Write down the expected minimum CRG requirements for extending credit. Explain with example

 Definition of Numbers of Credit Risk Grading

A clear definition of the different categories of Credit Risk Grading is given as follows:

 

Risk Rating	Grade	Definition
Superior – Low Risk	1	 Facilities are fully secured by cash deposits  Government bonds or a counter guarantee from a top tier international bank.   All security documentation should be in place.
Good – Satisfactory Risk	2	 The repayment capacity of the borrower is strong.  The borrower should have excellent liquidity and low leverage.   The company should demonstrate consistently strong earnings and cash flow.   All security documentation should be in place.  Aggregate Score of 95 or greater based on the Risk Grade Scorecard.
Acceptable – Fair Risk	3	Adequate financial condition though may not be able to sustain any major or continued setbacks.  These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record  An Aggregate Score of 75-94 based on the Risk Grade Scorecard.
Marginal – Watch list	4	 Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the  Economic environment.

 

		 These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings.   Aggregate Score of 65-74 based on the Risk Grade Scorecard.
Special Mention	5	 Grade 5 assets have potential weaknesses that deserve management‘s close attention.   If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower   An Aggregate Score of 55-64 based on the Risk Grade Scorecard.
Substandard	6	 Financial condition is weak and capacity or inclination to repay is in doubt   Loans should be downgraded to 6 if loan payments remain past due for 60-90 days   Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interest can still be taken into profits.   An Aggregate Score of 45-54 based on the Risk Grade Scorecard.
Doubtful and Bad (non- performing)	7	 Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.   However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Loss.  The adequacy of provisions must be reviewed at least quarterly on all non-performing loans, and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling.   In all cases, the requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed.   An Aggregate Score of 35-44 based on the Risk Grade Scorecard
Loss (non- performing)	8	 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation.   The prospect of recovery is poor and legal options have been pursued.   The proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted   An Aggregate Score of 35 or less based on the Risk Grade Scorecard

Define Credit Risk Grading (CRG), Function of Credit Risk Grading, What is the uses/purpose/importance of CRG

 *Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.

*CRG deploys a number/ symbol as a primary summary indicator of risks associated with a credit exposure.

*Credit Risk Grading is the basic module for developing a Credit Risk

Management system.

Function of Credit Risk Grading

Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.

What is the uses/ purpose/ importance of CRG

***The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of an individual obligor and the credit portfolio as a whole. It measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels.

***As evident, the CRG outputs would be relevant for credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit spread) and specific features of the credit facility.

 

***Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a bank. It is also relevant for portfolio level analysis.

Highlight the role and responsibilities of ALCO for proper functioning of a bank

 The key roles and responsibilities of the ALM Desk:

1) To assume overall responsibilities of Money Market activities.

2) To manage liquidity and interest rate risk of the bank.

3) To comply with the local central bank regulations in respect of bank‘s statutory obligations as well as thorough understanding of the risk elements involved with the business.

4) Understanding of the market dynamics i.e competition, potential target markets etc.

5) Provide inputs to the Treasurer regarding market views and update the balance

sheet movement.

6) Deal within the dealer‘s authorized limit.