Md Jamal Hossain

ID: 16-050
Department of Banking and Insurance
Univeristy of Dhaka
Credit Risk Management Practice in Bank: A
Study on BASIC Bank Limited
What is Credit Risk Management?
Credit risk means the probability that a bank borrower or counterparty will fail to
meet its obligations The objective of CRM is to minimize the risk and maximize
banks risk adjusted rate of return.
Importance of CRM for Banking Institutions:
1. Banks and other financial institutions must balance risks as well as returns.
2. If the interest rates in loan products are too low, the bank will suffer from losses.
3. Bank Must keep substantial amount of capital to protect its solvency .
4. CRM helps banks be in compliance with Basel II Accord and other regulatory
bodies.
Advantages of Credit Risk Management:
1. CRM helps to identify the possible loss of asset.
2. The manager can know that how difficult it will be if a large loan default and
affect the performance of bank.
3. Effective credit risk management improves the current and future financial
performance.
Challenages of Credit Risk Mangement:
1. The CRM practice will shell out cash from the bank funds.
2. Employee training should be provided to ensure proper execution of risk
management.
3. Employees needs to be motivated regularly.

CRM Process in Banks:
Credit processing/appraisal
Credit approval/sanction
Credit documentation
Credit administration
Disbursement
Monitoring and control of individual credits
Monitoring the overall credit portfolio
Credit classification
Managing problem credits/recovery
Overview of Basic Bank Limited
A state-owned bank
Established on 1989
Company Profile
Deposit taking, Term loan, SSIs Supports,
Micro Credit, Trade finance
Function
Provide special support to the small scale
business enterprises
Mission
Vision
Technology
CRAB Rating
Provide the best banking services to all kinds
of people
KASTLE core Software
long term rating BBB1, short term rating ST-3
Credit Principles of BASIC Bank Limited:
Loans and advances shall not exceed ten times the Banks net worth or 65%
of customers deposits whichever is lower.
Loans and advances as mentioned in (1) above, 50% of lending will be to
small industry sector
All lending will be adequately secured with acceptable security
The Bank shall not incur any uncovered foreign exchange risk
End-use of working capital facilities will be closely monitored
CRM Practice in BASIC Bank Limited
5C and Viability of project Credit Approval
Reminder, Letter, Phone call, Visit and Legal
actions
Credit Collection
SS, DF, BL and SMA Loan Classification
Loan Provision
Loan Rescheduling
Portfolio Recovery
General provision and Specific provision
With proper amount of down payment
File Transfer, Legal Notice, Write off
Management
CRM performance of BBL (Trend analysis)
2008 2009 2010 2011 2012
Total loans & advances ( tk. In crore) 2726.91 2926.15 4634.15 5688.47 8595.57
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
Total loans & advances Trend ( Tk. in crore)
2008 2009 2010 2011 2012
Classified Loan (NPL) Trend 166.61 164.44 249.31 289.54 769.3
0
100
200
300
400
500
600
700
800
900
Classified Loan (NPL) Trend (TK/ Crore)
CRM performance of BBL (Trend analysis)
2008 2009 2010 2011 2012
Classified Loan (NPL) Trend 2560.42 2761.73 4384.88 5398.9 7827
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Unclassified Loan (Standard) Trend (Taka/Core)
0
20
40
60
80
100
120
140
160
180
2008 2009 2010 2011 2012
Provision against NPL 41.58 52.33 73.45 87.96 174.9
(
t
k
.

i
n

c
r
o
r
e
)

Provision against classified Loans & Advances
( in crore)
CRM performance of BBL (Ratio analysis)
2008 2009 2010 2011 2012
Standard to Total Loans 93.89% 94.38% 94.62% 94.91% 91.05%
89.00%
90.00%
91.00%
92.00%
93.00%
94.00%
95.00%
96.00%
r
a
t
i
o
s

Standard Loan to Total Loans Ratio
2008 2009 2010 2011 2012
NPL to Total Loans 6.11% 5.62% 5.38% 5.09% 8.95%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
r
a
t
i
o
s

NPL to Total Loans Ratio
The Impact of CRM on Banks Profitability
Dependant Variable Return on asset
Independent Variables Non performing loan ratio, loan loss provision
and capital adequacy ratio
ROA = a + b1* NPLR + b2*LLPR + b3*CAR . (1)
0
5
10
15
20
25
30
35
40
2008 2009 2010 2011 2012
r
a
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Regression Line
ROA
NPLR
LLPR
CAR
The Impact of CRM on Banks Profitability
Name of Test Result
R .999
R
2
.998
Adjusted R
2
.991
SSE .05464
Regression Analysis:
1. R = 0.999 expresses that there is a high degree of positive relationship between
the ROA ( Dependent) and the independent variables NPLR, LLPR and CAR.
2. R
2
= 0.998 indicates 99.8% of the variability in obtained ROA is explained by the
independent variables LLPR, NPLR and CAR.
3. If a variable (say for NPLR) is added to the model, R Square = 0.991 becomes
larger even if the added variable is not statistically significant.
4. The value 0.0564 show the amount of variability of our estimated result and the
actual result of the observation.
The Impact of CRM on Banks Profitability
Coefficient Analysis:
1. An unit change in the independent variable NPLR causes the dependent variable
ROA to change by an amount of -.353.
2. An unit change in the independent variable LLPR causes the dependent variable
ROA to change by an amount of .010.
3. ROA will change by 0.041 with a unit change in CAR the movement of these two
variables will be also in the same direction as the LLPR.
Name of Test Result
Constant 2.195
NPLR -.353
PPLR .010
CAR .041
The Impact of CRM on Banks Profitability
Anova Test
Ho (Null Hypothesis):
1
= 0
H1 (Alternative Hypothesis):
1
0
1. If H0 is rejected, I have enough evidence to deduce that two of the parameters are
not equal to zero and that overall relationship between ROA, NPLR, LLPR and
CAR are significant.
2. The summary of F- test is given below: F = MSR/MSE = 0.462/.003 = 154.620
3. Here we accept alternative hypothesis. Thus there is a relationship between ROA
and the credit risk management.
Name of Test Result
MSR 0.462
MSE 0.003
F 154.620
Sig. 0.059
Summary of Findings
Credit risk is an investors risk of loss arising from a borrower who does not make
payments as promised.
The importance of credit risk management for banking is tremendous because
Banks and other financial institutions make profit from their credit disbursement.
The main challenges of CRM are additional cost for training and employee
motivation.
The process of CRM contains several elements such as Credit processing,
Approval, Documentation, Administration, Disbursement, Monitoring Credit
classification and Credit recovery etc.
Summary of Findings (Cont.)
The BBL follows the rules and regulation given by the Bangladesh Bank in
practicing Credit risk management. It generally focuses on industrial credit policy
rather than general credit.
The level of credit risk of BBL is in moderate level. The amount of total loans,
unclassified loans and classified loans is in increasing trend. BASIC Bank
maintains good amount provision against the classified loans. The NPLR and STLR
ratio is in good level for BBL.
The relationship between CRM and Banks profitability is positive. Therefore, it can
be said that effective CRM can contributes on Banks financial performance.
Recommendations
BBL should have a clear written guideline for CRM.
It should adopt a credit grading system in which all facilities should be assigned.
Approval authority should be delegated to individual executives rather than
Executive Committee/ Board to ensure accountability.
The employees of BBL should carefully check the customers KYC form, and take
enough collateral before providing them loan.
BBL should follow the CRG model provided by the Bangladesh Bank.
BBL should keep as much as provision against the loans.
BBL should lessen the NPL ratio low by the proper management of loan.
BBL should provide better training to the employees about CRM.
Conclusion
As a leading financial institution of Bangladesh, BASIC Bank Limited has been
maintaining its operation in a smooth way. Though the bank faced many
problems, its proper lending policy make it very much cautious about the risk. A
very skillful CRM department is always working with its full capacity to analyze
the risk of its products and services. So far it has proved itself as a successful
organization in assessing risk and thus takes care of it.