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Why Credit Goes Bad?

Segregation of Duties as a
tool of CRM

Golam Hafiz Ahmed

Addl. Managing Director
NCC Bank Limited

An overview of Industry
On September, 2012
Total No. of Banks 47
Total No. of PCB. 30

* Branches 8000 plus

* Deposits Tk. 501260 Cr. Growth

* Credit Tk. 402060 Cr. Growth 18.68%

Still 55% of population left out of Banking system
In 1988 it was Total No. of Banks 23 Branches - 5413
Deposits Tk. 17,115 Cr
Credit Tk. 15,237 Cr.
Total Capital of Banks Tk.56,201 Cr. Which is 11.31%
Banks capital grow 173% in 4 years since 2008
But top 10 Borrowers holds 18% of total Loans.
If top 3 borrowers of a bank default the sector would fall into

Looming Classified Loans


Tk. 29,000 CR Which is 7.17% of total loans.

Tk. 36,282 CR Which is 8.75% of total loans.
----------------------------------------7,000 CR increase.

It was only Tk.22,644 CR in Dec.2011

4 SCBs Tk. 15,518 CR
30 PSBs Tk. 13,586 CR
4 SBs. Tk. 6,427 CR
9 FCBs Tk. 1,076 CR
* Almost 77% i.e. 22,542 CR are Bad & Losses.
* Tk. 6,500 CR income kept in interest suspense depriving the banks.
Tk.24,000 CR write off from the books of the banks so far.
SCBs Tk.10,249 CR, PCBs Tk.10,341 CR, SBs Tk.3,238 CR, FCBs
Tk.314 CR

A Prelude
Credit Banks Prime Product
An integral Part of Basic Banking
Credit Departments are evolving
From underwright and hold

underwright to Distribute

To a new credit culture

Aim is to grow loan book in a way that
maximizes shareholders wealth.

Segregation of Duties
Best Practices
To be designed a system of checks and
balances to decrease the likelihood of errors
and irregularities.
The person who prepares documentation
should not be the same person to authorize
and execute the transaction Banks should aim
to segregate the following lending functions:
Segregation of Duties
Relationship Management/ Marketing/
Corporate Banking Unit
Credit Approval/Risk Management CRM
Credit Administration / NITS
Credit Monitoring & Recovery
Credit/ Loan Auditing

Few Principles of Corporate Lending

A risk/reward tradeoff, must manage those
risk well.
Encourages corps, to include hurt money as
first source of funding.
The overarching Principles
Safety Ability to repay the Loan
Suitability Purpose and amount of
Loan, hurt money, repayment Schedule.
Profitability Sufficient return of

Why Credit goes bad?

Wrong borrower Selection:
- Check the Character of Corp.
- How was Company set up and by whom?
- Reputation of the Company and its management.
- Relationship with Bankers and share holders.
- Inappropriate client need assessment
- Wrong structuring of the facilities.
- Security or collateral shortfall.
- Week internal cash generation in the business leading to
recurring past dues.
- Lending on the basis of reputation of the borrower without
looking into business fundamentals.

Why Credit Goes bad?

- Ignorance or underestimating the competition.
- Economic downturn or investment in the non-core area.
- Weak Credit assessment, Failure to understand foreign
Exchange risk in Cross Border exposures.
- Corruption of Lending officers.
- Using working capital to finance projects.
- Tenor provided was less then the Trade cycle.
- Close eye on security shortfall/weak financials.
- Failure in facility structuring, thus allowing borrowers
diverting money for unrelated purposes.
- Drastic reduction in underlying assets value making exit
impossible or extremely though without huge hair cut.

Why Credit Goes bad?

- Disbursement under deferrals, absence of monitoring
may lead to pending security perfection for years.
- Regular benchmarking of the security value vis--vis
outstanding should be a part of credit culture.
- Non compliance of environmental Standard/Regulatory
- Death of key persons without proper successions.
- Non-monitoring of Approval covenants.

Broad categories of causes of NPL

Documentation deficiency: overvaluation of collateral

improper regd or time barred, wrong schedule .etc.
Lack of proper supervision, control, review on
Willful default loan taken unscrupulous way.
National/Economic causes tax, tariff, duty, policy,
inflation, unemployment,political unrest. Etc.
Socio-Political environment changes.
Over finance/under finance-due to lack of knowledge
in business.
Delay in taking action to recover stuck-up advances.
Unscientific determination of credit without knowing
purposes, capacity of the borrower.
Directed lending.
Legal obstacle in enforcement of security.

Asset Structure of NCC Bank

Legacy issues.
Too much concentration on cash credit.
RMG units are not good performers.
Capital market exposures.
Over-finance in working capital.
Increasing trend in real estate
Non-earning/Low earning assets.

Proactive Approach
- Remedial Management for Problem Accounts may be
known as Special Asset management.
- The remedial Account Manager to learn how to behave
when the grasses are not greener on the other side.
- Keep the original RM and Client in good humer.
- Review the existing security arrangement, try your
best to restructure the loon by improving collateral
- Make sure the repayment Schedule is in line with
Trade/Business cycle.
- And get into a new repayment agreement with client.
- Improve your knowledge, patients, skill on Risk
Management, Legal matters and interpersonal

Monitoring Process
The prime objective of the Cell - continuous monitoring
the performance of Loan A/c [whether the loan A/c is
It covers all the Credit portfolios except defaulted
To remind branches to monitor cash flow vis--vis stock
To identify the deteriorating and irregular A/c(s).
To classify the irregular Loan A/c(s) in accordance with
their degree of defects.
To innovate device and strategies for regularizing the
defectives, overdue Loan A/c(s).
To furnish action plan for regularizing the defective
Loan A/c(s) and to suggest the Branch to furnish their
action plan and to monitor the Branch to keep the credit

Monitoring Process
Continue regular follow up and supervision for finding
ways to recover Banks dues in accordance with sanction
To point out the defects and furnishing the required
information to the Head of CRM.
To keep all the Branches under close watch on all of its
Loan & Advance A/c(s) except adversely classified to
ensure the timely action plan to be taken for adjustment /
regularization / timely renewal.
To tell all the borrowers to find out early indication of
the deteriorating financial health of them and to take
action plan for next course of action by analyzing the
Financial Statement.

Monitoring Process
To develop an IT enabled system to monitor and to take action plan
to recover, regularize past dues, principal or interest payment, past
due trade bills, account excess and breach of loan covenants
To monitor terms & conditions of Loan as approved are being
Financial statement is to be received on regular basis and covenants,
breaches or exception are referred to the Head of CRM and to
take action plan to regularize the same.
To monitor if the Loan Accounts are being Audited/reviewed on
appropriate basis.
Monthly return of the Loan & Advances of the Branches must be
collected in time and will review the same to keep all the credit
portfolio regular and even to check through Flora UBS to monitor the
transaction in the A/c, repayment installments, operation of A/c(s) as
per terms of sanction.
Surprise checking even on site visit to branches and clients.

Special Loan Monitoring Cell at CRM

-As Directed by our CEO on May 2012 to have early
warning signal about a deteriorating Account a special cell
has been formed at CRM.
-Once Loan is approved, Branches informed, CAD deals
with portfolios in Pre and Post disbursements
-After passing of time a few loan A/C become weak &
slow. Once classified these are sent to LM RD when
recovery becomes difficult.
-But it is understood that while renewal and enhancement
CRM Division can feel the pulse of the borrower A/C and
predict future trend of a particular A/C.

Level of Monitoring
At Branch level by RM.
At CRM by Special Monitoring Cell.
At CAD by their team before loading Limit.
To address all concerned including Head
of CRM and Risks.

Should the loan not perform

Prior planning should provide strategy to
quickly handle adverse credit events
If remedial actions fail, appropriate
courses of action must be determined
Workout Situation
Can alternatives lead to increased recovery such as change
repayment arrangements, exercise of liens over property, etc?

Write-off outstanding amounts

Advice from the Past

What are some of the key lessons from
experienced credit managers?
Always try to work in a team for credit
Allow sufficient time for reasoned decisions
Verify all facts and figures
Segregate the selling and approval of loans
Be firm with the client and dont be into bad

Advice from the past

Never promise what you cannot deliver
Always consider clients quantitative and
qualitative aspects
Volume is not necessarily profit. The
client must also add to profitability
The purpose of the loan should also
indicate the repayment ability
Visiting clients firms adds to your
understanding and allows business

Advice from the Past

Record all relevant facts as soon as
possible, and not from memory, as files
may become evidence
Try to confine client dealings to
professional matters only
Timely and careful gathering of
Be proactive, not lazy and reactive
All loans should provide at least two ways
out cashflows and security