Credit Processing-Appraisal, CRG, Approval & Administration

Ahsan Tarique
CONCEPT OF CREDIT
Credit is the trust which allows one party to provide resources (financial) to
another party where the second party arranges either to repay or return those
resources at a later date. Credit is extended by a creditor, also known as
lender, to a debtor, also known as a borrower.
PROCESSING OF CREDIT PROPOSAL--APPRAISAL
Processing of loan proposal is very important in the whole process of
lending procedure. Any lapse in processing may lead to take wrong decision
which ultimately will lead to creation of bad loan in the port-folio. Appraisal
means pre-investment/Ex-ante analysis of a proposed project. This analysis is
conducted to decide whether a particular project will be accepted or rejected
considering

its

various

aspects

i.e.

Management,

Technical,

Market,

Economic, Financial etc.

Management Aspects
In Management Aspects we analyze & examine the competency/capability
of the owners of the project. It is necessary to evaluate the following
matters Corporate Set-up/Organizational Structure of the project
Details of Promoters/Owners
Credit Worthiness of Promoters/Owners
Source of Mobilizing Equity
Collection of CIB report
Technical Aspects
In Technical Aspects we analyze and examine
Is the engineering design of project sound?
Credit Processing-Appraisal, CRG, Approval & Administration

 Has the size of the plant justified?

What is the production process?
Are the inputs & raw materials available?

Cost of the project

-02Market Aspects
In Market aspects we analyze and examine
Are there adequate possibilities for surviving the project in view of
consumers needs of the products to be produced by the project?
Has there any demand of the proposed goods & services?
Has there any supply gap of the proposed goods & services ?
What will be the marketing strategy of the proposed product &
services?
Financial Aspects
In Financial aspects we analyze and examine
Are the costs realistic & exhaustive?
How is the project proposed to be financed?
Will the project generate sufficient cash flows to cover debt servicing
liabilities?
Will the project earn sufficient profit?
Working Capital requirement
So the processing of proposal deserves full attention of the appraisal team.
After detail analysis of different aspects of the proposed loan proposal and
after recommendation of the appraisal team & credit committee, competent
authority will sanction loan.
CREDIR RISK GRADING (CRG)
Credit Processing-Appraisal, CRG, Approval & Administration

Credit risk is the primary financial risk in the banking system and exists
in virtually all income-producing activities Credit risk grading is the
process which helps the sanctioning authority to decide whether to lend or not
to lend, what should be the lending price, what should be the extent of
exposure, what should be the appropriate credit facility, what are the various
facilities, what are the various risk mitigation tools to put a cap on the risk
level. It Provides detailed and formalized credit evaluation process risk
identification, measurement, monitoring and control CRG is an important tool
for credit risk management as it helps the banks and financial institutions to
understand various dimensions of risk involved in different credit transaction.
It provides a better assessment of the quality of credit portfolio of a bank.

.
-03NUMBER AND SHORT NAME OF GRADES USED IN THE CRG
CRG scale consists of 8 categories. Short names and Numbers are as follows:GRADING
SUPERIOR

GOOD
ACCEPTABLE
MARGINAL
SPECIAL
MENTION
SUB-STANDARD
DOUBTFUL
BAD & LOSS

SHORT NAME
SUP

NUMBER
1

SCORE

GD
ACCPT
MG/WL
SM

2
3
4
5

85+
75-84
65-74
55-64

SS
DF
BL

6
7
8

45-54
35-44
<35

Fully cash covered/by

Govt.
guarantee/
guarantee of a top tier
international Bank.

Good - (GD) - 2
Strong repayment capacity of the borrower / excellent liquidity and low
leverage/strong cash flow
Borrower has strong market share/Very good management skill &
expertise.
Credit facilities fully covered by the guarantee of a top tier local Bank.
Aggregate Score of 85+

Credit Processing-Appraisal, CRG, Approval & Administration

Acceptable - (ACCPT) - 3
Borrowers have consistent earning, cash flow & liquidity
acceptable collateral (1st charge)
Acceptable management
Aggregate Score of 75-84
Marginal/Watch list - (MG/WL) 4

This grade call for greater attention

Downward liquidity, higher than normal leverage, thin cash flow.
Loan repayments routinely fall past due
Account conduct is poor
Aggregate Score of 65-74

Special Mention - (SM) - 5

consecutive losses, negative net worth, excessive leverage,
An Aggregate Score of 55-64
: Leverage measures the amounts of borrowed money being used by the firm.
-04Substandard - (SS) - 6
Financial condition is weak and capacity n to repay is in doubt.
Bangladesh Bank criteria for sub-standard credit shall apply.
An Aggregate Score of 45-54
Doubtful - (DF) - 7
Full repayment of installment is unlikely and the possibility of loss is
extremely high.
However, due to litigation, liquidation procedures or capital injection,
the asset is not yet classified as Bad & Loss.
Bangladesh Bank criteria for doubtful credit shall apply.
An Aggregate Score of 35-44
Bad & Loss - (BL) - 8
No future to recover loan.
Some recovery may possible from realization of security
Bangladesh Bank criteria for bad & loss credit shall apply.
An Aggregate Score of less than 35
COMPONENTS OF CREDIT RISK GRADING:
Credit Processing-Appraisal, CRG, Approval & Administration

Financial risk:
Financial risk is the principal components of credit risk grading. The
uncertainty of future incomes due to the companys financing. Risk that
counterparties will fail to meet obligation due to financial distress.

This

typically entails analysis of financials i.e. analysis of leverage, liquidity,

profitability & interest coverage ratios. To conclude, this capitalizes on the
risk of high leverage, poor liquidity, low profitability & insufficient cash flow.
Business/Industry risk:
The risk related to the inability of the firm to hold its competitive position and
maintain stability and growth in earnings. Risk that adverse industry situation
or unfavorable business condition will impact borrowers capacity to meet
obligation. The evaluation of this category of risk looks at parameters such as
business outlook, size of business, industry growth, market competition &
barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to
low market share & poor industry growth.
Management Risk:
The risks associated with ineffective, destructive or under performing
management. In other words Risk that counterparties may default as a result
of poor managerial ability including experience of the management, its
succession plan and team work.
-05Security risk:
Risk that the bank might be exposed due to poor quality or strength of the security in case of
default. This may entail strength of security & collateral, location of collateral and support.
Relationship risk:
Relationship risk mainly based on banker and customer relation. If the
entrepreneur can make a good relation to the banker he or she also gets the
loan at a lower rate. These risk areas cover evaluation of limits utilization,
account performance, conditions/covenants compliance by the borrower and
deposit relationship
Allocate weightages to Principal Risk Components
Principal Risk
Components

Weight

Credit Processing-Appraisal, CRG, Approval & Administration

Financial Risk
Business/Industry Risk
Management Risk
Security Risk
Relationship Risk
Principal Risk
Components
Financial Risk

50%
18%
12%
10%
10%

Key Parameters

Leverage
Liquidity
Profitability
Coverage
Business/Industry
Risk

Weight
50%
15%
15%
15%
5%
18%

Size of Business
Age of Business
Business Outlook
Industry growth
Market
Competition
Entry/Exit Barriers

5%
3%
3%
3%
2%
2%

Management Risk

12%
Experience
Succession
Team Work

5%
4%
3%

Security Risk

10%
Security coverage
4%
Collateral coverage 4%
Support
2%

Relationship Risk

10%
Account conduct
Utilization of limit
Compliance of
condition
Personal deposit

5%
2%
2%
1%

-07Guidelines of Bangladesh Bank on Management Credit Risks

Credit Processing-Appraisal, CRG, Approval & Administration

Credit Processing-Appraisal, CRG, Approval & Administration

Credit Processing-Appraisal, CRG, Approval & Administration

-07Credit Administration:
The Credit Administration function is critical in ensuring that proper
documentation and approvals are in place prior to the disbursement of loan
facilities. For this reason, it is essential that the functions of Credit
Administration be strictly segregated from Relationship Management in order
to avoid the possibility of controls being compromised or issues not being
highlighted at the appropriate level. Credit Administration procedures should
be in place to ensure the following:

All security documents comply with the terms of approval and it is

enforceable.
Disbursements are only be made when all security documentation is in
place and when CIB report is taken.
Appropriate insurance coverage is maintained over assets.
To maintain control over all security documents.
Monitoring the borrowers compliance with agreed terms and
conditions, and general monitoring of account conduct or performance.

Credit Processing-Appraisal, CRG, Approval & Administration