Credit Risk Management of Jamuna Bank Limited

Abstract

Banks are exposed to five core risks through their operation, which are – credit risk, asset/liability risk, foreign exchange risk, internal control & compliance risk, and money laundering risk. Among these risks management of credit risk gets most attention. Credit risk arises due to the possibility that the borrower may fail to repay the loan. Following the recent global financial crisis, which originated from poor management of credit risk, credit risk is the most discussed topic in banking industry. All commercial banks operating in Bangladesh are strictly regulated by Bangladesh Bank. Bangladesh Bank has provided a guideline for credit risk management. All banks try to comply with that guideline. Jamuna bank is no exception of this practice. JBL has segregated the credit related activities. Marketing, preparation of credit proposal, other documentation, credit disbursement, credit monitoring etc are done at branch level. Credit administration and credit risk management related works are done at head office. At branch level, branch managers act as Relationship Manager (RM) to explore/find new business opportunities. If a new business is located he informs Head of Corporate Division using a call report. Corporate Division shall examine the call reports and communicate their initial views to the Branch about the proposed business. If the views are positive, HO will direct the concerned RM to send a complete business proposal to Corporate Division. Then the Branch submits complete proposal to H.O. CRM examines the proposal from different angles of risk and compliance and communicate their views. Then the proposal is sent to credit review committee by corporate division. CRM simply presents their observations. Credit Review Committee provides their views about the proposal which has to be approved by the M.D. corporate division may amend/change their proposal according to the recommendation of credit review committee. The Managing Director shall approve the facility if it is within power. If Board/EC approval is required, the Memo is to be signed by the Managing Director. After approval the CRM shall issue sanction advice enclosing documentation check list with a copy to credit Administration Division. When a party approaches JBL for a loan, a loan proposal is prepared at branch level, which includes credit risk assessment report, credit risk grading report besides recommended amount of loan that can be disbursed. This proposal is sent to the Head Office for approval. If Credit Administration Department of Head Office sanctions the proposal then the amount is disbursed to that party. Monitoring the loan after disbursement is the branch’s responsibility. All loan applicants are required to submit financial statements of past three years. Relevant financial performance indicators are put into a spreadsheet to assess the credit risk. JBL has a credit policy guideline which is in line with the guideline provided by Bangladesh Bank. Different weights are given to different factors like industry profitability, company size, debt burden ratio, previous loan performance etc.