Introduction

Md. Saiduzzaman
Selim

Presentation
on
Performance evaluation of Credit Risk Management : A Case Study on Stateowned Commercial banks of Bangladesh

Objectives of The Study

The study has been under-taken with the following
objectives:

A. General Objectives
. To fulfill the partial requirements for obtaining MBA
degree from the IBAIS University.
. To review credit risk management policy and practice
in SCBs in line with the guidelines issued by
Bangladesh Bank to find out potential areas of
improvement.

B. Specific Objectives
. To assess the trend and magnitude of non-performing
loans.
. To find the causes of non-performing loans.
. To analyze the impact of NPL on profitability.
. To recommend for overcoming NPLs.

Methodology of the Study

Research Design: The qualitative and quantitative ways of
descriptive research method together have been followed to
accomplish the Dissertation report. The time preference of the study
relates
to the years
of 1990-2014.
Population
and Sample

size:

Banks

Total
population

Sonali
Agrani
Janata

10
15
10

Rupali
4

15
50

Sample
size

FFD 3

Data Collection Instruments:

Sources of data
A. Primary
B. Secondary

3
3
3
12

Trend and Magnitude of NPLs

A Non-performing loan is a loan that is in default or close to being in
default. Many loans become non-performing after being in default for
90 days.
According to IMF, definition of NPLs is A loan is nonperforming when
payments of interest and principal are past due by 90 days or more,
or at least 90 days of interest payments have been capitalized,
refinanced or delayed by agreement, or payments are less than 90
days overdue, but there are other good reasons to doubt that
payments will be made in full. Loan may also be Non- performing if it
is used in a different way than that for which it has been taken.
According to the latest notice of the central bank, only 'doubtful' and
'bad' categories are treated as default loans.
Non-performing loans are also called non-performing assets (NPA),
which are loans, classified by a bank or a financial institute, at the

The trend of non-performing loans in SCBs of

Bangladesh:
We can divide the trend of non-performing loan in three sections are
respectively

The trend of non-performing loans before

Liberation Period
Growth and Spread of non-performing loans after
liberation period
Present status of non-performing loans culture
in Bangladesh

Magnitude of
NPLs
Year
NPL (%)
1990
26.30
1992
32.23
1994
31.00
1996
36.57
1998
45.62
2000
37.02
2002
29.0
2004
21.35
2005

NPL (%)

Year

27.59

1991

31.86

1993

32.12

1995

32.55

1997

40.38

1999

38.56

2001

33.73

2003

25.3

2005

21.35

2006

Banks Non-performing Loans In Percentage of Total

Loan as Sept-2013: Comparison Between Types of
Banks :
28.76

29.39
7.3

6.02

Source: Bangladesh bank

publications-2013

Source: BB : Loan Rescheduled for the four State Owned Commercial

FINDINGS
Credit risk is a serious threat to the performance of banks;
therefore various researchers have examined the impact of credit
risk on banks in varying dimensions. Credit risk is the risk or
potential of loss that may occur due to failure of borrower/
counterparty to meet the obligation on agreed terms and
conditions of financial contract. To strengthen the risk
management practices of banks, Bangladesh Bank issued
Guidelines on Credit Risk Management (CRM) for Banks on the
basis of the first version of its kind, the Bank Company Act 1991
(Amended in 2013). Better credit risk management presents an
opportunity to greatly improve overall performance and secure a
competitive advantage. These guidelines provide broad-based
policy on the core principles for identifying, measuring, managing
and controlling credit risk in banks.
I have found that poor credit risk management practice by SCBs
that has made NPLs in high percentage where the 63% NPls of
total NPLs are from SCBs .

Some causes are responsible for increasing NPLs of four

state-owned banks:

business are run by adolescents who have lack of business

experience.
For peoples who want to do business in generally after
retirement from state or private service.
Political instability
Boards of the Directors.
Loans are given to the borrower without consideration of
Rescheduling of loans is offered to the defaulters without any
down payment in some causes.
Loan scams have been a big cause of non-performing loan in
banks in recent years.
They do not follow the Bangladesh Bank guidelines fully and
fairly.
Lack of power of BB to control SCBs because of the ministry
of finance .

Some causes are responsible for increasing NPLs of four

state-owned banks:

Anti-corruption Commission (ACC) Act- 2004, The Bank

Companies Act-1991and The Companies Act-1994 are the
suitable laws to prevent the bank fraudulence but their
implementation is very rare.
Lack of Monitoring
Lack of human resource policy
The practice of the purchase of loans of questionable quality
from private commercial banks (PCBs) under pressure from
powerful quarters that makes NPLs in SCBs.
The Internal Control department which ought to be the most
critically important department of any bank is weak in the
state-owned commercial banks (SCBs).

FINDINGS
I would like to say again that main causes of problem loans in those banks are:

Allowing customer to intimidate

Basing the lending decision on pressure from other parties
Inadequate analysis of the borrower
Inadequate analysis of financial statements
Inadequate analysis of loan purpose, source of repayment, and excess cash flow
Improper loan structureamount, source of repayment, timing of repayment (terms)
Improper collateralization
Failure to properly identify entity bank is dealing with

So we can say that indirectly the credit risk management of SCBs is

producing high percentage of NPls that indicates the negative impact on
performance of the banks :

erosion of the capital.

reduces current revenue.
resulting high loss of provision.
high cost of loan which causes low investment.
decrease of economic growth.
loan loss reserve to make up bad debt.
Finally law profit.

Capital deficit of SCBs (in BDT Billion)

Source: Bangladesh Bank

Comparison of SCBs ROA with others Bank

The recommendations for banks that may help

the authority to take effective remedial actions
to overcome the NPLs and CRM problems in at
least acceptable level.

Sanctioning of loans should be on the basis of

prudent banking principles and some other
considerations must be stopped.
Outright bribes
Putting an end to the practice of sanctioning loans
under pressure from powerful quarters .
Future lucrative employment in the borrower's
company
Over valuation of properties and assets of the
borrower which are offered as collateral
The boards of directors of state-owned banks must
consist of honest personalities
A high-powered Credit Counseling Committee
(CCC)
headed
by
the
Credit
Management
Department should be formed in each of the banks.

 Without meeting the credit risk grading and due diligence no

new loan should be sanctioned.
Documentation should be completed in all respects by the legal
department before disbursement of the loan.
A perfect and exquisite credit analysis should be made in all
respects about the applicant.
Bankers will have to increase their negotiation skills to speed up
loan recovery
Bangladesh Bank can impose strict rules of lending on all stateowned banks.
Bank officials must visit the client's office and factory regularly
Analyzing the disbursement of loans of past, present and future.
Banks should take high collateral.
SCBs have to follow each and every guidelines of risk
management of BB to overcome the problem of NPLs within
short period of time.

Conclusions
The default loan culture as a regular
phenomenon must not be accepted for an
indefinite period of time. The concerned
authorities already have taken some actions by
the amendment of bank company act 1991 in
2013 to come out from this regular problem.
The truth is that suggestions, thinking,
recommendations etc. will never work, unless
and until all the interested parties come up
with a positive approach. Unexpected political
influence should be kicked out from the banks.