Credit Appraisal and Credit Risk Management

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MANAGING CORE RISKS IN BANKING:

CREDIT RISK MANAGEMENT
Industry Best Practices

BANGLADESH BANK

CREDIT RISK MANAGEMENT
Industry Best Practices

PREPARED FOR:
BANGLADESH BANK

PREPARED BY:
FOCUS GROUP ON CREDIT & RISK MANAGEMENT

Team Co-ordinator: Team Members:

Sudhir Chandra Das Ali Reza Iftekhar Niaz Habib A.G. Sarwar Brian J. McGuire Naser Ezaz Bijoy

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INTRODUCTION: Risk is inherent in all aspects of a commercial operation, however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank’s dealings with or
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The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the bank based on the endorsement of the bank’s Head of Credit Risk Management and the Head of Corporate/Commercial Banking. (Section 2.1 of these guidelines refers) Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of loans that do not comply with Lending Guidelines should be restricted to the bank’s Head of Credit or Managing Director/CEO & Board of Directors. The Lending Guidelines should provide the key foundations for account officers/relatio nship managers (RM) to formulate their recommendations for approval, and should include the following: § Industry and Business Segment Focus The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the bank’s loan portfolio. For each sector, a clear indication of the bank’s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide necessary direction to the bank’s marketing staff. Types of Loan Facilities The type of loans that are permitted should be clearly indicated, such as Working Capital, Trade Finance, Term Loan, etc. Single Borrower/Group Limits/Syndication Details of
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