Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 1

1.0 INTRODUCTION
Dhaka Bank Limited (DBL) is the leading private sector bank in Bangladesh offering
full range of Personal, Corporate, International Trade, Foreign Exchange, Lease Finance and
Capital Market Services. Dhaka Bank Limited is the preferred choice in banking for friendly
and personalized services, cutting edge technology, tailored solutions for business needs,
global reach in trade and commerce and high yield on investments, assuring Excellence in
Banking Services.
Dhaka Bank Limited is a scheduled bank that was incorporated under the Companies
Act 1994, started its operation on July 1995 with a target to play the vital role on the socio-
economic development of the country. Aiming at offering commercial banking service to the
customers’ door around the country. The bank has been successful in positioning itself as
progressive and dynamic financial institution in the country. This is now widely acclaimed by
the business community, from small entrepreneur to big merchant and conglomerates,
including top rated corporate and foreign investors, for modern and innovative ideas and
financial solution.
The objectives of DBL are be one of the best banks of Bangladesh, achieve excellence
in customer service next to none and superior to all competitors, cater to all differentiated
segments of Retail and Wholesale Customers, be a high quality distributor of product and
services and use state-of the art technology in all spheres of banking.
If the jobs are not organized considering their interrelationship and are not allocated
in a particular department it would be very difficult to control the system effectively. If the
departments are not fitted for the particular works there would be haphazard situation and the
performance of a particular department would not be measured. Dhaka Bank Limited has
does this work very well. Different departments of DBL are as follows: Human Resources
Division, Personal banking Division, Treasury Division, Operations Division, Computer and
Information Technology Division, Credit Division, Finance & Accounts Division, Financial
Institution Division, and Audit & Risk Management Division.
Dhaka Bank Limited recognizes that a productive and motivated work force is a
prerequisite to leadership with its customers, its shareholders and in the market it serves. This
paper addresses the internal control and compliance risks; and to compare the existing credit
policy of Dhaka Bank Limited.
2.0 CREDIT MANAGEMENT IN DHAKA BANK LIMITED
The word credit comes from the Latin word “Credo” meaning “I believe”. It is a
lender’s trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 2

repay. In other words, credit is the ability to command goods or services of another in return
for promise to pay such goods or services at some specified time in the future. For a bank, it
is the main source of profit and on the other hand, the wrong use of credit would bring
disaster not only for the bank but also for the economy as a whole.
The objective of the credit management is to maximize the performing asset and the
minimization of the non-performing asset as well as ensuring the optimal point of loan and
advance and their efficient management. Credit management is a dynamic field where a
certain standard of long-range planning is needed to allocate the fund in diverse field and to
minimize the risk and maximizing the return on the invested fund. Continuous supervision,
monitoring and follow-up are highly required for ensuring the timely repayment and
minimizing the default. Actually the credit portfolio is not only constituted the bank’s asset
structure but also a vital factor of the bank’s success. The overall success in credit
management depends on the banks credit policy, portfolio of credit, monitoring, supervision
and follow-up of the loan and advance.
2.1 CREDIT POLICY OF DBL
One of the most important ways, a bank can make sure that its loan meet
organizational and regulatory standards and they are profitable is to establish a loan policy.
Such a policy gives loan management a specific guideline in making individual loans
decisions and in shaping the bank’s overall loan portfolio. In Dhaka Bank Limited there is
perhaps a credit policy but there is no credit written policy.
3.0 CREDIT PRINCIPLES
In the feature, credit principles include the general guidelines of providing credit by
branch manager or credit officer. In Dhaka Bank Limited they follow the following guideline
while giving loan and advance to the client.
 Credit advancement shall focus on the development and enhancement of customer
relationship.
 All credit extension must comply with the requirements of Bank’s Memorandum and
Article of Association, Banking Company’s Act, Bangladesh Bank’s instructions,
other rules and regulation as amended from time to time.
 Loans and advances shall normally be financed from customer’s deposit and not out
of temporary funds or borrowing from other banks.
 The bank shall provide suitable credit services for the markets in which it operates.
 It should be provided to those customers who can make best use of them.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 3

 The conduct and administration of the loan portfolio should contribute with in defined
risk limitation for achievement of profitable growth and superior return on bank
capital.
 Interest rate of various lending categories will depend on the level of risk and types of
security offered.
4.0 CREDIT EVALUATION PRINCIPLES
Some principles or standards of lending are maintained in approving loans in order to
keep credit risk to a minimum level as well as for successful banking business. The main
principles of lending are given below:
4.1 LIQUIDITY
Liquidity means the availability of bank funds on short notice. The liquidity of an
advance means it repayment on demand on due date or after a short notice. Therefore, the
banks must have to maintain sufficient liquidity to repay its depositors and trade off between
the liquidity and profitability is must.
4.2 SAFETY
Safety means the assurance of repayment of distributed loans. Bank is in business to
make money but safety should never be sacrificed for profitability, To ensure the safety of
loan. The borrower should be chosen carefully. He should be a person of good character &
capacity as well as bank must have to maintain eligible number of security from borrower.
4.3 PROFITABILITY
Banking is a business aiming at earning a good profit. The difference between the
interest received on advances and the interest paid on deposit constitutes a major portion of
the bank income, besides, foreign exchange business is also highly remunerative. The bank
will not enter into a transaction unless a fair return from it is assured.
4.4 INTENT
Banks sanction loans for productive purpose. No advances will be made by bank for
unproductive purposes though the borrower may be free from all risks.
4.5 SECURITY
The security offered for an advance is an insurance to fall bank upon in cases of need.
Security serves as a safety value for an unexpected emergency. Since risk factors are
involved, security coverage has to be taken before a lending.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 4

4.6 NATIONAL INTEREST

Banking industry has significant role to play in the economic development of a
country. The bank would lend if the purpose of the advances can contribute more to the
overall economic development of the country.
4.7 PRE-DISBURSEMENT COMPLIANCE
When the credit proposal are approved the credit officer must have to be ensured that
the disbursement of the credit facilities must comply with the directions written in the
credit policy and circular made by time to time along with checking all the following
terms and conditions:
 The officer of Loan Administration must collect the acceptance of the
customer’s of the terms and conditions on the duplicate copy of the sanctioned
advice.
 They will thoroughly examine and ensure that the subject credit facility does
not contradict to any law, rules and regulation of the country.
 Deed of the Mortgage and power of the Attorney to be drafted and executed
under the Supervision of the Bank’s Legal Advisor.
 Lawyers certificate to the effect that all the legal formalities (Equitable/
Registered Mortgaged) has been properly created on the land and building in
favor of the bank & bank has acquired the effective title of the property.
 Registered power of attorney has been collected from the borrower
(contractor) assigning the work order favoring the DBL and the power of
attorney has been registered with the work order given agency and they have
agreed that they will issue all the cheques favoring DBL.
 The legal documents of the vehicle have been obtained.
 Collection of the satisfaction certificate in respect of all the documents both
legal and banking from the lawyer.
 Entry has been made in the Safe -in and Safe-out register and the documents
are preserved.
 After being satisfied all the above terms and conditions the credit in-charge
will disburse the loan amount to the client.
4.8 DOCUMENTATION OF THE LOAN
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 5

Documentation is obtaining such agreement where all the terms and condition and
securities are written and signed by the borrower. It specifies rights and liabilities of both the
banker and the borrower. In documentation each type of advances requires a different set of
documents. It also differs with the nature of securities. The documents should be stamped
according to the stamp Act. There are no hard and fast rules of documentation and it varies
from bank to bank. Generally, the documents are taken in the case of a secured advance by
DBL:
i. Demand promissory note: Here the borrower promises to pay the loan as and when
demand by bank to repay the loan.
ii. Letter of arrangement.
iii. Letter of continuity.
iv. Letter of hypothecation of goods and capital machinery.
v. Stock report: This report is used for OD and CC. In this report, information about
the quality and quantity of goods hypothecated is furnished.
vi. Memorandum of deposit of title deed of property duly signed by the owners of the
property with resolution of Board of Directors of the company owning the landed.
vii. Personal guarantee of the owners of the property.
viii. Guarantee of all the directors of the company.
ix. Resolution of the board of directors to borrow fund to execute documents and
completes other formalities
x. Form no. XVII/XIX for filling charges with the register of joint stock companies
under relevant section.
xi. Letter of Revival
xii. Letter of lien for advance against FDR.
5.0 RESEARCH DESIGN
The research paper that has been prepared is exploratory in nature. This paper is on
the internal control and compliance risks; and to compare the existing credit policy of Dhaka
Bank Limited. In the context of this research we have reviewed the annual report of Dhaka
Bank Limited (DBL). Secondary data was used for the preparation of this research paper. The
secondary data sources are annual reports, manuals, and brochures of Dhaka Bank limited
and different publications of Bangladesh Bank. To identify the implementation, supervision,
monitoring and repayment practice- interview with the employee and extensive study of the
existing file was and practical case observation was done.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 6

6.0 GUIDING PRINCIPLE OF CREDIT APPRAISAL OF DBL FOR CREDIT

OFFICER
To determine the worth of a client, the following conceptual exercises should be
undertaken. There are no fixed and set methods to perform credit marketing, and scope for
application of individual judgment/ perception always plays over set rules in such work. For
example, drop in revenue of a contractor may indicate the client’s failure to get work, or it
may be due to adaptation of policy to do higher margin quality jobs.
6.1 INDUSTRY INFORMATION
Gather and evaluate industry information, where the client is, which may be done in the
following aspects:
Determine the price Records of prices can reveal trend, fluctuations through
behavior Of the product/ various lengths of time in short run/ long run. From the
service of the client. records it should be determined whether the Product/
Service has short term jump in demand and hence in price in
the increase / decrease. The effect of such Short Term
Increase /Decrease of demand on Sales Volume and
Profitability Short Term has to be understood and measured,
viz., fluctuation range, fluctuation cycle duration, vis-a-vis
clients cost/ revenue, etc. Examples of such products would
be Winter clothing, non-essential items like ice cream, fast
food, cars, and other luxury items.

Substitutability of the If the Product is easily substitutable, then price rise in

product.
Diversity of source of
procurement.
Market pact to set price.
Item for which taste
changes very fast.
Dhaka will influence customers to the other, often market
tolerance for short run fluctuation for such product is very
low. Example of this situation may be Paper for Plastic, tea
for coffee, etc.
If there are very few sources of procurement, price
fluctuations are often Wider. Example of this is seen in steel
sheet trading.
It often happens to specialized trade centers, to either
protect against unhealthy competition, or drive out
competition, in which case pricing may be in stress.
Existence of monopolist/ oligopolist as client's competitors
may Signal problem.
Such industry is susceptible quick change in taste, sharp
competition, large investment. Examples could be toy
industry, office furniture, fashion design Of clothing, etc.

The class of the country is In poorer countries/ or in countries with unstable political
important to note, when environment, Pricing of procurement / sale is more sensitive
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited
there is dependence on
foreign countries for import/ quake) in the short run for cars, non-essential foods like
export.
High dependency on
technology, which may
change suddenly.
technology, which may
in Dhaka country may not
be as popular in another
country), in which case
Possible hazard
Long Term Look
Accounts /Financial information should be evaluated in the following directions:
7
to political turmoil, natural disasters (flood / storm / earth
baby food (branded baby serial), etc.
Basic food and clothing demand may not be dented much.
Forei country's dependence of Aid /Grant / Investment may
influence certain industry such as building materials like
cement rod, therefore scrap vessel, etc.
Major construction like bridge over river, establishment of
large scale production industry of items like fertilizer, car,
etc. may influence purchase capacity of consumers, govt.
etc.
Some points to carefully watch in case of dependency on
foreign market may be:
(a) Currency fluctuation,
(b) Festival Depression/ Boost in market demand,
(c) Development of other country competition,
(d) Government intervention in stock market, etc.
Examples could be computers/ electronics, unfamiliar
brands (popular brand in Dhaka country may not be as
popular in another country), in which case large pile up of
inventory may result in pricing stress at the least.
Some industries are associated with risk of hazard, such as
mining, asbestos plant, industrial boiler, pressurized gas
filling, nuclear plant, isotope for medical industry, building
construction, etc. Such industry may require lot of safety
inspections, certifications, insurance etc., shortage of which
may result in serious consequence, or heavy cost at the least.
Quality of a relationship account may deteriorate due to
long run replacement of technology, in computer industry,
printing industry, medicine plant, etc. Deep stage of
business cycle, world depression, etc. may cause raise in
expenditure. Demography, change in population of
consumer group may influence business, examples may be
education, cars, insurance, baby food, travel, Medicare, etc.
Client in industry facing sun set may eventually become ill
quality.
6.2 FINANCIAL STRENGTH
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 8

Accounting Policy. It should be marked as change of policy may effect on the

profitability/ leverage, etc.

Auditor’s Often qualifications are not clearly expressed which may have
qualification. much impact on the financials.

Other bank’s limits/ This should be determined and ensured that client made full
out standings. disclosure.

Existence of other financing facilities is to be netted out from

total finance requirements of the client, otherwise over
financing; hence over-trading becomes a serious risk.

Modus operandi of the This has to be matched. Care should be exercised to distinguish
business between current and term requirements, permanent working
capital requirement is often Dhakaously financed by short term
loan, often client's intuition is taken for determining finance
requirements, temporary / seasonal raise in requirement is often
mistaken for regular requirement, or not at all accommodation.
Such mistakes lead to financial mismanagement on the client's
part as well as on the part of the financier.

7.0 STEPS INVOLVED IN CREDIT PROCESSING

7.1 APPLICATION FOR LOAN
Applicant applies for the loan in the prescribed form of bank. The purpose of this
forms is to eliminate the unwanted borrowers at the first sight and select those who have the
potential to utilize the credit and pay it back in due time.
7.2 GETTING CREDIT INFORMATION
Then the bank collects credit information about the borrower from the following
sources:
1. Personal Investigation.
2. Confidential report from other bank/ Head office/Branch/Chamber of commerce.
3. CIB report from central bank.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 9

7.3 SCRUTINIZING AND INVESTIGATION

Bank then starts examination that whether the loan applied for is complying with its
credit policy. If comply, than it examines the documents submitted and the credit worthiness.
Credit worthiness analyses, i.e. Analyses of financial conditions of the loan applicant are very
important. Then bank goes for credit Risk Analysis (CRA) and spreadsheet analysis, which
are recently introduced by Bangladesh Bank. According to Bangladesh Bank rule, CRA and
SA is must for the loan exceeding Dhaka core.
If these two analyses reflect favorable condition and documents submitted for the loan
appears to be satisfactory then, bank goes for further action.
8.0 CREDIT RISK ANALYSIS: MODERN TECHNIQUE OF CREDIT APPRAISAL
The Financial Sector Reform Project (FSRP) has designed the credit risk analysis (CRA)
package, which provides a systematic procedure for analyzing and quantifying the potential
credit risk. The objective of CRA is to assess the credit risk in quantifiable manner and then
find out ways & means to cover the risk. Broadly CRA package divides the credit risk into
two categories:
1. Business risk.
2. Security risk.
8. 1 BUSINESS RISK
It refers to the risk that the business falls to generate sufficient cash flow to repay the
loan. Business risk is subdivided into two categories.
8.2 INDUSTRY RISK
The risk that the company fails to repay for the external reason. It is subdivide into
supplies risk and sales risk.
8.3 SUPPLIES RISK
It indicates that the business suffers from external disruption to the supply of imputes.
Components of supplies risk are as raw material, Labor, power, machinery, equipment,
factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then
assessing the risk of disruption of supplies of each item.
8.4 SALES RISK
This refers to the risk that the business suffers from external disruption of sales. Sales
may be disrupted by changes to market size, increasing in competition, and change in the
regulation or due to the loss of single large customer. Sales risk is determined by analyzing
production or marketing system, industry situation, Government policy, and competitor
profile and companies strategies.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 10

8.5 COMPANY RISK

This refers to the risk that the company fails for internal reasons. Company risk is
subdivided into company position risk and Management risks.
8.6 COMPANY POSITION RISK
Within an industry each and every company holds a position. This position is very
competitive. Due to the weakness in the company's position in the industry, a company is the
risk for failure. That means, company position risk is the risk of failure due to weakness in
the company’s position in the industry. It is subdivided into performance risk and resilience
risk.
8.7 PERFORMANCE RISK
This risk refers to the risk that the company’s position is so weak that it will be unable
to repay the loan even under Favor able external condition. Performance risk assessed by
SWOT (Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, and Cash
flow forecast analysis and credit report analysis (i.e. CIB repot from Bangladesh Bank).
8.8 RESILIENCE RISK
Resilience means to recover early injury, this refers to risk that the company falls due
to resilience to unexpected external conditions. The resilience of a company depends on its
leverage, liquidity and strength of connection of its owner or directors. The resilience risk is
determined by analyzing different financial ratio, flexibility of production process,
shareholders willingness to support the company if need arise and political and private
affiliation of owners and key personnel.
8.9 MANAGEMENT RISK
The management risk refers to the risk that the company fails due to management not
exploiting effectively the company’s position. Management risk is subdivided into
management competence risk and integrity risk.
8.10 MANAGEMENT COMPETENCE RISK
This refers to the risk that falls because the management is incompetent. The
competence of management depends upon their ability to manage the company's business
efficiently and effectively. The assessment of management competence depends on
management ability and management team work. Management ability is determined by
analyzing the ability of owner or board of the members first and then key personnel for
finance and operation. Management team work is determined by analyzing management
structure and its strength and weakness.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 11

8.11 MANAGEMENT INTEGRITY RISK

This refers to the risk that the company fails to repay the loan amount due to lack of
management integrity. Management integrity is a combination of honesty and dependability.
Management integrity risk is determined by assessing management honesty, which requires
evaluating the reliability of information supplied and then management dependability.
8.12 SECURITY RISK
This sort of risk is associated with the realized value of the security, which may not
cover the exposure of loan. Exposure means principal plus outstanding interest. The security
risk is subdivided into two major heads i.e. security control risk and security cover risk.
9.0 CREDIT RISK MANAGEMENT GUIDELINES BY BANGLADESH BANK
The guidelines contained herein outline general principles that are designed to govern
the implementation of more detailed lending procedures and risk grading systems within
individual banks.
9.1 CREDIT GUIDELINES
All banks should have established Credit Policies (“Credit Guidelines”) that clearly
outline the senior management’s view of business development priorities and the terms and
conditions that should be adhered to in order for loans to be approved. The Credit Guidelines
should be updated at least annually to reflect changes in the economic outlook and the
evolution of the bank’s loan portfolio, and be distributed to all lending/marketing officers.
The Credit Guidelines should be approved by the Managing Director/CEO & Board of
Directors of the bank based on the endorsement of the bank’s Head of Credit Risk
Management and the Head of Corporate/Commercial Banking.
9.2 CREDIT ASSESSMENT
A thorough credit and risk assessment should be conducted prior to the granting of
loans, and at least annually thereafter for all facilities. The results of this assessment should
be presented in a Credit Application that originates from the relationship manager/account
officer (“RM”), and is approved by Credit Risk Management (CRM). The RM should be the
owner of the customer relationship, and must be held responsible to ensure the accuracy of
the entire credit application submitted for approval. RMs must be familiar with the bank’s
Credit Guidelines and should conduct due diligence on new borrowers, principals, and
guarantors. It is essential that RMs 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. All banks should have established Know Your Customer (KYC) and
Money Laundering guidelines which should be adhered to at all times. Credit Applications
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 12

should summaries the results of the RMs risk assessment and include, as a minimum, the
following details:
 Amount and type of loan(s) proposed.
 Purpose of loans.
 Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
 Security Arrangements.
In addition, the following risk areas should be addressed:
Borrower Analysis: The majority shareholders, management team and group or affiliate
companies should be assessed. Any issues regarding lack of management depth, complicated
ownership structures or intergroup transactions should be addressed, and risks mitigated.
Industry Analysis: The key risk factors of the borrower’s industry should be assessed. Any
issues regarding the borrower’s position in the industry, overall industry concerns or
competitive forces should be addressed and the strengths and weaknesses of the borrower
relative to its competition should be identified.
Supplier/Buyer Analysis: Any customer or supplier concentration should be addressed, as
these could have a significant impact on the future viability of the borrower.
Historical Financial Analysis: 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, guarantor financial statements should also be analyzed. The analysis should
address the quality and sustainability of earnings, cash flow and the strength of the
borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be
analyzed.
Projected Financial Performance: Where term facilities are being proposed, a projection of
the borrower’s future financial performance should be provided, indicating an analysis of the
sufficiency of cash flow to service debt repayments. Loans should not be granted if projected
cash flow is insufficient to repay debts.
Account Conduct: For existing borrowers, the historic performance in meeting repayment
obligations (trade payments, cheques, interest and principal payments, etc) should be
assessed.
Adherence to Credit Guidelines: Credit Applications should clearly state whether or not the
proposed application is in compliance with the bank’s credit Guidelines. The Bank’s Head of
Credit or Managing Director/CEO should approve Credit Applications that do not adhere to
the bank’s credit Guidelines.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 13

Mitigating Factors: Mitigating factors for risks identified in the credit assessment should be
identified. Possible risks include, but are not limited to: 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.
Loan Structure: The amounts and tenors of financing proposed should be justified based on
the projected repayment ability and loan purpose. Excessive tenor or amount relative to
business needs increases the risk of fund diversion and may adversely impact the borrower’s
repayment ability.
Security: A current valuation of collateral should be obtained and the quality and priority of
security being proposed should be assessed. Loans should not be granted based solely on
security. Adequacy and the extent of the insurance coverage should be assessed.
Name Lending: Credit proposals should not be unduly influenced by an over reliance on the
sponsoring principal’s reputation, reported independent means, or their perceived willingness
to inject funds into various business enterprises in case of need. These situations should be
discouraged and treated with great caution. Rather, credit proposals and the granting of loans
should be based on sound fundamentals, supported by a thorough financial and risk analysis.
9.3 RISK GRADING
All Banks should adopt a credit risk grading system. The system should define the
risk profile of borrower’s to ensure that account management, structure and pricing are
commensurate with the risk involved. Risk grading is a key measurement of a Bank’s 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 Credit Applications. The following Risk Grade Matrix is provided as an
example. The more conservative risk grade (higher) should be applied if there is a difference
between the personal judgment and the Risk Grade Scorecard results.
10.0 APPROVAL AUTHORITY, SEGREGATION OF DUTIES & INTERNAL
AUDIT
10.1 APPROVAL AUTHORITY
The authority to sanction/approve loans must be clearly delegated to senior credit
executives by the Managing Director/CEO & Board based on the executive’s knowledge and
experience. Approval authority should be delegated to individual executives and not to
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 14

committees to ensure accountability in the approval process. The following guidelines should
apply in the approval/sanctioning of loans:
 Credit approval authority must be delegated in writing from the MD/CEO & Board
(as appropriate), acknowledged by recipients, and records of all delegation retained in
CRM.

 Delegated approval authorities must be reviewed annually by MD/CEO/Board.

 The credit approval function should be separate from the marketing/relationship

management (RM) function.

 The role of Credit Committee may be restricted to only review of proposals i.e.
recommendations or review of bank’s loan portfolios.

 Approvals must be evidenced in writing, or by electronic signature. Approval records

must be kept on file with the Credit Applications.

 All credit risks must be authorized by executives within the authority limit delegated
to them by the MD/CEO. The “pooling” or combining of authority limits should not
be permitted.

 Credit approval should be centralized within the CRM function. Regional credit
centers may be established, however, all large loans must be approved by the Head of
Credit and Risk Management or Managing Director/CEO/Board or delegated Head
Office credit executive.

 The aggregate exposure to any borrower or borrowing group must be used to

determine the approval authority required.

 Any credit proposal that does not comply with Lending Guidelines, regardless of
amount, should be referred to Head Office for Approval

 MD/Head of Credit Risk Management must approve and monitor any cross border
exposure risk.

 Any breaches of lending authority should be reported to MD/CEO, Head of Internal

Control, and Head of CRM.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 15

 It is essential that executives charged with approving loans have the relevant training
and experience to carry out their responsibilities effectively. As a minimum,
approving executives should have:

 At least 5 years experience working in corporate/commercial banking as a

relationship manager or account executive.

 Training and experience in financial statement, cash flow and risk analysis.

 A thorough working knowledge of Accounting.

 A good understanding of the local industry/market dynamics.

 Successfully completed an assessment test demonstrating adequate knowledge of the

following areas:
o Introduction of accrual accounting.
o Industry / Business Risk Analysis
o Borrowing Causes
o Financial reporting and full disclosure
o Financial Statement Analysis
o The Asset Conversion/Trade Cycle
o Cash Flow Analysis
o Projections
o Loan Structure and Documentation
o Loan Management.
A monthly summary of all new facilities approved, renewed, enhanced, and a list of
proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.
10.2 SEGREGATION OF DUTIES
Banks should aim to segregate the following lending functions:
- Credit Approval/Risk Management
- Relationship Management/Marketing
- Credit Administration
The purpose of the segregation is to improve the knowledge levels and expertise in
each department, to impose controls over the disbursement of authorized loan facilities and
obtain an objective and independent judgment of credit proposals.
10.3 INTERNAL AUDIT
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 16

Banks should have a segregated internal audit/control department charged with

conducting audits of all departments. Audits should be carried out annually, and should
ensure compliance with regulatory guidelines, internal procedures, Credit Guidelines and
Bangladesh Bank requirements.
11.0 CREDIT MONITORING, CREDIT RECOVERY PROCESS OF DHAKA BANK
LIMITED
11.1 CREDIT MONITORING
To minimize credit losses, monitoring procedures and systems should be in places
that provide an early indication of the deteriorating financial health of a borrower. At a
minimum, systems should be in place to report the following exceptions to relevant
executives in CRM and RM team:
 Past due principal or interest payments, past due trade bills, account excesses, and
breach of loan covenants.
 Loan terms and conditions are monitored, financial statements are received on a
regular basis, and any covenant breaches or exceptions are referred to CRM and the
RM team for timely follow-up.
 Timely corrective action is taken to address findings of any internal, external or
regulator inspection/audit.
 All borrower relationships/loan facilities are reviewed and approved through the
submission of a Credit Application at least annually.
Computer systems must be able to produce the above information for central/head office
as well as local review. Where automated systems are not available, a manual process should
have the capability to produce accurate exception reports.
11.2 EARLY ALERT PROCESS
An Early Alert Account is one that has risks or potential weaknesses of a material nature
requiring monitoring, supervision, or close attention by management. If these weaknesses are
left uncorrected, they may result in deterioration of the repayment prospects for the asset or in
the Bank’s credit position at some future date with a likely prospect of being downgraded to
CG 5 or worse (Impaired status), within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts
are prime credit responsibilities of all Relationship Managers and must be undertaken on a
continuous basis. An Early Alert report should be completed by the RM and sent to the
approving authority in CRM for any account that is showing signs of deterioration within
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 17

seven days from the identification of weaknesses. The Risk Grade should be updated as soon
as possible and no delay should be taken in referring problem accounts to the CRM
department for assistance in recovery.
Despite a prudent credit approval process, loans may still become troubled. Therefore, it
is essential that early identification and prompt reporting of deteriorating credit signs be done
to ensure swift action to protect the Bank’s interest. The symptoms of early alert are by no
means exhaustive and hence, if there are other concerns, such as a breach of loan covenants
or adverse market rumors that warrant additional caution, an Early Alert report should be
raised.
Moreover, regular contact with customers will enhance the likelihood of developing
strategies mutually acceptable to both the customer and the Bank. Representation from the
Bank in such discussions should include the local legal adviser when appropriate.
An account may be reclassified as a Regular Account from Early Alert Account status
when the symptom, or symptoms, causing the Early Alert classification have been regularized
or no longer exist. The concurrence of the CRM approval authority is required for conversion
from Early Alert Account status to Regular Account status.
11.3 CREDIT RECOVERY
The Recovery Unit (RU) of CRM should directly manage accounts with sustained
deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT
accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and
Corporate Banking. Whenever an account is handed over from Relationship Management to
RU, a Handover /Downgrade Checklist should be completed.
The RU’s primary functions are:
 Determine Account Action Plan/Recovery Strategy
 Pursue all options to maximize recovery, including placing customers into
receivership or liquidation as appropriate.
 Ensure adequate and timely loan loss provisions are made based on actual and
expected losses.
 Regular review of grade 6 or worse accounts.
12.0 COMPLIANCE OF BANGLADESH BANK GUIDELINES BY DHAKA BANK
LIMITED
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 18

Comparing Dhaka Bank’s current credit risk management system with the Bangladesh
Bank best practices guideline we see that Dhaka Bank lacks some of the best practices in
banking industry which can be generated in the following way:
12.1CREDIT POLICIES/ LENDING GUIDELINE
In the above analysis we have seen that Dhaka Bank Limited has no written credit
policy though it follows some policy. As there is no written credit policy, branch managers
sometimes get confused whether to go with a project or not.
Thus Dhaka Bank Limited should have a credit guideline available in every branch so
that credit officers can take quick decision whether to accept or reject a project. The credit
guideline should include the following:
• Industry or business segment focus.
• Types of loan facilities
• Details of single borrower/ group limit
• Lending caps
• Discouraged business type
• Loan facility Parameters
• Cross Border risk
12.2 CREDIT ASSESSMENT & RISK GRADING
Though credit is properly assessed in DBL, but there is no risk grading system applied
here. It should adopt a credit risk grading system to ensure account management, structure
and pricing are commensurate with the risk involved.
12.3 APPROVAL AUTHORITY
In Bangladesh Bank’s guideline it is written that “Approval authority should be
delegated to individual executives and not to committees to ensure accountability in approval
process”. But in Dhaka Bank Limited we see that every credit goes to the board via credit
committee. As a result, wastage of time occurs and no one is held accountable for a bad loan.
12.4 SEGREGATION OF DUTIES
According to Bangladesh Bank Guideline Banks should aim to segregate the
following credit functions to improve the knowledge levels and expertise in each department:
- Credit Approval/ Risk Management
- Relationship Management/ Marketing
- Credit Administration
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 19

But in Dhaka Bank Limited there is no such depertmentation or segregation of duties.

In small branches of DBL only single loan officer do all the jobs like loan marketing, risk
assessing and credit administration.
12.5 INTERNAL AUDIT
Dhaka Bank limited has a segregated internal audit/ control department charged with
conducting audit of all departments as suggested by Bangladesh Bank guideline.
12.6 PREFERRED ORGANIZATIONAL STRUCTURE
Currently Dhaka Bank does not follow the preferred management structure as
suggested by Bangladesh Bank guideline. The key feature in the preferred management
structure is the segregation of Marketing/ Relationship function from approval/Risk
management/ Administration function.

12.7 APPROVAL PROCESS

According to Bangladesh Bank’s best practice guideline, ‘the recommending or
approving executives should take responsibility for and be held accountable for their
recommendations and approval’. The recommended delegated approval authority levels are
as follows:
Head of Credit/CRM Executives up to 15% of capital
Managing Director/ CEO Up to 25% of capital
EC/ Board All exceed 25% of capital
But in Dhaka Bank we see that every credit proposal goes to Executive committee i.e. board.
12.8 CREDIT ADMINISTRATION
The Bangladesh Bank guidelines suggest that Credit administration be strictly
segregated from relationship management/ marketing. As a result the possibility of controls
being compromised or issues not being highlighted at the appropriate level can be avoided.
The credit administration has the following functions:
• Disbursement
• Custodial duties
• Compliance requirement
In Dhaka Bank credit officers under supervision of Branch Credit In-charge or
Manager also carry out all the three functions of credit administration. But Credit Marketing
and administration is yet to be segregated.
12.9 CREDIT MONITORING
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 20

To minimize credit losses, monitoring procedures and systems should be in place that
provides an early indication of the deteriorating financial health of a borrower. Early
identification, prompt reporting and proactive management of Early Alert Accounts are prime
credit responsibilities of all relationship Managers. An early Alert Account is one that has
risks or potential weakness of a material nature requiring monitoring, supervision or close
attention by management.
In Dhaka Bank credit monitoring is also done by credit In charge or branch managers.
As a result Early Alert Accounts do not get that much attention as needed.
12.10 CREDIT RECOVERY
According to Bangladesh Bank guideline the recovery unit (RU) of CRM should
directly manage accounts with sustained deterioration. On a quarterly basis, a Classified Loan
review (CLR) should be prepared by the RU Account Manager to update the action/ recovery
plan, review and assess the adequacy of provisions, and modify as appropriate.
In Dhaka Bank the non-performing loan is very low (below 3%) and the recovery unit
is yet to be formed. But for personal loan program, Personal Banking Division has a recovery
unit.
12.11 INCENTIVE PROGRAM
The Bangladesh Bang guideline also encourages Banks to introduce incentive
programs for the Recovery Unit Account Managers to bring down the NON Performing
Loans (NPLs) Dhaka Bank Limited currently has no incentive program as it does not have
any Recovery Unit.
13.0 CONCLUSION AND RECOMMANDATION
The failure of commercial banks occurs mainly due to bad loans, which occurs due to
inefficient management of the loans and advances portfolio. Therefore any banks must be
extremely cautious about its credit portfolio and credit policy. So far Dhaka Bank Limited
has been able to manage its credit portfolio skillfully and kept the classified loan at a very
lower rate ---thanks go to the standard and stringent credit appraisal policy and practices of
the bank.
But all things around us are changing at an accelerating rate. Given the fast changing,
dynamic global economy and the increasing pressure of globalization, liberalization,
consolidation and disintermediation, it is essential that Dhaka bank Limited has a robust
credit risk management policies and procedures that are sensitive to these changes. To
improve the risk management culture further, Dhaka Bank Limited should adopt some of the
industry best practices that are not practiced currently. These are
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 21

 Dhaka Bank should have a clear written credit guideline. The credit guideline should
include Industry and Business Segment Focus, Types of loan facilities, Single
Borrower and group limit, credit caps, Discouraged Business Types, Loan Facility
Parameters and Cross boarder Risk.
 It should adopt a credit grading system all facilities should be assigned a risk grade.
And the borrowers risk grades should be clearly stated on credit application.
 Approval authority should be delegated to individual executives rather than Executive
Committee/ Board to ensure accountability. This system will not only ensure
accountability of individual executives but also expedite the approval process.
 All lending functions should be segregated in the following way
* Credit Approval / Risk Management
* Relationship Management / Marketing
* Credit Administration
 The segregation of duties will improve the knowledge levels and expertise in each
department.
 The organization structure should have to be changed to put in place the segregation
of the Marketing/ Relationship Management function from Approval / Risk
Management / Administration function.
 The responsibilities of the key persons of the above function must also be clearly
specified.
 An Early Alert Account system should be introduced to have adequate monitoring,
supervision or close attention by management.( An early Alert Account is one that
has risk and potential weaknesses of a material nature).
 There should be a Recovery Unit to manage directly accounts with sustained
deterioration. To encourage Recovery Unit incentive program may also introduced.
Internal Control and Compliance Risk; and To Compare the Existing Credit Policy of Dhaka Bank Limited 22

REFERENCE
1. Annual Report of Dhaka Bank Limited.
2. Bangladesh Bank (2003), Annual Report.
3. Google Wikipedia.
4. www.google.com
5. www.yahoo.com