Credit Risk Management Basics/Techniques-Part-1 - knowing borrower/ borrower evaluation

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One of the core function of the Bank is lending and the function is called providing credit facilities to the client/borrower. This has involved risk of fulfillment of obligations by the counter party/borrower as per contact. Managing this sort of risk to the acceptable level, Credit Risk Management is essential. Presently, in Bangladesh every Bank has Credit Risk Management Division to mitigate credit risk. Processing the proposals of the borrower for the credit facilities for approval/decline is main function Credit Risk Management Division.

In the approval process one of the most important things to consider is borrower evaluation. Knowing the borrower itself is 1st steps of borrower evaluation. Credit Analyst should know followings of the borrower (proprietor/partners/directors):

Personal life - What types of people(S) the borrower. Whether he is pious or not? Generally pious people have self motivation of repayment of the loan from religious point. Association, Social engagement of borrower is also important. Family back ground of the borrower also important. These are important to judge borrower willingness to pay and honesty. 

Educational Qualification- Knowledge is power. Whether the borrower/sponsors have proper educational strength to sustain the continuously changing business world. Educational back ground to known.

Business Experience and knowledge- Bank should also think about the client/borrower/sponsors related business experience and knowledge. Sponsors in new types of business should be examine with extra care and to be discouraged.

Credit Analyst should not recommend credit facilities without perfectly knowing the proprietor/partners/directors of the respective borrower.

CLASSIFICATION AND INTEREST SUSPENSE OF RESCHEDULED LOANS: BRPD Circular no. 15, dated September 23, 2012

Rescheduled loans may be put into any category of classification by the bank considering the existing financial soundness and repayment capacity of the borrower, subject to the accumulated amount in interest suspense account not being taken into income account, unless actually realized. Upon classification, applicable provisions have to be maintained, according to the Master Circular: Loan Classification and Provisioning (BRPD Circular No. 14/2012). These classifications will be reviewed by Bangladesh Bank inspectors. However, regardless of the classification category into which the loan is placed by the bank, a rescheduled loan will not be considered a "defaulted loan," and the borrower will not be considered a "defaulted borrower" as these terms are understood in the context of section 27KaKa(3) [read with section 5(GaGa)] of the Banking Companies Act, 1991, unless such loan has not been repaid after reaching the maximum number of allowable reschedulings. Interest accrued on rescheduled loans will be subject to the accounting treatment that is appropriate for the classification category of the loan, in line with the Master Circular: Loan Classification and Provisioning (BRPD Circular No. 14/2012) just as if the loan had not been rescheduled.