First NameSK. Talibur
Last NameRahman
Supervisor NameDr. A.K.M. Mukter Hossain, Dr. A.K.M. Zakir Hossain, Dr. Afroja Parvin, Dr. Saleha Kader, Dr. Zaharaby Ripon, Dr. Sultan Muhammad Razak
UniversityInternational Culture University
KeywordsFinance, Accounting, Risk Management
Publication Date06 June, 2017

Risk Management in Banking and Establishing a Credit Risk Grading Model

Abstract: Credit is the major earning asset of banks. However it is the riskiest asset. The banking sector of Bangladesh is burdened with substantial amount of NPL. Though, the banking sector of Bangladesh as a whole has been experiencing a long lasting declining trend in NPL excepting recent hike in classified loan resulting mainly from policy change, percentage of NPL, is still much higher than internationally accepted tolerable range of 2%-3%. Moreover “Bad” category of classified loan which is not recoverable from business constitutes about 70% of total NPL.

So, quality of credit is a key determinant of the financial health of a bank. Credit is a scarce commodity and the decision to give a credit to a borrower is at the same time a decision not to give it to other competing potential borrower. Thus, credit decision has important consequence on optimum utilization of loanable fund. The vital decision for a bank to select a borrower involves two types of asymmetric problems. Adverse selection and moral hazard problem. Ensuring proper discipline and robustness in credit operation depends on applying a standardized set of tools to minimize the adverse outcome of a lending decision.

In the report, chapter I describes the introduction, objective, hypothesis, some literature review and methodology and limitations.

Chapter II is description on Risk Management in banking and various risk definition. It also contains some description on Basel II and Basel III. Basel II is an international

business standard that requires financial institution to maintain cash reserve to cover the risks incurred by operation.

Basel III objective is to strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector, the Basel committee on Banking supervision (BCBS) issued Basel III : A global regulatory frame work for some resilient banks and banking systems in December 2010.

Chapter III deals with description about Non-performing loan and the scenario both in Bangladesh Banking sector and some selected countries. Some of the causes and remedies are also described.

Chapter IV is the credit Risk Grading Manuals and its contents and some circular by Bangladesh Bank related to Classification.

Chapter V describes about ratio analysis practiced in accounting, its formula and interpretation. The mostly widely used financial analysis technique is ration analysis, the analysis of relationship between two or more line items on the financial statement. Credit Risk grading system recommended 50% score on financial risk and all are based on ratio analysis.

Chapter VI describes about the limitation and drawback of the existing CRG, and recommended a new model in addition with existing CRG practiced in Banking sector in Bangladesh.

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