Principles, policies and guidelines for sustainable credit risk management in Bangladesh

Abstract

The purposc of Ihis documcnt is to providc dircctional gUl(ielines to Ihc banking 8ector that will Improve a) the risk managcmcnt culture, b) e~lablish minimum standards fot' segregalion of duties and responsibi lilies, ,md c) as,,,,t in the ongoing IInprovement of the banklllg ,ector m Bangladesh by ldentifying the lacking in the existing crcdil risk managcmcnt system and ITIlnilTIlLingso by ~dopting a <;tandanlJ;,cd approach in the LOTIn of credll fl5k grading (eRG) syslem, The policy and guidelincs suggested in this p~per are 1I1tcndcd for use in lhe eorpor~tci commnewl banking businesses. At present, the credlt nsk managcment technique is dominated by the Lendmg Risk AnalysIs (LRA) manual introduced 1111993 by the Bangladesh Dank h<lshecn in practice for m<lmi;ltory usc hI' the Banks & financial insti!Ll!ioJls for loan sizc of I3DT 10 million and above. Th~ Banking ,ector ,inc~ then h,lS changed a lot as cr~dil culturc has been SlllfLlIlg towalds a morc proLc~'lOl\al and st,l11(brdl/cd Crcdit Risk Managcmcnt approach. To o\'Clcome the lad.LIlg of Ihe cXlsting LRA (Lending Kisk AnalY'ls) systcm with a vi~w to Ct'caling a susl<lmahle crcdit risk managell1~m clIllllre, pcrJonnance, envmlllmcnt and l~chnique to render anced hascd simphficd and uscr friendly mode! for application by lhe Banks and fmancial instllutions in proces;mg crcdit dccisions and evaluating thc magnitudc of nsk involvcd thercill a rlew Strategy/~yslem in the foml of credit risk gradmg (eRG) has becn cxplorcd and sugge,kd in this thesi~ "ork, Cred,t risk grading suggestcd in this paper lS going to he an important tool for credit Ii,k mllilagement as it is gOlng to help the Il<lnb & Jinanci,11institutions 10 undersland various dimcn;lOns of risk iIwolved In dllTcrent credit tran,netiolls. rhc aggregation of stich grading across the bonuwer" activities and lhe lmcs of busmc>s can provide better assessment of lhe quality of credit portfolio of a bunk or a branch, Thc credil [1sk grading system is vital to take decIsions bolh at lhe pre-sanction ,lage "'"w~lI as po,l-sanction stage.