Credit Risk Management: One Bank Ltd

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Credit Risk Management: One Bank Ltd

History/Background

ONE Bank Ltd. is sponsored by a group of renowned and dynamic Bangladeshi industrialists, business persons and highly qualified professionals like medical practitioners, scientists and chartered accountants.

ONE Bank Limited was incorporated in May, 1999 With the Registrar of Joint Stock Companies under the Companies Act.1994, as a commercial bank in the private sector.

The Bank is pledge-bound to serve the customers and the community with utmost dedication. The prime focus is on efficiency, transparency, precision and motivation with the spirit and conviction to excel as ONE Bank Ltd. in both value and image.

The name ‘ONE Bank’ is derived from the insight and long nourished feelings of the promoters to reach out to the people of all walks of life and progress together towards prosperity in a spirit of oneness.

Company Profile

Third generation private commercial bank

OBL is a private sector commercial bank dedicated in the business line of taking deposits from public through its various saving schemes and lending the fund in various sectors at a higher margin. However, due attention is given in respect of risk undertaking, risk hedging and if not appropriately hedged, reflection of the same in pricing. In the financing side, the bank’s major concentration is in trade finance covering about 20.88% of total financing as on 2009 which is mainly a short-term investment. The banks financing concentrate in both, working capital finance and long-term finance. OBL has major concentration of financing in medium and large industries. Since the short-term finance carries low risk compared to long-term finance; the financing strategy of OBL will assist the bank to keep the risk at minimal.

While financing the industrial sector, the major concentration of the bank appeared to be in the textile and RMG sector; both the above sectors cover 30.89% of the total portfolio. OBL also involved in cement construction and transport sector financing. In the investment portfolio, OBL have substantial investment in quoted and non-quoted shares of different organization including some very prospective financial institutions. The bank has shown its acumen in reducing its exposure from ship scrapping sector, steel re-rolling where the bank had investment earlier. With the increase in exposure to RMG, the bank has increased its non-funded business income substantially. With an age of only 8 years, the OBL has taken initiative to launch IT based banking products like ATM facilities, E-banking etc that are praiseworthy.

Corporate Vision & Mission

Vision:

Ê To establish ONE Bank Ltd. as a role model in the Banking sector of Bangladesh.

Ê To meet the needs of the customers, provide fulfillment for the people and create shareholders value.

Mission:

Ê To constantly seek to better serve the customers

Ê Be pro-active in fulfilling social responsibilities

Ê To review all business lines regularly and develop the best practices in the industry

Ê Working environment to be supportive of teamwork, enabling the employees to perform to the very best of their abilities

Slogan:

….. WE MAKE THINGS HAPPEN

Core Value:

The Bank will be a confluence of following three interests:

Ê Of the Bank: Profit maximization and optimum growth

Ê Of the Customers: Maximum benefits and satisfaction

Ê Of the Society: Maximization of welfare

The Bank will also cater to the new expectations of the customers. It will be a customer-driven Bank.

Functions:

Ê Deposit mobilization ( Saving / Current / STD / FDR /Special Deposit Scheme Accounts)

Ê Lending

Ê Guarantees

Ê Trade Finance ( Import / Export LCs)

Ê Remittances ( Local / Foreign)

Ê Investment advices

Ê Retail Banking ( SME / CCS)

Ê Counter for Utility Bills

Ê Locker facility for safe keeping of valuables and documents

Ê State of the technology facilities: ATM Services

Ê Credit Cards

Ê Mobile Banking ( SMS Banking)

Ê Online Banking ( Any Branch Banking)

Future Plans:

Ê Introduction of Islamic Banking

Ê Louder corporate social welfare activities

Ê Introduction of Merchant Banking

Ê Strengthened global networking (Branch expansion/Increase of correspondent networking)

Organization Chart of ONE Bank Limited (OBL)

Figure – Organization Chart of ONE Bank Limited (OBL)

Hierarchy of Mangement in OBL

Figure – Designation Structure of OBL

Each of the branches of ONE Bank Limited work independently towards a common goal set by the management of the bank. Each of these branches is arranged according to the customer base of the branch and their banking needs.

Resources & Facilities

Total full time regular employee strength had increased to 300 by the year-end. Excepting for the new inductees, the remaining employees are all skilled banking professionals with varying degrees of experience and exposure, recruited from the leading local and foreign banks.

The Bank has a strong focus on imparting training towards enhancement of the skills and competencies of the employees. During the year a total of forty-seven training for the employees were organized, both at home and abroad.

Management of the Bank, on a continuous basis, undertakes in-house training initiatives towards raising awareness among the Bank employees with respect to Bank’s policies and instructions and directives of the various regulators so as to ensure that the employees are well informed and empowered towards providing customer services within the framework of laid-down regulatory requirements. The Bank offers a competitive compensation package towards successfully attracting, retaining and motivating its work force.

Products & Services

Service of the Professional Personal

The Officers of ONE Bank Limited have, to their credit, decades of banking experience with National/ international banks at home and abroad. They are suitably equipped to meet customer expectations and are available at all times to provide a single-window customized and confidential service.

A State-Of-The-Art Technology Banking

The Bank will provide a state-of-the-art technology banking such as Any Branch Banking, ATM Services, Home-Banking, Tele-Banking, Mobile-Banking etc.

Retail Banking

Bank limited offers individuals the best services, including the following, to provide complete customer satisfaction:

Ê Deposit services.

Ê Current Account in both Taka and major foreign currencies.

Ê Convertible Taka Accounts.

Ê Local and foreign currency remittances.

Ê Various types of financing to cater to the banking requirements of multinational clients.

Institutional Banking

ONE Bank Limited will offer various services to foreign missions, NGOs and voluntary organizations, consultants, airlines, shipping lines, contractors, schools, colleges and universities. The services include mainly the following:

Ê Deposit services.

Ê Current Account in both Taka and major foreign currencies.

Ê Convertible Taka Accounts.

Ê Local and foreign currency remittances.

Ê Various types of financing to cater to the banking requirements of multinational clients.

Corporate Banking

ONE Bank Limited caters to the needs of the corporate clients and provides a comprehensive range of financial services, which include:

Ê Corporate Deposit Accounts.

Ê Project & Infrastructure Finance, Investment Business Counseling, Working Capital and other finances.

Ê Bonds and Guarantees.

Commercial Banking

Being a commercial bank, ONE Bank Limited provides comprehensive banking services to all types of commercial concerns. Some of the services are:

Ê Trade Finance.

Ê Commodity Finance.

Ê Issuance of Import L/Cs.

Ê Advising and confirming Export L/Cs. – Bonds and Guarantees.

Ê Investment advice.

ONE Bank Limited will provide specialized services to Ministries, Autonomous and Semi-autonomous bodies.

On-Line Banking

ONE Bank Limited offers ‘Any Branch’ banking service that facilitates its customers to deposit, withdraw and transfer funds through the counters of any of its branches within the country.

Merchant Banking Advisory Services

The Bank will provide Merchant Bank advisory services, offer complete packages in areas of promotion of new companies, evaluation of projects, mergers, take-over and acquisitions, liaise with the Government with regard to rules and regulations, management of new issues including underwriting support etc.

Capital Market Operation

The Bank will also introduce capital market operation which will include Portfolio Management, Investors Account, Underwriting, Mutual Fund Management, and Trust Fund Management etc.

Islamic Banking Services

ONE Bank Limited will open Islamic Banking Branches to serve the customers who are interested in banking based on Islamic Shariah.

Farm and Off-Farm Credits (Rural)

Out of Bank’s social commitment towards the population at the grass-root level, it will participate in farm and off-farm credit programmers in rural Bangladesh to bring in economic buoyancy in the periphery.

Seed Money for Self-Employment

The educated young people with an aptitude for organizing enterprises will be provided with the seed money primarily for self-employment and subsequently will be given advisory services as well as required fund for expansion into a fast growing productive and employment generating venture.

Credit To Women Entrepreneurs

The Bank believes in ‘Equal Opportunity Policy’ and as such has a plan to introduce credit programmers for willing and talented women entrepreneurs.

Consumer Credit Facility

The Bank offers a Consumer Credit Scheme, facilitating financial ease in acquiring various day to day consumer products such as usable appliances and other items.

Counter For Payment of Bills

Dedicated counters are available at ONE Bank Limited’s branches to receive the payment of various utility (DESA, Mobile Phones) bills.

Other Services

Remit funds from one place to another through DD, TT and MT etc.

Conduct all kinds of foreign exchange business including issuance of L/C, Traveler’s Cheque etc

Collect Cheques, Bills, Dividends, Interest on Securities and issue Pay Orders, etc.

Act as referee for customers.

Locker facility for safe keeping of valuables and documents.

Short Look at OBL:

• Incorporated in : 1999
• No of Employees : 1060
• No of Branches : 39 nos
• Total Loans : BDT 3,239.57 crore [as on 31.12.2009]
• Total Deposits : BDT 3,950.91 crore [as on 31.12.2009]

Five Years Financial Highlights

Financial Highlights				Taka in Million
Prime Indicators	2005	2006	2007	2008	2009
Authorized Capital	1,200	1,200	1,200	4,150	4,150
Paid up Capital	807	888	1,039	1,299	1,558
Statutory Reserve	262	381	527	688	914
Total Capital	1,307	1,650	2,107	2,658	3,573
Total Deposit	18,030	20,253	24,484	27,861	39,365
Total Loan & Advances	13,851	15,681	19,709	23,287	32,533
Investment	2,165	3,321	3,587	3,715	6,789
Import Business handled	17,435	21,601	25,133	27,844	34,442
Export Business handled	11,916	16,360	19,413	25,214	25,561
Guarantee Business handled	1,367	947	949	1,454	5,075
Total income	2,007	2,886	3,587	4,293	5,824
Total expenditure	1,520	2,211	2,658	3,186	4,145
Net interest income	315	398	638	676	1,035
Operating Profit	626	674	929	1,108	1,679
Operating expenses	310	452	598	708	950
Profit after tax & provisions	302.83	347.22	405.50	422.88	72962
Total assets	20,105	23,143	27,475	31,744	45,163
Number of correspondence	268	270	280	285	300
Number of employees	386	580	781	859	1,039
Number of Branches	18	23	30	32	39
Loan Deposit ratio	76.82%	77.43%	80.50%	83.58%	82.64%
Capital adequacy Ratio	9.47%	10.03%	10.25%	11.02%	10.90%
Tier-1 Capital	8.44%	8.69%	8.91%	9.33%	9.08%
Return on Assets	2.87%	3.12%	3.67%	3.47%	4.37%
Earnings per share	37.46	39.06	31.18	27.08	46.63
Cash dividend	15%	10%
Bonus dividend	10%	17%	25%	20%	32%
Net Asset Value	159.34	171.03	176.39	178.24	196.89

Bank is an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged, respectively. Banks are critical to our economy. The primary function of banks is to put their account holders’ money to use by lending it out to others who can then use it to buy homes, businesses. When you deposit your money in the bank, your money goes into a big pool of money along with everyone else’s, and your account is credited with the amount of your deposit. When you write checks or make withdrawals, that amount is deducted from your account balance. Interest you earn on your balance is also added to your account.

Credit & Credit Risk

The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future. For a Bank, it is the main source of profit and on the other hand, the wrong use of credit would bring disaster not only for the bank but also for the economy as a whole.

Figure Classification of Credit Risk

Risk Management

Risk Management system and its application in practice is an important part of the bank management. In order to implement the system -based banking through appropriate risk management system, the Bangladesh Bank has circulated Five Core Risks Management Best Practice Guidelines- Internal Control & Compliances, Credit Risk Management, Foreign Exchange Risk Management, Asset Liability Management and Prevention of Money Laundering. Under only the credit risk management system as practiced in OBL is outlined below:

Credit Risk Management

Credit Risk management is one of the main functions of Bank/FI management. The Credit Risk Management System of OBL is still at its primary stage. Although the bank has adopted the best practice guideline suggested by Bangladesh Bank, it is yet to be made operational to a great extent. If any loan exceeds the discretionary power of any base line authority, it goes to the Executive Committee/Board. The product pricings are still not based on risk mapping. OBL is still to develop and implement sophisticated system based risk management system which is essential to cope with changing environment.

Credit Risk management is crucial for commercial banks, be it in developed or developing countries. Mere accumulation of deposits gives rise to entries both in liabilities and assets sides of the balance sheets. So, portfolio management involves in both liability and assets of commercial banks. If deposits of a bank grow at a steady rate and if loan demands can be met from deposit growth, the bank will have no problem of liquidity. In real life, deposits do not grow steadily all the time, nor does loan demand grow in keeping with growth in deposits. Fund management, which is the central point of portfolio management, thus involves estimating deposit liquidity needs and loan liquidity needs in most efficient manner possible.

The objective of the credit risk management is to maximize the performing asset and the minimization of the non-performing asset as well as ensuring the optimal point of loan and advance and their efficient management. Credit risk management is a dynamic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio is not only constituted the banks asset structure but also a vital factor of the bank’s success. The overall success in credit risk management depends on the banks credit policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance. Therefore, while analyzing the credit risk management of OBL, it is required to analyze its credit principals, credit policy, credit procedure and quality of credit portfolio.

Credit Risk Management is a very modern & important concept now-a-days for the Bankers of modern age. As for the mainstream work in process of the Bank, every one keeps a personal credit policy for management of the credit portfolio and future marketing aspects. The credit policy of any Bank is very confidential and full of strategic tools for Relationship Managers of the Bank. This is written and compiled by the Head of CRM (Credit Risk Management) and other top credit analyst of the Bank. This is the procedural guideline of the Bank officials to marketing, disbursement, manage & monitor credit portfolio of the Bank.

Credit Department of One Bank Limited

At first I have been placed in the Credit Department at ONE Bank Ltd. KawranBazar Branch. Credit department performs the critical functions of a bank. One of the primary functions of commercial banks is the sanctioning of credit to borrowers. Bank credit is a catalyst for bringing about economic development. Without adequate finance there can be no growth or maintenance of a stable output. Bank lending is important to the economy, for it makes possible the financing of agriculture, commercial, and industrial activities of a nation. At the same time, a bank will, therefore, distribute its funds among various assets in a manner as to derive sufficient income.

Types of Loans and Advances Offered By OBL

OBL offers following types of loans and advances,-

Secured Overdraft (SOD)

Loan (General)

House Building Loan (Staff)

Demand Loan

Transport Loan

Industrial Credit

House Building Loan (General)

Transport Loan (Staff)

Cash Credit (Hypothecation)

Past Due Bills

Loan against Trust Receipt (LTR).

Credit Principles of OBL

In our quest for maximizing the stakeholders’ value by establishing OBL as fundamentally sound financial institution, we will abide by the following ten credit principles which should always guide our behavior in our lending decisions:

1. Assess the customer’s character for integrity and willingness to repay

2. Only lend what the customer will have the capacity and ability to repay

3. Plan for the possibility of default

4. Only extent credit where we can sufficiently understand and manage the risk

5. Ensure independent credit participation in the credit process

6. Behave ethically in all credit activities

7. Be proactive in identifying, managing and communicating credit risk

8. Be diligent in ensuring that credit exposures and activities comply with OBL requirements

9. Optimize risk and reward

10. Build and maintain a diversified credit portfolio

Credit in general sense means an act of allowing person / person immediate use of money with payment deferred until an agreed future date. Bank is highly levered firm. It collects money from different types of deposit and utilizes this money for different purpose. Loans and advance is one of the most important and fruitful area to utilize money.

A sound credit is one where timely repayment is assured. So, before giving financial accommodation, a banker should consider the source from which repayment is promised. In some instances, debentures, which are to be redeemed in few months time or a life policy, which is to mature in near future, may be offered as security. An advanced against such security gives to trouble.

The central function of all banks is to collect deposits from surplus economic unit, and to lend those on deficit spenders. Both the surplus unit and spenders belong to real sector of the economy. Bank credit is catalyst for bringing about economic growth or development & without adequate finance there can be no growth or maintenance of actable output. So bank lending is important to the economy, for it makes possible financing of agriculture, commercial and industrial activities of a nation. At the same time a bank will, therefore, distribute its funds among different assets in a manner as to derive sufficient income.

Mission Statement

To deliver credit facilities to customers of ONE Bank Ltd. with prudence and efficiency and establish OBL as the preferred credit service provider in the country in terms of wide range of credit products, competitive price, adherence to credit norms, exercising due diligence and effective management of risk assets.

Procedure for Giving Advance

The prospective borrower has to apply to OBL for loan by filling up of a specific Application form. After receiving the loan application form, OBL sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. This report is essential if the loan amount exceeds Tk.50 Lac. But OBL usually collects this report if the loan amount exceeds Tk.10 Lac. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank; if ‘yes’, then whether these loans are classified or not.

After receiving CIB report if the Bank thinks that the prospective borrower will be a good borrower, then the bank will scrutinize the documents. In this stage, the Bank will look whether the documents are properly filled up and signed then comes processing stage. In this stage, the Bank will prepare a Proposal.

A proposal contains following relevant information-

a) Name of the Borrower

b) Nature of Limit

c) Purpose of Limit

d) Extent of Limit

e) Security

f) Margin

g) Rate of Interest

h) Repayment

Credit Monitoring, Follow-Up and Supervision

OBL Officer Check on the following points,

The borrower’s behavior of turnover

The information regarding the profitability, liquidity, cash flow situation and trend in sales in maintaining various ratios.

The review and classification of credit facilities starts at Credit Department of the Branch with the Branch Manager and finally with Head office credit division.

Credit Policy of OBL

Preamble

ONE Bank Limited with prudence and efficiency and establish OBL as the preferred credit service provider in the country in terms of wide range of credit products, competitive price, adherence to credit norms, exercising due diligence, and effective management of risk assets.

Thus, based on this credit principles, OBL undertakes to establish a credit risk management culture through outlining and practicing minimum credit standards, assessing and managing risks, segregating risk taking and risk managing activities, etc. to ensure that all the business pursuits are focused on building and maintaining a diversified and rewarding quality credit portfolio which will reflect OBL’s

Risk taking appetite and

Risk managing skills and wisdom.

In light of the above, Credit Policy Guidelines are laid downto tap business opportunities within the parameters of Credit Risk Management constraints.

These guidelines focus on corporate and commercial segment of OBL’s credit portfolio. A separate guideline for Retail Portfolio (Consumer and SME) is in place.

Annual Review of Policy Guidelines

Policy guidelines are not static; they are reshaped with the changes of the economic and business environment. As such, there will be continuous updates, but focus will remain the same – maintaining a rewarding quality credit portfolio through anticipating and managing risks. However, formally Credit Policy will be reviewed once a year by the Board of Directors.

General Policy Guidelines

OBL extends loans to individuals, proprietorships, partnerships, limited companies – both private and public, government organizations, financial institutions, joint ventures and such other organizations having legal existence and necessary permissions for conducting business in Bangladesh.

OBL extends loans only to productive and legitimate business activities, which are socially desirable, nationally important, and financially viable; and will not lend for unproductive purposes, speculative ventures, or socially undesirable schemes.

While extending loans, OBL will abide by its Know Your Customer (KYC) policy, money-laundering regulations and will conduct its credit activities within the prescribed regulatory parameters of Bangladesh Bank & Bank Company Act. All statutory guidelines outlined in BOI guidelines, Industrial Policy, Export Policy, Import Policy, Transfer of Property Act, Registration Act, etc. are to be strictly abided by.

The intending borrower must have legitimate source of earnings, clear purpose of utilizing loans, specific sources of repayment, capacity to enter into loan agreements.

OBL discourages low net-worth, or highly leveraged borrowers

OBL does not engage in Name Lending or lending solely on the basis of market reputation of the borrower. All relevant information as required by OBL is to be furnished to support the credit proposal. However, exception may be allowed in specific cases where the borrower is not willing to divulge financial or proprietary information on the plea that dissemination might hurt business prospects. Such cases are to be handled at the discretion of the management and on exception basis.

OBL primarily extends loan in Taka.

OBL does not allow any credit facility against owner’s cheque or pledge of goods.

OBL’s unsecured lending practices are to be limited to extension of credit for short term, self-liquidating transactions.

Overdraft or other continuous loans should have the provision of annual clean up unless there are evidences that such accounts have 3 / 4 times turnover.

OBL may consider term loans for five years or more.

OBL does not accept subordinate position to other lenders.

Credit Portfolio must be in line with Bangladesh Bank guidelines of Capital Adequacy.

OBL will primarily depend on its own deposits for lending and inter-bank borrowing will not exceed 20% of its loan portfolio.

The tenor of Loans and Deposits should be matched as much as possible.

OBL extends credit facilities in the areas where it has branch network and branches are sufficiently staffed to monitor the loans.

OBL does not extend credit facilities where it does not have the industry / business knowledge or highly specialized skills needed to properly evaluate the loan proposals.

Exceptions to the credit policy guidelines are to be referred to the Board of Directors.

Credit Portfolio Mix

Credit Portfolio to be guided by the following Sectoral Caps

Table 4.1: Credit Portfolio Mix

Sector Caps *	%
Trade Finance	40 %
Industry — Short term working capitals	30 %
Retail & SME	10 %
Project – Finance Medium & Long Term	10 %
Others	10 %
Total	100 %

Figure : Credit Portfolio Mix

*The Caps will be revised from time to time depending on the market conditions, shift in Government Policy and ONE Bank’s credit focus.

Trade Finance is prime focus

Being a new bank, trade finance is primary focus in the present context as:

Ê Relationship consists of specific transactions (deal basis),

Ê Fund based income is supplemented by FX gains, commission and fees,

Ê Transactions are short-term and self-liquidating in nature.

Retail and SME is the future focus, as it is a very promising sector because of:

Ê growth of micro, small and medium enterprises,

Ê burgeoning middle class with rising disposable incomes,

Ê installment loans allow for cash repayment on monthly basis matching the salary cycle of borrowers commensurate with monthly disposable income,

Ê risk is minimized spreading among large number of borrowers,

Ê Higher interest rate.

Corporate / project financing is preferred

To take advantage of stream of multiple earnings over the years. But this is subject to meticulous appraisal of market, technical, financial and management aspects of the project over a period of 5 – 7 years in order to assess inherent risk because of long tenure.

Agro based industries / business is encouraged

As a thrust sector declared by the GOB to contribute to national goal of poverty alleviation through employment generation.

Loan Products and Services of OBL

The range of products and services of OBL includes Trade finance (i.e., export, import and domestic trading), Project Finance, Retail Finance, Correspondent Banking, Treasury etc. Each of these areas may involve credit risk to a client or to a third party, providing both revenue as well as risks.

However, ONE Bank offers the following loan products:

Table 4.2: Showing different types of Advances offered by OBL

Name:	Description	Purpose	Risk/Payment	Tenor/ Validity
SOD	Secured Overdraft	-General Purpose.	-100% cash covered. -No Credit Risk. -Evergreen.	-12 Months
OD	Overdraft	General Purpose.	-High Credit Risk. -Recourse on Sales. -Ever Green.	-12 Months.
Time loan	Time Loan Against other security/collateral.	To Finance Inventory & accounts receivables on short time.	Recourse on Sales.	12 Months.
Term Loan	Term Loan against Fixed Assets.	-To finance fixed Assets/	-Recourse on fixed asset. -High credit risk.	-Over 12 Months -Max 7 years
PC	Packing Credit Against Export Order.	– To finance export LC pre – shipment Finance	-Performance Risk -Lien on Export LC.	180 Days.
Fwd FX	Forward contract.	Cover exchange risk against LC	Performance Risk.	180/360 Days.
PAD	Payment Against Document.	-Advance Against Sight LC. -Forced Loan	Recourse on title to import documents.	21 Days as per Bangladesh Bank rules.
LATR	Loan Against Trust Receipt.	-To finance import LCs.	-Recourse on Sales. -Clean finance.	180 Days
CC	Cash Credit against Inventory and Book debts.	-To finance inventory. -Other businesses operation. -General Purpose.	-Recourse on Sales. -Evergreen.	12 Months.
OAP	Own Acceptance Purchase.	-To refinance OBL acceptance. -Forced loan.	-No recourse. -Clean finance -Evergreen.	12 Months.
LDBP	Local Documentary Bill Purchase.	-To purchase against Usance LC. -Upfront interest to realize.	-Recourse on Banks through acceptance. -Residual on client.	180 Days.
FDBP	Foreign Documentary Bill Purchased.	-To purchase / discount/ negotiate export document against sight export LC. – Upfront interest to be realized (diff in FX rate)	-Recourse on Banks. -Residual on client.	45/180 Days
SLC	Sign Letter of Credit.	For imports	Recourse on titles to import documents.	12 Months.
ULC	Usance Letter of Credit.	For imports.	Recourse on sales.	12 Months.
BBLC	Back to Back Letter of Credit against Master Export LC and subsequent Acceptance.	For imports of raw materials and accessories for subsequent.	From export proceeds.	-BBLC Max 180 Days. -Accept Max 180 Days.
LG	-Letter of Guarantee. BB/PG/APG/Retention Bond/ Payment Guarantee.	For contractual obligations.	-Performance Risk -Evergreen.	-Specific Period -Open ended to be discouraged

Loan Pricing

Loan pricing decision is taken by the ALCO, where among others HOM, HOC and Head of Treasury are members. The basis of pricing are:

Cost of Funds

Risk exposure of obligor and industry

Risk appetite of OBL in the industry / business segment

Maturity of loans

However, OBL will offer competitive price to remain as preferred banker to existing and potential clients. Their pricing schedule will be published in ranges with Mid Rates for different sectors. ALCO will decide in the Mid Rates considering the above factors. Lower ranges of price will be considered for prime clients on the basis of their low risk grades. Similarly higher range of prices will be considered for riskier clients because of their higher score in the risk grade.

Credit Risk Analysis (CRA)

Credit Risk is the possibility that a borrower or counter party will fail to meet obligations. Credit Risk arises from the bank’s dealing with or lending to the corporate, individual and other banks or the financial institutions. To minimize credit risk ONE Bank Limited has comprehensive Credit Risk Management (CRM) policies and procedures. They are –

Risk Identification

Risk factors internal to bank and financial institutions.

Risk factors on account of borrowing parties.

Internal Risk Factors	External Risk Factors
Risk in planning Risk in execution Marketing risk Financial risk Managerial risk	Input utility availability Government policies Natural calamities Technological obsolescence Political situation

Risk Assessment

In this case, ONE Bank Limited measures the risk before the loan disbursement. It is a pre- sanction stage. Here the management tries to assess the risk which may be raised from the policy. Then the risk obligations are included in the agreement between the bank and party.

Credit Risk Grading (CRG)

It is an important tool of CRM to understand dimensions of the risk in credit transactions. ONE Bank Limited aggregates grading across the borrowers’ activities and lines of business reflecting the quality of credit portfolio of a branch, region or a bank. It is a pre sanction of lending decision and price setting and post sanction of review of grading and precautions.

Table: 4.3 Short Name and Number which is used by ONE Bank Limited is-

Grading	Short Name	Number
Superior	SUP	01
Good	GD	02
Acceptable	ACCPT	03
Marginal	MG	04
Special Mention	SM	05
Sub Standard	SS	06
Doubtful	DF	07
Bad &Loss	BL	08

Source: ONE Bank Limited

Credit Risk Rating Model

ONE Bank Limited follows the following steps in the credit risk rating model –

Ø Include all relevant aspects

Ø Rating scale: Beginning from the minimum risk category to loss asset category

Ø Rating parameters:

o Financial

o Industrial

o Management etc

Ø Weight age of risk parameters

Ø Preview period of risk rating

Ø Authority to approve risk rating

Credit Rating Report

One Bank Limited has been rated by the Credit Rating Agency of Bangladesh (CRAB) Limited on the basis of Financial Statement for the year ended on 31^st December, 2009. The summery of the ratting is presented below:

Year 2008 [CRISL]	Year 2009 [CRAB]	Definition
Long Term ‘A’	Long Term ‘A1’	Commercial Bank rated A1 in the Long Term means it has strong capacity to meet their financial commitments. A is judged to be of high quality and are subject to low credit risk.
Short Term ‘ST-2’	Short Term ‘ST-2’	Commercial Bank rated ST-2 in the Short Term is considered to have strong capacity for timely repayment and are characterized with commendable position in the term of liquidity, internal fund generation, and access to alternative sources of funds is outstanding.
Date of Rating		June 7, 2010

This rating is one step higher than previous year’s rating reflecting the bank’s steady qualitative growth momentum.

Interest rate

3% above of the instrument rate but generally the minimum rate is 12% and the maximum rate is 18%.

Applications Received & Declined

Table 4.4 reveals the loan application received by the bank for the year’s 2007 to2009. It is observed from the table that the major source of application was the sales force. The table given shows the member of loan application received for the last three years.

Table: Loan Applications Received

Year	No. of loan application	% Change
2007	3027	—
2008	5700	88.30%
2009	6128	7.51%

Source: ONE Bank Limited

The reason behind the massive increase in the loan application from 2007 to 2009 is due to the flexible loan evaluation policy during that period and the aggressive marketing policy of the bank. It is observed from table 4.5 that the volume of loan application has received quite a lot in the last three years. In terms of volume the number of loan applications received are shown on table below,

Table: Loan Amount Received Form Applicant

Year	Volume of loan application	% Change
2007	1653,000	–
2008	3175,920	92.14 %
2009	3550,875	11.81 %

Sources: ONE Bank Limited

The loan application received in terms of volume varies a little from the number of loan applications received. The loan applications received were much higher in 2008 than it was in 2007 and 2008 although it increased its growth rate was not as high.

The loan applications that have been received are not all approved. Some of these are approved while others are declined which can be observed from table 4.6. The following table states the approved loan applications.

Table: Approved Loan Application

Year	Number	Volume (BDT in ‘000)	% Change (No)
2007	1850	964,856	–
2008	4077	2186,940	120.38%
2009	4555	2490,875	11.17%

Sources: ONE Bank Limited

As discussed earlier not all the loan applications are approved. Some applications although are approved for different or lesser amount than the one applied for. The rest of the loan applications are declined as they fail to pass the loan evaluation criteria set by the bank which has already been discussed. The declined loan applications are those which are not approved by the Central Compliance Unit (CCU) as they fail to meet the loan evaluation criteria set by the bank. Table 4.4 in the next page states the figures for these declined loan application in terms of their number and volume,

Table: Declined Loan Application

Year	Number	Volume (BDT in ‘000)	% Change (No.)
2007	1177	688,144	–
2008	1623	988,980	37.89%
2009	1573	1060,000	– 3.08%

Source: ONE Bank Limited

We can see in the table that the performance of personal loan appraisal policy was good for the years. This has been possible due to the bank’s aggressive campaign in getting the loans and setting challenging yet attainable targets to the bank officials.

A thorough credit and risk assessment is to be conducted before granting of loans and once approved; all facilities are to be reviewed at least annually.

Origination of Credit Proposals

The result of such assessment is to be presented in a Credit Memorandum (CM) for approval. The CM is to be originated from Relationship Manager (RM), who should be the owner of the customer relationship and is responsible for ensuring the accuracy of the entire CM. RMs shall follow the OBL Credit Principles, Credit Guidelines and Conduct due diligence on new borrowers, principals and guarantors to ensure such parties are in fact who they are.

The RMs shall adhere to the OBL is established Know Your Customers (KYC), Money Laundering Guidelines and Bangladesh Bank regulation at all times.

Call Report

The Call Report is to be routed through Head of Credit (HOC) and Managing Director (MD), for initial review and guidance to the RMs for subsequent actions.

Disbursement

After verifying all the documents, the client disburses the loan to the borrower by issuing a cheque book. A loan repayment schedule is also prepared by the bank and supplied to the borrower.

Follow – Up

v Continuous supervision

v Working capital assessment

v Stock report

v Break even analysis

v Rescheduling of repayment.

Recovery

In general, the loans are repaid in installment. This installment is according to bank directives. Some loans are repaid all at a time. If any loan is not repaid then notices are server to the customer. Sometimes legal action is also taken for recovery of the loan.

Assessment of Risk Area

The CM should also contain assessment of the following risk areas:

Borrower Analysis: The majority shareholder management team and group of affiliate companies shall be as