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Govt. Azizul Haque College, Bogra
Term Paper on
Evaluation of Credit Assessment & Risk Grading
Management
Of
Dutch Bangla Bank Ltd

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Term Paper
On
Evaluation of Credit Assessment & Risk Grading
Management
Of
Dutch Bangla Bank Ltd
Submitted to : Submitted by :

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Letter Of Transmittal

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Student’s Declaration

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Preface

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Table Content
Title Page No
Chapter 1 :
1.
2.
3.
4.
Chapter 2 :
1.
2.
3.
4.
Chapter 3 :
1.
2.
3.
4.
Chapter 4 :
1.
2.
3.
4.
5.
6.
Chapter 5:
1.
2.

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1 .Introduction
The increased number of bankruptcycases worldwide,both corporate and
personal, is the mainreason for the renewedinterest in credit risk
management.A bad loansituation often arises from a combinationof
factors, amongstwhichthe major one is the absence of an adequatesystem
to classify loans properly and to identify problem loans promptly so as to
minimize the potentialdefaults and consequentlosses. More defaultsmean
more missed loanpaymentsand a reductionin profitability for banks. Poor
managementof credit risk is considered to be the major cause of banks’ bad
performance and often the reason for their bankruptcy.

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2. Statement of the Problem
Credit risk rating s ystems are becoming an increasingly
important element of commercial banks’ measurement and
management of credit risk. Such an importance has in fact been
highlighted in the proposed Credit Risk Grading Manual of
Bangladesh Bank was circulated by Bangladesh Bank vide BRPD
Circular No. 18 dated December 11, 2005,that includes the internal
rating approach to credit risk as one of its cornerstones. This paper
attempts to investigate the extent to which the credit rating systems
are used in DBBL based on a recent survey.

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3 Purpose of the Study
The report is based on my critical observation while working in the loans and
advancement division of DBBL. The report reveals the various types of loan scheme and
the criterion to get the loan and the risk grading system.
This report will not only help the management of the bank, but also the stakeholders on a
whole. Different financial institutions can be motivated to consider the study conducted
in this report, in order to improve the various offerings of the transaction banking
services for clients.

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4.OBJECTIVES OF THE STUDY
I. Broad/General Objective of the report are:
To achieve a wide knowledge of the various types of loan scheme, credit
assessment
procedure and risk grading system of DBBL bank.
II. Specific Objectives of the report are:
To examine the knowledge level of clients regarding the services of credit
division. To
investigate employees views regarding the quality and standard of the services
offered by
credit division.
To identify the gaps between the services and solutions that clients want
from this
segment and those which are actually being provided by credit division.
To suggest ways of improving the services and solutions offered by credit
division to
accommodate the rapidly growing client base of Dutch Bangla Bank.

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1. Literature Review
Banks manage a wide range of assets, liabilities, and equity capital that supporttheir
operations and activities. Properrisk management is therefore a vital and integral part of
effective bank operation. Widely cited risks include credit risk, interest risk, liquidity risk
and operational risk.
All these risks are derived from banks’ most fundamental and traditional roles of lending
and borrowing. Among those risks, credit risk, which is associated with the potential
variability of the stream of cash flows from an asset, is one of the most crucial ones, as it
is often appointed as the cause of a bank failure. To perfect its credit risk assessment,
monitoring and management, banks use a variety of methods and tools. In the pastfew
years, banks have been adopting and
improving credit scoring system so as to evaluate certain types of loans more objectively,
accurately and efficiently. Recently, the industry has started implementing credit rating as
a mechanism to better manage its credit risk and to improve its overall portfolio
performance. Credit risk rating is a summary indicator of risk for banks’ individual credit
exposures and is generally assigned at the time of each underwriting or credit approval
and reassessed during the credit review process.It functions as the barometer for the
banks to measure their credit risk
exposure to each individual customer, either in isolation or as part of their loan portfolio.
The rating allows banks to measure the relevant default probabilities at different rating
levels more accurately. It helps banks to reduce their risk exposure and to improve their
profitability by 32 reducing the number of potential default loans as well as minimizing
the costassociated with bad debt recovery.
Although the major objective of credit rating is to determine the ability and willingness of
a borrower to pay at the agreed terms, the rating does a bit more than just classifying the
borrowers into “pass”and “fail” categories. The most important benefits for banks in
using the rating system to assess their loans include:
Credit Risk Rating System in the Banking Sector
Identify and decline potential risky applicants
Reduce losses due to defaults
Price the loan properly
Increase liquidity
Maximize the profit
Improve monitoring process
Reduce monitoring cost
Minimize administrative costs with debt collection
Help banks to achieve their objectives

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Allow allocation of resources where they are more productive
Avoid loan concentration
Tracy and Carey (2000) suggest that in designing a credit rating system, a bank should
consider numerous factors, including cost, efficiency of information gathering,
consistency of rating produced, staff incentives, nature of a bank’s business, and uses to
be made of the internal ratings. They notice that the proportion of grades used to
distinguish among relatively low-risk
credits versus the proportion used to distinguish among riskier pass credits tend to differ
with the business mix of a bank. A rating system with more rating categories is better
than a system with just a few categories. Finer distinctions of risk, especially among
riskier assets, can enhance a bank’s ability to analyze
its portfolio risk exposure. However, an internal rating system with larger number of
grades is costly to operate becauseof the extra work required to distinguish finer degrees
of risk. When assigning a loan applicant to a particular grade, Croupy et al. (2001)
suggest that banks should analyze three different categories of variables – quantitative,
qualitative and legal. The quantitative analysis concentrates mainly on financial analysis
and is often based on a firm’s financial reports. The four main quantitative factors used in
the assessment model include net income, total operating income, total equity capital and
total asset values. These factors allow the banks to calculate a variety of ratios including
return on assets (ROA), return on equity (ROE) and assets utilization (AU), etc. Once
computed, these ratios would be compared with the Credit Risk Rating System in the
Banking Sectorindustry standard. In addition to the information disclosed in the financial
statements, the rating also includes information about the quality of 33
collateral and the third party support. Forcertain type of loans like overseas loans or
loans for customer in import/export business, country risk is also another important factor
to take into account.

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2.CONCEPTUAL FRAMEWORK
Credit Monitoring
Reliability
Assurance factor
Credit Risk

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3. Research Questions

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4.Hypothesis:
There is a major influence of reliability and responsiveness of a
client on credit sanction , because the loan officer must be
convinced that the customer has a well defined purpose for
requesting credit and a serious intention to pay . As well as
accessibility , assurance factor of the client and credit
monitoring policy of the bank have major impact on credit risk.

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1.Methodology of the report
My objective was to find out specific correlations between the
independent and dependent variables associated in this research
subject matter. Therefore, my objective was to look at the
relationship between various services provided by Credit department
as well as proper and prior analysis of credit proposals of the same
sector. For the purpose of my research, I initially designed a
descriptive- correlational study to assess whether there is any
correlation among the variables. This method would be most
effective as I am trying to find out the extent of the associations
between the variables, whether any exists, as well as their statistical
significance on my overall research. However, due to time constraints
and imitational length of the project, only qualitative study has been
made over the findings from this research. The research has been
carried out over a one period of time through questionnaires
answered by the employees using the conventional method of
personal interview.
Further information used to prepare this report has been collected
from both primary and secondary sources. The primary sources have
provided the report with reliable data and information relating to
Local clients and the bank’s operations. On the other hand, the
secondary sources have been an indispensable source of information
regarding the historical background of the bank, its functions, and
descriptions of its various departments and products.
i. PRIMARY SOURCES

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Data collected from the employees by personal interview conducted
through questionnaires.
Informal discussion with the bank’s staff, especially the credit
division managers of the corporate segment.
Relevant data from the bank’s reports, presentations and other
documents.
ii. SECONDARY SOURCES
Annual reports of the Dutch Bangla Bank.
Various product and service brochures.
Intranet Site of the Dutch Bangla Bank.
Official local website of the Dutch Bangla Bank.
Various web researches.

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2. SAMPLING
i. POPULATION
The population targeted for this research was mainly the employees of the bank.
ii. SAMPLE UNITS
The sampling unit in case of this research consisted of the employees taken from the
population of the bank.
iii. SAMPLING FRAME
The sampling frame usually contains a list of elements from which the sample is drawn. The
survey has been conducted among different levels of employees representing industries like
manager, senior officer, officer etc. Also, all levels of managers have been considered starting
from associate to associate directors of this segment.
iv. SAMPLING DESIGN
The sampling frame usually contains a list of elements from which the sample is drawn. The
survey had been conducted among different levels of employees representing industries like
manager, senior officer, officer etc.
v. SAMPLE SIZE
The sample size consisted of 20 respondents who are the employees of the bank. Employees
may not reveal information through online survey due to confidentiality concerns. Also, because
of time constraint it will not be possible to go to every employee and take the survey. For this
research, those employees will be chosen who has maximum possibilities of answering the
survey questions. So, keeping limitations in mind, a sample size of 20 has been chosen from the
banana branch of Dutch bangla bank.

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3. DATA COLLECTION METHODS
Employees are usually less in number at the same time corporate clients may
not reveal information through online survey due to confidentiality concerns.
The questions were prepared in such a way keeping their confidentiality
concerns in mind. Also, because of time constraint it was not possible to go to
every employee and take the survey. Therefore, data for this report was
collected through structured questionnaires from employees, who were asked
by personal interview with the help of the respective relationship managers of
the credit division. Also, informal discussions with the relationship managers
of the segment provided invaluable data for the report. Published statistics
relating to the bank and Local clients was also used in this report.

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3.7.4 DATA ANALYSIS
Analysis can be done for both qualitative and quantitative data. Due to time constraints and many
other limitations, only qualitative research has been done to limit the research to a reduced length
as required by the internship program in the university. To analyze the data collected in the
survey through questionnaires, analysis was conducted mainly through the use of Microsoft
Excel.

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3.8 LIMITATIONS OF THE STUDY
The survey was limited to the local clients of the wholesale banking division only.
Lack of comprehension and responsiveness of the clients was a major problem in the
collection of data.
Large-scale research was not possible due to constraints and restrictions posed by the
bank as well as the university.
Confidentiality of data acted as a barrier during the study, as banks have confidential data
related to its operations and clients which they did not want to reveal.
Time constraint was also one of the factors that curtailed the scope of the study.
Rush banking hours and hectic schedules of the banking staff was another obstacle to the
scope of the study. The Mangers of the concerned department were busy meeting their
targets and it was very difficult for me to get some practical ideas regarding their ideas,
expectations and opportunities regarding my topic.

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3.9 QUALITATIVE ANALYSIS
Qualitative questions were relatively less in the questionnaire that has been prepared for the
credit officers. Through questionnaire respondents had a chance to express their views openly
about credit assessment and credit rating policies. Unfortunately, not many respondents had clear
views about the qualitative questions and only few responses were fit to be recorded. Also, some
responses were found to be repetitive and therefore only some responses were suitable to be
presented as part of the analysis.
Credit Rating Information and Services Ltd (CRISL)
Credit Rating Agency of Bangladesh Ltd (CRAB)
National Credit Ratings Ltd
Emerging Credit Rating Ltd
Most of the officers’ responded with CRAB as credit rating agency for the bank. Few
were skipped this question as they were not sure about the agency.
Credit Rating Agency of Bangladesh (CRAB) Limited has assigned ‘A1’(Pronounced
Single A One) rating in the Long Term and ‘ST-2’ in the Short Term to Dutch-Bangla
Bank Limited in view of the performance of the Bank for the last business Year.
(Source: Rating Report -Dutch Bangla Bank Limited)
Which credit reporting agency does your bank use?

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Did the Bank update its credit rating for the last financial year within six
months from the date of close of the financial year?
Yes
No
Not Always.
Credit Rating report of a bank is an important tool for the borrower. To do a sound
practice, bank should update their important data on time. According to the response
bank is concern about updating their credit rating but sometime, due to pressure of other
work, they fail to do that.

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Did the Bank fully secure itselfagainstall guarantees issuedfor the conditions
mentioned in the Regulationof BangladeshBank?
Yes
No
Not Always.
The borrower must possess adequate net worth or enough quality assets to provide adequate
support for the loan. The value of the collateral security must cover the loan exposure. The recent
trend of borrower’s line of work or industry must be taken into considerations by the Bank.
If bank uses a credit rating score that results in an adverse effect on
qualification or rating of the applicant, do you advise the applicant?
Yes, in all cases
Yes, in some cases
No, not at all
Not applicable
The Credit Risk Grading Manual released by Bangladesh Bank earlier was applicable only in

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case of lending to commercial clients. Now it’s mandatory for all borrowers. So having a sound
credit rating is important in business culture. Bank always updates their data, so if they find any
downward indication about their clients they notify them.
Does factory visits are made before approved the loan?
Yes
No
Not Always
Factory visit is part of the process in evaluating client’s operational activities and granting credit
approval. According to their response bank does a factory visit most of the time, especially in
case of a new business project. But some time, if the client has a good past record and a sound
relationship with bank, they skipped this segment.

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Does the officers well aware of different business type?
Yes
No
Not Always.
The loan officer must be convinced that the customer has a well defined purpose for requesting
credit and a serious intention to pay. To clarify client’s project, loan officer should have a sound
knowledge about that project. But according to their response, officers are not well aware of all
type of projects.

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3.10 Findings:
Bases on observation and interpretation I found some positive and negative side in DBBL. Those
are given below:
Bank Follow the overall credit assessment and risk grading process according to
Bangladesh Bank at maximum case.
Loan and the advances are vital to finance the projects. An appropriate credit
distribution system and monitoring will ultimately lead to the profit maximizing of
banks. It is evident from that the size of DBBL loans and advances are increasing over
the years. It indicates mire earning for the bank. It shows a positive growth rate.
DBBL has a positive growth rate in Net profit.
PROBLEM IDENTIFICATIONS:
The Bank does not go through back ground investigation all parties.
Some time the loan documentation is not fairly done.
Some time the document verification is done after loan sanction.
The SME loan section is very poor because they focused on corporate loan.

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3. Analytical Prove :
PRINCIPAL RISK
COMPONENTS:
KEY PARAMETERS: WEIGHT:
Financial Risk Leverage
Liquidity
Profitability
Coverage
15%
15%
15%
5%
50%
Business/Industry
Risk
Size of Business
Age of Business
Business Outlook
Industry growth
Market Competition
Entry/Exit Barriers
5%
3%
3%
3%
2%
2%
18%
Management Risk Experience
Succession
Team work
5%
4%
3%
12%
Security Risk Security coverage
Collateral coverage
Support
4%
4%
2%
10%
Relationship Risk Account conduct
Utilization of limit
Compliance of covenants
Personal deposit
5%
2%
2%
1%
10%
(Source: CREDIT RISK GRADING MANUAL of Bangladesh Bank)

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The following is the proposed Credit Risk Grade matrix based on the total score obtained by an
applicant.
(Source: CREDIT RISK GRADING MANUAL of Bangladesh Bank)

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3.11 RECOMMENDATIONS
The Bank can organize more training program and workshop to make the employees
more efficient in their sector.
The Bank has to establish a strong “Credit Manual”.
The Bank has to go through back ground investigation of all party’s.
All the loan documentations have to done honestly.
All the document verifications have to done before loan sanction.
The Bank has to construct a long term strong investment policy.
The Loan and Advance section has to make strong and the employees have to be devoted
to the Bank.
The Bank has to give emphasis the SME loan section.
The Bank should introduce more loan section.

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3.12 Conclusion
Dutch-Bangla Bank Limited is one of the most potential Banks in the banking sector. It has a
large portfolio with huge assets to meet up its liabilities and management of this bank is
equipped with the export bankers and managers in all level of management. So it is not an easy
job to find out the drawbacks of this branch.
It has been observed that DBBL started its banking services with a view to minimize the
customer’s needs by offering different products and services which are easy and affordable for
all level of customers. To that extent, DBBL always emphasizes its customer services, product
development, resource management, branch networking and the contribution to the economic
development of the country. The bank also provides social services through DBBF as their social
responsibility.
The success of a bank depends on the quality of the services it offers. All the commercial banks,
therefore, try to provide quality services with competitive interest rates. DBBL is not an
exception. Life line package has been developed with the same purpose. Although, the
comparative analysis shows that DBBL is in better position, but there are some obstacles it faces
to sustain the position. However, the continuous improvement of the services will certainly place
the bank in the best position in one decade.

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4: References
Books
Cooper, Donald R. Schindler, Palmer. S. (2009) Business Research Methods (9th Ed).
McGraw Hill.
Journals and Reports
Internal Credit Risk Rating Systems in the Macao Banking Sector.
http://www.amcm.gov.mo/publication/quarterly/Jan2007/!%20InternalCredit_en.pdf%20
(20070214)
A Loan Assessment System for Centenary Rural Development Bank.
http://dspace.mak.ac.ug/bitstream/123456789/617/3/nassali-josephine-cit-mastersreport.
pdf
Focusgroup, 2007. CreditRiskManagementIndustryBestPractices.Availableat:
http://www.bangladesh-bank.org/mediaroom/corerisks/creditrisk.pdf
Crouhy, M., D. Galai, and R. Mark (2001), “Prototype Risk Rating System,” Journal
of Banking and Finance, No. 25, 47-95.
Treacy, W. F. and S. M. Carey (2000), “Credit Risk Rating System at Large U.S.
Banks,” Journal of Banking and Finance, No. 24, 167-201.
Rating Report of Dutch Bangla Bank Limited
Report on automation of DBBL.
Guidelines for Credit Management of Bangladesh Bank – 1996.
Credit Management Policy Order: 2008 – 2009
Websites:
http://www.dutchbanglabank.com
http://www.bangladesh-bank.org
http://www.e-mortgages.com.au/credit-assessment/default.aspx
www.thefinancialexpress-bd.com

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