CREDIT PRINCIPLES, PRODUCT

SPECIFICATION, MARKET ANALYSIS FOR

RETAIL CREDIT
What is Consumer Financing?

 'Consumer Financing' means any financing allowed to individuals for

meeting their personal, family or household needs. The facilities categorized
as Consumer Financing are given as under:

 Credit Cards: It is a forms of clean lending with a maximum limit of Tk.

500,000/- to a single borrower. Supplementary credit cards shall be
considered part of the principal borrower for this purpose. The limits
exceeding Tk. 500,000/- shall be secured appropriately by the banks.
Corporate Card will not fall under this category and shall be regulated
by exiting guideline/regulations for lending. For Charge Cards, pre-set
spending limits generated by the standardized systems, as in the global
practice, shall be allowed.

 Auto Loans: It is secured by way of hypothecation /charge on vehicle.

 Housing Finance: It is secured by mortgage on the property. e.g.

house/ flat/land.

 Personal loans: It is for the payment of goods service and expenses.

 Minimum Requirements:
 Apart from the specific regulations given under each mode of financing separately,
general requirements laid down here should also be followed by the banks while
undertaking consumer financing through establishing comprehensive credit risk
management systems appropriate to their type, scope, sophistication and scale of
operations.

 The Board of Directors of the banks are required to establish policies, procedures
and practices to define risks, stipulate responsibilities, specify security
requirements, design internal controls and then ensure strict compliance with them.

 Pre-Operation
 Operations
 Disclosure/Ethics
 Prudential Regulations:
 REGULATION – 1 : Facilities to related persons.
 REGULATION – 2 : Limit on Bank’s exposure against total consumer financing.

PERCENTAGE OF CLASSIFIED CONSUMER FINANCE MAXIMUM LIMIT

TO TOTAL CONSUMER FINANCING
a) Below 5% 10 times of the equity
b) 6% - 10% 6 times of the equity
c) 11% - 15% 4 times of the equity
d) 15% and over Equal to equity

* Method of classification for the above purpose shall be in accordance with the classification requirement as
prescribed under Prudential Regulation no.4

 REGULATION – 3 : Total financing facilities to be commensurate with the income.

 REGULATION – 4 : Classification and provisioning for assets, Submission of returns,
Timing of creating provisions.
 REGULATION – 5 : Rescheduling of loan.
 REGULATION – 6 : Transfer facilities from one category to another to avoid
classification.
 REGULATION – 7 : Credit Information Bureau (CIB) clearance.
 Prudential Regulations: Credit Cards
 REGULATION – 8 : Safely deliver cards to card holders whether personally or by
mail with secret PIN.
 REGULATION – 9 : Provide card holders the statement of accounts at monthly
intervals.
 REGULATION – 10 : Banks shall be liable for all transactions not authorized by the
credit card holders after they have been properly served with a
notice that the card has been lost/stolen. .
 REGULATION – 11 : In case the cardholders make partial payment, the banks
should take into account the partial payment before charging
service fee/mark-up amount on the outstanding/billed amount.
 REGULATION – 12 : Due date for payment must be specifically mentioned on the
accounts statement.
 REGULATION – 13 : Maximum unsecured limit under credit card to a borrower
(supplementary cards shall be considered part of the principal
borrower) shall not exceed Tk. 500,000/-.
 Prudential Regulations: House Finance
 REGULATION – 23 : The maximum per party limit in respect of housing finance by the banks
will be Tk 10 million. The housing finance facility shall be provided at a
maximum debt equity ratio of 80:20.
 REGULATION – 24 : Commercial banks shall ensure that at no time their total exposure
under house financing exceeds 10% of their net consumer advances.
 REGULATION – 25 : Banks are free to extend mortgage loans for housing, for a period not
exceeding twenty year.
 REGULATION – 26 : The house financed by the banks shall be mortgaged in bank's favor by
way of registered mortgage with registered Power of Attorney.
 REGULATION – 27 : Banks shall either engage professional staff or arrange sufficient
training for their concerned officials evaluate the property, assess the
genuineness and integrity of the title documents, etc.
 REGULATION – 28 : The bank's management should put in place a mechanism to monitor
conditions in the real estate market (or other product market).
 REGULATION – 29 : Banks must develop floating rate products for extending housing
finance, thereby managing interest rate risk to avoid its adverse effects.
Banks also must develop in-house system to stress test their housing
portfolio against adverse movements in interest rates as also maturity
mismatches.
 Prudential Regulations: Personal Loans

 REGULATION – 30: Limits per person for such loans will be Tk.3 lac with out any
securities. However, banks may lend higher amounts provided the
loans are secured appropriately. But, in no case, the loan amount
will be allowed to exceed Tk.10 lac. The loan secured against liquid
securities shall however, be exempt from this limit.

 REGULATION – 31: In cases, where the loan has been extended to purchase some
durable goods/item, the same will be hypothecated with the bank
besides other securities, which the bank may require on its own.

 REGULATION – 32 : The maximum tenure of the loan shall not exceed 5 year.
 Development Guidelines
- Prudential Guidelines provide directional guidelines to the banks who are considering
introduction of consumer finance under Consumer Banking.

- These guidelines is assisting banks to develop and implement pragmatic and value
added products, efficient Credit Approval & Risk Management processes, sound
organization structure, strong credit administration and a robust collection
procedures.

- It may be noted here that these are the minimum requirements and should not in any
way be construed to restrict the role of the management processes through
establishing comprehensive credit risk management systems.

- The guidelines have been organized into the following sections:

1. POLICY GUIDELINES
2. PROCEDURAL GUIDELINES
3. PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES
 Policy Guidelines
Product Program Guidelines (PPG):

Fundamentally, credit policies and procedures can never sufficiently capture all the complexities
of the product. Therefore, the following credit principles are the ultimate reference points for bank
staff-making consumer-financing decisions:
• Assess the customer’s character for integrity and willingness to repay
• Only lend when the customer has capacity and ability to repay
• Only extend credit if bank can sufficiently understand and manage the risk
• Use common sense and past experience in conjunction with thorough evaluation and credit
analysis.
• Do not base decisions solely on customer’s reputation, accepted practice, other lender’s risk
assessment or the recommendations of other officers
• Be proactive in identifying, managing and communicating credit risk
• Be diligent in ensuring that credit exposures and activities comply with the requirement set out
in Product Program.

A basic Product Program Guideline (PPG) has been developed for five consumer financing
products and These products would generally cover 80% of consumer financing needs in
Bangladesh. The products are:
 Auto Loan
 Consumer Durable Loans
 Loans for Professionals
 Unsecured Personal Loan
 Credit Cards
 Policy Guidelines – Continues
Credit Approval:
- Applications are received at Credit Approval unit from sales team / branches. Applications are evaluated
/ assessed by Credit Analysts / Managers. The evaluation process is carried out based on the agreed
and standard guidelines for different loans product and the documents checklist as per the product
development document (PDD).

- The sales team / branch staff responsible for loan sales and should be the owner of the customer
relationship, and must be held responsible to ensure the accuracy of the loan application submitted for
approval. They must be familiar with the bank’s Lending Guidelines and should conduct due diligence
on new borrowers, purpose of the loans and guarantors.

- All banks should have established Know Your Customer (KYC) and Money Laundering guidelines, which
should be adhered to at all times.

- Credit Applications should include, as a minimum, the following details:

 Amount and type of loan(s) proposed.
 Purpose of loans.
 Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
 Security (if any)

- To illustrate the process of marketing a loan at the front end till disbursement at the Credit Administration
Department, please refer to sample process workflow chart (See Sample).

- Credit Approval Authority: Lending Authority is delegated to individual credit analysts and credit manager
or senior credit executives by the Head of Credit. Records of such authority is retained with Head of
Credit. Copies of all DLA are also retained by Loan Administrations Department.
 Procedural Guidelines
Approval Process:

- Credit approval authority must be delegated in writing from the MD, acknowledged by
recipients and records of all delegation retained.

- Credit approval should be centralized within the Credit function and approval records must be
kept on file with the Credit Applications.

- Any credit proposal that does not comply with Lending Guidelines, regardless of amount,
should be referred to Head Office for Approval.

- Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control,
and Head of Credit.

- It is essential that executives charged with approving loans have relevant training and
experience to carry out their responsibilities effectively.
- A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals
declined stating reasons thereof should be reported by Credit Team to the Business Head.
 Procedural Guidelines – Continues (1)
- Approval Process function consists of the following tasks:

i) Duplication check:

- All approved applications must be checked against Banks database to

identify whether the applicant is enjoying any other loan in other account
apart from the declared loans.
- It must also be checked that the applicant has a credit card (if the bank
offers this product) and any payment default is made. This should be
mandatory for Credit Card approval. In such cases the application must be
rejected.

ii) Maintenance of Negative Files:

- Two negative files – one listing the individuals and the other listing the
employers - are to be maintained to ensure that individual with bad history
and dubious integrity and employers with high delinquency rate do not get
personal loan from banks.
 Procedural Guidelines – Continues (2)
Credit Administration:

- After approval, Credit Team will send / forward the approved applications along with the
security and other documents to the Credit Administration Team under Operations Unit for
processing.

- The Credit Administration function is critical in ensuring that proper documentation and
approvals are in place prior to the disbursement of loan facilities.
- Under Credit Administration there may be two-sub unit, who will process the document
and disburse the loan:
 Documentation & QC
 Loan Administration Department

- Credit Administration function consists of the following tasks:

i) Credit Documentation- To ensure that all security documentation complies with the
terms of approval and maintain control over all documents.
ii) Disbursement- Loan Administration dept. will disburse the loan amounts under loan
facilities only when all security documentation is in place.
iii) Custodial Duties- Loan disbursements and the preparation and storage of security
documents should be centralised in the regional credit centres. Security documentation is
held under strict dual control, in locked fireproof storage.
iv) Compliance Requirements- Bangladesh Bank circulars/regulations are maintained
centrally, and advised to all relevant departments to ensure compliance.
 Procedural Guidelines – Continues (3)
Risk Management:
- Risk Management function consists of the following tasks:
i) Credit Risk Management- Managed by the Consumer Credit & Collections unit (CCCU),
which is completely segregated from sales.
- Contact Point Verification: Contact Point Verification is done for all applicants except
for the High Net Worth (HNW) individuals or customers having account relationship
with banks.

ii) Third Party Risk Management- Verify third party’s signature against the specimen
attached to the original instrument and bank will also send the instrument to the issuing office
for their verification.
iii) Acquiring Risk Management- It is arises in the form of potential charge-back loss for the
Bank. Following measures are undertaken to mitigate the acquiring risks:
- All merchants are trained and monitored through a call/visitation program.
- Schemes (VISA and MasterCard) rules and regulations are strictly followed.
- Merchant floor limits are in accordance with schemes prescribed limits.
- Online authorization activity is monitored through a parameter driven system.
- While giving authorizations, high ticket size merchants are closely monitored.
- Electronic transaction capture at high volume/frequency merchants.

iv) Fraud Risk Management- There is an inherent fraud risk in any credit cards business.
The most common fraud risks are:
- Transaction Fraud Risk
- Application Fraud Risk
- Liquidity And Funding Risk
 Procedural Guidelines – Continues (4)
v) Liquidity And Funding Risk Management- This risk will be managed and the position
monitored by the Asset Liability Committee headed by the Managing Director / CEOs of the
Banks.
vi) Political and Economic Risk Management- Banks should always keep a close watch in
these areas so that it is able to position itself in the backdrop of any changes in country’s political
and economical scenario.
vii) Operational Risk Management- For consumer loans, the activities of front line sales and
behind-the-scene maintenance and support are clearly segregated. Consumer Credit &
Collections Unit (CCCU) will be formed. CCCU will manage the following aspects of the product:
- Inputs, approvals, customer file maintenance, monitoring & collections.
- Operational jobs like disbursal in the system including raising debit standing orders
and the lodgment and maintenance of securities.

viii) Maintenance of Documents & Securities- The applications and other documents related
to Consumer loans will be held in safe custody by CCCU or Operations Unit. The physical
securities and the security documents will be held elsewhere inside fire-proof cabinets under
CCCU’s or Operation’s custody.

ix) Internal Audit- All Banks should have a segregated internal audit department who will be
responsible with performing audits of all departments. Audits should be carried out on a regular
or periodically as agreed by the Management to assess various risks and possible weaknesses
and to ensure compliance with regulatory guidelines, internal procedures, Lending Guidelines
and Bangladesh Bank requirements.
 Procedural Guidelines – Continues (5)
Collection & Remedial Management :
- Collection & Remedial Management function consists of the following tasks:
i) Monitoring- A bank’s loan portfolio should be subject to a continuous process of monitoring.
There should be formal procedures and a system in place to identify potential credit losses and
remedial actions has to be taken to prevent the losses.
ii) Recovery- The collection process for personal loans starts when the account holder has
failed to meet one or more contractual payment (Instalment). It has been designed to enable
the collection staff to systematically recover the dues and identify / prevent potential losses,
while maintaining a high standard of service and retaining good relations with the customers.
iii) Collection objectives- The collector’s responsibility will commence from the time an
account becomes delinquent until it is regularized by means of payment or closed with full
payment amount collected.
iv) Identification and allocation of accounts- When a customer fails to pay the minimum
amount due or installment by the payment due date, the account is considered in arrears or
delinquent. When accounts are delinquent, collection procedures are instituted to regularize
the accounts without losing the customer’s goodwill whilst ensuring that the bank’s interests
are protected. The delinquent accounts can be classified as three categories as follows:
- Front-End
- Mid-Range
- Hard-Core
v) Collection Steps & Actions- To identify and manage arrears, the following aging
classification is adopted:
- For all products other than credit cards: (See Details)
- For credit cards: (See Details)
 Procedural Guidelines – Continues (6)
vi) Productivity tracking- The variables for productivity tracking are, no of calls made per day,
valid contact, promise to pay, kept promise, broken promise etc needs to be analyzed.

vii) Agency management- Depending upon the size of the account balance, internal recovery
efforts may continue while rest of the portfolio that would be assigned to external agencies
including legal agencies to ensure expected recovery.

viii) Provisioning policy- Each bank must comply with Provisioning Policy as stipulated in the
Prudential guidelines. However, provisions should be made earlier on occasions when the
accounts are deemed “not collectable” even though they have not reached the aging criteria for
provision e.g. deceased, fraud, skip, bankruptcy etc.

ix) Charge off/write off policy- Accounts are considered charged off when they are no longer
considered “collectible” or an asset of the Bank. An account to be charged off at 2 years past due.
When recovery from the charge off accounts are received from the debtors, they are treated as
recoveries. .
 Preferred Organizational Structure
- An appropriate structure for Credit must be in place to ensure that the segregation of the marketing /
sales function from Approval / Risk Management where Administration functions will be under
Operations umbrella.

- Credit approval should be centralized within the Credit Unit or regional credit centers where reporting
should be Central / Head office Credit Unit. All applications must be approved by the Head of Credit or
delegated Head Office credit executive.

- The following chart represents the preferred management structure:

Managing Director

Head of Credit Head of Consumer Banking Head of Operations

Credit Analyst Team Head of Credit Administration

Credit Collection Team

- A separate team of Credit Administration under Retail Operations will process and disburse the loans.
Thank You
Appendix
 Pre-Operation
Before embarking upon or undertaking consumer financing, the banks shall implement /
follow the guidelines given below-
1. Establish separate Risk Management capacity for the purpose of consumer
financing with sufficient expertise and experienced personnel.
2. Prepare comprehensive consumer credit policy duly approved by the Board of
Directors
3. Develop a specific Product Program Guide (PPG) for every type of consumer
finance activity indicating the maximum permissible exposure banks will take
against each product.
4. Develop comprehensive recovery procedures with pre-planned
enforcement/recovery measures for the delinquent consumer loans.
5. Maintain efficient computer based MIS for effective monitoring of consumer
financing portfolio as well as generating the following periodical reports:
▲ Delinquency reports (for 30, 60, 90 180 & 360 days and above) on monthly basis.
▲ Reports interrelating delinquencies with various type of customers of various attributes of the
customers.
▲ Quarterly product wise profit and loss account duly adjusted with the provision on account of
classified accounts.
5. Encourage to `impart sufficient training on an ongoing basis regarding the various
aspects of consumer finance.
6. Prepare standardized set of borrowing and recourse documents (duly cleared by
their legal counsels) for each type of consumer financing.
BACK
 Operations
1. Consumer financing, like other credit facilities, must be subject to the Bank's risk
management process setup. The process may include, identifying source of repayment
and assessing customer' ability to repay his/her past dealings with the bank, the net
worth and information obtained from a Credit Information Bureau approved by
Bangladesh Bank.

2. At the time of granting facility under various modes of consumer financing, banks shall
obtain a written declaration from the borrower with divulging details of various facilities
already obtained from other institutions. The banks should carefully study the details
given in the statement and allow fresh finance/limit (approved by bank) only after
ensuring that the total exposure in relation to the repayment capacity of the customer.

3. Internal audit and control function of the bank, apart from other things, should be
designed and strengthened so that it can efficiently undertake an objective review of the
consumer finance portfolio from time to assess various risks and possible weaknesses.

4. The banks shall ensure that their accounting and computer systems are well equipped
to avoid charging of mark-up. For this purpose it should be ensured that the mark-up
charged on the outstanding amount is kept separate from the principal.

5. The banks shall ensure that any repayment made by the borrower is accounted for
before applying mark-up on the outstanding amount.
BACK
 Disclosure/Ethics

- The banks must clearly disclose all the important terms & conditions. Fees,
charges and penalties, which are internal including interest rate, pre-payment
penalties and the conditions under which that apply.

- For ease of reference and guidance of their customers, banks are

encouraged to publish brochures regarding frequently asked questions.

BACK
Collection Steps: For all products other than credit cards
Days Past Due (DPD) Collection Action
1-14 Letter, Follow up & Persuasion over phone (Annexure V)

15-29 1st Reminder letter & Sl. No. 1 follows

30-44 2nd reminder letter + Single visit

45-59  3rd reminder letter (Annexure VI)

 Group visit by team member
 Follow up over phone
 Letters to Guarantor, Employer, Reference all above effort follows
 Warning on legal action by next 15 days

60-89  Call up loan (Annexure VII)

 Final Reminder & Serve legal notice
 legal proceedings begin
 Repossession starts
90 and above  Telephone calls/Legal proceedings continue
 Collection effort continues by officer & agent
 Letter to different banks/Association

BACK
 Collection Steps: For credit cards only
Days Past Due (DPD) Collection Action
X  Letter reminding payment past due
 Soft call requesting payment
30-59  Block card with “decline” response
 Call insisting payment
 Letter advising account status (blocked)
60-89  Block card with “decline” response
 Call insisting payment
 Letter advising a/c status (blocked) and threatening card cancellation if not
regularized
90-119  Call insisting immediate payment
 Letter advising cancellation & surrender of card
 Hot-list & circulate within the merchants
 Employ recovery agent where appropriate

120-149  Call threatening litigation

 Threatening letter to employer (for salaried only)
 Publish name & photograph in newspaper
 Personal visitation by recovery agent
 Set-off SCB Account(s), if any
 Serve legal notice where appropriate

150+  Bad debt allocation

 Account handed over to recovery agency
 Stop interest accrual
 Personal visitation by recovery agent
 Legal action

BACK
Process Flow Chart of Consumer Loan Processing (sample)

BACK