Account Statement with other banks

If the client has other loan
relationships then the account statements of other banks needs to be obtained.

3.8.4 CONCLUSION

After all the analysis if the credit
officer is satisfied with the justification of limit he prepares his
recommendation. The recommendations are then submitted to his immediate
supervisor for his approval.  Finally all
the documents are submitted to HOCRM for his approval. After getting the
approval from HOCRM the officer then prepares a sanction letter as per standard
format of the bank. One copy of the sanction letter is sent to the Credit
Administration department (this department is responsible for loading the limit
into the system so that the clients gets his loan) and another copy (original
documents) is then stored in the Credit File of the client. This is how the
credit officer carries out a typical renewal analysis.

CHAPTER-4

NON-PERFORMING LOAN CLASSIFICATION
CRITERION

4.1 NON-PERFORMING LOAN
CLASSIFICATION CRITERION

NPL (Non-performing Loans) include
those loans, which are showing signs of weakness in the credit quality of the
loans. When the quality of a loan deteriorates, the first signal comes as
irregularity in client’s loan repayment. Often a loan account starts having
past dues. International best practices require that a loan be classified as
non-performing if its principal and/or interest are three months or more in
arrears. Banks in Bangladesh are allowed to classify non-performing loans based
on a time frame of three months. Early recognition of non-performing loans
stimulates collection efforts and helps reduce the possibility of loss of such
assets.

4.2 NON-PERFORMING LOAN: ELABORATION

Loans
may be termed as Non-Performing both from the objective and subjective
judgment. Objective criteria for loan classification are grossly set by
Bangladesh Bank. Subjective judgment by the bank officials are guided by the
Instruction Circulars from the top management.

The
following objective criteria were prescribed by Bangladesh Bank for loan
classification vide BRPD Circular No. 16, dated 06 December, 1998 with
subsequent amendments vide BRPD Circular No. 9 of 2001, BRPD Circular No.02 dated
15 February, 2005 and BRPD Circular No. 09 dated 20 August, 2005.

**SM = Special Mention, SS = Sub Standard, DF = Doubtful, BL
= Bad & Loss

Besides the objective criteria, EBL
uses the following subjective criteria to classify loans. It can be noted here
that, loans are classified primarily by objective criteria. However, officials
are encouraged to follow the subjective criteria side-by-side the objective
criteria. Brief descriptions of the four classification categories are provided
in the following table.

A brief description of the activities
of different departments other than CRM for better understanding of the NPL
management function is presented below. Besides these departments, Relationship
Managers of Corporate Banking Units and SME units (Small & Medium
Enterprises) also play an active role in the NPL management.

4.3 CREDIT ADMINISTRATION DEPARTMENT
(CAD)

Activities of Credit Administration
Department include the following at its very basic:

a.
Documentation
of loans

b.
Disbursement
of loans

c.
Credit
Monitoring

d.
Early
Alert process

e.
Reporting
to Bangladesh Bank

4.4 SPECIAL ASSET MANAGEMENT
DEPARTMENT (SAMD)

Special Asset Management Department
is responsible for all accounts classified in the bank’s loan portfolio. The
three types of classification maintained by the department are given below:

 
Doubtful
and

SAMD’s responsibility sectors:

a.
Monitoring
and controlling the classified accounts through monthly reporting and quarterly
review/update.

b.
Actively
follow up with the borrowers for recovery,

c.
Negotiating
and restructuring/rescheduling debts wherever feasible, on its own and /or in
association with the concerned Relationship Manager/ Unit Head/Area Head/Line
of Business and Head Office Credit Risk Management.

d.
Review
for reschedule/restructure/waiver/write-off is presented by SAMD with, if
deemed necessary, inputs from the related unit or branch/line of business.
Proposal is placed as per the format with all relevant support/documents/
information to facilitate the process for approval from the appropriate
authority duly recommended by Head of Credit Risk Management and Managing
Director & CEO.

e.
Advise
client the reschedule / restructure / waiver letter after proper approval from
the EBL Board.

f.  
Head
Office Credit Risk Management releases the approved restructure
/reschedule/waive/write-off proposal to Credit Administration Department who
are responsible for communicating the decision jointly with Head of SAMD to
client as well as initiating action on the books of account of the unit or the
branch.

g.
Follow?up
responsibility on such waiver/reschedule /write?off loans is assigned to SAMD.

SAMD also prepares a Consolidated
Report of all bad loans written?off on a quarterly basis and submit the report
to the Head of Credit Risk management and Managing Director & CEO.

4.5 DETECTION PROCESS OF NPL

First and foremost requirement for
any and all Relationship Managers / Sales & Service Managers and Credit
Managers is to identify a problem credit in its earliest stages by recognizing
the signs of deterioration. Such signs include, but not limited to, the
following:

i) Non?payment of
interest or principal or both on due dates or past?dues beyond a reasonable
period or recurring past dues.

ii) In case of
Overdrafts, (or Cash?Credits or similar facility), no movement in the account
beyond a reasonable period.

v) Death or withdrawal of key owner(s) or
management personnel.

vi)
Company filing for bankruptcy or
voluntary dissolution.

 
Adverse
market report about the company itself or its principal owners.

4.6 STEPS TO FOLLOW FOR
CLASSIFICATION

Steps to follow in such
situations are:

i) CAD rechecks the account, for all
outstanding, including any outstanding in allied or sister company or in
owner’s or partners’ or directors personal name(s).

ii) CAD
thoroughly reviews loan documentation to confirm that “the bank has what the
bank needs”, documents are in proper form, properly executed and current
(i.e. not time barred). A review of the documentation serves as a good reminder
of the Bank’s legal rights against the debtor, principal owner/guarantors etc.

iii)  CAD
obtains current figures to review these on strict liquidation basis, to take a
close look at the assets and liabilities to determine who has the preferential
right or prior lien to what assets. For Limited Liability companies, a title
search at the RJSC office where all charges are filed is carried out.

iv)  If
Guarantors are involved, CAD looks closely at the net worth statement and take
steps to protect EBL’s interests’ vis-à-vis other creditors. In other words, if
possible, perfect liens on Guarantor’s assets or give demand notice to
guarantor.

v) Concurrently with the assessment of situation,
once the account is classified Sub?standard, credit lines are frozen with
notice to all concerned, on a “damage?control” concept.

vii)  A
full assessment of the problem situation surrounding the account leads the
reviewer to decide options available to the bank: viz

[
Work?out,
with no rescheduling

[
Work?out,
with rescheduling, under proper rescheduling agreement and if needed with fresh
documentation and renegotiated collateral security.

[
Legal
action, which if situation so warrant, is taken immediately (with prior
approval from appropriate approving authority) when the need is recognized to
pre?empt any dissipation or transfer of the assets of the borrower or the
guarantor.

4.7 CLASSIFICATION PROCESS

For the purpose of
determining the “Classified” status of an account, following
guidelines are observed

i) The
process of Classification of an account starts with strict application of the
risk rating assessment that is compulsory for each borrowing relationship.
Account deemed to be classified are subject to Portfolio Review Form submission
or a direct classification by Head Office Credit Risk Management:

[  Special Mention

[  Sub?standard

[  Doubtful

[  ii) However, unpaid
Interest or Principal or Expired Limit for a period of 90 days or more or
recurring past dues (of Principal) remain the most significant Rules of Thumb
triggering the classification.

4.8 DOWN?GRADING/UPGRADING CLASSIFIED
ACCOUNTS

The followings are the procedures for
upgrading or downgrading the classified accounts:

Primary
responsibility lies with the concerned Relationship Manager to initiate the
classification by submitting the Portfolio Review Form in a timely manner.

This responsibility first moves laterally to
Relationship Managers and escalates upwards to Unit Head/Sales & Service
Manager, if anyone having responsibility for the account in the layers fail to
identify and report a classified name.

If
and when a Portfolio Review Form is submitted, the concerned Relationship
Manager/Unit Head/Area Head, Head of Line of Business, reviews it promptly. The
latter finally recommends the category or severity of classification along with
Action Plan to upgrade/recover outstanding. Head of Credit Risk Management and
Managing Director & CEO reviews and agrees to the classification and the
related Action Plan for recovery/upgrade.

Head Office Credit Risk Management is responsible to release
and distribute copies of approved Portfolio Review Form to:

Head of Special Asset Management
Department

Head
Office Credit Risk Management may also independently classify an account in the
normal course of inspection of a branch or unit’s loan portfolio. In such
event, the Portfolio Review Form will then be filled in by Head Office Credit
Risk Management and will be referred to the respective Relationship Manager /
Unit Head / Area Corporate Head / Head of Line of Business and/or Head of
Special Asset Management Department for information. Action Plan for
recovery/upgrade will then be presented by Head of Special Asset Management
Department in consultation with RM / Unit Head / Area Head / Head of Line of
Business to the Head of Credit Risk Management & Managing Director &
CEO for approval.

Such
classification may be superseded by a more severe classification i.e. down
grading, by the regulatory body (Bangladesh Bank).

Wherever
required an independent assessment of the classified credit may be conducted by
Head Office Credit Risk Management or by internal auditor documenting as to why
the credit deteriorated and what were the lapses.

Only
the Head of Credit Risk Management & Managing Director & CEO is
empowered to up?grade a classified account but the recommendation has to
originate from the Head of Special Asset Management Department. Continuation of
business strategy (if any) for the upgraded account will require the consent of
Area Head – Corporate Banking / Head of Line of Business with proper
justification.

Upgrading
of a classified account has to be well justified diligently and objectively by
all recommending officers. Essentially, complete removal of the reason(s) for
classification should be the basis of any upgrading.

 
Classified
Accounts are passed on to Special Asset Management Department in the following
manner:

[  Any and all accounts, which
have been downgraded to Sub Standard status.

[  Any and all accounts, which
have been downgraded to Doubtful or Bad & Loss status.

[  Within 7 days of an account being
downgraded to substandard (SS-5), a Request for Action and a Handover/Downgrade
Checklist are completed by the RM and forwarded to SAMD for acknowledgment. The
account is assigned to an account manager within the SAMD who will then in
consultation with concerned Relationship Managers/Unit Head/Area Head/ Head of
Line of Business prepare Action Plan for recovery or upgrade and get it
approved by Head of Credit Risk Management and Managing Director & CEO.

[  Officer in Special Asset Management
Department get the credit files transferred to their Department from Corporate
Banking/Line of Business and under their custody for account being classified
Substandard, Doubtful and Bad & Loss, and will monitor all
upgrade/downgrade.

[  Officer in Special Asset Management
Department must sign on the Loan Documentation Checklist to ensure review of
loan documentation at his/her end.

[  Officer in Special Asset Management
Department must review the Stock Report and Stock Inspection Report of
classified accounts to arrive at an effective action plan for recovery/upgrade.
Specimen of Stock Report and Stock Inspection Report attached.

[  Special Asset Management team in the
standard waiver format processes proposal for restructure/reschedule/waiver for
the classified accounts. The proposal should accompany copies of previous
approvals, recent accepted Sanction Letter by client, Lawyer’s opinion and
updated status on Loan Documentation.

 
Head
of Special Asset Management in H.O. interfaces with Head Office Credit Risk
Management & Managing Director & CEO on all up?grading/recovery efforts
in the context of

[
Recovery,

[
Loan
Loss Provision and

[
Restructure/Reschedule/Waivers/Write-offs.

4.9 REPORTING OF CLASSIFIED ACCOUNTS

The reporting procedure for
classified accounts have been outlined below:

i) Accounts,
which are, once classified but not up-graded or recovered are to be separately
reported on a monthly basis to Head Office Credit Risk Management and Managing
Director & CEO. Complete accuracy is to be ensured while reporting these
names. Such reports originate from Credit Administration Department.

Head
of Special Asset Management Department submits monthly results on recovery
status on all existing and newly Classified Accounts to Head Office Credit Risk
Management and Managing Director & CEO.

Head
of Special Asset Management Department submits quarterly report on Classified
Accounts to Head Office Credit Risk Management and Managing Director & CEO.

4.10 NON- EARNING LOANS

Following guidelines are strictly
observed for treatment of unpaid/uncollected interest in classified accounts:

i) If interest is over?due by more than
90 days the outstanding must be classified Special Mention ? Non?Earning or
even lower (such as Sub-standard), if not already so classified.

If
any loan is classified as Special Mention/Sub standard/Doubtful, interest is
charged on this loan, but this cannot be treated as income. All such interest
is credited to Interest Suspense (Credits) A\C. or any other account specially
designated for this purpose by Bangladesh Bank.

If
a loan is classified as Bad & Loss, charging of interest thereafter is
suspended from the date of Bad & Loss classification. A contingent/memo
entry is taken up for the interest being suspended which is reversed/brought
back as actual liability at the time of suit being filed for recovery or if
restructure/waiver/settlement takes place. Head of Special Asset Management
Department ensures that these contingent/memo items are monitored and reported
on a quarterly basis to Head of Credit Risk Management and Managing Director
& CEO.

v) Sometimes,
Sub?standard loans may be restructured or rescheduled, with the stipulation
that as part of the rescheduling, accrued unpaid interest be capitalized. Only
in these situations, exceptions to the foregoing rule may be allowed but
strictly on the following conditions:

The restructuring or rescheduling is
approved by the appropriate approving authorities on the basis of a “Work-out”
credit proposal.

  The interest to be capitalized with
principal is reserved from interest suspense accounts only after full
completion of documentation related to rescheduling and compliance of all
conditions precedent related to rescheduling.

Borrower displays sustained repayment
performance in accordance with the repayment plan.

  All principal and interest amounts
contractually due are assured of repayment within a reasonable period.

However, return of such
accounts to earning status on this pretext must have Head Office Credit Risk
Management’s pre?fact concurrence.

 
Earlier,
accounts which have been classified by Bangladesh Bank auditors during their
course of inspection would require pre-fact approval from Bangladesh Bank for
declassification/upgrade as per their requirement. But in a recent amendment
from BB states that the board of directors of the bank can de-classify an
account. In this case, however, this phenomenon has to be reported to BB.

4.11 APPLICATION OF PAYMENTS INTO CLASSIFIED LOANS

If a classified loan or part of any
classified loan is collected than accrued interest and suspended interest
should be settled first any residual will be applied for settlement of
Principal Loan.

4.12 REVIEW OF CLASSIFIED ACCOUNTS

Classified Accounts (like Sub?standard,
Doubtful and Bad & Loss) are reviewed on a quarterly basis in the manner
and as stipulated in the Obligor Risk Rating (ORR) guidelines of the bank.

If Relationship Manager feels that
due to irregularities or over?dues, etc., regular lines should not be renewed
but existing outstanding should be placed on liquidation basis (i.e. adjustment
purpose), a renewal work?out CM covering

a) The outstanding, with
specific maturities,

b) Anticipated date of
liquidation (or expiry of the facilities) and

c) Action plan to either
up?grade or complete recovery

must be submitted in the normal
manner & account should be rated Special Mention – 4.

If up-to-date financials are not
available, Relationship Manager should submit renewals based on latest
available ones. More than perfunctory trade/bank checking must accompany the
CM.

4.13 CREATION OF LOAN LOSS PROVISION

As part of pragmatic and conservative
approach to sustain the quality of the Bank’s loan portfolio and hence, the
earning stream, Loan Loss Provision exercise is being made mandatory for all
Line of Business and Head of Special Asset Management of the Bank.

Such exercise is dictated by: a)
generally accepted banking practice, b) conservative approach to assess the
quality of Risk Assets whereby the most accurate health of the Loan Portfolio
is reflected on the books of the Bank and c) to be guided by Bangladesh Bank
instructions/guidelines on provisioning.

Following guidelines are observed:

i) The
prudential Provision Practice dictates that rather than wait until the close of
the fiscal year; provision exercise would be an on?going one, with the needed
provision created, when an account is classified and continues to remain
classified. The provision exercise is to be carried out by each quarter end,
based on reports on Classified Accounts related to previous quarter.

ii) Bangladesh
Bank instructions/guidelines are followed for the purpose of Loan Loss
Provision exercise.

Unless
otherwise enhanced by Bangladesh Bank regulatory body, Loan Loss provision
policy

as per the matrix given below is adopted and followed by the line of
Business and Special

Asset Management Department of the Bank.

Following formula is applied in determining the
required amount of provision:

1. Gross
Outstanding  XXX

2. Less: (i) Cash
margin held or Fixed

Deposits/SP
under lien.   ( XXX )

3. Loan
Value

(For
which provision is to be created before considering

estimated
realizable value of other security/collateral held) XXX

4. Less:
Estimated salvage value of security/collateral held   ( XXX )

Net
Loan Value
XXX

For the purpose of provision against
classified loans, “Eligible Securities” mean the following

100% of deposit under deposit against
the loan

100% of the market value of gold or
gold ornaments pledged with the Bank

100% of the value of Govt. bond/Sanchayapatra
under lien

50% of the market value of easily
marketable commodity kept under the control of the bank

50% of the market value of land and
building mortgaged with the bank

50% of the average market value for
last 06 months or 50% of the face value whichever is less, of the shares traded
in stock exchange

The amount of required provision may, in
some circumstances, be reduced by an estimated realizable forced sale value of
(i.e. Salvage Value) of any tangible collateral held (viz: mortgage of property,
pledged goods / or hypothecated goods repossessed by the bank, pledged readily
marketable securities etc). Hence, in these situations, it will be advisable to
evaluate such collateral, estimate the most realistic sale value under duress
and net?off the value against the outstanding before determining the Net Loan
value for provision purposes. Conservative approach is taken to arrive at
provision requirement and Bangladesh Bank guideline to be properly followed.

Provided:

The
classification criteria are strictly and objectively applied and

Therefore, the process of’
classification should trigger the Prudential Loan Loss Provision exercise.

The action is not completely a “blind
faith” one, since unique circumstances and recovery prospects may still lead
the assessor to provide for less than the prudential level. Judgmental
evaluation should accordingly play the desired role and final decision
for the extent of loss provision will rest with the Head of Credit Risk
Management and Managing Director & CEO.

iv) However, only the Managing Director
& CEO can approve the Loan Loss Provision, whether specific (against
each classified account) or general reserves on the strength of recommendation
from Special Assets Management and Head of Credit Risk Management.

4.14 PROBABLE LOSS

Only for the purpose of Prudential
Provision Exercise “Probable Loss” category of rating is to be determined.
In general, accounts which are already classified “Doubtful” but have
not been down?graded to ‘Loss” should be evaluated from the “Probable
Loss” perspective.

To determine this, following factors
should be reviewed and score be assigned against each (High score will mean
higher probability of Loss and vice versa).

: An
account scoring more than 50% may qualify to be high as a “Probable Loss” and
would despite being classified “Doubtful may deserve a higher provision on a
Net Loan value basis.

5.8.2 Industry Analysis

The key risk factors of the
borrower’s industry are assessed by the RM. Any issues regarding the borrower’s
position in the industry, overall industry concerns or competitive forces is
addressed and the strengths and weaknesses of the borrower relative to its
competition should be identified.

5.8.3 Supplier/Buyer Analysis

Any customer or supplier
concentration is reported in the credit application, as these could have a
significant impact on the future viability of the borrower.

5.8.4 Historical Financial Analysis

An analysis of a minimum of 3 years
historical financial statements of the borrower is presented in bank’s
specified format. The analysis should address the quality and sustainability of
earnings, cash flow and the strength of the borrower’s balance sheet.  Specifically, cash flow, leverage and
profitability must be analyzed.

5.8.5 Adherence to Lending Guidelines

Credit Applications should clearly
state whether or not the proposed application is in compliance with the bank’s
Lending Guidelines. 

Mitigating factors for risks
identified in the credit assessment is identified and reported in the
application. 

5.8.7 Loan Structure

The RM makes sure that the amounts
and tenors of proposed financing are justified based on the projected repayment
ability and loan purpose.  Excessive
tenor or amount relative to business needs increases the risk of fund diversion
and may adversely impact the borrower’s repayment ability.

5.8.8 Security

A current valuation of collateral is
obtained and the quality and priority of security being proposed is
assessed.  Loans are not granted based
solely on security. Adequacy and the extent of the insurance coverage are also
taken into consideration.

5.8.9 Name Lending

In this case bank also follows the
prudential guidelines which says “Credit proposals should not be unduly
influenced by an over reliance on the sponsoring principal’s reputation,
reported independent means, or their perceived willingness to inject funds into
various business enterprises in case of need. 
These situations should be discouraged and treated with great
caution.  Rather, credit proposals and
the granting of loans should be based on sound fundamentals, supported by a
thorough financial and risk analysis”. 

5.9 APPROVAL AUTHORITY

The prudential guidelines regarding
approval authority by BB is stated below:

“The authority to sanction/approve
loans must be clearly delegated to senior credit executives by the Managing
Director/CEO & Board based on the executive’s knowledge and
experience.  Approval authority should be
delegated to individual executives and not to committees to ensure
accountability in the approval process. The following guidelines should apply
in the approval/sanctioning of loans:

• Credit
  approval authority must be delegated in writing from the MD/CEO &
  Board (as appropriate), acknowledged by recipients, and records of all
  delegation retained in CRM.
• Delegated
  approval authorities must be reviewed annually by MD/CEO/Board.
• The
  credit approval function should be separate from the marketing/relationship
  management (RM) function. The role of Credit Committee may be restricted
  to only review of proposals i.e. recommendations or review of bank’s loan
  portfolios.
• Approvals
  must be evidenced in writing, or by electronic signature.  Approval records must be kept on file
  with the Credit Applications. All credit risks must be authorized by
  executives within the authority limit delegated to them by the
  MD/CEO. The “pooling” or combining
  of authority limits should not be permitted.
• Credit
  approval should be centralized within the CRM function.  Regional credit centers may be
  established, however, all large loans must be approved by the Head of
  Credit and Risk Management or Managing Director/CEO/Board or delegated
  Head Office credit executive.
• The
  aggregate exposure to any borrower or borrowing group must be used to
  determine the approval authority required.
• Any
  credit proposal that does not comply with Lending Guidelines, regardless
  of amount, should be referred to Head Office for Approval
• MD/Head
  of Credit Risk Management must approve and monitor any cross-border
  exposure risk.
• Any
  breaches of lending authority should be reported to MD/CEO, Head of
  Internal Control, and Head of CRM.

A monthly summary of all new
facilities approved, renewed, enhanced, and a list of proposals declined
stating reasons thereof should be reported by CRM to the CEO/MD”.

The bank tries to follow the above
guidelines as perfectly as possible. The existing approval authority for
approving credit proposals is summarized below:

Type of Credit

Amount

Tenor

Approving Authority

Funded/ Non-funded

Up to TK 1.00 Crore

12 month

Head of CRM

Funded/ Non-funded

Up to TK 1.50 Crore

12 month

Funded/ Non-funded

Up to TK 3.00 Crore

12 month

DMD (singly)

Funded/ Non-funded

Up to TK 5.00 Crore

60 month

Cash Against Security (Class A- EBL FDRs)

Up to TK 25.00 Crore

60 month

Cash Against Security (Class B- FDRs/other bank)

Up to TK 10.00 Crore

60 month

Consumer Banking

All products (Exceptions)

60 month

5.10 SEGREGATION OF DUTIES EBL segregates the following lending functions: Credit Approval/Risk Management Relationship Management/Marketing Credit Administration The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgment of credit proposals. 5.11 PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES The guideline proposes that appropriate organizational structure must be in place to support the adoption of the policies of the guidelines.  The key feature is the segregation of the Marketing/Relationship Management function from Approval/Risk Management/Administration functions. It also proposes credit approval should be centralized within the CRM function.  Regional credit centers may be established, however, all applications must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive. The organizational structure of EBL (credit related) is compared below with that of the BB guideline. EBL ensures that all credit approvals are centralized within the CRM function. There are three regional corporate bases two in Dhaka and the other one in chittagong, however, all applications are submitted to CRM of Dhaka Head office and approved by the Board, MD/DMD or HOCRM as appropriate. For the SME sector, all proposals come to Dhaka SME center and then approved through CRM. The following chart represents the preferred management structure in the BB guideline: The credit related structure of EBL is as follows: 5.11.1 Key Responsibilities: Key responsibilities of concerned parties as mentioned in the prudential guidelines are discussed below: Credit Risk Management (CRM) Oversight of the bank’s credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking, personal banking, & treasury operations. Oversight of the bank’s asset quality. Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made. To approve (or decline), within delegated authority, Credit Applications recommended by RM.  Where aggregate borrower exposure is in excess of approval limits, to provide recommendation to MD/CEO for approval. To provide advice/assistance regarding all credit matters to line management/RMs. To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively.   Credit Administration Ø  To ensure that all security documentation complies with the terms of approval and is enforceable. Ø  To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral, and is properly assigned to the bank. Ø  To control loan disbursements only after all terms and conditions of approval have been met, and all security documentation is in place. Ø  To maintain control over all security documentation. Ø  To monitor borrower’s compliance with covenants and agreed terms and conditions, and general monitoring of account conduct/performance. Relationship Management/Marketing (RM) To act as the primary bank contact with borrowers. To maintain thorough knowledge of borrower’s business and industry through regular contact, factory/warehouse inspections, etc.  RMs should proactively monitor the financial performance and account conduct of borrowers. To be responsible for the timely and accurate submission of Credit Applications for new proposals and annual reviews, To highlight any deterioration in borrower’s financial standing and amend the borrower’s Risk Grade in a timely manner.  Changes in Risk Grades should be advised to and approved by CRM. 5.12 APPROVAL PROCESS The approval process segregates the work of Relationship Management/Marketing from the approving authority.  The responsibility for preparing the Credit Application rests with the RM within the corporate/SME banking department.  Credit Applications are recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. The recommending or approving executives take responsibility for and are held accountable for their recommendations or approval.  5.12.1 Approving SME proposals The RM first sends the credit application to the SME center in Head office Dhaka. The SME center then checks the documents and make sure they are well within the lending guidelines of the bank. They also provide additional condition for sanction as appropriate. After reviewing they send the proposal to the CRM department. The respective credit officers review the proposal and get the approval from the approving authority. The routing process of credit proposals and its approvals can be summarized as follows: Recommendation by RM   Central SME center (Reviewed by SME officials)   CRM (Analyzed by officers of CRM)   Approved by HOCRM/DMD/MD   The following diagram illustrates the preferred approval process by BB: Credit Application Recommended By RM / Marketing   Head of Credit (HOC) & Head of Corporate Banking (HOCB)    Managing Director   5.13 CREDIT MONITORING To minimize credit losses, monitoring procedures and systems are in place that provides an early indication of the deteriorating financial health of a borrower.  At a minimum, systems are in place to report the following exceptions to relevant executives in CRM and RM team: Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants; Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up. Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit. All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually. EBL has an excellent IT backbone, which produces the above information for central/head office as well as local review. 5.14 CONCLUSION Compliance with the guidelines of BB circulars or directions is a must for all the scheduled banks in the country. EBL is no exception is this case. All the circulars related to credit are properly filed in the department. It is made sure from the top management that each and every credit officer understands all the circulars and directions and exercise due diligence during operation regarding the stated issue. The following section discusses a similar topic, which necessarily requires bank’s strong compliance regarding it.   CHAPTER-6 Credit risk grading is an important tool for credit risk management as it helps the Banks & financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch. The credit risk grading 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. 6.2 DEVELOPMENT OF THE SCORE CARD The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank has been in practice for mandatory use by the Banks & financial institutions for loan size of BDT 1.00 crore and above. However, the LRA manual suffers from a lot of subjectivity, sometimes creating confusion to the lending Bankers in terms of selection of credit proposals on the basis of risk exposure. Meanwhile, in 2003 end Bangladesh Bank provided guidelines for credit risk management of Banks wherein it recommended, interalia, the introduction of Risk Grade Score Card for risk assessment of credit proposals. Since the two credit risk models are presently in vogue, the Governing Board of Bangladesh Institute of Bank Management (BIBM) under the chairmanship of the Governor, Bangladesh Bank decided that an integrated Credit Risk Grading Model be developed incorporating the significant features of the above mentioned models with a view to render a need based simplified and user friendly model for application by the Banks and financial institutions in processing credit decisions and evaluating the magnitude of risk involved therein. 6.3 DEFINITION OF CREDIT RISK GRADING (CRG) The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure. A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure. Credit Risk Grading is the basic module for developing a Credit Risk Management system. 6.4 FUNCTIONS OF CREDIT RISK GRADING 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. 6.5 USE OF CREDIT RISK GRADING The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole. As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis. Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis. 6.6 NUMBERS AND SHORT NAME OF GRADES USED IN THE CRG The proposed CRG scale consists of 8 categories, of which categories 1 to 5 represent various grades of acceptable credit risk and categories 6 to 8 represent unacceptable levels of credit risk. GRADING SHORT NAME NUMBER Superior SUP 1 Good GD 2 Acceptable ACCPT 3 Marginal/Watchlist MG/WL 4 Special Mention SM 5 Sub standard SS 6 Doubtful DF 7 BL 8 6.7 RISK DEFINITIONS Bangladesh bank has set different criteria for risk grading definitions. However, they can be broadly categorized as: a) Acceptable Credit Risk and  b) Unacceptable Credit Risk Following is a detailed discussion of these two broad categories of risks. 6.8 ACCEPTABLE CREDIT RISK The following 5 categories are considered as acceptable credit risk. The respective risk category features have been provided below: Superior – (SUP) – 1 Ø  Credit facilities, which are fully secured i.e. fully cash covered. Ø  Credit facilities fully covered by government guarantee. Ø  Credit facilities fully covered by the guarantee of a top tier international Bank.  Good – (GD) -2 Strong repayment capacity of the borrower The borrower has excellent liquidity and low leverage.  The company demonstrates consistently strong earnings and cash flow. Borrower has well established, strong market share. Very good management skill & expertise. All security documentation should be in place. Credit facilities fully covered by the guarantee of a top tier local Bank.  Aggregate Score of 85 or greater based on the Risk Grade Score Sheet  These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record.  Borrowers have adequate liquidity, cash flow and earnings. Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property).  Acceptable management Acceptable parent/sister company guarantee Aggregate Score of 75-84 based on the Risk Grade Score Sheet Marginal/Watchlist – (MG/WL) -4 This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Weaker business credit & early warning signals of emerging business credit detected. The borrower incurs a loss Loan repayments routinely fall past due Account conduct is poor, or other untoward factors are present.  Credit requires attention Aggregate Score of 65-74 based on the Risk Grade Score Sheet  Special Mention – (SM) -5 · 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. · 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), An Aggregate Score of 55-64 based on the Risk Grade Score Sheet. 6.9 UNACCEPTABLE CREDIT RISK The following 3 categories are considered as unacceptable credit risk. The respective risk category features have been provided below: Substandard- (SS) – 6 Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Bangladesh Bank criteria for sub-standard credit shall apply.  An Aggregate Score of 45-54 based on the Risk Grade Score Sheet. Doubtful- (DF) – 7 Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss. Bangladesh Bank criteria for doubtful credit shall apply. An Aggregate Score of 35-44 based on the Risk Grade Score Sheet. Bad/Loss- (BL) -8 Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation. Prospect of recovery is poor and legal options have been pursued. Proceeds expected from the liquidation or realization of security may be awaited.  The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future.  Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal procedures/suit initiated. Bangladesh Bank criteria for bad & loss credit shall apply. An Aggregate Score of less than 35 based on the Risk Grade Score Sheet. 6.10 REGULATORY DEFINITION ON GRADING OF CLASSIFIED ACCOUNTS  Irrespective of credit score obtained by a particular obligor, grading of the classified names should be in line with Bangladesh Bank guidelines on classified accounts, which presently are: Sub standard – if any loan is past due/overdue for 180 days and above. Doubtful – if any loan is past due/overdue for 270 days and above. Bad & Loss – if any loan is past due/overdue for 360 days and above. 6.11 PROCEDURE FOR COMPUTING CREDIT RISK GRADING The following step-wise activities outline the detail process for arriving at credit risk grading. 6.11.1 STEP I: IDENTIFYING ALL THE PRINCIPALS RISK COMPONENTS Credit risk for counterparty arises from an aggregation of the following: Financial Risk Business/Industry Risk Management Risk Security Risk Relationship Risk Each of the above mentioned key risk areas require to be evaluated and aggregated to arrive at an overall risk grading measure. Evaluation of Financial Risk: Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow. Evaluation of Business/Industry Risk: Risk that adverse industry situation or unfavorable business condition will impact borrowers’ capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share & poor industry growth. Evaluation of Management Risk: Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work. Evaluation of Security Risk: Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security & collateral, location of collateral and support.   Evaluation of Relationship Risk: These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship. 6.11.2 STEP II: ALLOCATING WEIGHT TO PRINCIPAL RISK COMPONENTS According to the importance of risk profile, the following weights are proposed in guideline for corresponding principal risks.  Principal Risk Components:   Weight: Business/Industry Risk 15% Security Risk 10% Relationship Risk 10% 6.11.3 STEPIII: ESTABLISHING KEY PARAMETERS Principal Risk Components: Key Parameters: Leverage, Liquidity, Profitability & Coverage ratio. Business/Industry Risk Size of Business, Business Outlook, Industry Growth, Management Risk Security Risk Security Coverage, Collateral Coverage and Support Relationship Risk Utilization of Limit, Account Conduct, Compliance of 6.11.4 STEP IV: ASSIGNING WEIGHT TO EACH OF THE KEY PARAMETERS Principal Risk Components: Key Parameters: Financial Risk 50% Liquidity 15% Profitability 15% Coverage 5% Business/Industry Risk Size of Business 5% Business Outlook 3% Industry growth 3% Market Competition 2% Entry/Exit Barriers 2% Management Risk Experience 5% Succession 5% Team Work 5% Security coverage 4% Collateral coverage 4% Support 2% Relationship Risk 10% Utilization of limit 3% Account conduct 3% Compliance of covenants 2% Personal deposit 2% 6.11.5 STEP V: GIVING ENTRY TO THE MODEL TO ARRIVE AT SCORE    This report provides a well programmed MS Excel based credit risk scoring sheet (developed by Bangladesh Bank) 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. Open the MS XL file named, CRG_SCORE_SHEET The entire XL sheet named, CRG is protected except the particular cells to input data. Input data accurately in the cells which are BORDERED & are colored YELLOW. 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. 6.11.6 STEP VI: ARRIVING AT THE CREDIT RISK GRADING BASED ON TOTAL SCORE The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor. Number Risk Grading Short Name Score 1 Superior SUP 100% cash covered Government guarantee International Bank guarantees 2 Good GD 85+ 3 Acceptable ACCPT 75-84 4 Marginal/Watchlist MG/WL 65-74 5 Special Mention SM 55-64 6 Sub-standard SS 45-54 7 Doubtful DF 35-44 8 BL 6.12 CREDIT RISK GRADING PROCESS The followings are the directives forwarded by Bangladesh Bank regarding the risk grading process: ‘Credit Risk Grading should be completed by a Bank for all of its clients whose credit limit is BDT 1.00 crore and above. For Superior Risk Grading (SUP-1) the score sheet is not applicable. This will be guided by the criterion mentioned for superior grade account i.e. 100% cash covered, covered by government & bank guarantee. Credit risk grading matrix would be useful in analyzing credit proposal, new or renewal for regular limits or specific transactions, if basic information on a borrowing client to determine the degree of each factor is a) readily available, b) current, c) dependable, and d) parameters/risk factors are assessed judiciously and objectively. Risk factors are to be evaluated and weighted very carefully, on the basis of most up-to-date and reliable data and complete objectivity must be ensured to assign the correct grading. Credit risk grading exercise should be originated by Relationship Manager and should be an on-going and continuous process. Relationship Manager shall complete the Credit Risk Grading Score Sheet and shall arrive at a risk grading in consultation with a Senior Relationship Manager and document it as per Credit Risk Grading Form, which shall then be concurred by the Credit Officer in consultation with a Senior Credit Officer. All credit proposals whether new, renewal or specific facility should consist of a) Data Collection Checklist, b) Limit Utilization Form c) Credit Risk Grading Score Sheet, and d) Credit Risk Grading Form. The credit officers then would pass the approved Credit Risk Grading Form to Credit Administration Department and Corporate Banking/Line of Business/Recovery Unit for updating their MIS/record. The appropriate approving authority through the same Credit Risk Grading Form shall approve any subsequent change/revision i.e. upgrade or downgrade in credit risk grade.’ 6.13 EARLY WARNING SIGNALS (EWS) Early Warning Signals (EWS) indicate risks or potential weaknesses of an exposure requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects in the Bank’s assets at some future date with a likely prospect of being downgraded to classified assets. Early identification, prompt reporting and proactive management of Early Warning Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis. Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Bank’s interest. Irrespective of credit score obtained by any obligor as per the proposed risk grade score sheet, the grading of the account highlighted as Early Warning Signals (EWS) accounts shall have the following risk symptoms. if – Any loan is past due/overdue for 90 days and above. Frequent drop in security value or shortfall in drawing power exists. if – Any loan is past due/overdue for 120 days and above Major document deficiency prevails (such deficiencies include but not limited to; board resolution for borrowing not obtained, sanction letter not accepted by client, charges/hypothecation over assets favoring bank not filed with Registrar, Joint Stock Companies, mortgage not in place, guarantees not obtained, etc.) A significant petition or claim is lodged against the borrower.  The Credit Risk Grading Form of accounts having Early Warning Signals should be completed by the Relationship Manager and sent to the approving authority in Credit Risk Management Department. The Credit Risk Grade should be updated as soon as possible and no delay should be there in referring Early Warning Signal accounts or any problem accounts to the Credit Risk Management Department for their early involvement and assistance in recovery. 6.14 CREDIT RISK GRADING REVIEW Credit Risk Grading for each borrower should be assigned at the inception of lending and should be periodically updated. Frequencies of the review of the credit risk grading are mentioned below; Number Risk Grading Short Review frequency (at least) 1 Superior SUP Annually 2 Good GD Annually 3 Acceptable ACCPT Annually 4 Marginal/Watchlist MG/WL Half yearly 5 Special Mention SM Quarterly 6 Sub-standard SS Quarterly 7 Doubtful DF Quarterly 8 BL Quarterly 6.15 RATING SYSTEM OF EASTERN BANK LIMITED EBL has its own its risk rating methodology. Each corporate and SME client of the bank has their own ratings. It is termed as Obligor Risk Rating (ORR). Once a rating is given it is closely monitored in each quarter/ half yearly to justify its status or for upgrading or downgrading purpose of the same. Obligor Risk Rating The following table provides the rating and the features necessary for the assignment of rating to each of the obligor. It also states the preferred strategy to be followed for the rated clients. Once an obligor is awarded with a rating then it is reviewed on a quarterly basis. All the clients are closely monitored to see whether there are any violations of the conditions and covenants, deterioration of security, all the performance parameters are reviewed be the respective credit officer based on the quarterly report named ‘portfolio review’ and other excerpts as necessary. Then he recommends the rating to higher authority and if those are approved the new ratings are assigned to each client. RATING Short No CRITERIA STRATEGY GOOD GD 1 Growing Industry (Growth 15%+) Among top 20 in the Industry Strong management with succession Steady growth in financial performance Satisfactory payment record/account turnover Liquidity 3X and above Leverage 0.5X and below Timely submission of financial information Strong Parent/Sister Office Guarantee Good collateral OR 100% cash covered Retain and grow with client Sell multi products ACCEPTABLE ACCEP 2 Growing Industry (Growth 10%+) Acceptable player in the market Good management with succession Acceptable growth in financial performance Satisfactory payment record/account turnover Liquidity 1.5X and above Leverage 1.5X and below Timely submission of financial information Acceptable Parent/Sister Office Guarantee Acceptable collateral Retain and grow with client Sell multi products MARGINAL/WATCHLIST MG/WL 3 Problem in Industry Loosing market share Thin management with no succession Unreliable sales/operating profit. Unsatisfactory payment record/account turnover Liquidity below 1X High Leverage Perpetual delay in submission of financial information Incomplete Loan Documentation Drop in collateral value or collateral shortfall Past due over 60 days No increase in credit limit Close monitoring thru clear action plan Ensure 100% completion of loan doc. Semi-annual review Follow up for settlement of past dues RATING Short No CRITERIA STRATEGY SPECIAL MENTION SM 4 Problem in Industry Loosing market share Severe management problem Company operating at losses with sales going down. Unsatisfactory payment record/account turnover Liquidity below 1X / insufficient cash flow High Leverage Financial Information not available Incomplete Loan Documentation Drop in collateral value or collateral shortfall Diversion of fund Past due over 90 days Possible exit/reduction of credit limit Close monitoring thru clear action plan Ensure 100% completion of loan doc. Quarterly review Follow up for settlement of past dues SUB STANDARD SS 5 All criteria of Special Mention Past due over 180 days Credit limit for adjustment purpose Clear exit plan to be in place Quarterly review Follow up for settlement of past dues DOUBTFUL DF 6 All criteria of Substandard Client out of business Past due over 270 days Credit limit for adjustment purpose Quarterly review Follow up for settlement of past dues Legal action BL 7 All criteria of Doubtful Past due over 360 days Credit limit for adjustment purpose Quarterly review Follow up for settlement of past dues Legal action Recently Bangladesh Bank has provided a circular mentioning the classification category for the SME sector vide BRPD circular no 20, dated December 20, 2005 (to be implemented from April 2006) in which it has proposed the following category: Superior (SUP) Good (GD) Acceptable (Acceptable) Marginal/ watch list (MG/WL) Special Mention Account (SMA) Substandard (SS) Doubtful (DF) Loss (BL) The original circular is provided in the appendix section of the report. CHAPTER-7 FINDINGS AND CONCLUSOION 7. 1 FINDINGS Eastern Bank Limited follows a Credit Risk Management Practice that complies with the rules and regulation set by Bangladesh Bank. Eastern Bank has set extensive procedures both at the pre-sanction stage of credit proposal assessment and also at the post –sanction stage. The procedures are transparent, accountable and decentralized in such manner that they ensure maximum effectiveness in risk assessment of credit proposal. Thorough analysis of eastern Bank’s credit assessment procedure and extensive interpretation of Bangladesh Bank circulars regarding credit assessment and risk grading procedure helped in the comparison of the two systems. Eastern Bank’s process hardly deviates from that dictated by Bangladesh Bank. Bangladesh Bank credit risk management policies requires bank to set lending guidelines which EBL does and reviews on annual basis. As per BB requirement it is set by top management. EBL’s detailed product definition shows that each product falls under Bangladesh Bank broad classification of loan products. Eastern bank Limited follows the BB guideline regarding discouraged lending activities and also in addition they have a list of the discouraged business of their own. The Bank tries to adhere to the prudential guidelines regarding approval authority set by Bangladesh bank as perfectly as possible. Eastern Bank’s organization structure and delegation of responsibility is in line with the structure proposed by Bangladesh Bank. Bangladesh Bank requires all commercial banks to use risk grade score card for risk assessment of credit proposals. The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole. The Credit Risk Grading scale consists of 8 categories which can be broadly classified into two categories that of acceptable and non-acceptable credit proposals. EBL’s obligor risk rating system has 7 categories, each of which is a reflection of the scales provided under CRG, except with that of Superior Credit. EBL’s rating starts from good. The criteria for rating matches more or less with that of CRG only in EBL’s case the outlook is more conservative. 7. 2 RECOMMENDATION EBL’s approach to credit is more conservative than that proposed by Bangladesh Bank. Although this approach might seem more prudent, however in face of increasing competition from new generation banks, EBL needs carry out the following: Develop more customized parameters for credit approval process under the general guidelines of Bangladesh Bank to increase its market. Data used for assessment of credit proposals should be checked for authenticity and accuracy. CRG score depends heavily on the financial data provided by potential borrower. Therefore steps should be taken to make those data more reliable. EBL’s RM should be more aware of manipulative qualitative data than business development. There should be procedures and parameters to identify and eliminate such manipulation. Continuous improvement of the lending procedure would reduce the default risk of the bank and increase its profitability. Bangladesh’s banking system is heavily affected by bad loans. This not only makes bank more conservative, contracts the lending system, it discourages investment. As a result growth of the economy is impeded. One major reason for default loan is banks’ ineffectiveness of assessing credit risk of a proposed investment. With time, Bangladesh Bank has set rules and general guidelines to help bank assess risk and mitigate their credit risk. In spite of that many banks fail to attract good credit and run profitably. Thus it is not only the guidelines provided by Bangladesh Bank that a commercial lending institution need to follow but it own lending policies should be in place to ensure maximum effectiveness of credit assessment. With this perspective in mind the report has attempted to analyze the lending procedures of Eastern Bank especially in the SME sector and check whether it complies with that of Bangladesh Bank. In doing so the standard operating procedures of the bank have been delineated in details along with a case study to present a picture of the operation carried out in the field. The report has also discussed banks procedures for managing its non-performing loans and loan classification procedures and cross checked those with the central bank guidelines. The newly proposed Credit Risk Grading Score sheet by Bangladesh Bank has also been discussed in the report with Eastern bank’s very own risk rating system. Above all, the report provides a detailed discussion of some the crucial issues of credit risk management and tries to focus on the practice of Eastern Bank Limited in this regard under the regulatory framework prevailing in the country. The report finds that EBL not maintains its guidelines and procedures in compliance with the Bangladesh bank directives but has a more conservative look to credit risk than that required by Bangladesh Bank. This conservative approach has its pros and cons. Therefore some suggestions has been made at the end to increase the profitability of the bank while still maintaining its appreciative position in credit risk assessment.