.

Doubtful Loan: A loan classified as doubtful has all of the characteristics of a

substandard loan and credit weakness making full collection questionable and the
principal and interest has not been paid for a period of 91 to 180 days from the due
date, and there is no transaction (exception of interest and bank charges) for a period
of 91 to 180 days in the customer’s account, such loans are defined as doubtful loans.

Loss Loan: Certain assets are considered uncollected and worthless and
their continuation as bankable assets is not warranted. Bad loans classified when they
have the following characteristics; the financial position of the borrower clearly
discloses an incapability to fulfill the conditions of repayment, the borrower has been

20
declared a bankrupt and it involved in a liquidation process where creditors have
summited their claims, and the principal and interest has not been paid for a period
exceeding 181 days past due are also classified as loss loan. According to the CBM
Notification No.17/2017, non-performing loans means a loan or advance that is no
longer generating income and which is classified doubtful or loss.

21
 CHAPTER 4
EFFECT OF CREDIT RISK MANAGEMENT PRACTICES ON LOAN
PERFORMANCE OF KANBAWZA BANK LIMITED
In this chapter, finding from the analysis of the data from the survey are
presented with four sections. The first section is concerned about the research design
for this study, and the second section mentioned the demographic characteristics of
respondents. The credit risk management practices on loan in KBZ bank limited are
described in the third one. In the last section, the effectiveness of credit risk
management practices on loan performance of KBZ bank limited is analyzed.

4.1 Research Design

The objectives of the study are to examine credit risk management practices
on loans in KBZ bank and to analyze the effect of credit risk management practices
on loan performance of in KBZ bank limited. To carry out these objectives, the
primary data collection is used to obtained information and opinions directly and
specifically from the employees who are working in the Credit Functions of KBZ
bank. As a tool of the research instrument, a structured questionnaire has been used to
obtain data by face to face data collection method. The study adapts the
questionnaires from various parts studied related to the topic and mainly used Likert
scale measurement for all the variables constructed 46 questions was made to collect
data. It was organized into two sections. Section one consisted of 5 questions
regarding the personal details of respondents. Section two was designed to sampled
employee’s agreement level about the practice of credit risk management and loan
performance of KBZ bank in the proposed theoretical framework. A five-point Likert
scale has been used in this section to measure loan performance on credit risk
management practices. The scaling is 5 for strongly agree; 4 for agree, 3 for neutral, 2
for disagree and 1 for strongly disagree have been given to analyze data.

By way of sampling techniques, probability sampling techniques are employed

in the research as it ensures good estimates of the population characteristics. Among a
total of 118 employees who are working at Credit Functions in KBZ bank, 50 number
of employees (42% of the target population) are selected by a simple random
sampling method to obtain the information. After collecting the data, the processed

22
data are further analyzed by SPSS version 22. This thesis would utilize the following
statistical tools:

(1) Data organizing and description

(2) Cronbach’s Alpha for reliability statistics and
(3) Multiple linear regression analysis.

4.2 Demographic Characteristic of the Respondents

This section presents the profiles of selected sample employees in Credit

Functions in KBZ bank. The profiles cover the employees’ gender, age, level of
education, designation and working experience. All the data obtained from the
questionnaires collected are interpreted and summarized in frequency distribution and
percentage distribution. The frequency analysis of selected employee’s demographic
data is illustrated through the table of frequency counts, and their respective
percentages.

4.2.1 Respondents by Gender

The respondents are not only males, but also females. Table (4.1) shows the
gender of respondents.

Table (4.1) Respondents by Gender

Gender No. of Respondents Percentage

Male 14 28.0
Female 36 72.0
Total 50 100.0
Source Data: Survey Results, 2019

According to Table (4.1), it was found that out the 72% of respondents were of
female while 28% were males. Therefore, this result captured the gender of the
respondents in order to establish the most dominant working group of the employees
at Credit Functions in KBZ Bank.

4.2.2 Respondents by Age Group

Ages of respondent are divided by three group. They are age under 30 years,
age between 31 and 40 years and Age over 40 years. Table (4.2) respectively shows
the frequency distribution of age in year.
23
Table (4.2) Respondents by Age Group

Age (in year) No. of Respondents Percentage

Under 30 27 54.0
31 – 40 21 42.0
Over 40 2 4.0
Total 50 100.0
Source Data: Surveyed Results, 2019

Table (4.2) respectively shows the frequency distribution of age in year. They
include three age groups. 54% of employees fall in the age under 30 years, followed
by 42% employees fall between 31 and 40 years, and 4% of employees fall age over
40 years, respectively in term of percentage share. Therefore, the majority of age
group is under 30 years in credit department of KBZ bank.

4.2.3 Respondents by Educational Level

There are two education levels among the respondents in the sample: Bachelor
and master’s degrees. The following Table (4.3) shows the level of education and
qualification of the respondents and their percentage.

Table (4.3) Frequency Distribution of Education of Respondents

Education Level No. of Respondents Percentage

Bachelor degree 32 64.0

Master degree 18 36.0

Total 50 100.0
Source Data: Survey Results, 2019

As the result of Table (4.3) shows that most of the respondents hold a
bachelor’s degrees with 64% and remaining 36% are holding in master’s degree in
different field of study. This indicates that most of the management and operational
personnel have a high good level of education that is bachelor and master’s degree
and, they are well equipped with the information concerning risk management
practices and they can respond accurately to the questionnaire.

24
4.2.4 Respondents by Designation

Designation status is divided into four categories; assistant general manager,

manager, deputy managers and credit risk officers. Table (4.4) shows the number of
designation of respondents.

Table (4.4) Respondents by Designation

Designation No. of Respondent Percent

Assistant General Manager 10 20.0
Manager 14 28.0
Deputy Manger 7 14.0
Credit Risk Officer 19 38.0
Total 50 100.0
Source Data: Surveyed Results, 2019

As a result of Table (4.4), about 20% of employees are assistant general

manager, 28% of the employees are manager and 14% of the employees are deputy
manager and remaining 38% of the employees are credit risk officer. Therefore, most
of the employees in Credit Functions of KBZ is credit risk officer. All the employees
are management and manager level in operation that outnumbered these of executive
level. This was done intentionally to analyze the level of understanding and real
operation procedures in their fields. This result indicates that it is to reduce one climbs
up the ladder towards the top of the organization since top management is concerned
with making decisions which are then implemented by those in lower levels who
should be a good number to cope up with various assignments that would be
delegated.

4.2.5 Respondents by Working Experience

The other background information of the respondents is years of experience of

the Credit Function in KBZ bank. Table (4.5) shows the number of respondents by
working experience. Table (4.5) reveals that most of the respondents have worked in
loan department of KBZ bank for more than 5 years with 66% of the total
respondents.

25
Table (4.5) Respondents by Working Experience

Working Experience No. of Respondents Percentage

Less than 1 years 4 8.0
1–3 3 6.0
3–5 10 20.0
5 – 10 25 50.0
10 years and above 8 16.0
Total 50 100.0
Source Data: Surveyed Results, 2019

And it could be that most of the staffs acquired sufficient experience to

perform risk management activities. Less than 5 years’ services indicate that the
organizations have good succession plan for the risk management practice which is an
important factor for the KBZ bank long term sustainability.

4.3 Type of risks encountered by KBZ Bank on Loan

The employee’s mark the type of risks encountered by KBZ bank on loan is
divided by four risks. They are market risk, operation risk, liquidity risk and credit
risk. The following Table (4.6) shows the percentage of type of risk encounter by
KBZ bank in their multiple responses. This Table (4.6) is illustrated by the Figure
(4.1).

Table (4.6) Type of risks encountered by KBZ Bank on Loans

Type of Risk No. of Respondents Percentage

Market Risk 10 20.0

Operation Risk 10 20.0

Liquidity Risk 18 36.0

Credit Risk 48 96.0

Source Data: Survey Result, 2019

As commonly found in Table (4.6) and Figure (4.1), most 96% of the lent
money and advances from KBZ bank are encountered by facing the credit risk among
the other type of risk (Market risk, operation risk, and liquidity). So, it seems like the

26
KBZ bank effort the avoiding of credit risk to enhance their performance of loan and
profitability by emphasizing the credit risk management practices.

Figure (4.1) Type of risks encountered by KBZ Bank on Loans

50
40
Frequency

30
20
10
0
Market Opearation Liquidity Credit
Frequency 20 20 18 48

Source Data: Survey Result, 2019

The biggest risk faced by the KBZ Bank is credit risk, namely the position
customer defaults on the loan agreement. To protect the credit risk, KBZ Bank has
strict rules and best practices for customers to borrow the loans with full repayment
history. The default risk on a debt that arises from a borrower who fails to make the
required payments is called Credit Risk. Any financial institutions would include this
as a first resort which includes principal and interest along with disruption to cash
flows and the collection cost. The loss may be partial or even complete in many cases.
Higher borrowing costs are always associated with higher credit risk levels in an
efficient market. Due to this reason, the cost of borrowing can be used to conclude
credit risks based on the assessment by the participants of the market.

Few cases in which losses can arise when a consumer fails to make the
payment or when a company is unable to repay an asset secured debt. They also arise
when a consumer is unable to pay an invoice when it is due or when a business does
not pay salaries to its employees on time. A credit check is performed by the bank to
reduce this credit risk on the prospective borrower and it may require the borrower to
take insurance which guarantees from a third party of the payment to the lender. In
different cases, mortgage insurance or security over assets will be used for credit. In
general, the interest rate will depend on the risk, which means higher there is higher

27
will be the interest. Credit risk increases when the borrowers, willingly or unwillingly,
are unable to pay.

4.4 Assessment of the Reliability of the Scale

This study has extensively used Likert scales. Thus, before they are used, it
should be checked their reliability. The reliability of a scale is defined as its ability to
consistently measure the phenomenon it is designed to measure. Examining the
internal consistency of the test enables the researcher to determine which items are
not consistent with the test in measuring the phenomenon under investigation. The
object is to remove the inconsistent items and improve the internal consistency of the
test. In this study, Cronbach’s alpha value is used as a measure of the internal
consistency of the scales used in the questionnaire. Cronbach’s alpha is a single
correlation coefficient that is an estimate of the average of all the correlation
coefficients of the items within a test. If the alpha value is high, then this suggests that
all the items are reliable, and the entire test is internally consistent. If alpha is low,
then at least one of items is unreliable and must be identified via item analysis
procedure. However, as per DeVellis (2003), Cronbach’s alpha value should ideally
be above 0.7. Details outputs can be seen in the appendix A.

Table (4.7) Results of Cronbach’s Alpha Value

Practices No. of Items Cronbach’s Alpha Value

Credit Risk Identification 7 0.701
Credit Risk Analysis 11 0.758
Credit Risk Control 5 0.753
Credit Risk Monitoring 7 0.773
Loan Performance 11 0.791
Source: Appendix A, SPSS outputs

The results of the Cronbach’s alpha value are between 0.701 and 0.791,
suggesting very good internal consistency and reliability for the scale with this
sample.

4.5 Credit Risk Management Practices on Loan in KBZ Bank

Credit risk is the possibility of losing money due to the inability,

unwillingness, or no timeliness of counterparty to honor a financial obligation. KBZ

28
bank is one of the many other banks and institutions that lend money for individuals
and institutions to make a profit. The large stake of KBZ bank profit if from the lend
money interest and related fees. But the bank is a challenge of collecting the money
they lend which is called credit risk. Credit risk management is the process of
dominant the impact of credit risk related events on the institution and involves the
identification, understanding, and quantification of the degree of the potential loss and
the consequential implementation of appropriate measures to minimize the risk of loss
to the financial institution. Consequently, credit risk management practices are
impacting on bank performance.

This section mentions the findings with respect to objective one which to
identify the risk management practices of the loan in KBZ bank. Risk management
practices are a way of assessing the functionality of four components: Credit risk
identification, Credit risk measurement and analysis, credit risk control, and credit
risk monitoring. The practice assessment statements were ranked in terms of their
means and standard deviation as a way of interpreting results.

4.5.1 Credit Risk Identification Practices

Banks are invariably faced with different types of risks that may have a
potentially adverse effect on their business. Risk identification is vital for effective
risk management. Bank are obliged to establish the identification and assessment of
the different risk involving the different lines of defense to strengthen its advanced
and proactive risk practices. Risk identification practices are measured by seven
statement. All statement concerning risk identification practices dimension are
measured via five-point Likert scale. Table (4.8) shows the results of the respondents
regarding the practices of risk identification.

As a result of Table (4.8), reviewing of past payment record is the most

important factor is the highest means scores of 4.02 and, reviewing the length of time
or number of years the business has been in operation and personal business
experience of the borrower is the second highest 3.92; while auditing the financial
report to know business transparent transactions and long histories of their businesses
has the lowest mean score of 3.74 and all statement with a little variation.

29
Table (4.8) Credit Risk Identification Practices

Mean Standard
Sr. Statements
Value Deviation
1 Risk identification involves all level of staffs of concerned 3.80 0.78
department.
2 KBZ bank reviews the length of time or number of years the
business has been in operation and personal business 3.92 0.49
experience of the borrower.
3 KBZ bank identifies all possible risks from the survey 3.88 0.63
questions or computing the loan ratios.
4 KBZ bank reviews the customer’s past payment record from 4.02 0.59
existing loans.
5 KBZ bank reviews how long the borrower and his business
have been dealing with KBZ Bank. Primarily based on 3.82 0.66
opening date of first deposit account.
6 It is important to identify the risks of loss that it considers
that the obligor is unlikely to pay its credit obligations in 3.74 0.66
full or the obligor is more than 90 days past due on any
material credit obligation..
7 KBZ bank audits financial report to know business
transparent transactions and long histories of their 3.64 0.82
businesses.
Overall Mean 3.83
Source Data: Surveyed Results, 2019

The overall mean score of risk identification practices is 3.83. The result
shows, it is obvious that employees are most agreement the risk identification
practices are the effect on loan performance. Therefore, all respondents generally
agreed to the risk identification process by board and senior manager. Consequently,
bank need to consider developing the reviewing of past payment record which is the
key function of this practices.

4.5.2 Credit Risk Analysis/Measurement Practices

Credit risk analysis/ measurement practices are one of the main components of
effective risk management. This section contains the findings in respect to credit risk
analysis/measurement practices which sought to assess the influence of credit risk
analysis/ measurement on the performance of bank. To do this, the employees
responded as provided in Table (4.9).

30
 Table (4.9) Credit Risk Analysis/Measurement Practices

Sr. Statements Mean Standard

Value Deviation
1 KBZ bank estimates the impact and frequency of each
3.70 0.54
identified risk factor.
KBZ bank checks the level of all debts, including the
2 proposed loan request, compared to the equity how heavy 3.74 0.66
the debt burden is.
KBZ Bank checks the amount of the financing needs
3 compared to the business size, in terms of capital, total 3.58 0.76
debts and total assets.
4 KBZ Bank checks the ability to pay back short-term debts
3.54 0.78
with short-term assets.
5 KBZ Bank examines the borrower’s business ability of
3.68 0.59
growing sales in the recent years.
6 Case Relationship Manager visits to the borrower’s
4.02 0.47
business to check the business condition.
KBZ bank examines the borrower’s loan purposes
7 periodically and always compares the rate of return and 4.10 0.42
risk has to be perceived after the loan disbursed.
8 KBZ Bank analyzes the length of the need to repay the
3.76 0.72
loan.
KBZ bank utilizes the credit scoring model to identify
credit risks and mitigating factors, determining financing
9 requirements and earnings for bank, monitoring loan 4.10 0.42
performance risks in crisis situations, and structuring
facilities.
10 KBZ bank analyzes the financial characteristics from both 4.12 0.48
the business and the business owner carefully.
11 Scoring systems utilize information relating to the 4.36 0.56
traditional 5Cs of credit.
Overall Mean 3.88
Source Data: Surveyed Results, 2019

As a result of Table (4.9), it was found that scoring systems utilize information
relating to the traditional 5Cs of credit is the highest means scores of 4.36 and while
the ability to pay back short-term debts with short-term assets has the lowest mean
score of 3.54 with a little standard deviation. The overall mean score of credit risk
analysis/ measurement practices is 3.88 shows that all respondents are fairly agreed
the credit risk analysis/measurement on the effect on loan performance of KBZ bank.
The result shows, it is obvious that employees are most agreement the risk analysis/

31
management practices are the effect on loan performance. Consequently, bank need to
consider evolving the scoring system utilize information relating to the traditional 5Cs
of credit which is the key function of credit risk analysis practices.

4.5.3 Credit Risk Control Practices

This section pertains the findings in respect to risk control which sought to
access the influence of risk control on the loan performance of KBZ bank. Table
(4.10) shows the results of the respondents regarding the practices of risk control.
Assessment of response and control are one of the main components of effective risk
management practices. Question on this area put and the results indicates regarding
the activities of the risk control across the organization and whether it is in line with
the regulatory body and organization risk management framework.

Table (4.10) Credit Risk Control Practices

Mean Standard
Sr. Statements
Value Deviation
1 KBZ Bank takes the collateral to reduce the credit risk. It is
more important to have quality collateral than strong 3.84 0.51
financial background.
2 The first and main source of repayment, cash flow generated
by the business, be carefully assessed through financial 3.94 0.55
analysis to see if cash will be available.
3 Collateral is the second source of the repayment, which
would be the repossession and resale of the collateral to 3.92 0.78
cover the loan.
4 Lending to related parties is particularly dangerous form of
credit risk exposure. Bank consolidates lending of the related
3.76 0.74
party’s group that can be reduce the concentration risk in the
future.
5 When bank is lending with unsecured lending method
(without collateral), the bank takes the interest rate for 13% + 3.82 0.66
3% (risk premium) to cover the risk by insurance.
Overall Mean 3.86
Source Data: Survey Results, 2019

Table (4.10) shows that first and main source of repayment, cash flow
generated by the business, be carefully assessed through financial analysis to see if
cash will be available is the highest means scores of 3.94 and the standard deviation

32
 also suggests no varied responses from respondents with .055 while the consolidating
of the lend to dangerous of credit risk exposure parties has the lowest mean score of
3.76 with a little standard deviation. Most respondents agreed with the credit risk
control practice that the overall mean score is 3.86, which had an effect on loan
performance of KBZ bank.

4.5.4 Credit Risk Monitoring Practices

To achieve the effectiveness loan performance, private banks need to regularly

monitor the status of borrowers and re-evaluate individual credits and commitments,
and their rating. Monitoring is the last step in the credit risk management process.
Table (4.11) shows the results of the respondents regarding the function of credit risk
monitoring. All the question statement covered to address the necessary actions for
monitoring credit risk practices.

Table (4.11) Credit Risk Monitoring Practices

Mean Standard
Sr. Statements
Value Deviation
1 KBZ Bank follows up the customers’ financial analysis
4.27 0.49
periodically.
2 KBZ Bank follows up the customer’s bank account with cash
4.26 0.60
transaction and regular payment of interest for the all of debt.
3 Case Relationship Manager continuously deals with the
4.32 0.59
customer and unexpected Site Visit to the proposed project.
4 Credit risk officers are always update the borrower’s loan file. 3.92 0.56
5 Management Information System (MIS) uses to produce various
3.94 0.55
reports on demand or as scheduled.
6 After the loan is approved, the bank continuously watched over
4.10 0.42
the loan.
7 Monitoring practices include keeping track of borrowers’
compliance with credit terms, identifying early signs of
4.20 0.57
irregularity, conducting periodic valuation of collateral and
monitoring timely repayments.
Overall Mean 4.14
Source Data: Surveyed Results, 2019

As a result of Table (4.11) shows that follow up the customer’s financial

analysis periodically is strongest mean value in that practices with 4.27 and standard

33
deviation also suggests no varied responses from respondents with .49 while needing
update the borrower’s loan file has the lowest mean score of 3.92 with a little standard
deviation of 0.56. The overall mean score of credit risk monitoring practices is 4.14. It
can be concluded that all respondents are strongly agreed the effect of credit risk
monitoring on loan performance in KBZ bank. Consequently, bank need to follow up
the customer’s financial analysis periodically is the dominant fact of credit risk
monitoring practices in KBZ bank.

4.6 Summary Analysis on the Credit Risk Management Practices

Table (4.12) shows the summary analysis on the credit risk management
practices on loan in KBZ bank.

Table (4.12) Summary analysis on Credit Risk Management Practices on Loan in

KBZ Bank

Sr. Practices Mean Value

1 Credit Risk Identification 3.83
2 Credit Risk Measurement / Analysis 3.88
3 Credit Risk Control/ Mitigation 3.86
4 Credit Risk Monitoring 4.14
Overall Mean 3.92
Source Data: Surveyed Results, 2019

The above table (4.12) shows credit risk identification practices, credit risk
analysis/ measurement practices, credit risk control/ mitigation practices, and credit
risk monitoring practices on loans. As per overall mean value from Table (4.12), the
overall mean score for credit risk monitoring practices on loan is highest ranking with
M=4.14 which means that all the respondents are strongly agreed the credit
monitoring practices have the dominant effect on loan performance in KBZ bank.
However, overall mean value for credit risk identification practices on loan is lowest
ranking with M=3.83 which means that KBZ Bank have to improve better
identification practices on loans and have to increase credit risk controlling practices
to be more recovery. In regards to the total average mean value, M=3.92 and overall
score from each practice are strongly agreed on the effect of loan performance in KBZ
Bank.

34
4.7 Loan Performance of Kanbawza Bank

This section contains an analysis on the loan performance of KBZ bank in

term of credit risk management practices.

Table (4.13) Loan Performance of KBZ Bank

Mean Standard
Sr. Statements
Value Deviation
1 Efficient credit risk management practices have been vital in
4.04 0.54
preventing occurrence of bad debt and non-performing loans.
2 The financial success of a bank depends on the effectiveness of
credit management practices as most of the income from interest is 4.08 0.69
earned on loans extended.
3 Credit Analysis practice helps to mitigate the level of risk by
4.00 0.49
ensuring that borrowers are credit worthy before giving out credit.
4 Credit Scoring practices can be measured the level of default by
4.08 0.53
the borrower.
5 By using of the credit analysis model, the bank knows the
borrower’s characteristics and that can effect on loan performance 4.06 0.47
of a bank.
6 Credit risk analysis practice predicts accurately the future
capability of a borrower to meet his/her financial obligation and 4.06 0.42
that reduce the credit default risk in the future.
7 Effective credit risk identification practice is to identify all
possible risks that are either inherent in any banking operations 4.02 0.47
that may effect on the bank performance.
8 In mitigation practice, the bank controls the non-performing loan
and loan losses by insurance and by taking the enough collateral 4.04 0.64
for the loan amount.
9 Management Information System (MIS) helps in making various
decisions on credit risk management and that can be prevented the 4.02 0.69
occurrence of bad debt and non-performing loans.
10 KBZ bank maintains the LTD ratio directed by CBM to prevent
4.06 0.65
the liquidity risk and predicts the accurately the future capability.
11 Effective monitoring practice ensures that the bank understands
the current financial condition of the borrower, monitors
compliance with the existing terms and conditions, assesses 4.12 0.69
collateral in relation to the borrowers' current condition, identifies
non-performing accounts.
Overall Mean 4.05
Source Data: Surveyed Results, 2019

35
 The effectiveness of credit risk management practices has a great impact on
the performance of the loan in KBZ bank. This study analyzes the effect of credit risk
management practices on the loan performance of KBZ bank. To analyze the loan
performance in KBZ bank, questions were prepared into eleven statements and the
results show with the overall mean score and standard deviation in the Table (4.13).
Respondents were asked to indicate the extent to which they agreed to statements
relating to agreement of each factors on a five-point Likert scale (5= strongly agree, 1
= strongly disagree).

As a result of Table (4.13) the overall mean score of loan performance of KBZ
bank in term of credit risk practices is 4.05. It can be concluded that all respondents
are strongly agreed the credit risk management practices have dominant effect on loan
performance of KBZ bank.

4.6 Effect of Credit Risk Management Practices on Loan Performance of

KBZ Bank

To examine the effect of credit risk management practices on loan

performance of KBZ bank, statistical analysis of this section is included multiple
linear regression analysis. It is important to consider which factors of credit risk
management practices out of the four factors can significantly explain loan
performance of KBZ Bank. In order to do this, the multiple linear regression model is
applied to analyze the effect of credit risk management practices on loan performance
of KBZ Bank. The output from generating multiple linear regression models is shown
in Table (4.14). Details outputs can be seen in the appendix B.

One star (*) indicated the significant at 10% level, double star (**) indicated
the significant at 5% level and triple star (***) indicated the significant at 1% level
for t value and F value. The above results show that all the coefficients in the model
are jointly significant at 1% level, which is indicated by the value of F-statistic (F =
13.57). In addition, individual coefficients have expected positive signs. Three credit
risk practices in the model namely risk identification, risk analysis, and risk control
are significant while the risk monitoring is not significant.

36
Table (4.14) Effect of Credit Risk Management Practices on Loan Performance

Unstandardized Standardized
Credit Risk Coefficients Coefficients
t Sig.
Management Practices Std.
B Beta
Error
(Constant) .429 .310 1.383 .169
Risk Identification .256*** .061 .332 4.169 .000
Risk Analysis .216** .098 .207 2.210 .029
Risk Control .195** .083 .229 2.357 .020
Risk Monitoring .130 .079 .126 .1636 .105
N=120, R2 = .527, F = 13.57 *** DW = 1.844
Source: Appendix B, SPSS Outputs

The magnitude of each coefficient indicates the amount of how much the score
of the dependent variable will change if the score of an independent variable increases
by 1 unit while other things remain unchanged. That is, if the score of risk
identification practices increases by 1 unit, while other thing remains unchanged, the
level of loan performance will increase by .256 unit. If the score of credit risk analysis
practices increases by 1 unit, while other thing remains unchanged, the level of loan
performance will increase by .216 unit. If the score of credit risk control practices
increases by 1 unit, while other thing remains unchanged, the level of loan
performance will increase by .195 unit.

In terms of the magnitude of the standardized coefficient, credit risk

identification (beta = 0.332) is relatively the most important in explaining the loan
performance of KBZ bank. As the performance of the regression model, the model
can explain about 52.7% of the variation of the loan performance and credit risk
management practices.

37
 CHAPTER 5

CONCLUSION

This chapter includes the conclusion which is based on the analysis of the
results of the thesis. This chapter has been structured into three main sections:
findings and discussion, recommendations and needs for futures research.

5.1 Findings and Discussion

Credit risk management practices of KBZ Bank absolutely look like with
credit risk management practices of background theory. The bank follows the
guideline for soundness of credit risk management practices, state on reference
theory. However, some factors are not yet described on its practice, such as credit
bureau referencing. Credit information sharing through the credit reference bureaus
will enable borrowers build a track record that can be used in accessing credit and
thus bridge the information gap that exists between the Lenders and the borrowers.
This will be especially pertinent to those borrowers in the informal who have a track
record and good performance to use it to access credit. The study focusses on the
credit risk management practices of KBZ Banks on loans. The result was based on the
analysis of 42% of the total population of Credit Functions that provide the customers
with credit facilities. Findings state that KBZ Bank use different credit risk
management practices to ensure that techniques and assessment models manage the
credit risk which have one main objective of reducing the amount of loan default that
may be a principal reason for failure. Sound credit risk management practices have
lower loan default ratio (bad loans).

As per research analysis, credit risk identification practices is mostly effected

in loan performance of the KBZ Bank. The study concludes that KBZ Bank used a
combination of methods to identify credit risk among the businesses this includes
checking of borrower’s working experiences in operation, analyzing in financial
position of borrowers carefully by calculating loan ratios and make industry
comparison to identify risk and using the survey question for all possible risks,
reviewing of past payment record, borrowers’ relationship with KBZ, using audit
financial statement and identifying the risks of loss that it considers that the obligor is
unlikely to pay its credit obligations. Among them, the popular method for the risk

38
identification is reviewing the past payment record that is the highest mean score in
identification and the effectiveness way on the loan performance of the bank.
Auditing financial statement was the least popular method in risk identification that is
because most business do not have proper records concerning their businesses. Credit
Analysis model with Five Cs was most popular in credit measurement method and
credit scoring model with financial characteristics from both the business and
business owner these are the effective tools in credit risk management practices.

Credit facilities in KBZ Bank are heavily secured with physical collateral as
land, building and machinery and personal guarantors. Personal guarantors are used in
lending when the collateral pledged is not enough to cover the security, in most banks
the guarantor is an account holder with the lender. Bank also require that have to
operate Deposits/Savings accounts for a period of six to twelve months before
availing credit facilities to them. The first and main source of repayment, cash flow
generated by the business was the most popular method in risk controlling and
mitigation of the KBZ Bank. KBZ bank also requires the method to follow up the
financial statement periodically and visiting to customer premises (unexpected).
Visiting the customer’s premises was the most commonly used method by KBZ Bank
to identify credit risks and to monitor the risk among the loans which have a mean
response rate of 4.32, this was mainly used to verify physical address of the business
and identified potential sources of the credit risk for the customers. This is an
effective tool for monitoring the cash flow of the business. Finally, the analysis found
a positive relationship between loan performance and the credit risk management
variables used in the study.

5.2 Recommendations

Kanbawza Bank has been relying too much, almost exclusively on the
collateral to lend money without ever trying to find out what the borrower exactly
needs for money for and how he is going to repay, when, with what money, from
what sources. That is the surest way to have big troubles sooner or later. A better
lending approach is to try to rely less on the collateral. Kanbawza Bank would still
need collateral, but collateral is no longer the only criteria for approving or rejection a
loan. If the customer does not have collateral or does not have collateral with
sufficient value, we can still find a way to lend if banks are lending with unsecured

39
lending method (CGI) to Business in Myanmar. CGI is included as one of bank
lending policies. In this system, the businessman can apply for a loan from the bank
without collateral after he or she has bought guarantees from bank. Bank has to buy
full guarantees from Myanmar Insurance that is owned by the Ministry of Planning
and Finance. If the man of affairs had defaults for several reasons and therefore the
client couldn't pay back the borrowed money, the Myanmar Insurance will return just
60 percent of the loan to the bank. So, credit risk can be mitigated by full guarantees
from Myanmar Insurance. All of the credit risk management practices are important
in banking industry, but regarding of the respondents’ survey result, they are friendly
with three practices but the practice (risk monitoring practice) is still weak and they
assumed that this monitoring process are not fully impacted on the loan performance.

As per suggestion, they need to effort in this credit monitoring because this is
an integral part of lending activity. Banks have a good responsibility to maintain the
quality of the assets and to recover the interest and alternative dues in time. Though
adequate precautions are taken during the assessment and sanction of a loan, a banker
has to be more vigilant after sanction the loan. Unless early warning signals square
measure captured, a bank may not be able to take proper remedial measures to arrest
the slippage in the quality of the asset. Banks ought to place in place awfully sound
and effective credit monitoring system for looking at the borrower’s account from
varied angles.

To abide by the rules and regulations of Central Bank of Myanmar is very

important. The government can also provide special support units which includes
impacting appropriate business skill through workshops, expert advisers and
enterprises forums to SMEs clients, this will help the equip the business with
appropriate business management skills for future challenges and reduce instances of
nonperforming loans.

5.3 Limitation and Future Study

This study emphasized on the base of lecture notes of credit risk management
department and survey questions of management and manager level of operation and
credit risk officers from Credit Functions. This study is just analyzed by using
descriptive method with tables, graphs and charts.

40
 Therefore, it is needed to continuous study by using more completely method
with other analytical tools. Credit risk management is the crucial management for not
only banking industry also the whole financial institutions of Myanmar. Since this
study just emphasize on KBZ Bank only, the study represented the whole banking
system in Myanmar should be continuously performed.

41
42
 REFERENCES

1. Amalendu Ghost (2012), “Managing Risks in commercial and retail banking”.

2. Basel (2010), ‘‘Principles of management of credit risk” Consultative paper
issued by the Basel committee on banking supervision, Basel (April 2010)
3. Berger, A.N and G.F. Udell (2001). Small Business Credit Availability and
Relationship Lending: The Importance of Bank Organizational Structure.
Federal Reserve Board Working Paper, Washington D.C.
4. Central Bank of Myanmar (2017), “Central Bank of Myanmar Notification No.
(17/2017)".
5. Feldman, R., (1997). Banks and a Big Change In Technology Called Credit
Scoring. The Region Federal Reserve Bank of Minneapolis, September 19-2
6. Guimon Jose (2005). “Intellectual capital reporting and credit risk analysis”.
Journal of Intellectual Capital Vol. 6 No. 1, pp. 28-42 Emerald Group
Publishing Limited.
7. Hus Pyae Htun (2017), “A study on Credit risk management of Co-operative
Bank”, Master of Banking and Finance Programme, Yangon University of
Economics
8. Karanja G Gladys (2012), “The effect of credit risk management practices on
the level of non-performing loans”.
9. Machiraju, H.R., (2008), “Modern Commercial Banking (2nd Ed). New Age
International (P) Ltd, USA”.
10. Mareshah Dutt, (2018), “Risk and Risk Management in Indian Banking Sector”,
accessed online at: https://www.researchgate.net/publication/324570155.pdf
11. May Kha Naing (2016), “Effect of credit risk management on non-performing
loan in Kanbawza Bank”, Master of Banking and Finance Programme, Yangon
University of Economics
12. Nakanura, L.I. (1993). Commercial Bank Information Implications for The
Structure of Banking in M. Klausner and L.J. White Eds. Structural Change In
Banking, Isomer Wood; Ltd, Irowin Vol. 3 pp. 136
13. Ni Lar Hlaing (2015), “Credit Risk Management of Myanmar Economic Bank”,
Master of Banking and Finance Programme, Yangon University of Economics
14. Wachira, Alexander Kinyua, (2017), “Effects of credit risk management
practices on loan performance of commercial banks in Nyeri country”.
 APPENDIX A

1) Reliability (Risk Identification)

Case Processing Summary

N %
Valid 50 100.0 Reliability Statistics
Cases Excludeda 0 .0 Cronbach's Alpha N of Items
Total 50 100.0 .701 7
a. Listwise deletion based on all variables in the
procedure.

2) Reliability (Risk Analysis)

Case Processing Summary

N %
Reliability Statistics
Valid 50 100.0
Cases Excluded a
0 .0 Cronbach's Alpha N of Items
Total 50 100.0 .758 11
a. Listwise deletion based on all variables in the
procedure.

3) Reliability (Risk Control)

Case Processing Summary

N % Reliability Statistics
Valid 50 100.0
Excluded a
0 .0 Cronbach's Alpha N of Items
Cases
Total 50 100.0 .753 5
a. Listwise deletion based on all variables in the
procedure.

4) Reliability (Risk Monitoring)

Case Processing Summary

N %
Reliability Statistics
Valid 50 100.0
Cronbach's Alpha N of Items
Cases Excludeda 0 .0
Total 50 100.0 .773 7
5) Reliability (Performance)

Case Processing Summary

Reliability Statistics
N %
Valid 50 100.0 Cronbach's Alpha N of Items
Cases Excludeda 0 .0
Total 50 100.0 .791 11
a. Listwise deletion based on all variables in the
procedure.
 APPENDIX B

Model Summaryb
Change Statistics
Std. Error
Mo R Adjusted F Durbin-
R of the R Square Sig. F
del Square R Square Chang df1 df2 Watson
Estimate Change Change
e
1 .739 .547 .527 .37505 .090 1.114 4 45 .362 1.844
a. Predictors: (Constant), Risk Control, Risk Analysis, Risk Identification, Risk Monitoring
b. Dependent Variable: Loan Performance

ANOVAa
Model Sum of Squares df Mean Square F Sig.
Regression 19.342 4 4.8355 13.57 .000
1 Residual 16.035 45 0.3563
Total 35.377 49
a. Dependent Variable: Loan Performance
b. Predictors: (Constant), Risk Control, Risk Analysis, Risk Identification, Risk Monitoring

Coefficientsa
Unstandardized Standardized Collinearity
Coefficients Coefficients Statistics
Model t Sig.
Toleranc
B Std. Error Beta VIF
e
(Constant) .429 .310 1.383 .169
Risk Identification .256 .061 .332 4.169 .000 .984 1.016
1 Risk Analysis .216 .098 .207 2.210 .029 .967 1.034
Risk Control .195 .083 .229 2.357 .020 .903 1.108
Risk Monitoring .130 .079 .126 .1636 .105 .906 1.104
a. Dependent Variable: Loan Performance
 APPENDIX C

QUESTIONNAIRES for

“CREDIT RISK MANAGEMENT PRACTICES ON LOAN PERFORMANCE

OF KBZ BANK LIMITED”

PART A

Dear Respondents,

This questionnaire is a part of the special study, which is the curricular

requirements of the students from Master of Banking and Finance, Yangon University
of Economics, Myanmar. All information herein that the respondents provided in this
survey questionnaire will be treated with utmost confidentiality. Please kindly answer
all the questions in below survey questionnaire spread sheet. I am highly appreciated
for your cooperation by spending your precious time answering it.

Please tick the choice that you made after reading the statements.

Profile of the respondents

1. Gender of Respondents
o Male
o Female
2. Age of Respondents
o Age under 30 years
o Age between 31 and 40
o Age over 40
3. Level of Education
o Bachelor
o Master
4. Designation of Respondents
o Assistant General Manager
o Mangers
o Deputy Mangers
o Credit Risk officers
 5. Working Experience of Respondents
o Less than 1 year
o 1-3 years
o 3-5 years
o 5-10 years
o 10 years and above

PART B

Please mark the type of risks encountered by KBZ Bank on Loans.

o Market Risk

o Operation Risk

o Liquidity Risk

o Credit Risk

Please indicate your level of agreement with the following statements as regards
setting objective and risk identification techniques used by your company. Use scale
of 1-5 where:

Strongly Strongly
Disagree Not sure Agree
Disagree Agree
1 2 3 4 5
1. Credit Risk Management Practices
(A) Credit Risk Identification Practices
Statement 1 2 3 4 5
Risk identification involves all level of staffs of concerned
1 2 3 4 5
department.
KBZ bank reviews the length of time or number of years
the business has been in operation and personal business 1 2 3 4 5
experience of the borrower.
KBZ bank identifies all possible risks from the survey
1 2 3 4 5
questions or computing the loan ratios.
KBZ bank reviews the customer’s past payment record from
1 2 3 4 5
existing loans.
KBZ bank reviews how long the borrower and his business
have been dealing with KBZ Bank. Primarily based on 1 2 3 4 5
opening date of first deposit account.
It is important to identify the risks of loss that it considers
that the obligor is unlikely to pay its credit obligations in full
1 2 3 4 5
or the obligor is more than 90 days past due on any material
credit obligation..
KBZ bank audits financial report to know business
transparent transactions and long histories of their 1 2 3 4 5
businesses.
(B) Credit Risk Analysis/Measurement Practices
Statement 1 2 3 4 5
KBZ bank estimates the impact and frequency of each
1 2 3 4 5
identified risk factor.
KBZ bank checks the level of all debts, including the
proposed loan request, compared to the equity how heavy the 1 2 3 4 5
debt burden is.
KBZ Bank checks the amount of the financing needs
compared to the business size, in terms of capital, total debts 1 2 3 4 5
and total assets.
KBZ Bank checks the ability to pay back short-term debts
1 2 3 4 5
with short-term assets.
KBZ Bank examines the borrower’s business ability of
1 2 3 4 5
growing sales in the recent years.
Case Relationship Manager visits to the borrower’s business
1 2 3 4 5
to check the business condition.
KBZ bank examines the borrower’s loan purposes
periodically and always compares the rate of return and risk 1 2 3 4 5
has to be perceived after the loan disbursed.
KBZ Bank analyzes the length of the need to repay the loan. 1 2 3 4 5
KBZ bank utilizes the credit scoring model to identify credit
risks and mitigating factors, determining financing
requirements and earnings for bank, monitoring loan 1 2 3 4 5
performance risks in crisis situations, and structuring
facilities.
KBZ bank analyzes the financial characteristics from both
1 2 3 4 5
the business and the business owner carefully.
Scoring systems utilize information relating to the traditional
1 2 3 4 5
5Cs of credit.
(C) Credit Risk Control/Mitigation Practices

Statement 1 2 3 4 5
KBZ Bank takes the collateral to reduce the credit risk. It is
more important to have quality collateral than strong 1 2 3 4 5
financial background.
The first and main source of repayment, cash flow generated
by the business, be carefully assessed through financial 1 2 3 4 5
analysis to see if cash will be available.
Collateral is the second source of the repayment, which
would be the repossession and resale of the collateral to 1 2 3 4 5
cover the loan.
Lending to related parties is particularly dangerous form of
credit risk exposure. Bank consolidates lending of the related
1 2 3 4 5
party’s group that can be reduce the concentration risk in the
future.
When bank is lending with unsecured lending method
(without collateral), the bank takes the interest rate for 13% 1 2 3 4 5
+ 3% (risk premium) to cover the risk by insurance.
(D) Credit Risk Monitoring Practices

Statement 1 2 3 4 5
KBZ Bank follows up the customers’ financial analysis
1 2 3 4 5
periodically.
KBZ Bank follows up the customer’s bank account with cash
1 2 3 4 5
transaction and regular payment of interest for the all of debt.
Case Relationship Manager continuously deals with the
1 2 3 4 5
customer and unexpected Site Visit to the proposed project.
Credit risk officers are always update the borrower’s loan
1 2 3 4 5
file.
Management Information System (MIS) uses to produce
1 2 3 4 5
various reports on demand or as scheduled.
After the loan is approved, the bank continuously watched
1 2 3 4 5
over the loan.
Monitoring practices include keeping track of borrowers’
compliance with credit terms, identifying early signs of
1 2 3 4 5
irregularity, conducting periodic valuation of collateral and
monitoring timely repayments.
2. Loan Performance of KBZ Bank

Statement 1 2 3 4 5
Efficient credit risk management practices have been vital in
preventing occurrence of bad debt and non-performing 1 2 3 4 5
loans.
The financial success of a bank depends on the effectiveness
of credit management practices as most of the income from 1 2 3 4 5
interest is earned on loans extended.
Credit Analysis practice helps to mitigate the level of risk
by ensuring that borrowers are credit worthy before giving 1 2 3 4 5
out credit.
Credit Scoring practices can be measured the level of default
1 2 3 4 5
by the borrower.
By using of the credit analysis model, the bank knows the
borrower’s characteristics and that can effect on loan 1 2 3 4 5
performance of a bank.
Credit risk analysis practice predicts accurately the future
capability of a borrower to meet his/her financial obligation 1 2 3 4 5
and that reduce the credit default risk in the future.
Effective credit risk identification practice is to identify all
possible risks that are either inherent in any banking 1 2 3 4 5
operations that may effect on the bank performance.
In mitigation practice, the bank controls the non-performing
loan and loan losses by insurance and by taking the enough 1 2 3 4 5
collateral for the loan amount.
Management Information System (MIS) helps in making
various decisions on credit risk management and that can
1 2 3 4 5
be prevented the occurrence of bad debt and non-
performing loans.
KBZ bank maintains the LTD ratio directed by CBM to
prevent the liquidity risk and predicts the accurately the 1 2 3 4 5
future capability.
 Statement 1 2 3 4 5
Effective monitoring practice ensures that the bank
understands the current financial condition of the borrower,
monitors compliance with the existing terms and conditions, 1 2 3 4 5
assesses collateral in relation to the borrowers' current
condition, identifies non-performing accounts.

Thanks for taking of your time to complete the questionnaires.