1.

1 Origin of the Report

The Applied Research Work program exercise a significant importance as it is undertaken after completion of a vast theoretical course, Organized by the Department of Business Administration, the students study thoroughly about the institutions. At the end of the program, the students are required to place the accomplishment and findings of the work through the writing of report covering the topic assigned to them. During the program each student is supervised and guided by a teacher of the department. It enables the students to develop their analytical skills and scholastic aptitudes. I have conducted a study on Credit Risk Analysis of First Security Islami Bank Limited. My supervisor Mr. Ashraful Ferdous Chowdhury, Lecturer, Department of Business Administration, Leading University, Sylhet, also approved the topic and authorized me to prepare this report as part of the fulfillment of internship requirement.

1.2 Objectives
The objective of this report is to focus on two broad issues. One is to briefly look at First Security Islamic Bank and understand the whole banking process, keeping close attention on their culture. The second objective and the main issues of this report is as follows

To briefly discuss about the different investments made by FSIBL and discuss their process, policies and regulations.

To briefly discuss about the consumer credit approval procedure of the Bank as a system. Analyze different important risk assessment criteria in credit risk management.

1.3 Scope
The report limits its scope to First Security Islamic Bank only.

1.4 Limitations

Information at the bank is confidential & critical. FSIBL maintains their credit policy and different statistical information strictly confidential.

The findings are not statistically validated. No statistical analysis is done. The findings are not statistically validated. It is done on a subjective analysis approach.

1.5 Methodology
1.5.1 Approach
The report is based on both primary and secondary research. The secondary research provided the main input for the report. This provided a theoretical basis of the report. The primary research was done to interlink between different concepts & processes of risk assessment.

1.5.2 Information Source

Information collected to furnish this report is both from primary and secondary in nature. This study is mainly based on the information extracted from various published annual reports, books, documents, study reports and articles. Interviews and discussion with the senior executives of the Bank gave some insights into the problems and issues of the study. The methods of collecting data followed throughout the study may be detailed as under:

FSIBL credit policy and guidelines Practical Banking experience of the banks officers. Discussion with the officers / executives of the Bank. Annual Reports Journals of existing literature Different websites.
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1.6 Report Organization

This report is divided in five chapters. The following chapter is the organization part i.e. this chapter will give an overview of First Security Islami Bank Limited. In chapter (iii) to Credit Risk Management Policy and Practice of FSIBL is critically analyzed focusing on Credit and Risk Assessment Process, Credit Risk Grading System, Credit Approval Process and Monitoring, Credit Administration Process, and Loan Classification and Recovery and finally chapter (iv) deals with Empirical Analysis, findings and conclusion.

2.1 HISTORICAL BACKGROUND

First Security Islami Bank Limited (FSIBL) was incorporated in Bangladesh on 29 August 1999 as a banking company under Companies Act 1994 to carry on banking business. It obtained permission from Bangladesh Bank on 22 September 1999 to commence its business. The Bank carries banking activities through its Fifty Three (53) branches in the country. The commercial banking activities of the bank encompass a wide range of services including accepting deposits, making loans, discounting bills, conducting money transfer and foreign exchange transactions, and performing other related services such as safe keeping, collections and issuing guarantees, acceptances and letter of credit. At the beginning, FSIBL started their business with traditional commercial banking services. However, from 2008 they converted their business to Islamic Banking with Islamic Shariah Act. The FSIBL has played a pioneering role in shaping the future of the Banking industry in Bangladesh since its inception. The Bank started in 1999 with 14 branches and now it has 53 branches in Bangladesh and recently the bank introduce an Exchange House in Canada. The Bank also maintains a comprehensive correspondent relationship with top ranking banks. FSIBL has already started their on-line, SMS and ATM banking facilities for their clients.

2.2 Vision of the Bank

Wherever you are, you can Bank with us is the motto of First Security Islami Bank. FSIBL is prepared to meet the challenge of the 21st century well ahead of time. To cope with the challenge of the new millennium it hired experienced and well-reputed banker of the country from the inception. The bank has efficient and dedicated professional and equipped with modem technology to provide the best service in the need of the people and thus to realize its vision. So the Bank defamed its Vision: to be the most efficient Islamic Bank in terms of customer service profitability and technology application.

2.3 Mission
To develop & deliver the most innovative products, manage customer experience, deliver quality services that contributes to brand strength, establishes a competitive advantage and enhances profitability, thus providing value to the stakeholders of the bank

2.4 Goal of the bank

To exceed customer expectations through innovative Islamic financial products & services and establish a strong presence to recognize shareholders expectation and optimize their rewards through dedicated work force.

2.5 Special Features of FSIBL

All activities of FSIBL are conducted under a profit/loss based system according to Islamic Shariah to get the nation rid of Usury. Its investment policies under different modes are fully Shariah compliant and well monitored by the board of Shariah Council. FSIBL has included online banking in its wide range of services. Bangladeshi software has been introduced in this feature to promote the local developers. FSIBL regularly arranges its AGMs (Annual General Meeting). Whenever needed EGMs (Extraordinary General Meeting) are also arranged. They believe in providing dedicated services to the clients imbued with Islamic spirit of brotherhood, peace and fraternity. The bank is committed towards establishing a welfare-oriented banking system to meet the needs of low income and underprivileged class of people. The Bank upholds the Islamic values of establishment of a justified economic system through social emancipation and equitable distribution of wealth. Following the Islamic traditions, it is assisting in the economic progress of the socially deprived people; in the creation of employment opportunities and in promotion of rural areas to ensure a balance development of the country.

2.6 FSIBLs Inter Division and Branch Coordination

All the 53 branches are computerized under distributed server environment. Another few branches are planning to open in near future. FSIBL has already started their on-line, SMS and ATM banking facilities for their clients. FSIBL have set up Wide Area Network through Radio, Fiber-Optics & other available communication media systems to provide any branch banking to their customers. Customer of one branch is now able to deposit and withdraw money at any of our branches.

2.7 Online Banking

FSIBL Online banking application addresses the needs of small, individual and corporate account holders of the bank. This application provides a comprehensive range of banking services that enable the customer to meet most of their banking requirements over the Net at any branch.

2.8 SMS Banking

SMS banking is a technology-enabled service offering from banks to its customers, permitting them to operate selected banking services over their mobile phones using SMS messaging. First Security Islami Bank Ltd. has officially launched SMS banking service from December 17, 2007.

2.9 Merchant Banking

FSIBLs Merchant Banking Group is strongly positioned to offer perfect financial solutions its clients business. They specialize in the arrangement of various forms of Foreign Currency Credits for Corporate. FSIBL provide the resources, convenience and services to meet its clients needs by arranging Foreign Currency credits through: Commercial loans Syndicated loans

 Lines of Credit from Foreign Banks and Financial Institutions FCNR loans Loans from Export Credit Agencies Financing of Imports.

2.10 Product and Services

In the memorandum and articles of association of the First Security Islami Bank is revised its area of operation is clearly written. The product of FSIBL is targeted to fulfill that aim. The product and services that are currently available are given below: Depository Products

First Security Islami Bank is now offering 09 depository products for mobilizing the savings of the general people. There are also emphasizing on non-fund business and fee based income. Bid bond/ bid security can be issued at our customer's request. FSIBL is posed to extend L/C facilities to its importers / exporters through establishment of correspondent relations and Nostro Accounts with leading banks all over the world. Loan Products

First Security Islami Bank offers a wide range of loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and have good return to the investment as well as satisfy the client. Other Product and Services

The bank has its concentration for new product and services development for satisfying its customer and increasing its customer base. They prefer now faster service with least cost. For delivering faster service the bank has introduced online banking service. There are other products and services that FSIBL has introduced. They are: Online Banking Services Locker Services Utility Bills
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ATM services

3.1 Introduction
Risk is inherent in all commercial operations. For Banks and Financial institutions, Credit risk is an essential factor, which needs to be managed properly. Credit risk virtually is the possibility that a borrower will fail to repay debt in accordance with the terms of sanction. Credit risk, therefore, arises from the bank's lending operations. In the present day's state of deregulation and globalization, in banks a range of activities have increased, so also are the risks. Expansion of bank's lending operations rang new products have forced the banks to confront newer risk areas and therefore to work out proper risk addressing devices. Credit risks are so exhaustive that a single device cannot encompass all the risks. Moreover lending risks today have assumed such diverse nature, that newer techniques are to be applied to effectively contain the risks. In order to effectively contain risks, credit risk management has to be done in order to enable the bank to proactively manage loan portfolios in order to minimize losses and earn acceptable level of return for the shareholders. In the present scenario of fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and Dis-intermediation, it is essential to undertake robust credit risk management policies and procedures, sensitive and responsive to these changes. First Security Islami Bank Ltd. (FSIBL) is committed to extend high quality services to its clients through different financial products and profitable utilization of fund by undertaking various lending operations including financing trade, consumer finance, commerce & Industry etc. In conducting lending operations FSIBL always bears in mind the essence of proper risk identification and their effective management. It is also recognized that failure in proper identification and management of risks may result in a large quantum of bank advances turning into non-performing. In the above background, First Security Islami Bank Ltd. calls attention to the need of an effective credit risk management process has prepared the policy guidelines for Credit Risk Management. The policy will be reviewed annually by the Board of Directors of the bank. The policy must be strictly followed by all concerned officials and any deviation from the risk management policies to be clearly identified and justification for approval to be provided. The Credit Risk Management System of FSIBL covers the following main purposes, which make the credit management system more effective and fruitful.
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1) To provide directional guidelines to all concerned to improve risk management culture & establish minimum standard for managing risks in credit operations. 2) To adopt an appropriate working method. 3) To keep legal aspects relating to loans and advances vivid. 4) To introduce and adopt uniform practice in working. 5) To make working procedure rational. 6) To make lending correct information based. 7) To identify proper lending area. 8) To analyze all aspects related to credit and ascertain viability of lending. 9) To make credit documentation exhaustive. 10) To ensure proper supervision, monitoring & follow up. 11) To ensure safe return of money lent, avoidance of credit loss and strengthen asset quality and to protect bank's interest.

3.1.1 Lending principles

To safeguard Bank's interest over the entire period of the advance, FSIBL generally gives emphasis on a comprehensive view of the capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all legal formalities, and completion of all documentation and finally a constant watch on the account. Where advances are granted against the guarantee of a third party, that guarantor must be subjected to the same credit assessment as made for the principal borrower. The basis of security valuations is expert third party assessments, current market price and forced sale value. While making lending decisions, particular attention should be given to the analysis of credit proposals received from heavily leveraged Companies and those dealing in non-essential consumer goods, taking special care about their debt servicing abilities. Besides the bank gives emphasis on the following sound credit principles: (a) Present and future business potentiality for optimum deployment of Bank's fund to increase return on assets. (b) Preference for self-liquidating quality business.
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(c) Avoiding marginal performers. (d) Risk dispersion is basic to sound credit principles and policies. Bank should be careful about large and undue concentration of credit to industry, one obligors and common product line etc. (e) Managing the amount, size, nature and soundness of one-obligor exposures relative to the size of the borrower and Bank's position among his other lenders. (f) Personal guarantees of the principal partners or the Directors of the Companies and where necessary, subordination agreement should be obtained. (g) The asset-conversion or transaction flow cycle and the net trading cycle of the customer i.e. the terms on which they conduct-the business.

3.1.2 Credit evaluation

To minimize default risk of credit, FSIBL generally adopts the following credit evaluation process: Prevailing credit practices in the market. Credit worthiness, background and track records of the borrower. Financial standing of the borrower supported by financial statement and other documentary evidences. Legal jurisdiction and implications of applicable laws. Effect of any applicable regulations and laws. Purpose of the credit facility. Terms and conditions of the credit facility. Viability of the business concern. Cash flow analysis and also projections thereof. Quality, value and adequacy of security, if available. Risk taking capacity of the borrower. Entrepreneurship and managerial capabilities of the borrower. Reliability of the sources of repayment. Volume of risk in relation to the risk taking capacity of the bank or company concern. Profitability of the proposal to the bank or company concerned.
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Credit Risk Grading Yield from the facility Market aspect Total global exposure of the borrower CIB Status of borrower

3.1.3 Policy Guidelines

The Investment Policy guidelines of the Bank describes details fundamental Investment risk management policies, outlines general principles that are designed to govern the implementation of more detailed Investment procedures and Investment risk analysis / risk grading system.

3.1.4 Investment Guidelines

The basic principles of Investment are described in this section. It must be clearly understood at the outset that these principles are not inflexible and are given as guidelines for protecting the Investments. The followings are the general principle to be considered for Investment to customer on a basis consistent with the global operational objectives and business strategies of the bank: a. The bank shall provide suitable Investment services and products for the markets in which it operates. b. Investments shall normally be Investment from customers deposit and not out of temporary funds or borrowing from other Banks. c. Investment facility will be allowed in a manner, which will in no way compromise with Banks standards of excellence. d. All Investment extension must comply with the requirements of Banks Memorandum and Articles of Association, Banking Companies Act 1991 as amended from time to time / Bangladesh Banks instructions and other applicable rules and regulations. e. A prudent banker should always adhere to the following principles of Investment to his customer: (1) Background, character and capability of the borrowers, (2) Purpose of the facility, (3) Term of facility, Source of repayment, (8) Diversity
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(4) Safety, (5) Security, (6) Profitability, (7)

It should be remembered that selection of the appropriate borrowers, proper follow-up and end-use supervision through constant follow-up and monitoring are the cornerstone for timely recovery. These guidelines will be updated annually. Before selecting a customer / client and subsequent recommendation for Investment, the Investment Officer / Relationship Manager must observe the following basics of Investment:

Industry and Business Segment Focus As a general practice First Security Islami Bank Limited will definitely concentrate its business in Trade Investment / Export Import business and all types of Commercial Investment, Industrial / Project Investment / Syndication and structured Investment / SME Investment and other specialized programs except otherwise restricted by the Government or indicated as unethical and banned items. The Bank will give emphasis to diversify its business portfolio commensurate with economic and business trend, life cycle of the products, demand supply gap, social and national obligation etc. The Banks policies for Investment in different major sectors are summarized as follows:

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SL 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12)

Sectors Textile/Spinning/Sweater/Knitting/Denims & Garments Cement Construction / Real estate / House building Telecommunication Communication Information Technology (IT) Project Agro-based Industry Hospital / Clinic / School / College / University Healthcare / Pharmaceuticals / Medicine Electrical / Electronic appliance Investment to NBFI Special Program: Consumer Investment Scheme, SME Investment Scheme, Lease Investment Scheme, Hire

Policies To expand To maintain To maintain To maintain Selective basis To expand To expand Selective basis To expand To expand Selective basis

Purchase, Earnest Money Investment Scheme, Mortgage Selective basis Investment, Employees House Building Scheme, ATM, 13) 14) 15) 16) 17) 18) 19) 20) VISA Investment Card, EEF, etc. Plastic / Packaging Leather Steel and Engineering Edible oil Scrap Vessel Paper / Pulp / Partex Chemicals Others Selective basis To expand To expand To maintain Restricted way To expand To maintain Based on merit

The Banks policy is to handle the specialized business sectors / segments by setting up separate units in Head Office Investment Division. In view of this, Bank has a plan to set up the following units in Head office Investment Division:

a. Corporate Banking (already implemented), b. Project Investment, c. Syndication Investment, d. Garments Sector, e. SME (already implemented), f. Specialized Schemes like a. Consumer Investment Scheme,
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b. Lease Investment Scheme, c. Hire Purchase, d. Earnest Money Investment Scheme, e. Mortgage Investment, f. Employees House Building Scheme, g. ATM, VISA Investment Card, EEF, etc. The Policies for the above specialized segments / sectors have been / to be circulated to all concerns from time to time.

3.1.5 Types of Investment Facilities

The Banks Policy is to introduce diversified / new types of Products / Product derivatives along with usual Banking Products. At present the Bank offers the following facilities: i. Investment / Deployment of Funds: a. Bai-Murabaha (Deferred Lump Sum/ Installment Sale) b. Bai-Muajjal (Deferred Installment / Lump Sum Sale) c. Ijara (Leasing) d. Musharaka (Joint-Venture Profit-Sharing) e. Mudaraba (Trustee Profit-Sharing) f. Bai-Salam (Advance Sale and Purchase) g. Hire-Purchase h. Direct Investments i. Post Import Investment j. Purchase and Negotiation of Export Bills k. Inland Bills Purchased l. Murabaha Import Bills m. Bai-Muajjal Import Bills n. Pre Shipment Investment o. Quard-ul-Hasan (Benevolent Investment) ii. Letter of Guarantee:
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a. Tender Guarantee b. Performance Guarantee c. Guarantee for Sub-Contracts d. Shipping guarantee e. Advance Payment guarantee f. Guarantee in lieu of Security Deposits g. Guarantee for exemption of Customs Duties h. Others iii. iv. Letter of Credit (L/C) / Back to Back Letter of Credit (L/C) Specialized Schemes a. b. c. d. e. f. g. h. Consumer Investment Scheme, SME Investment Scheme, Lease Investment Scheme, Hire Purchase, Earnest Money Investment Scheme, Mortgage Investment, Employees House Building Scheme, ATM, VISA Investment Card, EEF, etc.

3.1.6 Single Borrower / Group Limits / Syndication

The Bank may extend the maximum Investment facilities (funded/non-funded) to a single client/enterprise/group as per guidelines of Bangladesh Bank BRPD circulars issued / to be issued from time to time on the following criteria: Clients falling under Grade 1 category as per Banks Risk Grading System. Covered by adequate collateral security or Guarantee. Established long term business / Banking relationship. The total outstanding Investment facilities by the Bank to any single client or enterprise or organization / group shall not at any point of time maximum ceiling as

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stipulated by the extreme Banking Authority i.e. Bangladesh Bank or as advised by Bangladesh Bank from time to time. Total large Investment portfolio of the Bank will not exceed the limit as stipulated by the Bangladesh Bank depending on the capital base and the volume of the non-performing Investments of the Bank in the portfolio or as advised by Bangladesh Bank from time to time. In line with basic principles of Investment, the Bank always discourages to lend its maximum ceiling to a single client / group to minimize the risk. The Bank will prefer as a policy guideline to arrange syndicated Investment / participate in the syndicated / consortium Investment arrangement or in a club Investment. One obligor / Group Concept: Group Relationship would be established as per Bangladesh Bank guidelines provided / to be provided from time to time.

3.1.7 Investment Caps

The Bank Management will establish a specific industry sector exposure cap to avoid over concentration in any one-industry sector. Sector-wise allocation of Investment shall be made annually with the approval of the EC of the Board / Board of Directors. Diversification of Investment Portfolio will be encouraged so as to reduce the risk of dependence on a particular sector for balanced socio-economic development of the country. Branches shall submit a report outlining trend and outstanding to the Head of Investment Administration Division on quarterly basis for onward submission to the Executive Committee of the Board of Directors / Board of Directors for information/ perusal/ guidance.

3.1.8 Discouraged business types (areas of business)

Military Equipment / Weapons Investment,
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Companies listed on CIB black list or known defaulters, Highly Leveraged Transactions, Investment of Speculative Investments, Tobacco Sector / Logging, Mineral Extraction / Mining or other activity that is Ethically or Environmentally Sensitive, Counter parties in countries subject to UN sanctions, Bridge Investment [Equity/Debt issuance as a source of repayment], Investment to Holding Companies.

3.1.9 Investment Facility Parameters

The Bank in general will approve / renew trade Investment facility for the period of 01 (one) year from the date of approval / last expiry date. The Bank will extend medium term Investment for 3 (three) years period. The Bank will extend long term Investment for maximum period of 7 (seven) year including grace period of 6 (six) months to 18 (eighteen) months (depending on the nature of Project) for project Investment but in case of need, in syndication or club Investment, the Bank may extend the period of Investment up to 8 (eight) years or as per consensus of the syndicated members. However, in case of House Building Investment (General), the repayment period will be a maximum of 20 (Twenty) years. House Building Investment to Banks employee shall be governed as per policy guidelines of Employees House Building Investment scheme. Besides above, the Bank will extend Investment facilities under special program like Consumer Investment Scheme, Small Investment Scheme, SME Investment, Doctors Investment Scheme, Women Entrepreneurship Development Project, Personal Investment, Car Investment, House Building Investment (General) / Mortgage Investment, NBFIs as per policy set/to be set by the Bank under the policy guidelines of the specific scheme.

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The rate of Profit / Commission / Charges / Fees etc. would be as per the approved schedule of charges with variation permissible as per Bangladesh Bank guidelines and with the approval of competent authority.

The Profit rate to be charged and to be paid out on yearly basis except the especial schemes and unless otherwise specified in the approved terms. Repayment of term Investment would be fixed on monthly/quarterly basis. In general, the cash margin for L/C would be 10% of the L/C amount or on the basis of Banker Customer relationship subject to the minimum requirement of Bangladesh Bank whichever is higher.

For the import of Capital machinery, the cash margin for L/C would be 25% 30% or on the basis of Banker Customer relationship subject to the minimum requirement of Bangladesh Bank whichever is higher.

The competent authority of the Bank, as mentioned above, would specifically approve any exception. Security accepted against Investment facilities shall be properly valued and shall be affected in accordance with Laws of the country in which the security is held. An appropriate margin of security will be taken to reflect such factor as the disposal costs or potential price movements of the underlying assets.

Accepted Securities: Cash/Cash equivalent, Land and Building (registered mortgage with registered IGPA), hypothecation / ownership of Plant and Machinery, stock of goods, assignment of bills / receivables, book debts, pledge of shares, guarantee / Corporate Guarantee, etc.

Valuation of the landed property / Building / Machinery / Stock of Raw materials / finished products shall be done by the Banks enlisted professional surveyors duly checked by the Bank officials.

Mortgage formalities including execution of registered IGPA must be completed as per legal vetting of the Banks approved enlisted Lawyer. The value of the mortgage property shall be preferably being double of the facility to be extended depending upon other security coverage.

The security condition may be relaxed depending upon the Investment worthiness of the client / Banker-Customer relationship / potentiality of the business.
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Any exceptions of the parameters mentioned above are subject to be approved by the competent authority as per delegated power approved by the Board of Directors

3.1.10. Cross Border Risk / Political and Sovereign Risk

Risk associated with cross border Investment. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or Profit obligation, distinguished from ordinary Investment risk because the difficulty arises from a political event, such as suspension of external payments. For example, export documents negotiated for countries like Nigeria. This risk can also be named as Third world debt crisis

3.1.11. Pricing Policy

Profit rates/pricing of Investments, charges, commissions, etc. on various Investment categories will depend on the level of risk, period of Investment and type of security offered. The higher the risk, the higher will be the Profit rate. However, exceptions shall be made in case of Investment in national priority sectors. The Bank from time to time circulate the Profit rate / pricing of Investments / charges / commissions, etc. to its branches with the approval of competent authority and as per guidelines of Bangladesh Bank. As on date the Bank fixes a mid rate for Investment based on the Average Cost of Fund. All pricing of Investments shall, however, have relevance to the market condition and be approved by the appropriate authority of the Bank.

3.1.12. Investment and Marketing Fundamentals

To place a high priority on the quality of Investment exposure, new proposals Maximization of profit is the basic aim of the bank, as such every profit must meet Banks Investment criteria review for improving risk positions. opportunity should be explored and professional skills be employed in this direction. To avoid unnecessary wastage of time, energy and ambiguity a clear, concise To be thoroughly familiar with the Banks policies and functions.
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and summary type communications shall be used.

To keep the expense burden of Investment operations to the barest minimum To contribute ones best in all matters where his approval, concurrence or To apply strong common sense in all Investment matters by raising questionsTo avoid all temptations which may jeopardize or compromise the Banks risk

and endeavor to improve the cost efficiency of Investment operations. other action is involved. does this make sense? Is there a better way? How to improve this? assets? 3.2 Credit Risk Assessment, Policies and regulations

3.2.1. Investment Assessment and Risk Grading

All financial activities involve a certain degree of risk and particularly, the financial institutions of the modern era are engaged in various complex financial activities requiring them to put proper attention to every detail. Investment Assessment A thorough Investment and Risk assessment shall be conducted for all types of Investment proposals. The results of this assessment to be presented in the approved Investment Appraisal Form that originates from the Investment Officer / Relationship Manager (RM) and is to be approved by the Investment Committee / Executive Committee of the Board of Directors / Board of Directors. The Investment Officers / RM is the owner of the customer relationship and must be held responsible to ensure the accuracy of the entire Investment application / proposal submitted for approval. The Investment Officer / RMs must be familiar with Banks Investment Guidelines and should conduct due diligence on new borrowers, principals and guarantors in line with policy guidelines.

Investment Appraisal should summarize the results of Investment Officers / RMs risks assessment and includes, as a minimum, the following details: Amount and type of Investment(s) proposed

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Purpose of Investment(s) Results of Financial analysis Investment structure (Tenor, Covenants, Repayment schedule, Profit) Security Arrangements

KYC Concept The Investment Officers/RM must know their customers and conduct due diligence on new borrowers, principals and guarantors to ensure such parties are in fact who they represent themselves to be i.e., Know Your Customer (KYC). The Banker Customer relationship would be established first through opening of CD/ STD / SB accounts. Proper introduction, photographs of the account holders / signatories, passport, Trade License, Memorandum and Articles of the Company, certificate of incorporation, certificate of commencement of business, List of Directors, resolution, etc. i.e. all the required papers as per Banks policy and regulatory requirements are to be obtained at the time of opening of the account. A declaration regarding approximate transaction to the account is to be obtained during opening of account. Information regarding business pattern, nature of business, volume of business etc. is to be ascertained. Any suspicious transaction must be timely addressed and brought down to the notice of the Head Office / Bangladesh Bank as required and also appropriate corrective measures to be taken as per the direction of Bank Management/Bangladesh Bank.

Risk Management/Investment Risk Assessment Investment Decision A comprehensive and accurate appraisal of the risk in every Investment proposal of the Bank is mandatory. No proposal can be put on place before approving authority unless there has been a complete analysis. In order to safeguard Banks Profit over the entire period of the Investment, a comprehensive view of the capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all regulatory /legal formalities, condition of all documentation and finally a continuous and constant supervision on the account are called
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for. It is absolute responsibility of the Investment Officer / RM to ensure that all the necessary documents are collected before the proposal is placed for approval. Where Investments are granted against the guarantee of the third party, that guarantor must be subject to the same Investment assessment as made for the principal borrower. While making Investment decisions, attention shall be given to the analysis of Investment proposals received from heavily leveraged companies and those dealing in non-essential consumer goods. Special care regarding their debt servicing abilities is to be taken. Emphasis shall be given on the following several Investment principles: Present and future business potentiality for optimum deployment of Banks fund to increase return on assets, Preference for self liquidating quality business, Avoiding marginal performers, Risk depression is basic to sound Investment principles and policies. Bank shall be careful about large and undue concentration of Investment to industry, one obligor and common product line etc., Managing the amount, size, nature and soundness of one-obligor exposures relative to the size of the borrower and Banks position among his other lenders, Personal guarantee of the principal partners or the Directors of the Company shall be obtained.

3.2.2 Prudential Regulations:

1. FACILITIES TO RELATED PERSONS The consumer finance facilities extended by bank to the directors, major shareholders, employees and family members of these persons shall be at arms length basis and on normal terms and conditions applicable for other customers of the banks. The Bank shall ensure that the

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appraisal standards are not compromised in such cases and market rates are used for these persons. 2. TOTAL FINANCING FIACILITIES TO BE COMMENSURATE WITH THE INCOME While extending financing facilities to the customers, the bank would ensure that the total installment of the loans extended by the Bank is commensurate with the take home income/disposable income and repayment capacity of the borrower. This measure would be in addition to banks usual evaluations of each proposal concerning credit worthiness of the borrowers, that the banks' portfolio under consumer finance fulfills the prudential norms and instructions issued by the Central Bank and does not impair the soundness and safety of the bank itself. 3. CLASSIFICATION AND PROVISIONING FOR ASSETS

Subjective evaluation of performing and non-performing investment portfolio shall be made for risk assessment and, where considered necessary, any account including the performing account will be classified, and the category of classification determined on the basis of time based criteria shall be further downgraded. Such evaluation shall be carried out on the basis of credit worthiness of the borrower, its cash flow, operation of the account, adequacy of the security, inclusive of its realizable value and documentation covering the advances. 4. RESCHEDULING OF INVESTMENT/LOAN Rescheduling of investment/loan will be governed by rules & regulations as prescribed by Bangladesh Bank from time to time. 5. TRANSFER FACILITIES FROM ONE CATEGORY TO ANOTHER TO AVOID CLASSIFICATION The bank shall not transfer any investment/loan or facility to be classified from one category of consumer finance to another to avoid classification. 6. CREDIT INFORMATION BUREAU (CIB) CLEARANCE

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While considering proposals for any exposure, banks should give due weight age to the credit report relating to the borrower and his group obtained from a Credit Information Bureau (CIB) of Bangladesh Bank. The condition of obtaining CIB report will be governed by rules & regulations as prescribed by Bangladesh Bank from time to time.

REGULATIONS FOR CREDIT CARDS REGULATION 1 The bank should take reasonable steps to satisfy themselves that cardholders have received the card, whether personally or by mail. The banks should advise cardholders of the need to take reasonable steps to keep the card safe and the PIN secret so that frauds are avoided. REGULATION 2 Bank shall provide the credit card holders with the statements of account at monthly intervals, unless there has been no transaction of any outstanding balance on the account since last statement. REGULATION 3 Bank shall be liable for all transactions not authorized by the credit card holders after they have been properly served with a notice that the card has been lost/stolen. However, the bank's liability shall be limited to those amounts wrongly charged to the credit card holder's account. In order to mitigate the risks in this respect, the banks are encouraged to take insurance cover against wrongly charged amounts, frauds, etc. REGULATION 4 In case the cardholders make partial payment, the banks should take into account the partial payment before charging service fee/mark-up amount on the outstanding/billed amount so that the possibility of charging excess amount of mark-up could be avoided.

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REGULATION 5 Due date for payment must be specifically mentioned on the accounts statement. If fine/penalty is agreed to be charged in case the payment is not made by the due date, a clear mention of the same should be given in the agreement. REGULATION -6 Maximum unsecured limit under credit card to a borrower (supplementary cards shall be considered part of the principal borrower) shall not exceed Tk. 500,000/-. The banks may allow financing under the credit card scheme in excess of the limit of Tk. 500,000/-, provided the excess amount is secured appropriately. However, in no case the limit will be allowed to exceed Tk. 2 million. In case of foreign currency cards, cards can be issued subject to repayment is made against respective foreign currency account or against lien of foreign currency quota allocated to Bangladeshi nationals by Bangladesh Bank from time to time. REGULATIONS FOR HPSM (AUTO) REGULATION 1 The vehicles to be utilized for commercial purposes shall not be covered under the Prudential Regulation for consumer finance. Any such financing shall ensure compliance with existing regulations covering lending. These regulations shall only apply for financing vehicles for personal use. REGULATION 2 The maximum tenure of the HPSM (Auto) investment shall not exceed five-year. REGULATION 3 The bank shall not allow Hire Purchase under Shirkatul Milk (Auto) (including insurance) exceeding TK. 5 million per individual under this head. For the purpose of this regulation, auto facility to the dependent members of an individual shall also be treated as part of the exposure of that individual. While allowing HPSM (Auto), the bank shall ensure that the minimum down payment does not fall below 20% of the value of vehicle.
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REGULATION 4 In addition to any other security arrangement on the discretion of the banks, the vehicles financed by the banks shall be properly secured by way of hypothecation. REGULATION 5 The banks shall ensure that the vehicle remains properly insured (comprehensive) at all times during the tenure of the investment. REGULATION 6 The clause of repossession in case of default should be clearly stated in the investment agreement. At least 15 days before enforcing repossession, banks shall send a legal notice to the borrower through courier service of registered mail against proper acknowledgment. The repossession expenses charged to the borrower shall not be more than actual incurred by the bank. However, the maximum amount of repossession charges shall be listed in the schedule of charges provided to customer. The banks shall develop an appropriate procedure for repossession of the vehicles and shall ensure that procedure is strictly in accordance with law. REGULATION 7 A detailed repayment schedule should be provided to the borrower at the outset. Where alterations become imminent because of late payment or prepayment and the installment amount or period changes significantly, the revised schedule should be provided to the borrower at earliest convenience of the bank but not later than 15 days of the change. Further even in case of insignificant changes, upon the request of the customer, the bank shall provide him revised repayment schedule free of cost. REGULATION 8 The bank desirous of financing the purchase of used cars shall prepare uniform guidelines for determining value of the used vehicles. However, in no case the bank shall finance the cars older than five year.

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REGULATION 9 The bank should ensure that a good number of authorized auto dealers are placed at their panel to eliminate the caches of collusion of other unethical practices.

REGULATIONS FOR HPSM (HOUSE BUILDING) REGULATION 1 The maximum per party limit in respect of housing finance by the banks will be Tk 7.5 million. The housing finance facility shall be provided at a maximum debt equity ratio of 80:20. REGULATION 2 The bank shall ensure that at no time the total exposure under house financing exceeds 10% of the net consumer advances. REGULATION 3 Bank will extend mortgage investment for housing, for a period not exceeding twenty year. Bank should be mindful of adequate asset liability matching. REGULATION 4 The house financed by the bank shall be mortgaged in bank's favour by way of registered mortgage with registered Power of Attorney. REGULATION 5 Bank shall either engage professional staff or arrange sufficient training for concerned officials to evaluate the property, assess the genuineness and integrity of the title documents, etc. REGULATION 6 The bank's management should put in place a mechanism to monitor conditions in the real estate market (or other product market) to ensure that its policies are aligned to current market conditions.

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REGULATION 7 Banks must develop floating rate products for extending housing finance, thereby managing interest rate risk to avoid its adverse effects. Banks also must develop in-house system to stress test their housing portfolio against adverse movements in interest rates as also maturity mismatches. REGULATIONS FOR PERSONAL INVESTMENT INCLUDING INVESTMENTS FOR THE PURCHASE OF CONSUMER DURABLES REGULATION 1 Limits per person for such investment will be Tk.3 lac without any securities. However, bank may lend higher amounts provided the investments are secured appropriately. But, in no case, the investment amount will be allowed to exceed Tk.10 lac. The investment secured against liquid securities shall however, be exempt from this limit. REGULATION 2 In cases, where the investment has been extended to purchase some durable goods/item, the same will be hypothecated with the bank besides other securities, which the bank may require on its own. REGULATION 3 The maximum tenure of the investment shall not exceed 5 year.

3.2.3 Basics of Investment Risk

The following risk areas shall be considered for analyzing a Investment proposal. Borrower Analysis (Management / Ownership / Corporate Risk) The majority shareholders, management teams and group or affiliate companies shall be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall be addressed, and risks to be mitigated. The following questions may be asked to assess the Management Risk:

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Who is the borrower? Does any particular/special characteristic of borrower need particular attention? For example, if the borrower is a Trust, this calls for examination of Trust Deed. Are there adequate abilities and experience in senior management? Is there adequate depth and succession planning? Is there any conflict amongst owners / senior managers that could have serious implications? Is the Manager/Investment Officer satisfied about the character, ability, integrity and experience of the borrower?

Industry Analysis (Business and Industry Risk) The key risk factors of the borrowers industry shall be assessed. Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces (demand supply gap) shall be addressed and the strengths and weaknesses (SWOT Analysis) of the borrower relative to its competition to be identified. For the above purpose the Investment Officers/RM may obtain / collect data from the statistical yearbook / economic trends of Bangladesh Bank / public report / newspaper/ journals etc. The following questions may be asked to assess the Business and Industry Risk:

Are there any significant concentrations of sales (by customer, industry, country, region)? How does the borrower rate with its competitors in market share? Can increased direct production costs be passed on to customers? Does the borrower deal in products that are subject to obsolescence? Is the purpose of borrowing consistent with the objectives of the Company? Is the purpose legal? Does it contravene any laws of the country and any instruction issued by the Bangladesh Bank/Head Office? Supplier / Buyer Analysis / Market Risk Any customer or supplier concentration shall be addressed, as these could have a significant impact on the future viability of the borrower. Market Risk

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The sufficient market data is to be obtained to identify clients/borrowers market share in the industry / demand-supply gap in the market. Technological Risk The product that is manufactured must be technologically viable i.e. whether the technology applied is updated. The products stage in its life cycle must be understood. Technical Aspects of the products must be addressed. The Investment Officer/RM must be satisfied with the mitigating factors of technical and technological risk, associated with the products. Financial Analysis (Historical / Projected) An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantors financial statement should also be analyzed. The analysis should address the duality and sustainability of earnings, cash flow and the strength of the borrowers balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. In this regard the Investment Officer / RM must look into the status of chartered accountant audit firm. Where term facilities (tenor > 1 year) are being proposed, a projection of the borrowers future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Investments shall not be granted if projected cash flow is insufficient to repay debts. In this regard the possibilities of cost overrun and sensibility analysis shall be done. The following questions may be asked to assess the Financial Risk: Does the borrower produce financial statements on time? Is working Capital Adequate? Has the customer actual title to stock? Have financial covenants been met? Has there been any major sale of shares by directors? Any significant change in asset conversion cycle? (Account Receivables/ payables Inventory etc.)

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Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, Profit and principal payments, etc.) shall be assessed. In this regard the Investment Officer / RM may look into the account turnover like debt summation / Investment summation / highest debit balance/ highest Investment balance (or lowest debit balance), no. of debit entries/ no. of Investment entries for last three years (year wise).

Adherence to Investment Guidelines The Investment Applications/ Appraisals must be prepared in line with Banks Investment guidelines. It must be clearly stated whether or not the application/proposal is in compliance with Banks Investment Policy Investment guidelines. Related questions to be addressed are:

Is proposed application in compliance with Banks guidelines? Does the Investment to clients also compliant with Central Banks guideline? What are the Niche Products? Profit Rate Risk The Profit rate must be fixed based on different risk factors associated with the type of business such as liquidity risk, commodity risk, equity risk, and Investment period risk. Profit rate also arises from the movements of Profit rate in the market. In assessing the pricing and profitability, the Investment Officer/RM must consider the income from ancillary business like foreign exchange business, group business, volume of business etc. Related questions to be addressed are:

What is the rate of Profit charged? Is the rate fixed in consideration to the risk factors? Will the rate charged be profitable to the Bank?

Foreign Exchange Risk

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The foreign exchange transaction is associated with foreign currency fluctuation risk. Therefore the Investment Officer/RM must take care of for the Forex risk. The questions to be addressed are: Does the business involve foreign currency dealings? What are trends of foreign currency fluctuation?

Cost overrun Risk This type of risk is generally involved in taking project Investment decision. A high degree of cost overrun may cause the failure of the project. Therefore the Investment officer must consider the cost components of the project and their chance of devaluation. The questions to be addressed are-

Whether the construction cost may increase? Whether the imported machinery cost may increase for the fluctuation of the foreign currency. Are all types of cost components addressed during preparation of feasibility report? Does sensitivity analysis prove sufficient shock absorbing capability? Mitigating Factors The Investment Officer/RM must address to different risks associated with the proposal. The possible risk include but not limited to market risk, financial risk, foreign exchange risk, risk of cost overrun, margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues, rapid growth, acquisition or expansion, new business line/product expansion: management changes or succession issues, customer or supplier concentrations, and lack of transparency or industry issues. Mitigating factors for risks identified in the Investment assessment shall have to be described and understood. The Bank must assess the critical risks of facilities given / to be given and ways / factors of mitigation of those risks. Some of the critical factors are: Volatility High debt
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Overstocking Rapid growth Acquisition Debtors issues Succession

Investment Structure The amounts and tenors of Investment proposed should be justified based on the projected repayment ability and Investment purpose. Excessive tenor or amount relative to business needs increase the risk of fund diversion and may adversely impact the borrowers repayment ability. Related questions to be addressed are: Are facilities justified by the borrowers business? Are any capital / long term expenditure being Investment by short time borrowing (either OD or TR)? What is the amount required? Is it sufficient or excess for the purpose mentioned?

Security Banks approved enlisted surveyors must make a current valuation of collateral and the quality and priority of security being proposed shall be assessed properly. Investment shall not be granted solely on security consideration. Adequacy and the extent of the insurance coverage shall be assessed. The Investment Officer/RM must look into the clients Profit / dependability on the collateral offered as security. Is security offered acceptable and adequate? Has all the security been perfected in accordance with the Investment application? Have any valuation and inspection been undertaken since the last application? If you hold a guarantee, do you consider it has value?
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Has the Investment rating of the Borrower deteriorated and has you considered the requirement for additional security? Can a valid charge be obtained on the security?

Name Investment (Relationship Assessment) Investment proposals shall not be unduly influenced by an over reliance on the sponsoring principals reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations shall be discouraged and treated with great caution. Rather, Investment proposals and the granting of Investments will be based on sound fundamentals supported by a thorough financial and risk analysis. Related questions to be addressed are: Has the borrower complied with the terms of the facility? Adverse feature include: any past dues / excesses / delays / cheque returns and or default in covenants and / or failure to meet Profit. Does the account fluctuate with the seasonality of the business? Has the relationship strategy and earnings for the last twelve months been met?

3.2.4 Credit Assessment

A thorough credit and risk assessment is conducted before granting of loans, and all approved facilities are reviewed at least annually. Credit assessment is presented in a credit application duly signed and approved by the official of the branch. In case an account deviates from the guidelines the same are identified in credit applications and justifications for approval are provided by the originating officials of the branch. Bank conducts financial analysis on a regular basis and monitors changes in the client's financial condition. The proposals are prepared in proposal format that originates in the credit department of the branch and is processed and approved by the Head of Branch and Head office Management/Executive committee as per delegated authority. At the time of originating, a proposal accuracy of all information to be ensured. Originating officers follow credit principles,
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credit policy and guidelines and conduct due diligence on new borrowers, principals and guarantors. They also adhere to the FSIBL's established Know Your Customer (KYC), Money Laundering guidelines, and Bangladesh Bank's regulations. For initiating credit relationship credit officer/Head of Branch (HOB) call on the client, visit factory/business centers to see production facility/stock/storage, pattern/business transactions/reputation etc and through these, to assess possibilities of establishing a remunerative relationship. He/she also conducts due diligence to get market information on the borrower from industry sources, competitors, local area. The Head of Branch is also the part of this process. In this regard if required, the Head of Branch and/or Credit officer may also take help of Head Office Engineer/Head Office personnel for initial assessing the credit needs of large borrowers. Based on findings of such calls/visits/inspection, the Head of Branch (HOB)/Credit Officer initiates proposal, containing information on client's background, business, market share, integrity, credit exposure, existing banking relationships, and credit needs along with pricing, loan structure (tenor, covenants, repayment schedule) purpose of credit, type of credit, security arrangement, etc. Before sending proposal to the approving authority, the originating officials of the branch ensure that the following steps/formalities have been taken/completed properly and incorporated in the credit proposal appropriately: 1. Current CIB Report obtained 2. Repayment sources of the borrower has been justifiably established by financial analysis 3. Purpose and amount with types of loan proposed by the borrower stated in the proposal. 4. Earnings from the relationship properly assessed in the credit proposal. 5. Pre-sanction Inspection report/call report/site visit report is in place. 6. Management profile & Capital structure, Constitution, Date of Establishment are stated in the proposal. 7. Experience of Borrowers, business skills, management & successions are properly mentioned in the proposal. 8. Borrower's Rating in the Industry is assessed along with overall industry concerns and borrowers strength & weakness relative to its competitions are identified. 9. Industry's position along with supplier and buyer risk is analyzed.

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10. Borrower credit worthiness is established by review of 3 years historical financial statements and past track record. 11. Cash Flow analysis justifying client's ability to repay is reflected in the credit proposal. 12. Industry and Business analysis is done in the proposal. 13. Credit facilities availed from other banks are clearly stated in the proposal and opinions are obtained regarding the credit standing of 'the borrowers. 14. Credit facilities are based on an evaluation of the borrower's business needs. 15. Possible risks are identified in the credit assessment & Risk mitigating factors are clearly mentioned in the credit proposal. 16. Credit proposals clearly mention current outstanding against all limits. 17. Audited financials, Large Loan positions etc. are reflected in the credit proposals. 18. Branches ensure that collateral has been properly valued, verified and are managed. 19. Account conduct of the borrower & his allied concerns have been done. 20. Amount and tenors are justified based on the projected repayment ability & loan purpose. 21. Adequacy and the extent of Insurance coverage are assessed. 22. Policy compliance is clearly stated in the Credit Proposal. 23. Changes in pricing of facilities are highlighted in credit proposal. 24. Usage of borrowed fund is confirmed through financial statement analysis. 25. Borrowers Risk Grade has been done as per Bangladesh Bank Guidelines, examined & approved by the authorized official and stated in the credit proposal.

3.2.5 Risk Grading

Risk grading is a key measurement of a Banks asset quality and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Investment Applications. Presently the Bank is following/conducting the Investment Risk Analysis to assess the risk grade. The concerned Investment Officer / RM must clearly indicate the risk grade (as per the finding) in the specific column of Investment appraisal form so that the authority can take decision on the matter.
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Risk Rating Grade Superior (SUP) Low Risk Good (GD) Satisfactory Risk 2 1

Details Investment facilities, which are fully secured i.e. fully cash covered. Investment facilities fully covered by government guarantee. Investment facilities fully covered by guarantee of a top tier international Bank 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. Investment 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. Investment in this grade would normally be secured by acceptable collateral (1st property). charge over inventory / receivables / equipment /

Acceptable (ACCPT) Fair Risk Marginal / Watch List 4 3

Acceptable management Acceptable parent/sister company guarantee Aggregate Score of 75-84 based on the Risk Grade Score Sheet This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment.
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Risk Rating Grade

Details These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Weaker business Investment& early warning signals detected. The borrower incurs a loss Investment repayments routinely fall past due Account conduct is poor, or other untoward factors are present. Investment requires attention Aggregate Score of 65-74 based on the Risk Grade Score Sheet. This grade has potential weaknesses that deserve managements close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower.

(MG/WL)

Special Mention (SM) 5

Severe management problems exist. Facilities should be downgraded to this grade if sustained deterioration in financials (consecutive losses, negative net worth, excessive leverage), An Aggregate Score of 55-64 based on the Risk Grade Score Sheet. Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of Investments. Bangladesh Bank criteria for sub-standard Investment shall apply An Aggregate Score of 45-54 based on the Risk Grade Score Sheet. Full repayment of principal and Profit is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.
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Substandard (SS)

Doubtful(DF) (Non -performing)

Risk Rating Grade

Details Bangladesh Bank criteria for doubtful Investment shall apply. An Aggregate Score of 35-44 based on the Risk Grade Score Sheet. Investment 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 Investment as a bankable asset is not warranted, and the anticipated loss should have been provided for.

Bad and Loss (BL) (Nonperforming) 8

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 Investments must be adhered to. Legal procedures/suit initiated. Bangladesh Bank criteria for bad & loss Investment shall apply. An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

3.2.6 Product Program Guidelines (PPG)

Fundamentally, investment policies and procedures can never sufficiently capture all the complexities of the product. Therefore, the following investment principles are the ultimate reference points for all concerned bank staff-making consumer-financing decisions: Assess the customers character for integrity and willingness to repay Only invest when the customer has capacity and ability to repay Only extend investment if bank can sufficiently understand and manage the risk Use common sense and past experience in conjunction with thorough evaluation and investment analysis.

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Do not base decisions solely on customers reputation, accepted practice, other investors risk assessment or the recommendations of other officers Be proactive in identifying, managing and communicating investment risk Be diligent in ensuring that investment exposures and activities comply with the requirement set out in Product Program

3.3 Credit Approval Process:

Investment approval authority must be delegated in writing from the Head of Consumer Banking responsible for the Consumer business, acknowledged by recipients and records of all delegation retained. The investment approval function should be separate from the marketing / sales function. Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Investment Applications. Investment approval should be centralized within the Investment function. Regional investment centers may be established, however, all large investments (as defined in the PPG) must be approved by the Head of Investment or delegated Head Office Investment executive. Any investment proposal that does not comply with Investing Guidelines, regardless of amount, should be referred to Head Office for Approval.Any breaches of Investing authority should be reported to MD/CEO, Head of Internal Control, and Head of Investment.

It is essential that executives charged with approving investments have relevant training and experience to carry out their responsibilities effectively. As a minimum, approving executives should have: At least 5 years experience working in Branch / Sales team as a relationship manager or account executive. Training and experience in financial statement, cash flow and risk analysis. A good working knowledge of Accounting. A good understanding of the local market.

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A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals declined stating reasons thereof should be reported by Investment Team to the Business Head.

3.3.1 De duplication check:

All approved applications must be checked against Banks database to identify whether the applicant is enjoying any other investment in other account apart from the declared investments. It must also be checked that the applicant has a credit card (if the bank offers this product) and any payment default is made. This should be mandatory for Credit Card approval. In such cases the application must be rejected.

3.3.2 Maintenance of Negative Files

Two negative files one listing the individuals and the other listing the employers - are to be maintained to ensure that individual with bad history and dubious integrity and employers with high delinquency rate do not get personal loan from bank.

3.3.3 Investment Administration

After approval, Investment Team will send / forward the approved applications along with the security and other documents to the Investment Administration Team under Operations Unit for processing. The Investment Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of investment facilities. Under Investment Administration there may be two-sub unit, Documentation & QC and Investment Administration Dept who will process the document and disburse the Investment.

3.3.4 Investment Documentation

Investment Documentation dept is responsible: To ensure that all security documentation complies with the terms of approval. To control investment disbursements only after all terms and conditions of approval have been met, and all security documentation as per the checklist of approved PPG is in place. To maintain control over all security documentation.

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To monitor borrowers compliance with agreed terms and conditions, and general monitoring of account conduct/performance. Upon performing the above, Documentation dept will forward the Limit Insertion Instruction (refer Appendix II) to the Investment Administration unit for limit and other information to input into the banks main system.

3.3.5 Disbursement
Investment Administration dept will disburse the Investment amounts under investment facilities only when all security documentation is in place. CIB report is obtained, as appropriate, and clean. A sample documentation and disbursement checklist is attached as Appendix III. Strict security controls over the storage of blank cards, the embossing of blank cards and dispatch of cards to holders is essential. There must be procedures for evaluating, authorizing and monitoring credit card facilities that are at least as stringent as those of normal investments.

3.3.6 Custodial Duties:

Investment disbursements and the preparation and storage of security documents should be centralized in the regional investment centers. Security documentation is held under strict dual control, in locked fireproof storage. For cards, banks should ensure that its controls over issue, delivery and the use of such cards are strong. In particular, bank should have system for notifying retailers promptly of the numbers of mislaid or stolen cards.

3.4 Risk Management:

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3.4.1.Credit

Risk

The credit risk is managed by the Consumer Investment & Collections unit (CICU), which is completely segregated from sales. The following elements contribute to the management of investment risks: The investment risk associated with the products is managed by the following: 1. Investment will be given only after proper verification of customers static data and after proper assessment & confirmation of income related documents, which will objectively ascertain customers repayment capacity. 2. Proposals will be assessed by independent Investment division (CICU) completely separated from sales. 3. Every investment will be secured by hypothecation over the asset financed, and customers authority taken for re-possession of the asset in case of investment loss. For HPSM (Auto), the vehicle will be registered in banks name, which will give the bank the legal right of re-possession when required. 4. The investment approval system is parameter driven which will substantially eliminate the subjective part of the assessment procedure. 5. There will be dedicated collection force who will ensure timely monitoring of investment repayment and its follow up.

6. The Investment & Collection activities will be managed centrally and investment approval authorities will be controlled centrally where the branch managers or sales people will have no involvement

3.4.1.1 Contact Point Verification

Contact Point Verification is done for all applicants except for the High Net Worth (HNW) individuals or customers having account relationship with banks. The external CPV includes residence, office and telephone verifications (format of CPV report attached in Annexure IV). All verifications are done to seek/verify/confirm the declared/undeclared information of the applicant.

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3.4.2

Third Party Risk

In case of third party deposits/security instruments, we verify third partys signature against the specimen attached to the original instrument and bank will also send the instrument to the issuing office for their verification and written confirmation on lien marking and encashment of the instrument. Therefore, any inherent risk emanating from accepting third party deposits/security instruments is minimal.

3.4.3

Acquiring Risk

For credit card acquiring risk arises in the form of potential charge-back loss for the Bank. Following measures are undertaken to mitigate the acquiring risks: All merchants are trained and monitored through a call/visitation program on a regular basis Schemes (VISA and MasterCard) rules and regulations are strictly followed Assignment of merchant floor limits are in accordance with schemes prescribed limits Online authorization activity is monitored through a parameter driven system While giving authorizations, high ticket size merchants are closely monitored Electronic transaction capture at high volume/frequency merchants In case where a merchant is at fault for a potential charge-back loss, the bank recovers the same by debiting the merchant account held with Banks.

3.4.4 Fraud Risk

There is an inherent fraud risk in any credit cards business. The most common fraud risks are:

3.4.4.1Transaction Fraud

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For credit cards, transaction fraud exposure may arise from the usage on lost/stolen card, misuse of card numbers and counterfeit cards. Over the last twelve years cards acquiring volume has increased quite significantly and now there is a need to set up a separate fraud department for efficient monitoring and handling of all suspicious high-risk transactions.

3.4.4.2 Application Fraud

The applicants signature is not verified for authenticity. However, the applicants identity is confirmed by way of scrutiny of identification and other documentation. A Contact Point Verification (CPV) agency is in place to verify applicants residence, office and contact phone numbers. There always remains the possibility of application fraud by way of producing forged documents. Considering the current market practices and operational constraints, it is not feasible to validate the authenticity of all documentation. However, in the near future, we may consider validating the bank statement (the most important and commonly provided income document) through CPV agent.

3.4.5 Liquidity and Funding Risk

This risk will be managed and the position monitored by the Asset Liability Committee headed by the Managing Director / CEOs of the Banks.

3.4.6 Political and Economic Risk

Political and economical environment of a country play a big role behind the success of business. Banks should always keep a close watch in these areas so that it is able to position itself in the backdrop of any changes in countrys political and economical scenario.

3.4.7 Operational Risk

For consumer investments, the activities of front line sales and behind-the-scene maintenance and support are clearly segregated. Consumer Investment & Collections Unit (CICU) will be formed. CICU will manage the following aspects of the product: a) inputs, approvals, customer file maintenance, monitoring & collections; b) the Operation jobs like disbursal in the system

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including raising debit standing orders and the lodgment and maintenance of securities. Type a jobs and type b jobs will be handled by separate teams within CICU; therefore the risk of compromise with investment / security documentation will be minimal. It will ensure uncompromising checks, quick service delivery, uncompromising management of investment risks and effective collections & recovery activities. For credit cards, controls will be in place to ensure that operational risks are managed. These include: Segregation of duties e.g. data input independently validated against source documentation. Similarly card and PIN production and handling are also done independently. Restricted access to certain important areas / functions to ensure adequate control and security e.g. card embossing, dispatch and supervisory access into the core card processing system. Besides, all staff is only given the minimum required level of access into the system to perform their departmental functions properly. Dual controls e.g. plastic custody, card destruction, access into the system for parameter changes etc.

3.4.8 Maintenance of Documents & Securities

The applications and other documents related to Consumer investments will be held in safe custody by CICU or Operations Unit. All this documents will go under single investment file per customer developed before launch of the product. The physical securities and the security documents will be held elsewhere inside fire-proof cabinets under CICUs or Operations custody. The dual-key system for security placement and retrieval will have to be implemented.

3.4.9 Internal Audit

The Bank has a segregated internal control and compliance division who will be responsible with performing audits of all departments. Audits should be carried out on a regular or periodically as agreed by the Management to assess various risks and possible weaknesses and to ensure

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compliance with regulatory guidelines, internal procedures, Investing Guidelines and Bangladesh Bank requirements.

3.5 Monitoring and Recovery:

3.5.1 Monitoring
A banks investment portfolio should be subject to a continuous process of monitoring. This will be achieved by regular generation of over limit and overdue reports, showing where facilities are being exceeded and where payments of interest and repayment of principle are late. There should be formal procedures and a system in place to identify potential investment losses and remedial actions has to be taken to prevent the losses. Besides that the systems should be in place to report the following exceptions to relevant executives in Investment / sales and branch marketing staff: Past due principal or profit/mark-up payments; Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit. All investment facilities are reviewed annually. Computer systems should be able to produce the reports for central / head office as well as branch review.

3.5.2 Recovery
The collection process for personal investments starts when the account holder has failed to meet one or more contractual payment (Installment). It therefore becomes the duty of the Collection Department to minimize the outstanding delinquent receivable and investment losses. This procedure has been designed to enable the collection staff to systematically recover the dues and identify / prevent potential losses, while maintaining a high standard of service and retaining good relations with the customers. It is therefore essential and critical, that collection people are familiar with the computerized system, procedures and maintain effective liaison with other departments within the bank.

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Analysis and Findings:

In the quest of reducing the inherent risk on investments, the management of FSIBL practices a set of self developed policies and regulations. The management team of the bank developed a set of requirement guidelines which they follow before embarking upon any kind of financing. Moreover, the bank has also developed and follows some prudential regulations and specific regulations for each types of investment/credit it makes. All the efforts taken by the bank mainly has one purpose: to maintain secured investments. In this chapter, I have taken the help of Six Cs of credit to analyze different guidelines and regulations followed by the bank. They are discussed below: 4.1 Six Cs: CHARACTER (Credit Reputation): A person with a good character is one who willingly and responsibly lives up to agreements. One distinctive sign of a good character is a responsible attitude toward paying bills and meeting obligations on time. CAPACITY: The ability to repay a loan or make payments on merchandise with present income is known as capacity. Creditors want to make certain that you will have enough money left over each month after other fixed expenses have been met to pay your credit debts. CAPITAL: Property and other assets that total more than debts are known as capital. In other words, when you add up all that you own (assets) and subtract all that you owe (liabilities), the difference (your net worth or capital) should be sufficient to ensure payment of another bill. CONDITIONS: All other existing debts, stability of employment, personal factors, and other factors that might affect a persons ability or desire to meet financial obligations are important conditions to be considered. For example, a person who has moved six times during the past year might not be considered a good risk because of living conditions that indicate some type of problem.

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COLLATERAL: Property or possessions that can be mortgaged or used as security for payment of a debt are known as collateral. If a debt is not paid as agreed, the collateral is repossessed and sold to pay the debt. COMMON SENSE: A persons inner ability to make wise decisions is often referred to as common sense. A loan officer or credit manager would determine that you have good common sense based on how you answer questions (either orally or in writing). Good decisions are reflected in answers such as reasons for leaving employment, number and types of credit cards and balances outstanding, or references listed on an application. 4.1.1. Analysis: Character: This point enlightens the borrowers willingness to repay the loan. If we look on the Product Program Guidelines (PPG) (Discussed in chapter 3, Section 3.3.5) the bank has a specific guideline for its loan officer to assess the customers character for integrity and willingness to repay the loan. Capacity: As discussed above, this point tells about the ability of the borrower to repay the loan. FSIBL has precise guideline (discussed in PPG section 3.3.5) that ensures an inspection on the customers ability to repay the loan. The bank also has regulation (under section 3.2) that tells the loan officer to make sure the customer as the ability to repay the loan. Capital: This calls for the worthiness of the borrower or the evaluation of the total net worth of the customer. FSIBL checks the customers net worth condition by doing credit evaluation process (Discussed in chapter 3, section 3.1.2) Conditions: Here, a customers present conditions are examined. While applying for a loan, the bank takes all necessary information that shows the condition of the customer. Collateral: This point is self explanatory. FSIBL has precise regulation and policy on getting proper collateral from the customer before sanctioning a loan. However, a customer is not always asked to provide a collateral security (In case issuing Credit Card etc.). Mainly collateral security is asked during processing of large loans.
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Common Sense: In credit assessment process, a customer is also reviewed about his/her ability to make wiser decisions. 4.2 MAJOR FINDINGS The major findings as revealed from the study are as under: Banks are financial intermediaries linking the savers and the users of fund and the main income flow comes from lending activities. But lending possesses the inherent and default risk. Proper risk management and policy regulation can help to reduce such risk to a great extent. As such Credit Risk Management (CRM) is obviously vital and important for a bank of financial institution.

Bank CRM policy provides directional guidelines to all concerned to improve risk management culture and establish minimum standard for managing risks in credit operations. It has been observed that First Security Islami Bank follows prudential regulation for Credit risk management that has been established by the Bank Management under the light of existing regulatory requirement. FSIBL follows a minimum requirement policy for consumer credit. They follow certain guidelines before undertaking consumer financing. Its credit management policy and segregation of key responsibilities is standard to mitigate the credit risk. The bank has a highly experienced, well-educated, self-motivated and proactive credit management team. Bank completes the Credit Risk Grading (CRG) in each proposal as per Bangladesh CRG Manual and guidelines before sanctioning a loan (except SME and cash-back). But CRG comes with inherent limitations that sometimes indicate wrong score for risk grading. For example, higher current ratio measures high score which is not true in all kinds of borrowers. It depends on types of business. Very high liquidity indicates inefficiency of management in utilizing current portion of fund or working capital. Besides data in most cases are not available regarding industry growth which carries maximum score 3(three).

The impact of change in the employee productivity on deposit and loans & advances was the largest contributor to the change in deposit and loans & advances.
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Conclusion:
Over the last decade our understanding of commercial banks within the financial sector has improved substantially. But they are virtually facing several types of systematic and unsystematic risks. Bangladesh Bank, our central bank, has also identified five core risks in financial sectors. Among such risks the most important risk banks and financial institutions faced is credit risks which also know as default risk in credit. For Banks and Financial institutions, Credit risk is an essential factor, which needs to be managed properly. Credit risk virtually is the possibility that a borrower will fail to repay debt in accordance with the terms of sanction. Credit risk, therefore, arises from the bank's lending operations. In the present day's state of deregulation and globalization, banks a range of activities have increased, so also are the risks. Expansion of bank's lending operations rang new products have forced the banks to confront newer risk areas and therefore to work out proper risk addressing devices. Credit risks are so exhaustive that a single device cannot encompass all the risks. Moreover lending risks today have assumed such diverse nature, that newer techniques are to be applied to effectively contain the risks. In order to effectively contain risks, credit risk management has to be done in order to enable the bank to proactively manage loan portfolios in order to minimize losses and earn acceptable level of return for the shareholders. In the present scenario of fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential to undertake robust credit risk management policies and procedures, sensitive and responsive to these changes. In the above backdrop, First Security Islami Bank Limited should be committed to extend high quality services to its clients through different financial products and profitable utilization of fund by undertaking various lending operations including financing trade, commerce & Industry etc. In conducting lending operations the bank should always bears in mind the essence of proper risk identification and their effective management. It is also recognized that failure in proper

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identification and management of risks may result in a large quantum of bank advances turning into non-performing.

The current report aimed at critically examining the CRM policy and practice of First Security Islami Bank. The main objective of this report was to evaluate the CRM policy and practice of First Security Islami Bank Limited along with how efficiently the Bank was providing credit to different sector by mitigating the possible risks.

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