Chapter 3

Credit Risk Assessment & Risk Grading

3.1 Credit Risk Assessment
3.1.1 Overview
The Credit Risk Assessment starts with a thorough analysis of the borrower’s ability to repay and end with
arrangement of adequate security and covenants for the mitigation of risk. During analyzing the risk in a credit
exposure, the certain key parameters must be considered, such as:
1. Financial Analysis: The borrower’s current and expected financial condition, i.e., cash flow, liquidity,
leverage, Debt Service Coverage are required to be analyzed. Existing and Projected Financial
Statements Analysis give an indication about borrower’s existing and future repayment capacity.
Quantitative analysis of revenues, profit margins, income and cash flow, leverage, liquidity, and
capitalization must be analyzed rigorously to determine borrower’s present and future performance.
Financial Ratios provide vital information about balance sheet and income statement proportions (debt
to equity, income to revenues, etc.). Financial ratios can be compared with prior periods, industry and
peer group to detailed insight on Financial Scenario.
2. Loan Repayment Trend Analysis: Historical trend of the borrower’s track record of servicing debt and
the borrower’s willingness for repay to be considered. Evaluation of past performance will show the
possibility of success and failure.
3. Collaterals: Quality and kinds of collateral to be evaluated as per policy of the bank.
4. Debt Structuring: Structuring of credit facility to be made on the basis of judgment of credit worthiness
and right diagnosis of appetite for credit having required security coverage with focus on the control of
lending relationship.
5. Qualitative Factors: such as the caliber of the borrower’s management and the strength within industry,
and economy required to be analyzed. Management competency and integrity need to be considered.
Analysis should be focused on the ability of the commercial entity’s managers to guide it, exploit
opportunities, develop and execute plans, and react to market changes is extremely important to its
financial well-being. Industry Analysis to be performed for understanding the conditions in which the
business operates and the changes under cyclical, competitive, and technological Scenario.
A thorough credit and risk assessment should be conducted prior to granting of loans, and at least annually
thereafter for all facilities. Thus appraising a credit is the most challenging job for credit analyst. His / her
intention is to define and minimize potential risks associated with a credit as to secure return of money
together with the appropriate charges for use of the money. Although nobody can fully guarantee the future of
a credit as because business may be subject to the effects beyond the control of either of the banker or of the
borrower, experience shows that in properly appraised credits the banker is likely to lose only a tiny portion of
what he lends.
3.2 Evaluation & Analysis of Loan Application
3.2.1 Borrower Analysis
Verification of Individual or Corporate entity fulfilling all Know Your Customer (KYC) requirements is to be
compiled, which is the compliance to the anti-money laundering guidelines of Bangladesh Bank. KYC
requirements must be satisfied before disbursement.

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The majority shareholders, Management team and group or affiliate companies should be assessed. Any issues
regarding lack of management depth, complicated ownership structures, or inter-group transactions should be
addressed, and risks mitigated. The following may be asked to evaluate the Management Risk:
1. Who is the borrower? Whether any particular/special characteristics of borrowers need particular
attention.
2. Are there adequate abilities and experience in senior management?
3. Is there adequate depth and succession planning?
4. Is there any conflict among owners/senior managers that could have an implication?
5. The borrower must be legally capable of entering contractual credit relationship and providing a
charge over any asset taken as collateral for a loan.
6. Are the Branch Managers/Relationship Managers/Credit Officers satisfied about the character, ability,
integrity, and experience of the borrower?
3.2.2 Industry Analysis
The key risk factor of the borrower’s industry should be assessed. Any issue regarding the borrower position
in the industry, overall industry concern or competitive forces should be addressed and the strength and
weakness of the borrower relative to its’ competition should be identified. For the above purpose the branch
credit officer/ relationship manager (RM) may obtain/collect data from reliable sources. The following
question to be asked for assessing the Business and Industry Risk:
1. Are there significant concentration of sales ( by customer, industry, country, region)
2. How does the borrower rate with its competitors in terms of market share?
3. Whether the increase in production cost significantly affects the consumer?
4. Does the Borrower deal any specific product that may be subject to obsolescence?
5. Is the purpose of borrowing consistent with objectives of the company?
6. Is the purpose legal? Does it contravene any rules and laws of the country and any instruction issued
by the Bangladesh Bank?
3.2.2.1 Supplier/ Buyer Analysis:
Any customer or supplier concentration should be addressed, as these could have a significant impact on the
future viability of the borrower.
3.2.2.2 Market Risk
Whether there is enough market for the products. The sufficient market data is to be obtained. The clients/
borrowers market share in the industry is to be ascertained. The demand supply gap is to be addressed.
3.2.2.3 Technological Risk
The product that is manufactured must be technologically viable i.e. whether the technology applied is
updated. The product’s stage in its life cycle must be understood. Technical Aspects of the product must be
addressed. The relationship manager and credit officer must be satisfied with the mitigating factors to
technical and technological risk associated with the products.

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3.2.2.4 Environmental & Social Risk
Environmental & Social Risk must be assessed and complied as per respective guidelines given by Bangladesh
Bank and Head Office.
3.2.3 Financial Analysis
An analysis of minimum three (03) years historical (preferably Audited) and projected financial statements for
continuing business and five (05) five years projected financial statements for new/green field business.
Where reliance is placed on corporate guarantor, guarantor financial statements should be analyzed. The
analysis should address reliability, durability and sustainability of earnings, cash flow and the strength of
borrower balance sheet. Specifically, cash flow, leverage and profitability must be analyzed.
Where term facilities (tenor > 1 year) are being proposed, a projection of borrower future financial
performance should be provided, indicating an analysis of sufficiency of cash flow to service debt repayments.
In this respect, the possibilities of cost overrun and sensitivity analysis should be done. The following question
may be asked to assess the Financial Risk:
1. Does the borrower produce financial statement on time?
2. Is working capital assessment accurate?
3. Has the customer actual title to stock?
4. Have financial covenants been met?
5. Has there been any major sale of shares by Directors?
6. Any significant change in asset conversion cycle? (Account Receivables, Account Payables, Inventory
etc.)
In addition to above, for the purpose of financial analysis the following should also be taken into consideration:
3.2.3.1 Working Capital Financing
For working capital financing proposal in favor of ongoing concerns, financial analysis with emphasis on
liquidity, profitability and leverage aspect should be submitted with the proposal. Such aspects shall be
covered by way of analyzing the following ratios:
 Sale growth and profitability (Net profit margin, percentage increase in sales, gross profit margin,
ROE etc.).
 Cash management (Cash conversion cycle with breakup)
 Structural liquidity (Working capital, Current Ratio, Quick Ratio etc.)
 Debt equity management (Leverage Ratio, Long term debt over equity)
 Asset management (ROA, Percentage increase in Assets)
 Client’s borrowing and debt servicing ability (Turnover ratios, interest coverage ratio etc.)
For term/project financing, financial analysis should be accompanied with the projections and stress testing
for the entire tenor of the facility/project based on rational assumptions.
3.2.3.2 Account Conduct
For existing borrowers, the historical performance in meeting repayment obligations (trade payments,
cheques, interest and principal payments, etc.) should be assessed. In this regards the Relationship Manager/

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Credit Officers must look into the account turnover like debit summation/ credit summation, highest- lowest
debit and credit balance, debit entries/ credit entries for last three years.
3.2.3.3 Adherence to Lending Guidelines
Credit Application should clearly state whether or not the proposed application is in compliance with lending
guidelines of the Bank and Central Bank.
3.2.3.4 Interest Rate Risk
The interest rate must be fixed based on Bangladesh Bank guidance, different risk factors associated with type
of business such as liquidity risk, commodity risk, equity risk, loan period risk, movement of interest rate in
the market. In assessing the pricing and profitability, the credit officer must consider the income from
ancillary business like foreign exchange business, group business, volume of business etc.
3.2.3.5 Foreign Exchange Risk
The foreign exchange transaction is associated with foreign currency fluctuation risk. Therefore the credit
officer must take care for the Foreign Exchange Risk. The questions should be addressed as:
 Does the business is involved in foreign currency dealings?
 What are the recent trends of foreign currency fluctuation?
In this connection, opinion from Treasury Division has to be obtained regarding the prevailing market trend of
foreign currency movement and availability of FC.
3.2.3.6 Cost Overrun Risk
This type of Risk is generally involved in taking project finance decision. A high degree of cost overrun may
cause the failure of the project. The credit officer must consider and examine the cost component very
carefully. The questions to be addressed:
 Whether the construction cost may increase?
 Whether the imported machinery cost may increase for the fluctuation of foreign currency?
 Are all types of cost components addressed during preparation of feasibility report?
 Does sensitivity analysis have proved sufficient shock absorbing capability of the project?
3.2.3.7 Mitigation Factor
The Credit Analyst / Relationship Manager must address to different risks associated with the proposal. The
possible risk include but not limited to market risk, financial risk, foreign exchange risk, risk of cost overrun,
high debt load (leverage/ gearing), overstocking or debtor issues, rapid growth, acquisition or expansion, new
business line/ product expansion, management changes or succession issues, customer or supplier
concentrations, and lack of transparency or industry issues. Mitigating factors for risks identified in the credit
assessment should be described and well understood.
Credit Officials and Relationship Manager must evaluate the following critical risk factors and parameters:
1. Volatility
2. High Debt
3. Overstocking
4. Rapid Growth
5. Acquisition

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 6. Account Receivables.
7. Succession
3.2.3.8 Loan Structure
The amounts and tenor of financing proposal should be justified based on the projected repayment abilities
and loan purpose. Excessive tenor or amount relative to business needs increase the risk of fund diversion and
may adversely impact the borrower’s repayment ability.
 Are facilities justified by the borrower’s business?
 Are capital/ long-term expenditures being financed by short term borrowing through OD, LTR, STL,
CC (Hypo) etc.?
 What is the amount required? Is it sufficient or excess for purpose mentioned?
3.2.3.9 Security
A current valuation of collateral must be obtained from Bank’s approved surveyor (which shall not be more
than two years old) and the quality of the security should be assessed. Relationship manager and credit
officials must examine client’s interest/ dependability on the collateral offered as security.
 Is security offered acceptable and adequate?
 Has all security been perfected in accordance with the loan application?
 Have any valuation and inspection being undertaken since last approval?
 Has the credit rating of the borrower has been deteriorated and have you considered the requirement
for additional security?
 Can a valid charge to be obtained on security?
The basic consideration in evaluation of security would be the easiest to realize, the best. As such best security
is cash collateral followed by legal charges over property and other tangible assets. However regarding
security the points to consider are type, value, ownership and marketability.
Usually third party immovable property as security shall be avoided. The situation further aggravates if the
third party security is not associated with any other security of the borrower in case of other than corporate
concerns. In such a case relationship with the owner of the property and the borrower as well as
considerations between them shall be carefully considered and satisfied.
In analyzing security, valuation of it occupies a center place and same has been dealt with separately. Branch
should always consider ‘forced sale value’ of the security offered.
3.2.3.10 Diversification of Portfolio
Branches, Relationship Manager, Head Office Credit Officials shall exercise vigilance to avoid concentration of
portfolio in a particular sector of the economy or nature of business viz. import, export, trading etc. However,
some branches are located in areas that are earmarked for a particular activity and in such an area optimum
diversification may not be possible. If so care shall be taken to diversify within the particular line of business in
respect of nature of operation such as producer, importer, wholesaler, retailer etc.
Branches shall also be careful to avoid excessive concentration of advances in the hands of a few clients.

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3.2.3.11 Familiarity with the borrower
Relationship Manager and Credit personnel should have a thorough knowledge about the past and present of
the borrower. If the borrower is a non-human legal entity, the familiarity should be with the past and present
of the controlling persons.
3.3 Content of Credit Proposal / Memo
The following Information should be included in the Credit Proposals/ Memos:
SL No. Particulars
1. Name of the borrower and Customer ID Number
2. Address of the borrower
3. Constitution (with year of establishment)
4. Business Background and History of the client and allied concern.
5. Ownership and Management structure
6. Capital Structure
7. Nature of business of the client.
8. Industry Analysis
9. Business performance of the client with the bank
10. Group Business Performance with Dhaka Bank PLC. and Other Banks.
11. Present and proposed facility under one obligor
12. Purpose of the facility
13. Security
14. Documentation status
15. Work Order Performance.
16. Credit History of the client with Dhaka Bank PLC. and Other Banks.
17. Key financial indicators, Cash Flow Analysis, Working Capital Assessment.
18. Project Particulars, Cost of Project, Means of Finance,
19. Account turnover and Limit Utilization.
20. Income generated
21. Projected income
22. Projected rate of return
23. Liabilities with other Banks
24. CIB findings
25. Anti-Money Laundering (AML) Risk Assessment.
26. Client’s Credit Risk Grade
27. Internal Credit Risk Rating
28. External Credit Rating
29. Approval Authority
30. Sources of repayment - (Primary, Secondary, Others)
31. Justification of the credit requirement
32. Nationality of the owners / Directors of the borrower company / firm
33. Net worth of the owner / Director of the borrower company / firm
34. Risk & Mitigates
35. Policy compliance declaration.
36. Environmental & Social Risk Due Diligence and Rating.
Note: Detailed of Credit proposal format given at Annexure.

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3.4 Internal Credit Risk Rating (ICRR) System
3.4.1 Introduction
Credit risk is the risk of losses arising from borrowers' failure to repay the loans or meet contractual
obligations. In order to establish a sound credit risk management, adopting a modern rating mechanism is
important.
Since exposure to credit risk continues to be the leading source of problems in banking, the bank should have a
keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that
they hold adequate capital against these risks and they are adequately compensated for risks incurred. The
Internal Credit Risk Rating System describes the creditworthiness of the borrower of a particular sector based
on the assessment criteria set for that sector. Since the leverage, liquidity, profitability, as well as other
quantitative and qualitative indicators, vary significantly from sector to sector, the ICRRS is developed to
calibrate such diversities into the rating system. Moreover, relevant and appropriate numbers of financial
ratios are used in Internal Credit Risk Rating System for assessing the strengths of the borrowers. The set of
the qualitative questioners used in the process are also more robust. This will effectively ensure that the
borrowers from different sectors and industries are assessed based on the unique characteristics of those
sectors.
Internal Credit Risk Rating System refers to the system to analyze a borrower's repayment ability based on
information about a customer's financial condition including their liquidity, cash flow, profitability, debt
profile, market indicators, industry and operational background, management capabilities, and other
indicators.
The summary indicator derived from the system will be called Internal Credit Risk Rating (ICRR)- a key
reference for credit risk assessment and decision making.
The internal credit risk rating system is vital to take decisions both at the pre-sanction stage as well as post-
sanction stage. At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to
lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the
appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap
on the risk level. At the post-sanction stage, the bank can decide about the depth of the review or renewal,
frequency of review, periodicity of the grading, and other precautions to be taken.
In the ICRR, 60 percent weights are assigned for quantitative indicators while 40 percent are assigned for
qualitative indicators.The quantitative part of the ICRR exercise shall be conducted by a credit officer/ an
analyst. The Relationship Manager/ Branch Manager shall complete the qualitative assessment part to
generate the total scores. The ICRR shall be applicable for all exposures (irrespective of amount) except
consumer loans, small enterprises having total loans exposures less than BDT 50 (fifty) lac, short-term agri
loans, micro-credit and lending to bank, NBFI and Insurance.
Guidelines on Internal Credit Risk Rating System for Bank and enclosed MS excel based model shall be used
side by side CRG Manual (enforced by BRPD Circular no. 18/2015) up to June 30, 2019. Newly adopted ICRRS
guidelines and enclosed MS excel based model shall be ensured to use compulsorily from July 01, 2019.
3.4.2 Functions and Usage of Internal Credit Risk Rating System
Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed
decision-making. Grading systems measure credit risk and differentiate individual credits and groups of
credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in
risk levels. The process also allows bank management to manage risk to optimize returns.

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3.4.2.1 Use of ICRRS
ICCRS shall be an integral part of credit risk management for the bank. Key uses of the system are as under:
a) To measure and assess the credit risk of a borrower;
b) To facilitate the portfolio management activities;
c) To assess the quality of individual borrower to help the bank to determine the quality of the credit
portfolio, line of business, the branch or the Bank as a whole.
d) To be used for individual credit selection, credit pricing, and setting credit limit and terms &
conditions
3.4.3 Functions of Internal Credit Risk Rating System:
a) Internal Credit Risk Rating System is a fully automated credit risk scoring system that calibrates the
characteristics of different sectors and industries in one single model;
b) To get the appropriate rating and score, the analyst shall select the appropriate sector or industry from the
dropdown list given in the top page of the template; If the right sector or industry is not selected; the rating
will not reflect the unique characteristics of the particular sector or industry.
c) If the borrower is in multiple lines of business, the sector should be used assessing the line of business
generating the highest portion of the revenue &/or profit. If there is no particular line of businesses can be
singled out- the ICRRS should be conducted using "other industry- if manufacturing" or "other service-if
service".
3.4.4 General Instructions
a) The Bank shall strictly follow this guidelines and rating system issued by Bangladesh Bank without making
any change, extension, modification or deletion.
b) The ICRR shall be applicable for all exposures (irrespective of amount) except consumer loans, small
enterprises having total loan exposures less than BDT 50 (fifty) lac and small enterprises in manufacturing
having total loans exposures less than BDT 1 (one) crore, short-term agri loans, micro credit, and lending to
bank, financial institution, insurance company, micro finance institution, merchant bank, stock brokerage
house and non-government organization. For these types of entities, banks shall use their own credit risk
management tools and risk mitigation strategies.
c) The quantitative part of the ICRR exercise shall be conducted by a credit officer/ an analyst. The
Relationship Manager/ Branch Manager shall complete the qualitative assessment part to generate the total
scores.
d) ICCR shall be an integral part of the credit approval process.
e) The credit risk function of the bank is responsible for the accuracy and integrity of the rating as the second
line of defense.
f) The executive summary report of the ICRR of the borrower shall be approved and signed by the Chief Risk
Officer (CRO) and for those loans that are approved below the CRO level e.g zonal office or branch office, the
executive summary report of the ICRR shall be approved and signed by the final approval authority.
g) Bank shall use the latest audited financial statements of the borrower for generating the quantitative rating
under ICRR.
h) All credit proposals whether new, renewal or enhancement shall be gone through the ICRR process and a
set of the ICRR report shall be retained in the loan file.
i) The Relationship Manager shall pass the approved ICRR report to the related department for updating their
MIS/record.

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j) Bank shall conduct the routine internal audit to check whether the Internal Credit Risk Rating
System is functioning as per the instructions laid down in the guidelines.
3.4.5 Scope of Internal Credit Risk Rating
 Bangladesh Bank vide BRPD Circular no.16 dated 30.10.2018 has introduced new ICRRS guidelines
and MS excel based model instead of CRG Manual;
 The aforesaid guidelines and enclosed model will be minimum standard for credit risk rating of a
borrower;
 The ICRR shall be applicable for all exposures (irrespective of amount) except consumer loans,
small enterprises having total loans exposures less than BDT 50 (fifty) lac, short-term agri loans,
micro-credit and lending to bank, NBFI and Insurance.
 The ICRR shall be conducted for all credit proposals including new, renewal and enhancement of the
existing proposal.
3.4.6 Frequency of Credit Risk Scoring:
ICRR shall be conducted for all credit proposals including new, renewal and enhancement of the existing
proposal;
For existing credit relationship, the ICRR shall be reviewed as under:
SL No. Rating Frequency of Rating
1 Excellent
Annually or at regular credit review
2 Good
3 Marginal Semi-annually or at regular credit review
4 Unacceptable Quarterly or at regular credit review
3.4.7 Selected Sectors:
To ensure the current system useful, the following sectors are selected considering the size of exposures of
bank in these industries.
A. Industry
1. Ready Made Garments (RMG)
2. Textile (including spinning, knitting, weaving)
3. Food and Allied Industries
4. Pharmaceutical
5. Chemical
6. Fertilizer
7. Cement
8. Ceramic
9. Ship building
10. Ship breaking
11. Jute Mills
12. Steel Engineering
13. Power and Gas

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14. Other industry (only to be selected if the borrower falls under industry but does not fit with other 13
specific sub-categories)
B. Trade and Commerce
C. Agro Base and Agro Processing
D. Service
1. Housing and Construction
2. Hospitals and Clinics
3. Telecommunication
4. Other service

3.4.8 Credit Risk Rating Scores and Management Action Triggers there against:
The ICRR consists of 4-notched rating system covering the Quantitative and Qualitative parameters. The
ratings and scores are mentioned below:

No. Rating Scores Aggregate Mgt. Action Triggers

1 Excellent ≥75%
New, renewal or enhancement proposal will be
2 Good ≥65% to <75%
allowed.
[the quantitative score of at least
27]
3 Marginal ≥55% to <65% New, renewal or enhancement proposal may be
allowed but bank must satisfy on additional
[the quantitative score of at least
collateral & prospect of business.
27]
4 Unacceptable <55% New proposal may be allowed but 100% cash
covered or fully guaranteed by Govt. or MDBs) or
loans to state owned company or project.
However, renewal or enhancement of existing
loan may be allowed for maximum 2 times.

3.4.9 Definitions of Credit Risk Rating:

The features of the different categories of Credit Risk Ratings are given below:
a) Excellent
• Aggregate score of 80 or greater in ICRR.
• Strong repayment capacity of the borrower evident by the high liquidity, low leverage, strong earnings, and
cash flow
• Borrower has well established strong market share.
• Very good management skill & expertise.
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b) Good
• Aggregate score of 70 or greater but less than 80 and the quantitative score of at least 30.
• These borrowers are not as strong as "Excellent "borrowers, but still demonstrate consistent earnings, cash
flow and have a good track record.
• Borrower is well established and has strong market share.
• Very good management skill & expertise.
c) Marginal
• Aggregate score of 60 or greater but less than 70 and the quantitative score of at least 30.
• This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these
weaknesses may result in a deterioration of the repayment prospects of the borrower.
d) Unacceptable
• Aggregate score of less than 60
• Financial condition is weak and no capacity or inclination to repay.
• Severe management problems exist.
• Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted
(consecutive losses, negative net worth, excessive leverage).
3.4.10 Management Action Triggers:
a) Bank is allowed lending to a borrower if the borrower's ICRR is "Excellent" or "Good". However, for the
"Marginal "cases, the bank shall take cautionary measures in renewing the facilities or lending new money to
the customers. While assessing credit proposals, bank must satisfy themselves on the future prospect of the
business, additional collateral coverage etc. Bank shall take heightened measures for monitoring these
accounts including but not limited to regular client visits, monitoring of the improvement plans, close
monitoring of the repayment performances, timely review of the facilities, oversight on the improvement areas
etc.
b) No loan shall be sanctioned to borrowers whose ICRR is "Unacceptable" unless the loan is 100% cash
covered or fully guaranteed by the Government or Multilateral Development Banks (MDBs) or the loan is for
any state-owned organization or state-owned project.
c) For the quantitative and qualitative risk analysis, if the ICRR falls under "Marginal" or "Unacceptable" for
any risk criteria (among 16 quantitative and 18 qualitative); whatever the aggregate score is, the relationship
manager shall evaluate what would be the impacts of such on loan repayment and justify how those risks are
mitigated; and in loan proposal the approval authority should review that justifications thoroughly and make
necessary evaluations on it and should be documented in the loan file.
d) In deriving ICRR, whatever score a borrower gets in the qualitative analysis if the score in the quantitative part is
less than 45%, the borrower’s ICRR shall be "Unacceptable".
e) Bank can make renewal and enhancement of existing loans for maximum 2 (two) times if the borrower's
ICRR is "Unacceptable".
f) In conducting qualitative analysis, justifications for all criteria are required to be documented.
g) Bank must maintain portfolio level data base for the asset base with "Excellent", "Good" “Marginal” and
“Unacceptable” category and maintains risk appetite/tolerance level for portfolio.

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3.4.11 Exception to Credit Risk Rating:
a) For a newly established company with no meaningful financial statements, the bank can apply a rating
based on the projected financial statements and the rating of the borrower shall not be better than Marginal.
However, the bank must run the rating module once the full year audited financial statements became
available reflecting customer's full-fledged business operation.
b) For the companies under large business conglomerate, rating substitution is allowed based on the rating of
Corporate Guarantor of the performing concern of the same group or holding company. In case of rating
substitution based on the corporate guarantor, the guarantee must be legally enforceable, irrevocable and
unconditional. In this regard, a full-fledged ICRR shall be conducted on the guarantor to determine whether the
guarantor has the ability to the support the borrower at the time of need.
c) Rating generation is discouraged using outdated financial statements (i.e available audited financial
statements are more than 18 months old). In exceptional cases where there is valid reason for delay in audited
financial publication, out dated financial statements can be accepted only if up to date unaudited financial
statement is submitted, but the rating shall not be better than “Marginal”. In this case, the conditioned
mentioned in para 3.4.10 (a) is to be followed.
d) Rating shall be downgraded if there is any internal/external factors or information that have not been
captured in the rating/financial statements (because they are post balance sheet events) having the material
impact on the customer's business operation and loan repayment. A conservative and consistent approach
should be used in employing judgments in the case of events like the death of key sponsor, prolonged factory
shut down, deteriorating financial profile reported in interim financial statements, change in tax
structure/duty, large expansions funded by debt, excessive leverage ratio, merger-acquisition etc.
e) For the proprietorship & partnership concern where preparation of the audited financial statements are not
mandatory, un audited financial statement can be used for rating generation but due diligence should be
conducted on the accuracy of the financial statements with high-level checking of the bank statements
recording the sales collection, stock/receivable position, peer analysis, bank liabilities etc.
f) If the customer is in multiple lines of business, the most appropriate sector/industry shall be the line of
business generating revenue more than 50% of total revenue. If there is no particular line of businesses can be
singled out- the rating for "other industry" or "other services" should be used.
g) ICRRS and MS excel based model will be the minimum standard of risk rating of any borrower.
3.4.12 Components of Credit Risk Rating:
In the previous version of Credit Risk Grading Manual, 50 percent weights were assigned for quantitative
indicators while 50 percent weights were for subjective judgment. In the ICRR, these weights have been
revised; 60 percent weights are assigned for quantitative indicators while 40 percent are assigned for
qualitative indicators.
(a) Quantitative indicators and associated weights: Quantitative indicators in ICRR fall into six broad
categories; leverage, liquidity, profitability, coverage, operational efficiency, and earning quality.
Details indicators under these categories and associated weights are furnished below:
Quantitative Indicators Weight Definition

1. Leverage a) Debt to Tangible Net 7 Total interest-bearing liabilities or Financial

(10%) Worth (DTN) Debt/Total Tangible Net Worth1
b) Debt to Total Assets 3 Total interest-bearing liabilities or Financial
(DTA) Debt/Average Total Assets

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 2. Liquidity a) Current Ratio (CR) 7 Current Assets/ Current Liabilities
(10%)
b) Cash ratio 3 Cash and easily marketable securities/Current
Liabilities
3. Profitability a) Net profit Margin (NPM) 5 Net profit after tax/Net Sales
(10%)
b) Return on Assets (ROA) 3 Net profit after tax/Average Total Assets

c) Operating Profit to 2 Operating profit/Average operating Assets.

Operating Assets (OPOA)
4. Coverage a) Interest Coverage (IC) 3 Earnings Before Interest and Tax/Interest
(15%) Expense
b) Debt Service Coverage 5 Earnings Before Interest and Tax plus
Ratio (DSCR) Depreciation& Amortization/Debts to be
Serviced
c) Financial Debt to 4 Financial Debt/Operating Cash Flow
Operating Cash Flow
(FDOCF)
d) Cash Flow Coverage 3 Cash Flow from operation/ Debts to be
Ratio (CCR) serviced
1Total Tangible Net Worth= Total Equity-Intangible Assets.
(b) Qualitative indicators and associated weights
Qualitative indicators covers six broad aspects of the firms/institutions to be rated, namely business/industry
risk, credit quality enhancement, performance behavior, management risk, relationship risk, and compliance
risk. Noteworthy that aggregate weights against the qualitative indicators stand at 40 percent. Detail
indicators and associated weights are appended below in details:

Qualitative Indicators and associated weights

Indicators Weights
1. Performance Behavior 10
Performance behavior with Banks Borrowings 9
Performance Behavior with Suppliers/Creditors 1
2. Business and Industry Risk 7
Sales Growth 2
Age of Business 2

Industry Prospects 1

Long-Term External Credit Rating of the Borrower 2

3. Management Risk 7

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Experience of the Management 2
Existence of Succession Plan 2
Auditing Firms 2
Change in Auditors in last 4 Years 1
4. Security Risk 11
Primary Security 2
Collateral 2
Collateral/Security Coverage 5
Type of Guarantee 2
5. Relationship Risk 3
Account Conduct 3
Compliance Risk 2
Compliance With Environmental Rule, Regulations and Covenants 1
Corporate Governance 1
Total 40

3.4.13 Credit Risk Rating Process:

After the risk identification & weight assignment process, the next steps will be to input actual parameters in
the score sheet to arrive at the scores corresponding to the actual parameters. ICRRS also provide a well
programmed MS Excel-based credit risk scoring system to arrive at a total score on each borrower. The excel
program requires inputting data accurately in particular cells for input and will automatically calculate the risk
grade for a particular borrower based on the total score obtained. The following steps are to be followed while
using the MS Excel program.
a) Open the MS XL file named, ICRRS
b) The entire XL model named, ICRRS is protected except the particular cells to input data.
c) Some input cells contain DROP DOWN LIST for some criteria corresponding to the Key Parameters. Click to
the input cell and select the appropriate parameters from the DROP DOWN LIST as shown below.

e) All the cells provided for input must be filled in order to arrive at accurate risk grade.

The following step-wise activities outline the detail process for arriving at Credit Risk Rating.

Input primary information of borrower and select sector/industry:

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3.4.14 Input data of Balance Sheet, Profit and Loss Statement and Cash
Flow Statement
In the input sheet of the balance sheet, profit, and loss statement and cash flow statement, Input must be given
to all cells that are marked with yellow colors. Moreover, while providing input to the balance sheet, profit and
loss statement and cash flow statement following issues should be taken care of:
a) Current Portion of Long-Term Borrowing/Loan
• Input must be given to this cell. This cell is crucial to calculate "debt service coverage ratio". If "Current
Portion of Long-Term Borrowing/Loan" is not found in the balance sheet, the analyst shall communicate this
to the borrower and determine the amount based on other material information including notes and
communication with the borrower.
• If the amount is already added with the total loans in the balances sheet then "Current Portion of Long-Term
Borrowing/Loan" must be deducted from the total loans and must insert the split figures in related cells.
• If the figure is still zero, it means the borrower has no existing long-term borrowings; which is unusual. If
found so, the analyst should interview the borrower.
• If the analyst becomes certain that the borrower has no existing borrowings, then 0.01 shall be inserted in
the corresponding cell.
b) Other Current Liabilities:
• To make the balance sheet balance i.e as sets = liabilities + equity, deduct amount 0.01 in this cell, if the same
is inserted in row 56: Current Portion of Long-Term borrowing/ Loan.

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c) Financial/Interest Expenses
• Input must be given to this cell. If not found in the P&L, the analyst shall look into the notes of financial
statement and communicate with the borrower to determine the amount.
•If the figure is zero, it means the borrower has no existing borrowings; which is unusual.
• If the analyst becomes certain that the borrower has no existing borrowings, then figure 1 must be inserted
in the corresponding cell.
3.4.15 Qualitative Analysis:
After providing input to the balance sheet, profit and loss statement and cash flow statement, the rigorous
qualitative analysis shall be conducted. The qualitative analysis shall be conducted by the relationship
manager. The details qualitative analysis are as follows:
G Performance Behavior 10
G.1 Performance Behavior with lending Banks
G.1.1 How many times the borrower was
adversely classified in last 3 years
[Adversely classified means the borrower’s 0 time 5
loans classified as per BB loan classifications 1 time 4
policy i.e SS,DF,BL] 2 time 3
3 time 2
>3 times 0
G.1.2 How many times the borrower’s loans was
rescheduled/restructured in last 3 years
0 time 4
1 time 3
2 time 2
3time 1
>3 times 0
G.2 Performance behavior with
suppliers/creditors
Did the borrower pay its Suppliers/Creditors Yes 1
regularly in last 1 year
No 0
H Business and Industry Risk 7
H.1 Sales Growth
*Sales growth means annual sales growth >10% 2
The formula for calculating sales growth is 5%-10% 1
[(current year sales-previous year
sales)]/previous year sales]*100 Less than 5% 0
H.2 Age of Business
The number of years the borrower engaged in >10 years 2
this line of business 7 to 10 years 1.5
5 to 7 years 1
4 to 5 years 0.5
<4 years 0
H.3 Industry Prospects
Critical assessment of 5 years prospect of Growing and low volatility 1

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 industry and borrower’s sales volatility Stable 0.75
*Volatility denotes sales volatility Growing but high volatility 0.5
Declining 0
H.4 Long-Term External Credit Rating of the
Borrower
Rating Grade should be assigned in line with 1 2
BB rating Mapping as per BRPD circular
18/2014 on Risk-based Capital Adequacy in 2&3 1.5
line with Basel III (See annex 2)
>3 0.5
Unrated 0
I Management Risk 7
I.1 Experience of the Management
Quality of the management based on total More than 10 years in the 2
number of years of experience of the senior related line of business
management in industry
*Senior Management means MD & next two 5-10 years in the related line of 1
tiers business
Less than 5 years 0
I.2 Existence of Succession Plan
Yes, with good capability of 2
successor
Yes, but questionable capacity 1
of successors
No successor 0
I.3 Auditing Firms
BSEC listed auditors are considered as Recognized auditors 2
recognized Other auditors 1
Un audited 0
I.4 Change in External Auditors in Last 4 years
YES 1
No 0
J Security Risk 11
J.1 Primary Security
Fully pledged Facilities 2
Registered Hypothecation(1st 1.5
Charge/1st Pari Passu Charge)
2nd Charge/Inferior Charge 1
No Security 0
J.2 Collateral
Registered Mortgage on Municipal 2
Corporation/Prime area Property
Registered Mortgage on 1.5
Pouroshova/Semi-
Urban/Union Parishad Area
Property
Equitable Mortgage or No 1
property but Plant and

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 Machinery As Collateral
No Collateral 0
J.3 Eligible Collateral Coverage
>100% 5
The formula of eligible collateral coverage is
[eligible collateral / total loans] 80%-100% 4
*Forced Sale value should be determined as 70%-80% 3
per BRPD circular no 14 issued on
September 23,2012 (Para 07:Elligible
50%-70% 2
Collateral) (Annex 3)

<50% 0

J.4 Type of Guarantee

Government Guarantee and/or 2
Strong Corporate Guarantee means the credit
Bank Guarantee
rating of the guarantor should be at least 1 or 2
as per BB rating mapping mentioned in BRPD Strong Corporate Guarantee 1.5
circular 18/2014 on risk based Capital
Adequacy in line with Basel III (See Annex 2)
Personal Guarantee or 1
Corporate Guarantee without
Strong Financial Strength
No Support/guarantee 0
3
K Relationship Risk
More than 3 years Account 3
K.1 Account Conduct
with Faultless Record
Less than 3 years Account with 2
Faultless Record
Accounts having satisfactory 1
dealings with some late
payments
Frequently Past dues & 0
Irregular dealings in account
2
L Compliance Risk

L.1 Compliance with environmental rules,

regulations and covenants
Yes 1
No 2
L.2 Corporate Governance
Good Corporate Governance 1
Independence of Management
Questionable Corporate 0
Governance
40
Total

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3.4.16 Generating Score:
After providing inputs to the balance sheet, profit and loss statement, cash flow statement and qualitative
analysis, the detail management report and executive summary report will automatically be generated. In the
detail management report and executive summary report, four-color coding are used. The detail of the color
coding are as follows:
Color Rating
Green Excellent
Blue Good
Yellow Marginal
Red Unacceptable
The analyst should meticulously review all color coding and rating. For the quantitative and qualitative risk
analysis, if the ICRR falls under "Marginal" or "Unacceptable" for any risk criteria (among 16 quantitative and
20 qualitative); whatever the aggregate score is, the relationship manager shall evaluate what would be the
impacts of such on loan repayment and justify how those risks are mitigated; and in loan proposal the approval
authority should review that justifications thoroughly and make necessary evaluations on it and should be
documented in the loan file. In the executive summary report, the movement of the key quantitative indicators
for last three years are also disclosed. The details of the executive summary are as follows:

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3.4.17 Risk Acceptance Criteria:
Bank will accept credit risk for every obligor as per risk grade under ICCRS as under:

No. Rating Scores Aggregate Mgt. Action Triggers Justification

(ICRR)

1 Excellent ≥75% New, renewal or enhancement of (a) Strong repayment capacity

loan proposal will be allowed.
(b) Well established business
(c) Very good management skill &
expertise.

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2 Good ≥65% to <75% (a) Good repayment capacity
[the quantitative score of (b) Well established business
at least 27]
(c) Good management skill &
expertise.

3 Marginal ≥55% to <65% New, renewal or enhancement of (a) ensuring adequate collateral
loan proposal will be allowed but
[the quantitative score of (b) High net worth
bank must satisfy on additional
at least 27]
collateral & prospect of business. (c) Future business prospect

4 Unacceptable <55% New loan proposal will be allowed but (a) 100% cash collateral to be
100% cash covered or fully ensured for new loan sanction.
guaranteed by Govt. or MDBs) or
(b) Identification of genuine reason
loans to state owned company or
for downturn of business.
project. However, renewal or
enhancement of existing loan allowed
for maximum 2 times.

3.5 Credit Risk Mitigation Strategy

Collateral and Third-Party Guarantee are considered to be two main Credit Risk Mitigation strategies. The
existence of collateral and third-party guarantee is not substitute for proper loan underwriting and loan
administration. They are correctly viewed only as secondary sources of loan repayment, never primary
sources.
As a measure of credit risk mitigation bank will try to securitize the loan through collateral and 3 rd party
guarantee so that in case of necessity bank can realize their due amount through the liquidation process. But
obtaining of these will not be considered as mandatory. Approving credit will be subject to proper and in-
depth credit analysis like assessment of credit requirement, credit history and background of borrower,
industry analysis, credit risk rating, cash flow of the business, prospect of business, different types of risk
analysis, market reputation of the borrower etc. Considering strengths of the borrower bank may even
approve credit facility without collateral and 3rd party guarantee (Personal/Corporate). There should be
strong justification in the credit memo in this regard.
Loan to Value (LTV) ratio of a loan is determined based on the banker customer relationship, social status,
corporate ranking, business condition & industry position and strength of the borrower mentioned above.

Collateral:
Bank will try to obtain suitable collateral for mitigating credit. Bank must keep track of which loans are
collateralized by which types of collateral.
The following scheme for categorizing loans by collateral type is recommended:
1) Shares and securities
2) Commodities/export documents
a) Export documents
b) Commodities
i) Export commodities
ii) Import commodities and

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 iii) Other commodities pledged or hypothecated
3) Machinery/fixed assets (excluding land, building/flat)
4) Real estate
a) Single-family dwelling units
b) Multi-family dwelling units
c) Non-residential real estate, except vacant land or farmland
d) Vacant land
e) Farmland
5) Financial obligations
6) Guarantee of individuals (personal guarantee)
7) Guarantee of institutions (corporate guarantee)
a) Guarantee of bank or NBFI
b) Other corporate guarantee
8) Miscellaneous
a) Hypothecation of crops
b) Other
9) Unsecured loans
Third-party guarantees
The bank must understand that the credit risk on a loan is not eliminated by the existence of a third-party
guarantee. The bank merely substitutes the credit risk of the guarantor for that of its own client. With regard
to guarantees, banks should evaluate the level of coverage being provided in relation to the credit-quality and
legal capacity of the guarantor. Additional steps are the following:
(a) The corporate guarantee must be supported by a Memorandum of Association (MoA) and Articles of
Association (AoA) of the company giving the corporate guarantee. Additionally, the corporate
guarantee to be approved in the board meeting of the corporate guarantor.
(b) The guarantor company must be rated in any of the investment grade categories by at least one ECAI.
(c) The financials (income statement and balance sheet) of the third party giving a corporate guarantee is
to be analyzed. Net worth, total assets, profitability, existing credit lines, and security arrangements of
the company giving the corporate guarantee to be analyzed to ensure that the company is not exposed
to financial obligation beyond its capability. Upto date CIB report is to obtained from Bangladesh bank
in the name of guarantor company.
(d) Once the financial stability of the corporate guarantor has deteriorated in terms of the above, the bank
shall ask for remedial measures from the borrower (replacement/new collateral).
(e) Reciprocal guarantee arrangements between two banks will be disregarded. For example, if Bank A
guarantees loans made by Bank B to certain client(s), and Bank B guarantees loans made by Bank A to
certain client(s), only the difference between the two guaranteed amounts will be considered as a
credit enhancement for the purposes of determining the overall level of credit risk at the bank whose
borrowers benefitted from the higher amount.

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