Credit Risk Management: An Empirical Study on BRAC Bank Ltd

By Ghosh, Proshenjit; Islam, Md Ariful et al. | Business Management and Strategy, January 1, 2014 | Go to article overview

Credit Risk Management: An Empirical Study on BRAC Bank Ltd


Ghosh, Proshenjit, Islam, Md Ariful, Hasan, Md Moeid, Business Management and Strategy


Abstract

Credit Risk Management holds a positive relationship with credit monitoring, reliability and assurance factors. All these factors play vital role in the mitigation process of credit risks. Risk mitigation process starts from sourcing loan applications and the loan application goes through several screening process where reliability and assurance factors are very much important. Here, knowledge of practical world and product program are very much essential to identify risks associated with loan proposals. With the centralized banking system BRAC Bank deals with a systematic lending procedure which follows an straightforward policy. This type of policy helps the analysts to analyze loan proposals very easily. But there are some weak points of this straightforward policy and guidelines. This procedure deny any type of exceptional proposals which may have better creditworthiness and repayment capacity. Business is lost in these situations which is treated as opportunity cost. In a word, credit risk management is all about ensuring repayment capability of the customers who are provided loans and advances. Minimizing Credit Risk is subject to proper framework of risks and justification with historical trend and other assurance factors.

Keywords: Credit Risk Management, BRAC Bank Ltd., Credit Risk Assessment, Credit Monitoring, Assurance Factor, Reliability

1. Introduction

1.1 Background of the Study

Credit Risk Management can be treated as the heart of any Commercial Bank. It plays the vital role in the performance of a financial institution as it analyzes creditworthability of borrowers. If there is any loophole in credit risk assessment, then recovery of the provided loans and advances is challenged greatly. As a whole, profitability falls in a great uncertainty. A bad loan often arises from different factors or combination of factors, but the most important reason is the absence of proper loan classification system. It can identify problem loans immediately and take necessary steps to minimize potential defaults and consequent losses. Poor Credit Risk Management is the main consideration in case of Banks' unsatisfactory performance and often the reason of bankruptcy.

1.2 Problem Statement

Credit Risk Grading (CRG) is treated as the common credit risk measurement system in BRAC Bank Ltd. There are also other factors which influences the default risk of a loan. They are subject to mitigation.

* Credit Risk>>>>>>>>>>>>>>>>>>>> Mitigation

* Process Risk>>>>>>>>>>>>>>>>>>> Mitigation

* IT System Risk>>>>>>>>>>>>>>>>> Mitigation

* Foreign Exchange Risk>>>>>>>>>>>>Mitigation

* Credit Sensitivity>>>>>>>>>>>>>>>>Mitigation

* Compliance Risk >>>>>>>>>>>>>>> Mitigation

* Internal & External Fraud Risk >>>>>>Mitigation

* Documentation Risk>>>>>>>>>>>>>>Mitigation

* Operational Risk>>>>>>>>>>>>>>>> Mitigation

1.3 Objectives of the Study

Lending is one of the main factors of Asset side of balance sheet of a bank. So, profitability of the bank is greatly involved with the lending procedure to borrowers. This report is equipped with critical observation of Loans and advancement division of BRAC Bank Ltd. Three factors are correlated with Credit Risk management system of BBL and hypothesis of these factors are treated as the primary tool for measuring performance Credit Risk Management Division of BBL. There are five wings in the Credit Risk Management Division of BBL. They are as follows:

* Wholesale Credit

* Retail Underwriting

* SME Underwriting

* Collection Unit (SME, Retail & Cards)

* Credit Inspection & Special Asset Management, Wholesale Banking & Medium Business

1. …

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