CHAPTER: ONE

ORIENTATION TO THE REPORT

CHAPTER-1
Orientation to the Report

1.1 THE AUTHORIZATION FACT

Internship is a compulsory requirement for everybody pursuing a BBA degree at University of Dhaka. The Internship program includes organizational attachment period of 12 weeks and report writing period of 4 weeks. I am working with the Operations Divisions of IDLC Finance Limited. After consultation with my faculty advisor Mr. Md. Nazim Uddin Bhuiyan and my supervisor in the host organization Mr. Md. Abdul Hannan, I decided to work on the policies and practices of credit risk management and appraisal process of IDLC. I strongly believe that, this study will enrich my knowledge in the very crucial area of the financial institutions (FIs): Credit Risk Management.

1.2 OBJECTIVES OF THE REPORT

• MAIN OBJECTIVE:
The main focus of the report is on credit risk management practices and credit appraisal procedure of IDLC Finance Limited.

• SPECIFIC OBJECTIVES:
The specific objectives are: ❖ To look at the portfolio of sectors financed by IDLC ❖ To evaluate the norms and rules practiced in assessing the borrower ❖ To compare the credit policy of IDLC with the credit policy guideline for the financial institutions (non-bank) of Bangladesh Bank and to identify the extent to which IDLC follows this guideline. ❖ To compare the credit risk management practices of IDLC Finance Limited with that of Industrial Promotion and Development Company of Bangladesh Limited, as a sample financial institution, to get an idea of the common deviations of credit risk management practices of the FIs from the central bank guideline. ❖ To summarize the fact findings and to give recommendations in improving the existing procedures wherever required.

1.3 SCOPE OF THE STUDY

In broad the report highlights the credit risk management practices and appraisal process of IDLC Finance Limited. There are two major part of the report. The first part includes the critical and relevant background of the company. The second part focuses on the credit appraisal, loan classification, credit risk grading, and other credit risk management practices followed by IDLC. This part also includes a comparison of with the central bank’s credit risk management guideline for the financial institutions. Moreover, as a supplementary, this second part includes IDLC’s CRM practices with that of IPDC of Bangladesh Limited, the main sponsor shareholder of IDLC, for identifying the common deviations of CRM practices among the financial institutions of the country from the central bank guideline. However the report does not cover all financial institutions (non-bank) active in our country.

1.4 METHODOLOGY

The credit risk management techniques and appraisal process followed by IDLC Finance Limited have been observed through practical attachment with the operation of the company. On the job training is the primary tool to evaluate and analyze the process. Both primary and secondary sources have been used in preparing the report.

• SECONDARY SOURCES: □ Relevant information regarding the background, products and services, and financial performance of the subject company from website, company annual report, brochures, and written policies. □ The credit risk management guideline for financial institutions specified by Bangladesh Bank from the central bank website.

• PRIMARY SOURCES: □ Unstructured interview of Mr. Ariful Alam Chowdhury, Assistant General Manager, Head of Credit Risk Management Department, Mr. Md. Abdul Hannan, Assistant Manager, Operation Division, and Mr. Shafayet Hossain, Head of Special Asset Management, to obtain required primary data. □ Various appraisal reports are studied to supplement the primary source. □ Unstructured interview of Ms. Pallabi Sarkar, Head of Credit Risk Management Department, IPDC of Bangladesh Limited

In preparing report, I have used the following steps: • Collected the aforementioned secondary information; • Collected the required information regarding the credit risk management practices and appraisal procedures of IDLC & IPDC. • Collected some primary data on some other FIs’ CRM practices;

• Analyzed the extent to which IDLC follows the credit policy guideline specified by the central bank. • Compared the CRM practices of IDLC with mainly that of IPDC to identify the common deviations of CRM practices from the central bank CRM guideline. • Finally structured the report, submitted the draft to the supervisor and finalized it.

1.5 LIMITATIONS OF THE STUDY

▪ The report mainly focuses on IDLC’s credit risk management practices and does not focus on that of other financial institutions (non-bank);

▪ The management and the senior officials of maximum FIs, for security reasons, were very reluctant to provide any information regarding their credit risk management practices and statistical figures of different credit facilities. So the report does not contain detailed quantitative analysis. ▪ ▪ The maximum information used for preparing this report was of publicly available information in nature. So, it may not depict the real picture;

▪ The study is based on the aforementioned secondary data and the primary data collected by interviewing senior officials of the company and do not reflect the clients reactions and suggestions about IDLC’s credit appraisal procedures which could have made the analysis more accurate and relevant.

CHAPTER TWO
ORGANIZATION PART

CHAPTER- 2
Overview of IDLC Finance Limited

2.1 IDLC AT A GLANCE
IDLC Finance Limited, the first leasing company in Bangladesh commenced its journey in 1985. It was established with the collaboration of reputed international development agencies like ▪ Korean Development Financing Corporation, South Korea ▪ Kookmin Bank, South Korea ▪ International Finance Corporation of the World Bank Group ▪ Aga Khan Fund for Economic Development ▪ German Investment and Development Company
Later Bangladesh Bank gave license to IDLC Finance Limited as a Financial Institution following the enactment of the Financial Institution Act 1993. Over the last two decades, IDLC has grown in tandem with the country’s transition into a developing country and has emerged as Bangladesh’s leading multi-product financial institution. Since 1998, IDLC has started diversifying its products and services and continues to evolve as an innovative financial solutions provider. IDLC is now able to offer customers integrated and customized financial solutions- all under one roof. IDLC’s wide array of products and services, the number is about 40, range from retail products, such as home and car loans, corporate and SME products including lease and term loans, structured finance services ranging from syndications to capital restructuring and a complete suite of merchant banking and capital market services. Currently IDLC has a customer base of more than 10,000. To encapsulate the evolving nature of the company, IDLC has changed its name to IDLC Finance Limited in August 2007.

IDLC Finance Limited has a total asset base of BDT 14,424 million (USD 208.59 million) at the end of 2007. IDLC meets its funding needs through a variety of sources including credit lines from banks and financial institutions of both local and foreign origin. Besides under Financial Institutions Act 1993, IDLC is allowed by Bangladesh Bank to accept term deposits from local and foreign corporate bodies, insurance companies, banks, financial institutions and individuals. The unique institutional shareholding structure comprising mostly of

financial institutions helps IDLC to constantly develop through sharing of experience and professional approach at the highest policy making level.

2.2 Shareholding Structure

|International Sponsors (30%) |
|[pic] |- Korea Development Financing Corporation (KDFC), South Korea (20%) |
| | |
|[pic] |- Kookmin Bank, South Korea (10%) |
|Domestic Sponsors (17.3 %) |
|[pic] |- The City Bank Limited 9.7 % |
| | |
|[pic] |- Sadharan Bima Coporation 7.6 % |
|General (52.7 %) |
| |Mercantile Bank Ltd. (7.5 %) |
| |Eskayef Bangladesh Ltd. (8.0 %) |
| |Reliance Insurance Ltd. (7.0 %) |
| |Other Institutions (13.5 %) |
| |Individuals (16.7 %) |
| |1.3 Board of Dire |

2.3 Board of Directors:

|Chairman |Mr. Anwarul Huq, Nominated by Reliance Insurance Limited |
|Directors |Mr. Rubel Aziz, Nominated by The City Bank Limited |
| |Mr. Ahmed Rajeeb Samdani, Nominated by The City Bank Limited |
| |Mr. Habibur Rahman Mollah, Nominated by Transcom Group |
| |Mr. Md. Shafiqul Azam, Nominated by Sadharan Bima Corporation (SBC) |
| |Mr. Lee Dong Jue, Nominated by Korea Development Financing Corporation (KDFC) |
| |Mr. Yongbok Jo, Nominated by Korea Development Financing Corporation (KDFC) |
| |Mr. Choong-Sun Park, Nominated by Kookmin Bank |
| |Mr. A. K. M. Shahidul Haque, Nominated by Mercantile Bank Limited |
| |Mr. Monoweruddin Ahmed, Independent Director |
|CEO & Managing Director |Mr. Anis A. Khan |
|Company Secretary |Mr. H.M. Ziaul Hoque Khan |

2.4 Management:

|Mr. Anis A. Khan |CEO & Managing Director |
|Mr. Yongbok Jo |Deputy Managing Director |
|Mr. Arif Khan |General Manager |
|Mr. H.M. Ziaul Hoque Khan |General Manager |
|Mr. Mir Tariquzzaman |Deputy General Manager |
|Ms. Bilquis Jahan |Deputy General Manager |
|Mr. Jamal Uddin |Deputy General Manager |
|Mr. Bidyut Kumar Saha |Deputy General Manager |
|Mr. Arifur Rahman |Deputy General Manager |
|Mr. Shaikh Kamruzzaman |Deputy General Manager |
|Mr. Mahmudul Bari |Deputy General Manager |
|Mr. Kh. Asadul Islam |Deputy General Manager |
|Mr. Irteza A. Khan |Assistant General Manager |
|Mr. Ariful Alam Chowdhury |Assistant General Manager |
|Mr. Iqbal Mahmud |Assistant General Manager |

3 IDLC History – Key Milestones:

| 1985 |Incorporation of the Company |
| 1985 |Joung Dal Lee assumes office as the first Managing Director |
| 1986 |Commencement of Leasing Business |
| 1986 |Signing of First Lease |
| 1990 |Establishment of Branch in Chittagong |
| 1993 |Listing on the Dhaka Stock Exchange |
| 1994 |Licensed by Bangladesh Bank for deposit-taking |
| 1995 |Licensed as Non-Banking Financial Institution under the Financial Institutions Act, 1993 of Bangladesh Bank |
| 1995 |Licensed by Bangladesh Bank as off-shore financier in Export Processing Zones |
| 1996 |Listing on the Chittagong Stock Exchange |
| 1997 |Commencement of House Finance and Short Term Finance operations |
| 1998 |Licensed as Merchant Banker by Securities and Exchange Commission |
| 1998 |Launching of Factoring Operations |
| 1999 |Commencement of Corporate Financing and Merchant Banking operation |
| 2000 |Exceeded Tk. 1 billion mark of annual lease executions |
| 2002 |Arranged the largest ever lease syndication amounting to Tk. 950 million |
| 2002 |Strengthening the mobilization of deposit products |
| 2003 |Anis A. Khan joins IDLC as CEO & Managing Director |
| 2004 |Setting up of retail focused branches at Dhanmondi and Gulshan in Dhaka |
| 2004 |Commencement of Capital Market Investment Service & Car Loans |
| 2004 |Incorporation of I.Cons Limited, a wholly owned subsidiary of IDLC Finance Ltd. |
|2005 |Introducing Securitisation by securitising BDT 190 mln (US $ 3.01 mln) |
|2005 |Strategic Alliance with SBI Capital Markets Ltd. |
|2005 |Strengthening Merchant Banking operations |
|2005 |Introduction of Home Loan Shield – the first in the market |
|2005 |Launching of Local Enterprise Investment Center with CIDA |
|2005 |Launching of Retail SME Financing Schemes |
|2005 |Opening of Bogra Branch |
|2006 |Opening of Branch at Uttara |
|2006 |Opening Merchant Banking Branch in the port city Chittagong |
|2006 |Relocation of company’s Registered and Corporate Head Office at own premises at 57 Gulshan Avenue, Dhaka |
|2006 |Commencement of operation of IDLC Securities Limited, a wholly owned subsidiary of IDLC. |
|2007 |IDLC Bags SAFA Best Presented Accounts Award 2005 |
|2007 |Launching of Discretionary Portfolio Management Service “ Managed Cap Invest” |
|2007 |Company name changed to IDLC Finance Limited |
|2007 |IDLC Securities Limited Chittagong Branch Opened |
|2007 |IDLC Securities Limited DOHS Dhaka Branch Opened |
|2007 |IDLC bags ICAB national award 2006 |
|2007 |IDLC Receives first ICMAB National best corporate award 2007 |
|2008 |IDLC Securities Limited Mohakhali Branch Opened |
| | |
|2009 |IDLC Finance Limited Sylhet Branch Opened |

2.6 VISION, MISSION & CORPORATE PHILOSOPHY

Vision
“Become the best performing and most innovative financial solutions provider in the country”

Mission
“Create maximum possible value for all the shareholders by adhering to the highest ethical standards”

For Customers: Relents pursuit of customer satisfaction through delivery of top quality services
For Shareholders: Maximize shareholders’ wealth through a sustained return on their investment
For Employees: Provide job satisfaction by making IDLC a center of excellence with opportunities for career development
For Society: Contribute to the well-being of the society, in general, by acting as a responsible corporate citizen

Corporate Philosophy “Discharge IDLC’s functions with proper accountability for all its actions and results and bind IDLC to the highest ethical standards”

2.7 GOAL, STRATEGIC OBJECTIVES & CORE VALUES

Goal “Long term maximization of Stake holder’s value”

Strategic Objectives • Create synergy b combining high quality and strategically balanced portfolios • Provide a range of financial products and services to the customers under one roof • Strengthening IDLC’s position in capital market operation • Balanced diversification of funding sources

• Maximize corporate value through sustained high quality growth • Strengthening corporate governance practices

Core Values

• IDLC always gives its first priority to the national interest. Highest importance is always attached to country’s growth and prosperity • IDLC employees are trained with the object of developing good leaders rather than good managers • IDLC places emphasis on creativity and innovation to achieve organizational excellence • IDLC believes in adherences to the highest ethical standards

2.8 IDLC CODE OF CONDUCT & ETHICAL PRINCIPLES

In accordance with approved and agreed Code of Conduct, IDLC employees shall: ▪ Act with integrity, competence, dignity and in an ethical manner when dealing with customers, prospects, colleagues, agencies and public. ▪ Act and encourage others to believe in a professional and ethical manner that will reflect positively on IDLC employees, their profession and on IDLC, at large. ▪ Strive to maintain and improve the competence of all in the business. ▪ Use reasonable care and exercise independent professional judgment. ▪ Not restrain others from performing their professional obligations. ▪ Maintain knowledge of and comply with all applicable laws, rules and regulations. ▪ Disclose all conflicts of interest. ▪ Deliver professional services in accordance with IDLC policies and relevant technical and professional standards. ▪ Respect the confidentiality and privacy of customers, people and others with whom they do business. ▪ Not engage in any professional conduct involving dishonesty, fraud, deceit or misrepresentation or commit any act that reflects adversely on their honesty., trustworthiness or professional competence

IDLC employees have an obligation to know and understand not only the guidance contained in the Code of Conduct, but also the spirit on which it is based.

2.9 IDLC SUBSIDIARIES & ASSOCIATES

[pic]
Figure: 2.1 subsidiaries and Associates of IDLC □ IDLC is now operating with 8 branches in Bangladesh- among them 6 branches are in Dhaka, 1 in Chittagong and 1 in Bogra. □ Merchant Banking Division of IDLC Finance Limited offers portfolio management services, Initial Public Offerings, underwriting, acquisitions, mergers and divestments. □ IDLC Securities Limited (IDLCSL)- a fully owned IDLC subsidiary, which offers brokerage services with memberships of both Dhaka Stock exchange and Chittagong Stock exchange. IDLC is also a Depository Participant and a member of the Central Depository Bangladesh Limited. □ Cons Limited – a fully owned IDLC subsidiary and an IT company dedicated to devising solutions, mostly, for the financial services industry. □ IDLC Asset Management Company Limited (under incorporation) offering mutual funds, etc. □ As Manager of the Local Enterprise Investment Center (LEIC), with contribution of the Canadian International Development Agency (CIDA) of the Government of Canada, IDLC plays an active role in the development of the country’s private sector by providing financial and professional support to the Small and Medium Enterprises (SMEs), who wish t expand and improve their products and services. This is the first direct partnership by CIDA with a local private sector entity in a developing country.

□ IDLC has made strategic alliance with the State Bank of India Capital Markets Ltd. (SBICAP) which allows the company to provide project advisory, infrastructure advisory, privatization advisory, merger and acquisition valuations, deal structuring etc.

2.10 PRODUCTS & SERVICES

[pic]
Debt Products Corporate Services
- Lease Finance - Project Loan Syndication
- Term Finance - Working Capital Arrangement
- Home Loans with Home Loan Shield - Project Finance Appraisal
- Home Equity Loans - Syndication Agency Services
- Real Estate Developers’ Finance - Corporate Financial Advisory
- Corporate Real Estate Finance - Refinancing Arrangements
- Car Loans for Individuals - Securitization of Receivables
- Domestic Factoring - Trusteeship Management
- Bill / Invoice Discounting - Professional Support - SMEs
- Work Order Finance
- Business Loan Investment Products
- Machinery Loan - Common Equity Investments
- Double Loan - Preferred Equity Investments
- Festival Loan - Bonds

Liability Products Products of IDLC Securities
-Term Deposit Schemes - Brokerage
-Debentures - Depository
-Securitized Bonds - Research

Merchant Banking & Portfolio Management Services - Investor Discretionary / Non-Discretionary Portfolio Management Services: “Cap Invest” & “Managed Cap Invest” - IPO Advisory - Issue Management - Underwriting - Investment Advisory - Placement of Equity, Debenture and Bonds - Custodial Services

Lease Financing

Leasing is IDLC’s core financial product. IDLC provides lease financing for all types of manufacturing and service equipment. It has significant exposure in all the major industrial sectors and maintaining its leadership in the industry since inception.

[pic] Fig 2.2: Lease Income Earned

Short Term Financing
Short Term Finance (STF) was launched in the year 1997 with an objective to provide solution to working capital requirements. IDLC is the first company in the country to introduce factoring on recourse basis where it is offering financing, sales ledger administration, collection and follow-up services that are considered valuable for small and medium scale companies. The diverse field of STF includes factoring, work order finance, bill discounting, and short-term loans.
[pic]
Fig: 2.3: Term Finance Income

Real Estate Financing
With a view to participate and contribute in the country’s fast growing real estate sector, Real Estate Finance (REF) was launched in the year 1997. IDLC extends loan facilities to individuals for purchase of apartments, house renovation & extension, and to its employees, under corporate house finance scheme. Loan is also extended to business houses and professionals for purchase of commercial spaces. Real estate developers are also given loan for construction works.

[pic]
Fig 2.4: Income from real estate finance

Merchant Banking & Corporate Finance
The latest addition to IDLC’s array of financial products is Merchant Banking & Corporate Finance. IDLC received license to operate as a full-fledged merchant bank by Bangladesh Securities and Exchange Commission in the year 1999. Merchant Banking wing offers services like Issue Management, Underwriting, Trust Management, Portfolio Management and Bridge financing whereas Corporate Finance offers corporate counseling, project counseling, capital restructuring, financial engineering, merger and acquisition services, and syndication of loan, lease and equity.

[pic]
Fig 2.5: Merchant Bank Revenue

2.11 Sectoral Investment Portfolio of IDLC in 2007:
|Sectoral Exposure as on December 31, 2007 |
|Sector |% of portfolio |
|1. Services |10.29% |
|2. Food and Beverage |9.75% |
|3. Textiles |8.59% |
|4. Financial Services |8.43% |
|5. Transport |7.18% |
|6. Apparels & Accessories |6.88% |
|7. Building & Construction |5.41% |
|8. Packaging |5.25% |
|9. Agro Based Industry |5.17% |
|10. Household & Home Appliances |4.79% |
|11. Power & Energy |4.69% |
|12. Education |3.93% |
|13. Pharmaceuticals |3.82% |
|14. Housing & Real Estate |3.58% |
|15. Iron & Steel |2.90% |
|16. Information Technology |2.86% |
|17. Paper & Paper Products |2.33% |
|18. Others |4.16% |

[pic]
Fig 2.6 : Sectoral Exposure as on December 31, 2007

Sector Definitions
There are more than a thousand clients/contracts in the 18 sectors each belonging to a single different sector as identified. The clients/companies are segregated according to the products and/or services they provide in the market.

Apparels and Accessories (AA)
Manufacturer or trader of accessories for export oriented RMG industries. Exporters of Ready made shirts, trousers and regular garments items.

Agro Based Industries (ABI)
Manufacturer of agricultural products like all sorts of crops, engaged in cold storages business, traders of crop and lives stock related items. Engaged in firming business for crops or livestock.

Building Materials, Glass & Ceramics (BGC)
Manufacturers and Traders of Bricks & Rocks, Glass, Ceramics, Cement, Household Fittings, Tiles, Aluminum Etc.

Construction (CNR)
Contractors of Government construction works & private builders.

Education (EDU)
Schools & Colleges, Universities, training centers of all types, providers of all types of diplomas etc.

Food and Beverage (FB)
Manufacturers or traders of confectionary or bakery items. Manufacturers or traders of primary raw material for food items based on grain. Manufacturers or traders of any type of processed food, drinks. Manufacturers or traders of milk, ice cream, edible oil. Manufacturers or traders of cigarettes and other tobacco related products. Manufacturers or traders of salt. Manufacturers or traders of sugar.

Financial Services (SF)
Schedule commercial banks. Leasing companies, House finance companies, etc. General and Life insurance companies. Companies related with issuance, underwriting, trading of securities.

Housing & Real Estate (HRE)
Real Estate Developers, Apartment Developers & Real Estate Rental Earners.

Home Appliances & Household Products (HH)
Manufacturers or traders of cosmetics, shaving related products, & other toiletries, like soap, shampoo, detergent etc. Manufacturers or traders of table and kitchenware, decoration pieces made of ceramics or porcelain. Manufacturers or traders of house hold retail electrical or electronics item (other than telecommunication and IT hardware) Manufacturers or traders of kitchenware, or tableware made from metal. Manufacturers or traders of house hold items made of plastic & rubber, like plastic tableware, mattresses, toys etc. Manufacturers or traders furniture of wood and steel or iron. Manufacturers or traders of wooden furniture and fittings.

Hospitality & Leisure Services (HLS)
Departmental stores and large supermarkets, Residential hotels, Movie houses. Restaurants and café's. Theme park, amusement park, children's games park or any such recreational facility.

Healthcare Service (HC)
Professional doctors, hospitals, clinics, diagnostic centers, medicine stores, etc.

Information Technology (IT)
Independent Internet service provider. Any other business related with computer hardware or software.

Iron & Steel (IS)
Manufacturers and Traders of CI/GP Sheet. Manufacturers and Traders of CR Coil as raw material for CI GP sheet and other steel industry. Manufacturers and Traders of MS Rod, Angle & Bar.

Leather & Leather Products (LLP)
Manufacturers or traders of Finished or crust leather. Manufacturers or traders of any Leather goods.

Packaging, Printing & Publishing (PCK)
Manufacturers or traders of cans, bottles, paper cartons, any other products primarily used as packing material. Any business engaged in printing and publishing.

Power & Energy (PE)
Manufacturer or producer of cylinder gas, fuel, CNG stations. Manufacturers or traders of generators, electricity distribution etc.

Pharmaceutical & Healthcare Products (PHA)
Manufacturers or traders of pharmaceutical products. Manufacturers or traders healthcare products like sanitary napkin, diaper, bandage, syringe, etc. Manufacturers or traders veterinary pharmaceutical products.

Paper & Paper Products (PPP)
Manufacturers or traders for industrial and consumer paper. Manufacturers or traders of paper products like - napkin , tissue, paper gift or decoration items etc.

Professional Services (SP)
Advertisement firms, bill board rental firms, graphic design and advertisement production houses. Accounting firms. Provider of independent consultancy services for any purpose. Legal advisory firms.

Textiles (TXT)
Manufacturer or trader of knit fabric for the export & local market. Manufacturer or trader of woven fabric & finished fabric (dyeing, printing & finishing) for the export & local market. Home textiles will also be included in this category. Manufacturer or traders of yarns for export markets.

Telecommunications (TLC)
Cellular phone network and service provider, Land phone network and service provider, Distributors of telecommunication networks, bill collectors, repair and maintenance companies etc.

Transport (TP)
Independent passenger or cargo air transport operator. Independent truckers, covered van or trailer operators. Independent cargo vessel operators (other than oil tankers). Inner city commercial transport like buses, minibuses, taxis, three wheelers etc. Intercity commercial passenger bus, minibus or train. Intercity launch, steamer etc . Importers and Suppliers of vehicles & all types of accessories for vehicles.

Home Loan Retail (HLR)
Individuals taking financing for purchasing Ready-Made Flats, or building own houses.

Other Services (SO)
Manufacturers or traders of cable or wire. Assembling of vehicles, tractors and other heavy equipments. Manufacturers or traders of industrial spares. Manufacturers or traders of tube well, pump etc.

Any client/company that availed any product/service from IDLC belongs to any one of these sectors. The allocation of client base in terms of sectors was performed following the sector assignment criteria discussed earlier. The revenue that was generated from the four major products of IDLC as reported in the Annual report 2007, comes form all theses sectors taken together having exposure in any one or multiple products/services as offered by IDLC.

2.12 PERFORMANCE OF IDLC OVER THE YEARS:

| | | | | | | |
| |2003 |2004 |2005 |2006 |2007 |Growth |
| | | | | | | |
|Financial Performance | | | | | | |
| | | | | | | |
|Operational Performance | | | | | | |
|Financial Ratios | | | | | | |
|Equity Statistics | | |
|Exposures |Default Rates |Credit Default Loss |Provisioning |
| | |Distribution | |
|Recovery Rates |Default Rate | |Limits |
| |Volatilities | | |
| | |Scenario Analysis | |
|Credit Risk Grading | | |Portfolio Management |
|Model | | | |

Table 3.1: Components of Credit Risk Management

A modern approach to credit risk management should address all aspects of credit risk, from quantitative modeling to the development of practical techniques for its management. In addition to well-established credit risk management techniques, such as individual obligor (borrower, counterparty or issuer) limits and concentration limits.

Types of Credit Risk: There are two main types of credit risks:

Credit spread risk:

Credit spread risk is exhibited by portfolios for which the credit spread is traded and marked-to-market. Changes in observed credit spreads impact the value of these portfolios. Credit spread is the excess return demanded by the market for assuming a certain credit exposure. Credit spread risk is the risk of financial loss owing to changes in the level of credit spreads used in the mark-to market of a product. Credit spread risk fits more naturally within a market risk management framework. In order to manage credit spread risk, a firm's value-at-risk model should take account of value changes caused by the volatility of credit spreads. Credit spread risk is only exhibited when a mark-to-market accounting policy is applied, such as for portfolios of bonds and credit derivatives. In practice, some types of products, such as corporate or retail loans, are typically accounted for on an accruals basis. A mark-to-market accounting policy would have to be applied to these products in order to recognize the credit spread risk.

Credit default risk:

All portfolios of exposures inhibit credit default risk, as the default of an obligor results in a loss. Credit default risk is the risk that an obligor is unable to meet its financial obligations. In the event of a default of an obligor, a firm generally incurs a loss equal to the amount owed by the obligor less a recovery amount that the firm recovers as a result of foreclosure, liquidation or restructuring of the defaulted obligor. All portfolios of exposures exhibit credit default risk, as the default of an obligor results in a loss. Credit default risk is typically associated with exposures that are more likely to be held to maturity, such as corporate and retail loans and exposures arising from derivative portfolios. Bond markets are generally more liquid than loan markets and therefore bond positions can be adjusted over a shorter time frame. However, where the intention is to maintain a bond portfolio over a longer time frame, even though the individual constituents of the portfolio may change, it is equally important to measure the default risk that is taken by holding the portfolio.

Taking credit risk is part and parcel of financial intermediation. Yet, the effective management of credit risk by financial institutions is critical to institutional viability and sustained growth. Failure to control risks, especially credit risk, can lead to insolvency. Thus the effective management of credit risk is a critical component of comprehensive risk management and is essential for the long-term success of any financial institution.

Chapter-4
Risk Management at IDLC

Risk is the element of uncertainty or possibility of loss that prevail in any business transaction in any place, in any mode and at any time. Risk is an integral part of financing business. Risk management entails the adoption of several measures to strengthen the ability of an organization to cope with the vagaries of the complex business environment in which it operates.

IDLC always concentrates on delivering high value to its stakeholders through appropriate trade off between risk and return. A well structured and proactive risk management system is in place within the Company to address risks relating to credit, market, liquidity and operations. Risk grading is assigned at the inception of lending considering the industry, business, financial and management risk associated with the financing. The Company has different committees for risk management and appropriate internal control measures are also in place to mitigate risk.

In addition to the industry best practices for assessing, identifying and measuring risks, IDLC also considers guidelines for managing core risks of financial institutions issued by the Country's Central Bank, Bangladesh Bank, vide FID Circular No. 10 dated September 18, 2005 for management of risks.

▪ Credit Risk:

Credit risk is the possibility that a borrower or counter party will fail to meet agreed obligations. Thus managing credit risk for efficient management of a financial institution (FI) has become the most crucial task. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, and consolidation it is essential that Fls have robust credit risk management policies and procedures that are sensitive and responsive to these changes. At IDLC, credit risk may arise in the following forms:

▪ Default Risk ▪ Exposure Risk ▪ Recovery Risk ▪ Counter Party Risk ▪ Related Party Risk ▪ Legal Risk ▪ Political Risk

To encounter and mitigate credit risk the following control measures are in place at IDLC: □ Multilayer approval process □ Policy for maximum sector and group exposure limit □ Policy for customers maximum asset exposure limit □ Mandatory search for credit report from Credit Information Bureau □ Looking into payment performance of customer before financing □ Annual review of clients □ Adequate insurance coverage for funded assets □ Vigorous monitoring and follow up by Special Assets Management Team □ Strong follow up of compliance of credit policies by Operational Risk Management Department □ Taking collateral □ Seeking external legal opinion □ Maintaining neutrality in politics and following arm's length approach in related party transactions □ Regular review of market situation and industry exposure

The Credit Evaluation Committee (CEC) regularly meets to review the market and credit risk related t An independent Credit Risk Management Department is in place, at IDLC, to scrutinize projects from a risk-weighted point of view and assist the management in creating a high quality credit portfolio and maximize returns from risk assets.

▪ Market Risk:

Market risk refers to the risk of fluctuation in a variety of markets such as interest rates, prices of securities where the values of assets and liabilities can change and there exists the risk of incurring losses.

The Asset Liability Committee (ALCO) of the Company regularly meets to assess the changes in interest rate, market conditions, carry out asset liability maturity gap analysis, re-pricing of products and thereby takes effective measures to monitor and control interest rate risk. To encounter market risk IDLC negotiates for facilities that match the maturity structure with ideal interest rate, maintaining a balanced diversification in investments and maintaining prudent provisioning policies. IDLC has also strong access to money market and credit lines at a competitive rate through good reputation, strong earnings, financial strength and credit rating.
However, in order to mitigate any adverse effect that results from fluctuating interest rate in future, IDLC is planning to carry out some securitizations of receivables and fixed rate long term loans to raise funds.

▪ Liquidity Risk:

Liquidity risk arises when a company is unable to meet the short term obligation to its lenders and stakeholders. This arises from the adverse mismatch of maturities of assets and liabilities. Liquidity requirements are managed on a day-to-day basis by the Treasury Division which is responsible for ensuring that sufficient funds are available to meet short term obligations, even in a crisis scenario, and for maintaining a diversity of funding sources. The Asset Liability Committee also oversees the asset liability maturity position and recommend and implement appropriate measure to encounter liquidity risk.

▪ Operational Risk:

Operational risk is the potential loss arising from a breakdown in company's systems and procedures, internal control, compliance requirements or corporate governance practices that results in human error, fraud, failure, damage of reputations, delay to perform or compromise of the company's interests by employees. Operational risk may also arise from the following:

□ Leakage of sensitive information. □ Shortcomings of organizational structure. □ Turnover of trained stuff. □ Risk of insider dealings. □ Risk of falling in credit ratings. □ Money laundering. □ Changes in statutory requirements. □ Technological obsolescence.

Appropriate internal control measures are in place, at IDLC, to address operational risks. IDLC has also established an Operational Risk Management Department (ORMD) to address operational risk and to frame and implement policies to encounter such risks. ORMD assesses operational risk across the Company as a whole and ensures that an appropriate framework exists to identify, assess and mange operational risk. The function of ORMD is to constant vigilance against leakage of Shareholders value by identify, assess, measure, manage and transfer operational risk resulting from inadequate or failed internal processes, people and system or from external events. ORMD also develops policies, processes and procedures for managing operational risk in all of the company products, activities, processes and systems by identifying and assessing the operational risk inherent in all our products, activities, processes and systems.

In particular, the following risk management measures are present at IDLC to address operational risk:

□ Effective internal audit function throughout the organization with direct access of Chief Internal Auditor to the Audit Committee and Board.

□ Suitable delegated authority level.

□ Awareness throughout the organization on "Know Your Customer (KYC)" policy. □ Maintenance of assets through maintenance agreement with vendor. □ Proper risk transfer measure by taking insurance coverage for all assets of the Company. □ Infusing organizational values and ethics in employees. □ Strict compliance of Employees Code of Conducts. □ Regular compliance audit in relation to reporting requirements to regulatory bodies and other stakeholders. □ Creating conducive working environment for the staff. □ Implementation of computer based MIS system. □ Implementation of proper back up system. □ Regular upgrading of hardware and software to keep it up to state of the art level.

▪ Business Volume Risk:

At IDLC, business volume risk may arise in the form of risk of falling business volumes and market share, risk of being overtaken and losing leadership position and risk of over trading which may affect profitability due to volatile revenues and reduced spread earnings, credit rating and reputation. Risk of over trading may lead to insufficient capital. To encounter and mitigate business volume risk the following risk mitigation measures are in place, at IDLC: □ Innovative and convenient financial products and services. □ Taking prompt action on customer companies. □ Frequent assessment of clients' satisfaction. □ Regular review of performance against budget and targets. □ Review and analysis of competitors performance.

Assessment of the Riskiness of the operation:

We estimate our risk exposure based on our own assessment of the operations as well as the market perception to be as follows:

| Credit Risk | Moderate |
| Market Risk |Moderate |
| Liquidity Risk |Moderate |
| Operational Risk | Low |
| Business Volume Risk | Low |

Table 4.1: Riskiness of Operations

Building Blocks of Credit Risk Management:

In a financial institution like IDLC Finance Limited, an effective credit risk management framework comprises of the following distinct building blocks:

1. Policy and Strategy 2. Lending Guideline 3. Credit Assessment and Risk Grading 4. Risk Management Structure and Specified Responsibilities 5. Appropriate Approval Authority and Approval Process 6. Operations/Systems 7. Strong Credit Recovery Strategy

The aforementioned building blocks of credit risk management on the context of IDLC Finance Limited are being described in the following chapters.

Chapter-5 Policy & Strategy Guideline

5.1 CREDIT POLICY

Every FI should have a credit risk policy document that should include risk identification, risk measurement, risk grading/aggregation techniques, reporting and risk control/mitigation techniques, documentation, legal issues and management of problem facilities. The senior management of the FI should develop and establish credit policies and credit administration procedures as a part of overall credit risk management framework and get those approved from Board. Such policies and procedures shall provide guidance to the staff on various types of lending including Corporate, SME, Consumer, Housing etc.

In order to be effective, these policies must be clear and communicated down the line. Further any significant deviation/exception to these policies must be communicated to the top management/Board and corrective measures should be taken. It is the responsibility of senior management to ensure effective implementation of these policies duly approved by the Board.

IDLC Perspective:

IDLC Finance Limited has a credit policy which was last prepared for 2008. This policy is not yet approved by the board. However the different sections of the policy (such as the sect oral exposure limit, the approval authority, and the approval process) were approved separately at different times by the board of IDLC.

IDLC's Credit Policy of 2008: ▪ Provides detailed and formalized credit evaluation! appraisal process ▪ Provides risk identification, measurement, monitoring and control ▪ Defines target markets, risk acceptance criteria, credit approval authority, credit origination! maintenance procedures and guidelines for portfolio management ▪ Is communicated to branches! controlling offices to ensure that all marketing officials clearly understand the Frs approach for credit sanction and are held accountable for complying with established policies and procedures . ▪ Clearly spells out roles and responsibilities of units! staff involved in origination and management of credit.

5.2 CREDIT RISK STRATEGY

The very first purpose of FIs credit strategy is to determine the risk appetite of the FI. Once it is determined the FI could develop a plan to optimize return while keeping credit risk within predetermined limits. It is essential that Fls give due consideration to their target market while devising credit risk strategy. The credit procedures should aim to obtain an in-depth understanding of the FIs clients, their credentials & their businesses in order to fully know their customers.

IDLC Perspective:

▪ The Credit Policy of IDLC Finance Limited has clearly mentioned its own credit risk strategy that establishes the objectives guiding IDLC's credit-granting activities and adopts necessary policies/procedures for conducting such activities. This strategy tells about the risk appetite of IDLC. ▪ The strategy tells about the target markets and business sectors, preferred levels of diversification and concentration, the cost of capital in granting credit and the cost of bad debts. Generally IDLC grants facilities based on various client segments and products, economic sectors, geographical location, market, maturity and anticipated profitability. ▪ The strategy ensures that IDLC's overall credit risk exposure is maintained at prudent levels and consistent with the available capital. ▪ IDLC's credit risk strategy is reviewed periodically taking into account cyclic aspect of country's economy and amended, if necessary, i.e. it includes the resulting shifts in composition and quality of overall credit portfolio as such to make it viable in long term.

CHAPTER-6 Lending Guideline

All Fls should have established "Lending Guidelines" that clearly outline the senior management's view of business development priorities and the terms and conditions that should be adhered to in order for facilities to be approved. The Lending Guidelines should be updated at least annually to reflect changes in the economic outlook and the evolution of the Fl's facility portfolio, and be distributed to all lending/marketing officers: The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the FI based on the endorsement of the FI's Head of Credit Risk Management and the Head of Business Units.

Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of facilities that do not comply with Lending Guidelines should be restricted to the FI's Head of Credit or Managing Director / CEO or Board of Directors.
The Lending Guidelines should provide the key foundations for account officers/relationship managers (RM) to formulate their recommendations for approval, and should include the following:

6.1 INDUSTRY AND BUSINESS SEGMENT FOCUS

The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the Fl's facility portfolio. For each sector, a clear indication of the FI's appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide necessary direction to the Fl's marketing staff.

IDLC Perspective:

IDLC has a Lending Guideline that represents the top management's view regarding credit system and the policy & strategy of business development. The lending guideline is distributed to all relationship managers and marketing officers. However the guideline is not yet approved by the board. But the different parts of the lending guideline were approved separately at different times. The lending guideline clearly indicates the sector-wise focus and IDLC's growth appetite in these sectors as shown in the following table:

Table 6.1: Sector-wise portfolio (As On December 2007) and Focus

|Sectors |Code |% of portfolio | Increase/ |
| | | |maintain/decline |
|Food and Beverage |FB |9.75% |Maintain |
|Financial Services |SF |8.43% |Increase |
|Service |SO |7.79% |Maintain |
|Textiles Export |TXT |7.43% |Maintain |
|Transport |TP |7.18% |Decline |
|Apparels |AA |6.88% |Maintain |
|& Accessories | | | |
|Packaging |PCK |5.25% |Maintain |
|Agro Based Industry |ABI |5.17% |Increase |
|Household Products & |HH |4.79% |Increase |
|Home Appliances | | | |
|Power & Energy |PE |4.69% |Increase |
|Building Materials, Cement, Glass, Ceramics,|BGC |4.03% |Maintain |
|Pipes | | | |
|Education |EDU |3.93% |Increase |
|Pharmaceuticals |PHA |3.82% |Increase |
|Housing & Real Estate |HRE |3.58% |Maintain |
|Iron & Steel |IS |2.90% |Decline |
|Information Technology |IT |2.86% |Maintain |
|Paper & Paper Products |PPP |2.33% |Maintain |
|Construction & Contractors |CNR |1.39% |Maintain |
|Furniture & Related Products |FNT |1.27% |Increase |
|Textiles Local |TXT(L) |1.16% |Maintain |
|Tele Communications |TLC |1.07% |Maintain |
|Leather & Leather Products |LLP |0.99% |Maintain |
|Healthcare Services |HS |0.95% |Maintain |
|Professional Service |SP |0.86% |Increase |
|Hospitality& Leisure Services |HLS |0.69% |Maintain |
|Engineering |ENG |0.46% |Increase |
|Chemicals |CHM |0.37% |Increase |

6.2 TYPES OF FACILITIES, FACILITY PARAMETER & PRODUCT LENDING CAPS

The type of facilities that are permitted should be clearly indicated, such as Lease, Term Loan, Home Loan, and Working Capital etc. Fls should establish a specific product exposure cap to avoid over concentration in anyone product.

Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated. As a minimum, the following parameters should be adopted: ▪ Fls should not grant facilities where the Fl's security position is inferior to that of any other financial institution. ▪ Assets pledged as security should be properly insured ▪ Valuations of property taken as security should be performed prior to facilities being granted. ▪ A recognized 3rd party professional valuation firm should be appointed to conduct valuations.

IDLC Perspective:

IDLC has clearly mentioned all the different types of facilities and their parameters in its credit policy. The standard products that are permitted in IDLC and their attributes as mentioned in IDLC credit policy 2008 are listed below: (Exceptions may be made in case of Syndicated Financing and Structured Financing activities)

Lease Finance:

|a. |Payment mode |May be 'Advance' or 'Arrear'. |
|b |Payment schedule |May be 'Regular' or 'Structured'. |
|c |IDCP capitalization |IDCP capitalization: to be calculated as pool rate plus 3%. |
|d |Stipulated loss value |To be calculated as Present Value after discounting at rate-true rate at 2% |
|e |Lease term |Normally maximum 60 months including grace period. Exceptions may be made after taking approval |
| | |from board. |
|f |Installment |Usually monthly or quarterly Installments |
|g |Insurance |In case of vehicle and equipment taking insurance is compulsory. |
| | |i. For vehicles, taking comprehensive insurance is mandatory |
| | |ii. For equipments, insurance must cover fire with electrical clause and machine break down clause|
| | |iii. For Marine cargo, coverage will be under ICC Act. |
| | |iv. For marine hull/vessel, comprehensive insurance coverage is compulsory. However, for |
| | |multinational and local reputed corporate organizations exceptions may be made at the discretion |
| | |of CEO & MD after obtaining CEC approval. |
|h |Exposure limit |Exposure to clients or group of enterprises shall not exceed 50% of the total assets (including |
| | |off balance sheet assets) of the client/group. |

| | | |
| | | |
|i |Collateral |Cumulative Net exposure (including term loan) without security shall not exceed 10% of IDLC's equity to |
| | |any group. 100% Security coverage must be taken on additional amount exceeding 10% IDLC's equity. These |
| | |limits to be reached only if, |
| | | |
| | |i. A client has an excellent past repayment performance with IDLC Finance Limited, |
| | |ii. business's debt: equity is less than 70:30 after consideration of proposed financing |
| | |iii. client is well renowned in the business arena, |
| | |iv. business has a diversified target market, or |
| | |v. counterparty is considered to be a potential good client by the sanctioning authority. |
| | | |
| | |Exposure without security should be considered only if CIB shows a clean record. |
| | | |
|j |Special covenants |IDLC Finance Limited may include a clause restricting the client from availing any new credit facility |
| | |from any bank or financial institution (non-bank) without prior consent of IDLC Finance Limited. If |
| | |clients' debt: equity is equal to 70:30 or more IDLC Finance Limited will impose this restriction on the |
| | |client |
|k |Repeat Financing |To become eligible for repeat financing client must have at least 6 months of good repayment record with |
| | |IDLC. |

Term Finance/Business Loan/Machinery Loan/Double Loan

|a |Payment mode |May be 'Advance' or 'Arrear'. |
|b |Payment schedule |May be 'Regular' or 'Structured'. |
|c |IDCP capitalization |IDCP capitalization: to be calculated as pool rate plus 3%. |
|d |Prepayment |Term Loan can be fully or partly prepaid prior to expiry of Loan Term with payment of 2% |
| | |termination fee subject to providing a 1(one) month prior notice to the Lender. |
|e |Loan term |Normally maximum 60 months including grace period. Exceptions may be made after taking |
| | |approval from board. |
|f |Installment |Usually 12 a year, one each month |
|g |Exposure limit |Exposure to clients or group of enterprises shall not exceed 50% of the total assets |
| | |(including off balance sheet assets) of the client/group. |
|h |Collateral |Cumulative Net exposure (including term loan) without security shall not exceed 5% of IDLC's |
| | |equity to any group. 100% Security coverage must be taken on additional amount exceeding 5% |
| | |IDLC's equity. These limits to be reached only if, |
| | |i. A client has an excellent past repayment performance with IDLC Finance Limited, |
| | |ii. business's debt: equity is less than 70:30 after consideration of proposed financing |
| | |iii. client is well renowned in the business arena, |
| | |iv. business has a diversified target market, or |
| | |v. counterparty is considered to be a potential good client by the sanctioning authority. |
| | | |
| | |Exposure without security should be considered only if CIB shows a clean record. |
| | | |
| | | |
|i |Insurance |Insurance should be taken in case of first charge on hypothecated assets (if applicable). |
|j |Special covenants |IDLC Finance Limited may include a clause restricting the client from availing any new credit |
| | |facility from any bank or financial institution (non-bank) without prior consent of IDLC |
| | |Finance Limited. If clients' debt: equity is equal to 70:30 or more IDLC Finance Limited will |
| | |impose this restriction on the client. |
|k |Repeat Financing | |
| | |To become eligible for repeat financing client must have at least 6 months of good repayment |
| | |record with IDLC. |

Women entrepreneurs' loan

|a |Special Characteristics | Loan size shall be between BDT 100,000/- to BDT 5,000,000/-. |
| | |Interest rate of financing shall be maximum "bank rate + 5%". |
| | |Client must have a valid trade license. |
| | |Client must have minimum 2 years of business track record. |
| | |Share holding by women entrepreneurs must be more than 50%. |
| | |Documentation charge 1 % of loan amount. |
|b |Payment mode |May be 'Advance' or 'Arrear'. |
|c |Payment schedule |May be 'Regular' or 'Structured'. |
|d |IDCP capitalization |IDCP capitalization: to be calculated as pool rate plus 3%. |
|e |Prepayment |Term Loan can be fully or partly prepaid prior to expiry of Loan Term with payment of 2% |
| | |termination fee subject to providing a 1(one) month prior notice to the Lender. |
|f |Loan term |Tenure of Loan will be between 13 to 39 months. |
|g |Installment |Monthly installments. |
|h |Exposure limit |Exposure to clients or group of enterprises shall not exceed 50% of the total assets |
| | |(including off balance sheet assets) of the client/group. |
|i |Collateral |A maximum of BDT 1.5mln can be disbursed only against personal guarantee without taking |
| | |any security. Exposure without security should be considered only if CIB shows a clean |
| | |record. |
|j |Insurance |Insurance should be taken in case of first charge on hypothecated assets (if applicable).|
|k |Special covenants |IDLC Finance Limited may include a clause restricting the client from availing any new |
| | |credit facility from any bank or financial institution (non-bank) without prior consent |
| | |of IDLC Finance Limited. If clients' debt: equity is equal to 70:30 or more. IDLC Finance|
| | |Limited will impose this restriction on the client. |
|l |Repeat Financing |To become eligible for repeat financing client must have at least 6 months of good |
| | |repayment record with IDLC. |

Festival Loan

|a |Special Characteristics |Loan size shall be between BDT 200,000/- to BDT 2,000,000/-. |
| | |True rate shall be 1.75% per month. |
| | |Processing fees is 1 % of the loan amount. |
| | |Documentation charge BDT 1,200 per case processed. |
|b |Payment mode |Only interest to be paid monthly and principal to be paid in a single shot at maturity. |
|c |Loan Term |Tenure of loan 3 to 4 months from date of disbursement. |
|d |Collateral |Taking registered mortgage for this product is discouraged as its tenure is of only 3 to 4 |
| | |months. Instead we shall take, |
| | |Hypothecation of stock, receivables, and machinery. |
| | |Personal guarantee from two reputed third party guarantors. |
| | |Post dated checks for monthly payment of interest and single payment of principal at |
| | |maturity. |
| | |Exposure without security should be considered only if CIB shows a clean record. |
|e |Mortgage Insurance |No registered mortgage or insurance will be taken as Loan Term is very short. |
|f |Product Special Criteria |Shall be extended to only to the existing Small Business Finance clients who has excellent |
| | |track record of repayment of at least 3 months. |

Developer real-estate financing

|a. Payment mode |May be 'Advance' or 'Arrear'. |
|b. Payment schedule |May be 'Regular' or 'Structured'. |
|c. IDCP capitalization |IDCP capitalization: to be calculated as pool rate plus 3%. |
|d. Prepayment |Term Loan can be fully or partly prepaid prior to expiry of Loan Term with payment of 2% |
| |termination fee subject to providing a 1 (one) month prior notice to the Lender. |
|e. Loan term |In general maximum term of loan for financing a private developer shall not exceed 3 years. |
|f. Installment |Usually monthly or quarterly Installments |
|g. Loan to Ratio |Value Highest limit for Loan to Value Ratio is 70%. |
|h. Exposure limit |Real-estate exposure to any single group of enterprises shall not normally exceed 15% of IDLC's |
| |unimpaired equity as determined by the Financing Method of accounting, |
| |Total exposure to a developer, on URPA basis, shall not exceed total 50% assets base of the |
| |developer. |
|i. Product limit |Total outstanding portfolio of developer finance product under real-estate finance shall not |
| |exceed 25% of IDLC's net-worth. |
| |Developer finance portfolio shall not normally exceed 25% of total outstanding real-estate loan |
| |portfolio. |
|j. Collateral |For this product some real-estate should be taken as security. |
|k. Special covenants |IDLC Finance Limned may include a clause restricting the client from availing any new credit |
| |facility from any bank or financial institution (non-bank) without prior consent of IDLC Finance |
| |Limned. If clients' debt: equity is equal to 70:30 or more IDLC Finance Limned will impose this |
| |restriction on the client. |
|l. Repeat financing |To become eligible for repeat financing client must have at least 6 months of good repayment |
| |record with IDLC. |

Commercial Real-estate financing

|(a) Payment mode |May be 'Advance' or 'Arrear'. |
|(b) Payment schedule |May be 'Regular' or 'Structured'. |

|(c) IDCP capitalization |IDCP capitalization: to be calculated as pool rate plus 3%. |
|(d) Prepayment |Term Loan can be fully or partly prepaid prior to expiry of Loan Term with payment of 2% |
| |termination fee subject to providing a 1 (one) month prior notice to the Lender. |
|(e) Loan term |In general the term shall not exceed 7 years. However, for professionals the maximum term can |
| |be extended up to 12 years. |
|(f) Installment |Monthly installments |
|(g) Loan to Value Ratio |Highest limit for Loan to Value Ratio is 70%. |
|(h) Exposure limit |Exposure to any single group of enterprises shall not normally exceed 15% of IDLC's net worth |
| |subject to maximum of 25% of IDLC's equity inclusive all products of IDLC. |
|(i) Product limit |Commercial finance portfolio shall not normally exceed 25% of total outstanding real-estate |
| |loan portfolio. |
|(j) Collateral |Exposure without security should be considered only if CIB shows a clean record. |

Factoring Bill Discounting

|(a) Special Characteristics |Available facilities under this product are, |
| |Financing |
| |Invoice submission |
| |Physical collection |
| |Accounting & reporting |
|(b) Percentage of advance |Highest 80% of the gross invoice value. |
|(c) Expiry |Maximum of 1 year after sanction, but may be renewable |
|(d) Credit Term |The term of credit facility under this scheme will be maximum 120 days from invoice/bill date. |
|(e) Exposure amount |Without any fixed security, maximum net exposure will be Taka. 20 million for the first time. |
| |Enhancement may be obtained after observing transactions for minimum of six months. |
|(f) Collateral |Under this scheme at least following collateral should be obtained: |
| |Assignment of payment from approved customers |
| |Floating Charge on all Receivables |
| |Personal Guarantee of all the Directors |
| |Security Cheque covering the entire credit limit |
|(g) Discount |The Factoring Discount will be calculated on daily product basis on the loan amount and charged|
| |at the end of each month. |
|(h) Product Special Criteria |Agreement must be signed within 6 months from approval. |

Work order financing

|(a) Special Characteristics |Available facilities under this product are; |
| |Financing |
| |Physical collection |
| | |
|(b) Percentage of advance |Highest 70% of the work order value |
|(c) Expiry |Maximum of 1 year after sanction, but may be renewable. |
|(d) Credit Term |The term of credit facility under this scheme will be maximum 120 days from disbursement |
| |date. |
|(e) Interest Calculation |Interest will be calculated on daily product basis on the loan amount and charged at the |
| |end of each quarter. |
|(f) Collateral |Under this scheme at least following collateral should be obtained: |
| |Assignment of payment against work orders |
| |Floating charge on receivables |
| |Personal Guarantee of the sponsors |
| |Security cheque covering the entire credit limit |
|(g) Delayed Repayment |In case of delayed repayment "interest rate plus 2%" shall be charged on overdue amount |
| |for the period of overdue. |
|(h) Product Special Criteria |Agreement must be signed within 3 months from approval. |

Time loan (ICD)

|(a) Service options |Revolving or non-revolving |
|(b) Disbursement |Single shot or in phases |
|(c) Expiry |Maximum of 1 year after sanction, but may be renewable. |
|(d) Repayment |Usually at one go for revolving facility and in installments in case of non revolving facility |

|(e) Credit term |The term of credit facility under this scheme will be maximum 120 days from disbursement date. |
|(f) Exposure amount |Without any fixed security, maximum net exposure will be Tk. 20 million for the first time. Enhancement |
| |may be obtained after observing transactions for minimum of six months. |
|(g) Collateral |Under this scheme at least following collateral should be obtained: |
| |Assignment of payment against work orders |
| |Floating charge on receivables |
| |Personal Guarantee of the sponsors |
| |Security cheque covering the entire credit limit |
|(h) Delayed Repayment |In case of delayed repayment "interest rate plus 2%" shall be charged on overdue amount for the period of|
| |overdue. |
|(i) Product Special Criteria |Agreement must be signed within 6 months from approval. |

Bridge financing
|(a) Repayment mode |Only interest to be paid monthly and principal to be repaid in a single shot at maturity by, |
| |IPO proceeds, |
| |Preferred stock |
| |Syndicated finance or/land |
| |Self finance |
|(b) Financing term |Tenure of investment shall not exceed 1 (one) year or the time required for floating the share |
| |which ever is shorter. |
|(c) Incremental charge |Incremental Charge at rate "Interest rate +3%" on overdue amount for the period of overdue. |
|(d) Exposure limit |Exposure to clients or group of enterprises shall not exceed 50% of the total assets (including|
| |off balance sheet assets) of the client/group. |
|(e) Collateral |Under this scheme at least following collateral should be obtained, |
| |Personal guarantee of the Directors. |
| |Sponsors' undertaking to remain the majority shareholder of the company during the tenor of the|
| |loan, to be in control of the management of the company and to inject necessary equity funds to|
| |finance any cost overrun of the project and to maintain all the covenants of loan agreement, |
| |unless otherwise mutually agreed. |
|(f) Special covenants |IDLC Finance Limited may include a clause restricting the client from availing any new credit |
| |facility from any bank or financial institution (non-bank) without prior consent of IDLC |
| |Finance Limited. If clients' debt: equity is equal to 70:30 or more IDLC Finance Limited will |
| |impose this restriction on the client. |

Underwriting:

▪ Product limiting criteria: In general, the amount underwritten shall not exceed 100% of IDLC's equity.

Some Additional Issues followed by IDLC

▪ Market value of collaterals must be evaluated using a third party consultant valuer/surveyor. ▪ In all mortgages, taking personal guarantee of owner of the property is compulsory. ▪ For third party mortgages: o Personal guarantee of all shareholders or proprietor for partnerships or Proprietorship is mandatory. o Personal guarantee of main sponsors are preferable for private or public limited companies.

▪ Tagging on registered mortgage will not be considered as security. ▪ Tagging on tripartite agreement will not be treated as security. ▪ Tagged securities must be re-mortgaged to be considered as a security. ▪ In case of cash security, security deposit must be collected before disbursement

6. 3 SINGLE BORROWER/ GROUP LIMITS

As a prudential measure intended for ensuring improved risk management through restriction on credit concentration, Bangladesh Bank has from time to time advised the financial institutions in Bangladesh to fix limits on their large credit exposures and their exposures to single and group borrowers. The Fls must be in compliance with the limit on loans to a single borrower and also to a group of companies. Fls may wish to establish more conservative criteria in this regard.

IDLC perspective:

IDLC Finance Limited is in compliance with the single borrower and group exposure limits advised by the central bank. In fact IDLC follows more conservative policy- in this regard. Whereas the central bank's suggested exposure limit is 30% of the company's equity, the total exposure to any single borrower or group of borrowers must not exceed 25% IDLC's equity. However the exposure limit may be different for different clients based on other characteristics of the client. The Statement of General and Operational Policies of IDLC provides for prudential guidelines for group exposure. IDLC follows the following policies to set group and company specific limits:

▪ Limits will be assigned to both group and individual companies of that group. ▪ Group limit will be set considering, ← Projected requirement of the group ← Debt Service Coverage Ratio (DSCR) of the Group [at least 1.50] ← Debt to equity ratio of the Group [70:30 including our limit]

▪ Company specific limit will be set based on, ← Projected requirement of the company ← DSCR of the company [at least 1.50] ← Debt to equity ratio of the company [70:30 including our limit] ▪ Organizations of a single group, regardless of their individual limits, collectively their net exposure must not exceed the group limit at any point in time. Any addition to any group must be approved by CEO & MD, for purpose of availing credit facility. ▪ CEO & MD may sanction credit facility up to 10% of Group Limit to an organization, which is a new addition to the group. For credit facility beyond 10% of Group Limit to such a new company, approval must be taken from sanctioning authority that had previously sanctioned the group limit. ▪ If any new sanction exceeds previously sanctioned group limit marginally i.e. 1% of previously approved group limit or less, sanctioning authority will be CEO & MD. However, for proposal that results in exposure exceeding 1% of previously approved group limit, approval must be taken from sanctioning authority that had previously approved the group limit.

6.4 DISCOURAGED BUSINESS TYPES

Fls should not offer credit facility to any sectors! entities which do not comply with rules and regulations of regulatory bodies; produce harmful by-products or release non-biodegradable wastes; employ children as workers; discriminate on the basis of age, gender, region, religion, complexion; involved in manufacturing of arms and military hardware or speculative business. Fls should outline industries or lending activities that are discouraged.
IDLC has segregated the following discouraged sectors that include some sectors in addition to the list of sectors prohibited for investments by Banks and Financial Institutions.

|Government Specified |Best Practice |Company Specific |
| |Highly leveraged transactions |Bridge Loans relying on equity issuance as a |
|Military Equipment/ |Financing illegal and unethical activities. |source of repayment. |
|Weapons Finance. |Logging, Mineral Extraction /Mining, or other |Organizations with litigation in progress. |
|Lending to companies listed on CIB black list or|activity that is ethically or environmentally |Organizations with family disputes. |
|known defaulters. |sensitive. |Organizations with political affiliation. . |
| |Counter parties in countries subject to UN |Borrower's integrity and records are |
| |sanctions. |questionable. |
| | |Total reliance placed on all economic factors to|
| | |work in borrower's favor to allow agreed |
| | |payment. |
| | |Associations and NGOs. |

Table 6.2: Discouraged Industries

CHAPTER-7
Credit Assessment & Risk Grading

7.1 CREDIT ASSESSMENT

A thorough credit and risk assessment should be conducted prior to the granting of a facility, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer ("RM"), and is reviewed by Credit Risk Management (CRM) for identification and probable mitigation of risks. The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the FI's Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.

It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All Fls should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times.

Credit Applications should summarize the results of the RMs risk assessment and include, as a minimum, the following details:

▪ Amount and type of facility(s) proposed ▪ Purpose of facilities ▪ Facility Structure (Tenor, Covenants, Repayment Schedule, Interest) ▪ Security Arrangements ▪ Government and Regulatory Policies ▪ Economic risks.

IDLC perspective

The relationship managers (RMs) of IDLC Finance Limited are responsible for maintaining continuous relationship with their customers and for conducting due diligence on new borrowers. However credit and risk assessment are conducted only prior to granting a facility, not annually for all facilities which is in violation of BB guideline. According to the credit personnel, it is not feasible to assess credit risks annually

for all facilities specially after granting a facility, although the borrowers are always kept in continuous monitoring by the RMs.

IDLC has recently revised its Know Your Customer (KYC) policy, however not yet approved by the board. This policy is in compliance with Anti Money Laundering Act 2002 and includes KYC policy for deposit products approved in April 2002 with KYC limit bar and subsequently, revised the KYC limit bar in 2007. As per the Act, IDLC is obligated to comply with KYC procedure for each and every product. So IDLC implemented KYC policy for the Asset Products, KYC checklist and sign-off sheet of Asset Products in compliance with KYC procedure for all new customers. Collected KYC documents are kept in the respective contract file along with the completed checklist signed by Head of Dept./Branch. In addition to that, KYC deferral form is maintained in case of pending documents related to KYC.

All appraisal reports are accompanied by Credit Control Report and Risk Grading Report. Appraisal report formats used at IDLC are shown in the Appendix-1.

Exception - for Small Business Finance, short-term finance and entities not in business for at least one year, Risk Grading is not necessary.

▪ An appraisal report contains following information ← Name of the borrower and group ← Legal status, address and phone number ← Sector, sub-sector and nature of business ← TIN number ← CIB report in the name of borrower, not earlier than 90 days. ← If CIS report shows any overdue obtaining bank opinion (formal/informal) is compulsory ← Shareholding structure of the company (as per format) ← Exposure and details of existing relationship with IDLC Finance limited, if applicable ← Proposal facility type, amount, purpose and rationale ← Existing liability status of the company and DSCR calculation ← Balance Sheet and Income Statement of recent years including necessary explanations ← Key management and no. of employees ← Trade checking (buyer/supplier opinion) ← Risk factors and mitigation ← Risk Grade, using an appropriate model

▪ All reports of IDLC Finance limited use formal report formats as provided in a separate memorandum Appendix 02: Report Formats.

▪ For updating report format memorandum Appendix 02: Report Formats must be updated with approval of the management.
Some Additional Aspects:

Complying with the central bank guideline for banks and financial institutions, appraisal
Reports for project type investments review following additional aspects of the borrower:

▪ Management Aspects:
From our experience, we have observed that a major portion of the business in difficulty, suffered due to management problems. Therefore, management appraisal findings have special significance on the decision to be made. Management part of appraisal should cover following aspects:

❖ Proprietor's/Shareholders'/Directors' experience on relevant fields ❖ Proprietor's/Shareholders'/Directors' educational background ❖ Business advisors'/consultants' experience and background ❖ Experience and background of top executives of the organization ❖ Vision, Mission, Values, Concepts and Goals of the organization ❖ Organization structure and decentralization level ❖ Organizational efficiency ❖ Relationship with suppliers ❖ Relationship with workers ❖ Relationship with other stakeholders

▪ Technology &Technical Aspects:

Technical appraisal broadly involves a critical study of the following: ⇨ Location and Site: The problem of selection of the location is complicated by the fact that a particular location where one or few factors are favorable, other factors may be unfavorable. ⇨ Size (Plant Capacity): The size of the plant or scale of operation is an important factor that determines the economic and financial viability of a project. The size should be optimal; otherwise it will lead to diseconomies of scale. ⇨ Technology, Plant and Equipment: The appraisal should also consider some important technological factors, which regard to plant and equipment. ⇨ Building and Layout: The operational efficiency of an industrial project also depends on the layout. Layout refers to the arrangement of physical facilities. The site, factory and plant layouts are important. All these layouts shall ensure that the operations are carried out smoothly and efficiently.

Technical aspects of an industrial project are appraised to determine whether the project is sound with regard to every engineering and technological consideration, including product specification, process, size, internal balance, suitability and availability of physical facilities design and layouts of equipment and buildings etc.

Second important aspect of technical study includes evaluation of resources to be used for, ⇨ Setting up the project ⇨ Operating it subsequently.

The physical resources to be used are to be transferred into financial terms. Hence the task is to evaluate quantitatively resources such as land, building, materials, machinery, equipment, stores and spares, raw-materials, labor, power, fuel etc. Then the task is to work out the cost of these resources. So, this part should contain (for both setting up and operation),

⇨ List of resources required, ⇨ Quantity of each resource required, and ⇨ Cost of acquiring these resources

While evaluating the capital outlay and physical facilities, two more important factors will have to be determined, ⇨ Time schedule for implementation, and ⇨ Production Cycle

In case of the project involving technical collaboration or borrowed technology, facets of technology transplant and its adoption will have to be examined,

⇨ Suitability in local conditions ⇨ Terms and conditions of technology transfer ⇨ Financial and economic implications of the technology transfer

Thus, the technical studies and cost analysis provide basis both for the initial estimates of the profitability of an investment during the initial stages and for financial decision to invest or not. The technical appraisal, therefore, constitutes the foundation of the entire superstructure of project appraisal.

However good one may be in technical appraisal, one cannot be expected to be expert in all specialized fields. This point has great practical significance while dealing with a project in which IDLC Finance Limited has no previous experience. In such situations, particularly proposals involving large capital outlay, it is preferable to find out best advisors (consultants) from outside. For because any defect in technical design and formulation will eventually affect the investment adversely.

▪ Marketing Aspects:
An organization's long term success and sustainability is heavily dependent on the organization's ability to understand goods and services desired by target market, communicate with target market, and deliver goods and services in a desirable manner. Therefore, these aspects are important for us to analyze before approval. Marketing part of appraisals should cover following aspects:

□ Global Scenario □ Industry Scenario in Bangladesh □ Nature of the Market □ Definition of Target Markets □ Product mix or Service mix □ Pricing Strategy □ Market Positioning Strategy □ Promotional Strategy □ Distribution Network □ SWOT Analysis □ Competitor Analysis

▪ Financial Aspects:

According to our experience, entities (organizations/persons) that give importance on financial planning are most likely to become good borrowers regardless of their asset size or profitability. However, financial characteristics still act as reliable indicator for determination of financial risks associated with the applicant. Therefore financing aspects of the appraisal should cover following aspects: □ An analysis on Financial Statements (both Balance Sheet and Income Statement) □ Cash Flow Statement and Analysis □ Comments on past financial performance □ Projected future cash flow and profitability analysis □ Sensitivity analysis □ Debt Service Coverage Ratio (DSCR)

▪ Socio-economic Aspects:

All projects have more or less impact on surrounding communities and economic activities carried out in those communities. A business may be desirable to local community or not. To evaluate impact of investments on society a socioeconomic study should be carried out.

Socioeconomic analysis should cover following aspects: ⇨ Employment generation ⇨ VAT and Taxes payable forecasts ⇨ Contribution to GDP ⇨ Environmental impacts/issues ⇨ Social desirability ⇨ Scope of foreign exchange earning

7.2 RISK GRADING

The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure. A Credit Risk Grading deploys a number alphabet! 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. Credit risk grading is an important tool for credit risk management as it helps the Financial Institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a FI. ▪ Functions of Credit Risk Grading:

Well-managed credit risk grading systems promote financial institution 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 FI management and examiners to monitor changes and trends in risk levels. The process also allows FI management to manage risk to optimize returns. ▪ Uses of Credit Risk Grading:

➢ The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the FI as a whole. ➢ CRG would provide a quantitative measurement of risk which portrays the risk level of a borrower and enables quick decision making, ➢ As evident, the CRG outputs would be relevant for individual 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. These would largely constitute obligor level analysis. ➢ Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of an FI. It is also relevant for portfolio level analysis. ➢ CRG would provide a quantitative framework for assessing the provisioning requirement of a Frs credit portfolio.

The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as post-sanction stage.

At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the lending price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level.

At the post-sanction stage, the FI can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. Risk grading should be assigned at the inception of lending, and updated at least annually. Fis should, however, review grading as and when adverse events occur. A separate function independent of facility origination should review risk grading. As part of portfolio monitoring, Fls should generate reports on credit exposure by risk grade. Adequate trend and migration analysis should also be conducted to identify any deterioration in credit quality. Fls may establish limits for risk grades to highlight concentration in particular grading bands. It is important that the consistency and accuracy of grading is examined periodically by a function such as an independent credit review group.

❖ Risk Grading for Corporate and SME

• The proposed CRG scale is applicable for both new and existing borrowers. • It consists of 8 categories, of which categories 1 to 5 represent various grades of acceptable credit risk and 6 to 8 represent unacceptable credit risk. However, individual FI depending on their risk appetite may implement more stringent policy.

|Number |Grading |Short Name |
|1 |Superior |SUP |
|2 |Good |GD |
|3 |Acceptable |ACCPT |
|4 |Marginal / Watch List |MG / WL |
|5 |Special Mention |SM |
|6 |Sub Standard |SS |
|7 |Doubtful |DF |
|8 |Bad & Loss |BL |

TABLE 7.1: RECOVERY ACTION PLAN

• Having considered the significance of credit risk grading, it becomes imperative for the financial system to carefully develop a credit risk grading model, which meets the objective outlined above.

• The more conservative risk grade (higher) should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results. It is recognized that the Fls may have more or less Risk Grades, however, monitoring standards and account management must be appropriate given the assigned Risk Grade.

IDLC Perspective:

IDLC uses a very structured credit risk grading model for calculating risk grades only at the pre-sanction stage of a facility. For Small Business Finance, short-term finance and entities not in business for at least one year, Risk Grading is not necessary. However, IDLC has no compliance in credit risk assessment at the post-sanction stage of the facilities. IDLC neither review risk grading annually nor establish any limits for risk grades. There is no migration analysis to identify any deterioration in credit quality. Only when a borrower does not pay an installment, then the RM contacts with that borrower to identify the reason and the SAM department takes the appropriate recovery actions.

Risk Grading Model is described as follows in IDLC Credit Policy 2008:

1. Classification of Borrowers:
Risk Grading Models have been developed for the following borrower categories: • Manufacturing • Services • Trading Companies

2. Common Characteristics of All Three Models:

Some characteristics are common for all three models:

• All three models use a scale of 10. Scoring is done on a scale of 0 to 10 with an interval of 2, effectively making it a 6-point scale.

|FROM |TO |RISK GRADE |
|10 |8 |IDLC 1 |
|8 |7.5 |IDLC 2 |
|7.5 |7 |IDLC 3 |
|7 |6.5 |IDLC 4 |
|6.5 |6 |IDLC 5 |
|6 |5.5 |IDLC 6 |
|5.5 |5 |IDLC 7 |
|5 |0 |IDLC 8 |

Table 7.2: Final Risk Rating Grades Intervals

• All project type investment get a grade lower than usual grade according to above table considering risks involved in a project type investment. • In case borrower is a multinational organization, the grading is upgraded one level. • Total score and grading are reduced based on CIS report for new clients or performance with IDLC for existing clients, if irregularities are observed.

|CIB report status |Performance with IDLC |Point Reductions |
|No Overdue |No Overdue |0 |
|Standard Overdue |Standard Overdue |0.25 |
|SMA |SMA |0.50 |
|Sub standard |Sub standard |IDLC 6 regardless of score |
|Doubtful |Doubtful |IDLC 7 regardless of score |
|Bad/Loss |Bad/Loss |IDLC 8 regardless of score |
|Nil Information |New Client |0 |

Table 7.3: Reduction in Total Score

3. Interpretation of Risk Grades:

According to the Risk Grade Matrix used by IDLC Finance Limited, the interpretations of the Risk Grades are broadly as follows:

|Grade |Risk Rating |Interpretation |
|IDLC 1 |Superior – |Credit facilities, which are fully secured i.e. fully cash covered |
| |Low Risk |Credit facilities fully covered by government guarantee |
| | |Credit facilities fully covered by the guarantee of a top tier |
| | |international Bank |
| | |The fundamentally strong debt servicing capacity of such companies |
| | |is most unlikely to be adversely affected by changes in circumstances |

|IDLC 2 |Good Satisfactory Risk |The borrower has excellent liquidity and low leverage |
| | |The company demonstrates consistently strong earnings and cash flow |
| | |certainly. |
| | |Borrower has well established, strong market share |
| | |Very good management skill & expertise |
| | |Adverse business conditions are unlikely to affect debt-servicing |
| | |capacity. Such companies differ in safety from those in Grade 1 only |
| | |marginally. |
|IDLC 3 |Acceptable Fair Risk |These borrowers are not as strong as GOOD Grade borrowers, but still |
| | |demonstrate consistent earnings, cash flow certainty and have a good |
| | |track record |
| | |Credit in this grade would normally be secured by acceptable |
| | |collateral |
| | |(1st charge over inventory / receivables / |
| | |equipment / property). |
| | |Debt servicing capacity is less likely to be adversely affected by |
| | |changes in circumstances than for lower grades. |
|IDLC 4 |Marginal Watch list |This grade warrants 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. |
| | |Weaker business credit & early warning signals of emerging |
| | |The borrower incurs a loss |
| | |Facility repayments routinely fall past due |
| | |Account conduct is poor or other untoward factors are present |
| | |Changes in circumstances are more likely to lead to weakened debt |
| | |servicing capacity than for higher grades |

|IDLC 5 |Special Mention |This grade has 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 |
| | |Severe management problems exist |
| | |Facilities should be downgraded to this grade if sustained |
| | |deterioration in financial |
| | |condition is noted (consecutive losses, |
| | |negative net worth, excessive leverage) |
| | |Changes in circumstances are more likely to lead to weakened debt |
| | |servicing capacity than for higher grades. |
| | | |
|IDLC 6 |Sub standard |Financial condition is weak and capacity or inclination to repay is in|
| | |doubt. |
| | |These weaknesses jeopardize the full settlement of facilities. |
| | |While such companies are less susceptible to default than those in |
| | |lower grades, uncertainties faced by them could adversely affect debt |
| | |servicing capacity. |
| | | |
|IDLC 7 |Doubtful & Bad (Nonperforming) |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 Bad & Loss |
| | |Adverse business or economic conditions are likely to lead to lack of |
| | |ability or willingness to service debt obligations |

|IDLC |Loss (Nonperforming) |Credit of this grade has long outstanding with no progress in |
|8 | |obtaining repayment or on the verge of wind up liquidation. |
| | |Prospect of recovery is poor and legal options have been pursued. |
| | |Proceeds expected from the liquidation or realization of security may |
| | |be awaited. The continuance of the facility as a bankable asset is not|
| | |warranted, and the anticipated loss should have been provided for |
| | |This classification reflects that it is not practical or desirable to |
| | |defer writing off this basically valueless asset even though partial |
| | |recovery may be affected in the future. Bangladesh Bank guidelines for|
| | |timely write off of bad facilities must be adhered to. Legal |
| | |procedures/suit initiated. |
| | |Debt servicing capacity is highly vulnerable to adverse changes in |
| | |circumstances |

Companies under the same grade are of similar but not identical creditworthiness.

4. A brief description of the Risk Grading Model used in IDLC:

The newly upgraded RGM of IDLC Finance Limited is somewhat identical to the Risk Grading Score Card specified by BB CRM Guideline. It considers some more factors to assess the scores. However the security risk factors are not considered in IDLC's RGM as the amount of collateral is very negligible among the facilities. It has the following five types of fields to fill:

• General information

• Industry Risk Factors • Business Risk Factors • Management Risk Factors • Financial Risk Factors

• General information Some cells of this field do not contribute to risk grading; therefore, it is not compulsory to fill all cells in this field to obtain a risk grading. However, it is strongly recommended to fill all cells with care. "Organization Type", "Project Type", "CIB Report" and "Performance with IDLC" are compulsory for obtaining a risk grading. "Organization Name", "Sector", "Product" and "Client of' are optional but holds high importance for future research and development.

o In case of a new client, "CIB Report" is filled up based on worst account condition presented in CIB Report and "New Client" option is chosen for "Performance with IDLC". o In case of an existing client, "Existing Client" option is chosen for "CIB Report" and "Performance with IDLC" is filled up according to outputs provided by IDLC's software generated report.

• Industry Risk Factors

Industry risk factors are not subject to individual judgment. Sectors and sub-sectors are predefined in Credit Policy. And scores to be provided are defined by Credit Risk Management Department based on industry studies done previously. However, if new industry immerges or for any other reason scores of any particular industry can not be found, Head of Credit Risk Management will mark out appropriate scores. Under any circumstances, one should not differ from scores already provided by Credit Risk Management Department or use one's own judgment prior approval from Head of Credit Risk Management Department.

• Business Risk Factors

Business risk factors are subject to one's interpretation of available information about the client and value statements of the model. Moreover, high importance has been provided on these factors; that result in major contribution in determination of risk grade. Therefore, one should be very careful in selection of scores for each factor of this field.

• Management Risk Factors

Management risk factors are also subject to one's interpretation of available information about the client and value statements of the model. Moreover, highest importance has been provided on these factors; that result in utmost contribution in determination of risk grade. Therefore, one should be most careful in selection of scores for each factor of this field.

• Financial Risk Factors

Two factors are subject to individual judgment - "Ability to Raise Debt" and "Ability to Raise Equity". One must use one's prudent judgment for scoring these two factors. Most financial risk factors are not subject to individual interpretation. They are also not visible at the input sheet. The input sheet only provides option to give account balance of several balance sheet and income statement accounts. And most importantly all values should be as recent as possible. Using managerial accounts is preferable to using audited accounts. For small and medium business without any accounting records, balance sheet and in me statement must be reconstructed, for this purpose, based on verifiable information from the client and realistic assumptions about the market.

CHAPTER-8
Approval Authority

All commercial activities, which commit the FI to deliver risk sensitive products, require prior approval by authorized committees/individuals. A FI may have the Board, Management/Executive Committee, and Credit Committees for reviewing and approving financing proposals. The FI may have threshold based on percentage of equity that sets limits for review and approval of credit proposals in different committees. The Board must approve the threshold limit. Besides, approval authority may be delegated further to individual executives based on security, the executive's knowledge and experience to ensure accountability and quick decision in the approval process. The concerned CRM officials should be the owner of their independent review and identification of risks based on the credit application.

The authority to sanction/approve facilities must be clearly delegated by the Managing Director/CEO & Board to the Corporate Center and further down to the Business Units. Business Units are independent and responsible for managing all business activities within the approved limits. However, the concerned RM of the sales team / branch staff responsible for facility sales should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the facility application submitted for approval. They must be familiar with the Fl's Lending Guidelines and should conduct due diligence on new borrowers, purpose of the facilities and guarantors.

The following guidelines should apply in the approval/sanctioning of facilities:

• Credit approval authority must be delegated in writing from the MD/CEO & Board, acknowledged by recipients, and records of all delegation retained in CRM. • Delegated approval authorities must be reviewed annually by MD/CEO/Board. • The credit approval function should be separate from the marketing/relationship management (RM) function. • Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications. • All credit risks must be authorized by executives within the authority limit delegated to them by the MD/CEO or Board. • All applications must be reviewed by the Head of Credit Risk Management for independent assessment and identification risks and approved by respective committees or individuals delegated by Board or CEO/MD. • Respective CRM officials will be held responsible for identification of risk. • The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the Fl's Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.

• The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required. • Any credit proposal that does not comply with Lending Guidelines, regardless of amount, should be referred to Head of Credit Risk Management for review and approved by CEO/MD or Board. • MD/CEO must approve and monitor any cross-border exposure risk. • A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals declined stating reasons thereof may be reported by CRM to the CEO/MD. • Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control, and Head of CRM.

IDLC Perspective:

The Board of Directors is the highest approval authority, A person can exercise only the powers delegated by the Board of Directors in ways and manners specified by them, IDLC Finance Limited believes in decentralization of powers. With a view to ensuring prompt and efficient service to clients, IDLC Finance Limited envisages delegation of optimum powers to its management. Board of directors delegated power to ensure prompt and efficient service to sanctioning authorities in following manner:

Approval authorities, in sequence of their capacity are:

-Board of Directors -Management Committee -CEO & Managing Director

[Note:
1. All following approval limits are applicable for all proposals simultaneously. Therefore, if different criteria suggest different approval authorities, only the higher authority will be considered as approval authority
2. CEO & Managing Director is authorized to delegate his sanctioning authority from time to time at his discretion]

❖ Based on Group Exposure (Under Financing Method of accounting)

|Approving Authority |Amount |
| |New client - For exposure more than 15% of equity |
|Board of Directors |Existing client - For exposure more than 20% equity |
|Management Committee |New client - For exposure up to 5% of equity |
| |Existing client - For exposure up to 10% equity |
|CEO & Managing Director |New client - For exposure up to 5% of equity |
| |Existing client - For exposure up to 10% equity |

Equity means IDLC's unimpaired equity based on last audited financial statements.

❖ Real Estate Developer Finance

|Approving Authority |Amount |
| |Any proposal exceeding BOT 30.0 million or exceeding 50% of the project cost (including cost of |
|Board of Directors |land) |
|Management Committee |Any proposal up to 50% of the project cost (including cost of land) or BOT 30.0 million, whichever |
| |is lower |
|CEO & Managing Director |Any proposal up to 40% of the project cost (including cost of land) or BOT 20.0 million, whichever |
| |is lower |

❖ Based on Group Total Asset

|Approval Authorities |Cumulative net exposure as % of group total asset |
|Managing Director |Up to 50% |
|Board of Directors |More than 50% |

❖ Based on Single Sector Exposure

|Approval Authorities |Net exposure in a single sector as% of IDLC's portfolio |
|Managing Director |Up to 15% |
|Management Committee |Up to 20% |
|Board of Directors |Up to 25% |

❖ Renewal and Enhancement of Limit Facility

o Limit facilities must be renewed after each 5th quarter with approval from Managing Director. o Enhancement of company limit or product limit within group limit will be approved by CEO & Managing Director. o For enhancement of group limit facilities appropriate sanctioning authority will be determined by limit of sanctioning authorities.

o CEO & MD may sanction credit facility up to 10% of Group Limit to an organization, which is a new addition to the group. For credit facility beyond 10% of Group Limit to such a new company, approval must be taken from sanctioning authority that had previously sanctioned the group limit. o If any new sanction exceeds previously sanctioned group limit marginally, 1% of previously approved group limit or less, sanctioning authority will be CEO & MD. However, for proposal that results in exposure exceeding 1 % of previously approved group limit, approval must be taken from sanctioning authority that had previously approved the group limit.

❖ Additional Credit Facility

o If additional credit facility requested by client is not greater by 5% of immediate previous credit facility (sanctioned amount, not net exposure), CEO & Managing Director will be considered as sanctioning authority for additional amount. o If additional credit requested by client is greater by 5% or more of immediate previous credit facility (sanctioned amount, not net exposure), additional credit facility to a client will be extended after taking approval of authority determined by limit of sanctioning authorities.

❖ Additional Clauses Any violation of product wise exposure limits has to be approved by the Board of Directors.

CHAPTER-9 Board Responsibilities in Managing Credit Risk

To maintain FI's overall credit risk exposure within the parameters set by the Board of directors, the importance of a sound risk management structure is second to none. The appropriate organizational structure must be in place to support the adoption of the credit policies. While the Fls may choose different structures, it is important that such structure should be commensurate with institution's size, complexity and diversification of its activities. The key feature is the segregation of the Marketing/Relationship Management function from Approval/Risk Management/Administration functions. It must facilitate effective management oversight and proper execution of credit risk management and control processes.

9.1 Risk Management Structure

The Board of Directors should have the overall responsibility for management of risks. The Board should decide the risk management policy of the FI and set limits for liquidity, interest rate, foreign exchange and equity price risks.

The Risk Management Committee will be a Board level Sub committee including CEO and heads of Credit, Market and Operational Risk Management Committees. It will devise the policy and strategy for integrated risk management containing various risk exposures of the FI including the credit risk. For this purpose, this Committee should effectively coordinate between the Credit Risk Management Committee (CRMC), the Asset Liability Management Committee and other risk committees of the FI, if any. It is imperative that the independence of this Committee is preserved. The Board should, therefore, ensure that this is not compromised at any cost. In the event of the Board not accepting any recommendation of this Committee, systems should be put in place to spell out the rationale for such an action and should be properly documented. This document should be made available to the internal and external auditors for their scrutiny and comments. The credit risk strategy and policies adopted by the committee should be effectively communicated throughout the organization.

Each FI may, depending on the size of the organization or facility/investment book, constitute a high level Credit Risk Management Committee (CRMC). The Committee should be headed by the Chairman/CEO/ED, and should comprise of heads of Credit Department, Treasury, and Credit Risk Management Department (CRMD). The functions of the Credit Risk Management Committee should be as under:

• Be responsible for the implementation of the credit risk policy/ strategy approved by the Board • Monitor credit risk on a FI wide basis and ensure compliance with limits approved by the Board • Recommend to the Board, for its approval, clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks • Taking decisions in terms of capital allocation and defining limits in line with the risk strategy • Decide delegation of credit approving powers, prudential limits on large credit exposures, standards for facility collateral, portfolio management, facility review mechanism, risk concentrations, risk monitoring and evaluation, pricing of facilities, provisioning, regulatory/legal compliance, etc.

Concurrently, each FI should also set up Credit Risk Management Department (CRMD), independent of the Credit Administration Department. The CRMD should:

• Measure, control and manage credit risk on an organization basis within the limits set by the Board/ CRMC • Enforce compliance with the risk parameters and prudential limits set by the Board/CRMC

• Lay down risk assessment systems, develop MIS, monitor quality of facility/investment portfolio, identify problems, correct deficiencies and undertake facility review/audit. Large Fls could consider separate set up for facility review/audit. • Be accountable for protecting the quality of the entire facility/ investment portfolio. The Department should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the resilience of the facility portfolio.

Credit risk committees must be distinguished from those committees (often referred to as credit committees) which have to make decisions on credit approval, extension etc.

The composition, and roles and responsibilities of the individual units of the above structure are as follows:

• BOARD OF DIRECTORS:

Composition
The Board of IDLC considers that its membership should comprise directors with an appropriate mix of skills, experience and personal attributes that allow the directors individually and the Board collectively to discharge their responsibilities and duties under the law efficiently and effectively, to understand the business of the Company, and assess the performance of the management.

The Board of IDLC comprises of nine directors who possess a wide range of skills and experience over a range of professions, businesses and services. All the directors are nominated directors. Each Director brings

in independent judgment and considerable knowledge to perform their roles effectively. The Board of Directors ensures that the activities of the Company are always conducted with adherence to strict and highest possible ethical standards and in the best interests of the stakeholders.

Role and Responsibilities of the Board

The Board is committed to the Company seeking to achieve superior financial performance and long term prosperity, while meeting stakeholders' expectations of sound corporate governance practices. The Board determines the corporate governance arrangements for the Company. As with all its business activities, the Board is proactive in respect of corporate governance and puts in place those arrangements which it considers are in the best interest of the Company and its shareholders and consistent with its responsibilities to other stakeholders.

The Board duly complies with the guidelines issued by Bangladesh Bank regarding the responsibility and accountability of the Board, its Chairman and Chief Executive/Managing Director, vide DFIM Circular NO.7 dated September 25,2007.

The Board of Directors of IDLC sets out its strategic focus and oversees the business and related affairs of the Company. The Board also formulates the strategic objectives and policy framework for the Company. In discharging the above responsibilities the Board carries out the following functions as per the charter of the Board and Bangladesh Bank's DFIM Circular No.7, dated September 25, 2007:

• Determine, monitor and evaluate strategies, policies, management performance criteria and business plan • Periodic and timely reporting to the shareholders on the affairs, progress and performance of the Company • Ensuring proper decision-making and accountability structure throughout the Company so that the staff down the line is fully accountable to the corporate management • Monitoring of significant business risks and reviewing how they are managed as per Bangladesh Bank's "Core Risk Guidelines" • Delegation to Board Committees and management and approval of transactions in excess of delegated level • Approval of annual budgets including major capital expenditure proposals • Critical evaluation of all proposals which require Board's approval and/or directives. • Regular review of financial performance and overdue situation • Appointment and evaluation of the performance of CEO & Managing Director and Deputy Managing Director and senior executives

• Ensuring that the senior management team has the necessary skills and experience to perform their functions effectively in the best interests of the Company. • Monitoring the adequacy and appropriateness and operation of internal controls. • Ensure that technology and information systems used in the organization are sufficient to operate the organization effectively and maintain competitiveness

Board Meetings
The meetings of the Board of Directors of IDLC are normally held at the Registered and Corporate Head Office of the Company. The meetings are held frequently, at least once in a quarter, to discharge its responsibilities and functions as mentioned above.

There are procedures, at IDLC, for keeping the Board up-to-date with the Company's activities and relevant external developments. These includes senior management presenting significant matters to the Board and Board being able to seek further information on any issue relating to performance, strategy, outlook etc,

• INTERNAL CONTROL

The Board is responsible for ensuring that the Company has an adequate and effective control system in place. Although no system of internal financial control can provide absolute assurance against material misstatement or loss, the Company's internal control systems have been designed to provide the directors with reasonable assurance that assets are safeguarded against unauthorized use by the employees and/or management and/or third parties, transactions are authorized and properly recorded and material error and irregularities are either prevented or detected within a reasonable period of time.

Properly designed management structure, clearly defined responsibilities, delegation of authority, establishment of accountability at each level and system of periodic reporting and monitoring performance are the key elements of the internal control framework employed in IDLC.

• AUDIT COMMITTEE

The Audit Committee comprises of five Directors. The Company Secretary is the Secretary of the Committee. The Committee is headed by a director who has professional background in accounting and finance. The rules of the Audit Committee clearly lay down its authority, responsibility and specific duties.

The Committee is empowered, among other things, to examine any matter relating to the financial affairs of the Company and to review all audit and inspection programs, internal control systems and procedures, accounting policies and adherence to compliance requirements, etc. This ensures that a sound financial reporting system is in place, which is well managed, providing accurate, appropriate and timely information

to the Board of Directors and stakeholders. The Chief Risk & Compliance Officer has direct access to the Committee and the Committee is directly reportable to the Board.

• MANAGEMENT COMMITTEE

A four member Management Committee headed by a Director is responsible for strategic and operational plans of the business. The matter related to ordinary business operations of the Company and the matters that the Board of Directors from time to time authorize are vested to this Committee in accordance with the Statement of General and Operational Policies established and made by the Board of Directors. This Committee assists IDLC in taking prompt decisions and reacting swiftly to changes in the market-place as they occur. The Rules of the Management Committee is framed by the Board.

• CREDIT EVALUATION COMMITTEE (CEC)

CEC evaluates all projects/proposals of financing activities of the Company from risk point of view. The Committee is headed by CEO & Managing Director and consists of six members. Credit Evaluation Committee members are, o Chief Executive Officer & Managing Director o Deputy Managing Director o General Manager o Chief Financial Officer o Head of Corporate Division o Member of Credit Risk Management Department

▪ INDEPENDENCE OF CREDIT EVALUATION PROCESS

Credit Evaluation Committee (CEC) holds rights to: o Approve an appraisal report as per proposed terms and conditions for consideration of sanctioning authority; or, o Request for additional information; or, o Request evidence regarding any information provided; or, o Suggest changes in or inclusion of terms and conditions regarding client's liability with IDLC Finance Limited or any other financial institution or bank; or, o Suggest changes in terms and conditions concerned with repayment; including repayment schedule, transfer price, late payment interest rate, true rate and effective rate; or, o Suggest to change or increase security; or, o Suggest increasing equity participation of client; or, o Suggest providing additional guarantor.

9.2 SEGREGATION OF DUTIES

Adequate segregation of duties is a prerequisite for an effective system of internal control. To be adequate, segregation must ensure that the following functions are performed by persons independent of each other, although, within limits, certain may be combined so long there is adequate supervision:

o Credit Approval/Risk Management/Recovery o Relationship Management/Marketing o Credit Administration

The credit approval team will be independent from the sales and branch team who will evaluate and approve the facility. The Credit Administration department will check and ensure the documentation and disburse the facilities. This will ensure better control of the FI asset and mitigate the risk of compromise of the duties. The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized facilities and obtain an objective and independent judgment of credit proposals.

IDLC Perspective:

IDLC Finance Limited has properly segregated the duties of the employees. All individuals except some have clear-cut job description for their position. However the job descriptions for specific positions (as described in the SS CRM Guideline) are not mentioned in the Credit Policy of IDLC Finance Limited. IDLC has segregated the functions of the following departments:

o Relationship Management I Marketing Departments (Corporate, SME, Structured Finance etc.) o Credit Risk Management o Operational Risk Management o Operations I Credit Administration o Special Asset Management

The personnel of the marketing departments of IDLC Finance Limited like Corporate, Structured Finance, and SME perform the relationship management function. The relationship managers are responsible to build and maintain relationship with borrowers. Credit Administration function is performed by the Operations department. The functions of this department are critical in ensuring that proper documentation and approvals are in place prior to the disbursement of financial facilities. The Credit Risk Management department is an independent body that is responsible for recommending credit approval. However, the Credit Recovery function is not performed by the Credit Risk Management Department in IDLC. Instead a completely separate department named Special Asset Management performs this function.

9.3 KEY RESPONSIBILITIES

Bangladesh Bank has outlined the key responsibilities of the aforementioned functional units in the Core Risk Management Guideline which are suggested to follow by the Fls.

IDLC Perspective:

IDLC Finance Limited has compliance with BB CRM guideline in the risk management structure and in the key responsibilities performed by the different committees and departments. However, some responsibilities are segregated to different departments. For example, the credit monitoring function is performed by the Operations department and credit recovery function is performed by the Special Asset Management (SAM) department. The key roles and responsibilities of different departments are as follows:

▪ Roles & Responsibilities of Credit Risk Management Dept.

o Oversight IDLC's credit policies, procedures and controls relating to all credit risk arising from corporate and SME lending. o Reviewing appraisal reports from Corporate, SME, PFD (Developer & Corporate), Chittagong, Structured Finance, LEIC for evaluating key risks and recommending credit decisions. o Approve or decline credit applications recommended by Relationship Managers, within delegated business authority, for consideration of sanctioning authorities. o External reporting to regulatory authorities, various business authorities and multilateral organizations. o Ensure CIB report collection and application of regulatory requirements relating to CIB. o Oversight IDLC's asset quality through various reporting activity. o Oversight merchant banking operations through, ✓ Approving securities for trading, ✓ Recommendations regarding new IPO’s, ✓ Monitoring and reporting (if necessary) of margin status, purchase and single stock exposure of "Cap Invest" clients. o Conducting Case Study sessions on default clients, improving credit skills of Relationship Managers and Credit Officers, for better performance in future. o Publication of "Monthly Business Review" for private circulation.

▪ Roles & Responsibilities of Special Asset Management (SAM) Dept.

The functions of Credit Recovery Unit specified by Bangladesh Bank (BB) Credit Risk Management Guideline for Fls (non-bank) are performed by the Special Asset Management (SAM) Department in IDLC Finance Limited. IDLC has strong compliance in credit recovery with BB CRM guideline.

Job Responsibilities o Overdue Monitor - Corporate, SME, STF, Syndication o Overdue Follow Up - Corporate, SME, STF, Syndication (through Phone, Visit, Letter) o SAM Clients Follow Up - (Regular, Difficult, Block, Litigated) - (through Phone, visit, negotiation) o Block & Litigation - Initiate, Follow Up, Court Attendance o Recovery Agent Appointment o Indemnity Bond Follow Up o Rescheduling - Negotiation, Approval o Write Off - Approval & Follow Up o Routine Works - Receivable Calculation, Closure, Waiver Approval, Adjustments, Reconciliation o Letter Issue - Overdue Clients o Preparing Departmental Bulletin

▪ Roles & Responsibilities of Credit Administrational Operations Dept.

The Credit Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of financial facilities. For this reason, it is essential that the functions of Credit Administration be strictly segregated from Relationship Management/Marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level. Ongoing administration of the credit portfolio is an essential part of the credit process. Credit administration function is basically a back office activity that support and control extension and maintenance of credit.

The functions of Credit Administration Department specified by Bangladesh Bank (BB) Credit Risk Management Guideline for Fls (non-bank) are performed by the Operations Division (OpD) in IDLC Finance Limited. IDLC is in full compliance in this respect.

There are two sections in OpD of IDLC:
1. Execution: The responsibility of the Execution section is to ensure. All the security documentation is in place and all credit approval terms are met before any disbursement.
2. Expiry: The functions performed by the Expiry section are to monitor:

o Account maintenance, o Credit monitoring o Facility repayment, and o The Process for Expiry, Partial Termination & Foreclosure.
IDLC uses some software like Receivable Management, Collection Specialist System, and Lease Accounting System etc. for this purpose.

In general, the key responsibilities of OpD are listed below:

Documentation & Disbursement:
After a financing proposal is approved by the appropriate authority (Management or CEC or MC or Board), Operations Department starts documentation process. This is an orderly procedure, which needs constant attentiveness and meticulous details. All security documentation must be in place and all credit approval terms must be met before any disbursement. OpD is responsible for preparation of documents for revised terms in the "Process of Rate Revision & Reschedule". These documents include: Amendment Agreement, Acknowledgement from personal guarantors and corporate guarantors, and Acknowledgement from any other third party. IDLC uses a Lease Monitoring Software for this purpose.

Process for Security:
As part of service delivery process for long term products, IDLC considers different types of security such as Mortgage, Hypothecation, Lien on FORI Deposit! Cash Security, Lien on Shares, Personal Guarantee, Corporate Guarantee, Bill Assignment, Insurance Guarantee, Share Retention Guarantee, Subordination of Director's Loan, and Tagging of security with description. IDLC OpD uses an Insurance Management Software to create month-wise report on the status of the Insurance claims which is useful for the "Process of Insurance Renewal".

OpD also performs the "Security Release Process" to release different securities when any contract is closed.

Custodial Duties: Different departments like Operation Risk Management, SAM as well as the RMs frequently need files, which are in custody of the OpD. If any person from the above mentioned departments needs any file, s/he has to fill up a File Movement Form with signature and has to return the file after a certain number of days. OpD maintains a Master File Index containing all files under unexecuted, executed, Expiry under processing, and Expired category. The expired/settled files are stored for almost five years and then are sent to the out-stationed stockroom, called "Modhumita Building". A list, tracing that is maintained.

Credit Monitoring & Facility Repayment: OpD is responsible for managing the Process of Late Payment Interest (LPI). At the beginning of each month, OpD sends mail to both ECD and Corporate Division for LPI billing or waiver, sends bills to pertinent clients, collect and follow up LPI, prepare and place LPI waiver memo for management approval within 7 calendar days and update LPI software.

▪ Roles of Relationship Management/Marketing/investments (RM)

o To keep regular contact with borrowers over telephone and/or visiting the factory. In case of new borrower, visiting is must. o To be responsible to investigate that the borrower utilizes the money for the specified purpose in the credit appraisal report. o To be responsible for the timely and accurate submission of Credit Appraisal Report according to the specified format mentioned in the credit policy of IDLC Finance Ltd. o To investigate the reasons of not paying regular installments by communicating with the borrower.
To seek assistance/advice at the earliest from CRM regarding the structuring of facilities, potential deterioration in accounts or for any credit related issues.

▪ Functions and responsibilities of the Audit Committee

o To assist the Board in fulfilling its oversight responsibilities including implementation of the objectives, strategies and overall business plans set by the Board for effective functioning of the Company o To review the financial reporting process, the system of internal control and management of financial risks and the Company's processes for monitoring compliance with laws and regulations and its own code of business conduct o To ensure that Company has adequate process in place to safeguard the assets of the Company against unauthorized use by the employees/third parties and to ensure that expenses incurred by the Company are for the purposes of the Company o To evaluate whether management is setting the appropriate compliance culture by communicating the importance of internal control and the management of risk and ensure that all employees have understanding of their roles and responsibilities o To review the arrangements made by the management for building a suitable Management Information System (MIS) including information technology system and its applications o To review the corrective measures taken by the management as regard the reports relating to fraud and forgery, deficiency in internal control or other similar issues detected by internal and external auditors and inspectors of the regulatory authorities o To review the activities and organizational structure of internal audit functions and ensure that no unjustified restrictions or limitations are made. o To do any other functions as the Board may require from time to time.

CHAPTER-1O Approval Process

The approval process must reinforce the segregation of Relationship Management/Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the business unit. Credit Applications should be recommended for approval by the RM team and forwarded to CRM for their review and assessment. The credit should subsequently be approved by proper approval committee.

The recommended procedure for all the business units is as follows:
1. Application forwarded to Zonal Office or Head Office for review by the ZCRO or HCRO
2. Advise the review to recommending branches
3. ZCRO/HCRO supports & forwarded to Head of Business Units (HOBU) within their delegated authority and to Head of Credit Risk (HOCR) for onward recommendation
4. HOCR advises the review to ZCRO
5. HOCR & HOBU supports & forwarded to Credit Committee
6. Credit Committee advises the decision as per delegated authority to HOCR & HOBU Credit 7. Committee forwards the proposal to EC/Board for their approval within their respective authority
8. EC/Board advises the decision to HOCR & HOBU.

IDLC Perspective:
IDLC has a very structured approval process despite it is somewhat different from the recommended process of Bangladesh Bank.

▪ Approval Process Types
Approval process for financing clients of IDLC Finance Limited can be broadly classified into following two categories:

1. Online Approval Process
Online approval process is conducted by circulating soft copies of all necessary documents to CEC members through internal computer network.

2. Offline Approval Process
Offline approval process is conducted by arranging a meeting of CEC members and concerned Relationship Managers. Offline approval is necessary if,

|Criteria |Basic Parameter for CEC Meeting |Remarks |
| | | |
|Nature of Clients |First Time Proposal amount of more than BOT 5 min (net) for | |
| |not renowned/established companies or unfamiliar businesses to| |
| |us | |
| | | |
|Proposal Amount |> 25% of Company's Total Assets |Exception in case the total net exposure less |
| |OR > Existing Exposure |than BOT 5min |
| | 2.33 (70:30) | |
|Proposed BMRE as percentage of Total | | |
|Equity (including Directors' Loan) | | |
|Business Performance |>= 30% | |
| | | |
| | | |
| |Negative Equity/Profits | |

Table 10.1: Criteria for Online CEC

▪ Approval Process

Credit Policy acts as a guideline in every step of approval process for all concerned personnel.

o Relationship Managers will do initial screening of clients' requests. o If considered to be a potential good client Relationship Managers will inform client with initial terms and also take client's acceptance of initial terms. o With client's acceptance of initial terms, Relationship Managers will prepare an appraisal report, obtaining necessary information from the client, and will submit report with all essentials for evaluation by Credit Evaluation Committee. o Approval process will be determined by criteria for approval process types.

▪ Credit Evaluation

CEC members evaluate appraisal reports for all possible credit risk possibilities. To accomplish this objective, CEC members always address following issues: o Compliance with Credit Policy of IDLC. o Analysis of CIS report and bank opinions.

o Analysis of financial statements. o Verification of financial projections and evaluating assumptions taken to construct the financial projections. o Factory/site visit of project type investments; if considered important, for other investments as well o Verification of market information. o Verification of security and evaluation of security coverage. o Awarding of appropriate risk grades to clients.

Online approval process:

o CEC members will review appraisal report and post queries, suggestions through internal network of IDLC Finance Limited. o Upon satisfactory reply from Relationship Managers CEC may provide initial approval for consideration of approval authority.

Offline approval process:

o CEC members will hold a meeting with concerned Relationship Managers to address their queries and suggestions. o Upon satisfactory reply from Relationship Managers CEC may provide initial approval for consideration of approval authority. o Meeting minutes will be circulated for online approval of CEC members.

After initial approval from CEC the appraisal report will be presented in front of appropriate approval authority. After approval from proper approval authority, all required documents will be prepared and duly signed by both party before disbursement.

Chapter-11 Credit Recovery

The Recovery Unit (RU) of CRM should directly manage accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Fls may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and Corporate Fl. Whenever an account is handed over from Relationship Management to RU, a Handover/Downgrade Checklist (As specified by the central bank CRM guideline) should be completed.

IDLC Perspective:

In IDLC Finance Limited, the credit recovery function is performed by the Special Asset Management (SAM) department. The primary functions of this department are: o Determine Account Action Plan/Recovery Strategy o Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate o Ensure adequate and timely loan loss provisions are made based on actual and expected losses o Regular review of grade 6 or worse accounts

The management of problem facilities (NPLs) is a dynamic process, and the associated strategy together with the adequacy of provisions is regularly reviewed. Some discussions on default facilities are arranged to share the lessons learned from the experience of credit losses in order to update the lending guidelines.

The departmental targets of SAM department are: o Collection of Overdue Rentals o Reduction of Non-Performing-Loans (NPL) (Now 5.5%) o Reduction of Infection Ratio (Now 13%) o Bad / Loss Provision Management - Incremental Provision Control

11.1 NPL Account Management & Account Transfer Procedures

All NPLs should be assigned to an account manager within the RU who is responsible for coordinating and administering the action plan recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Corporate FI/Relationship Management may be sought, it is essential that the autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented.

Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action (RFA) and a handover/downgrade checklist should be completed by the RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the customer, and prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR should be approved by the Head of Credit, and copied to the Head of Corporate FI and to the Branch/office where the facility was originally sanctioned. This initial CLR should highlight any documentation issues, facility structuring weaknesses, proposed workout strategy, and should seek approval for any loan loss provisions that are necessary.

Recovery Units should ensure that the following is carried out when an account is classified as Sub Standard or worse: o Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate authorities. o CIB reporting is updated according to Bangladesh Bank guidelines and the borrower's Risk Grade is changed as appropriate o Loan loss provisions are taken based on Force Sale Value (FSV). o Prompt legal action is taken if the borrower is uncooperative

IDLC Perspective:

IDLC Finance Limited has partial compliance in this regard. Neither the relationship managers (RMs) in IDLC prepare any Request for Action (RFA) and handover/downgrade checklist, nor do the SAM personnel prepare any Classified Loan Review (CLR). Instead all the communications are done through emails. Generally, when any client starts to default i.e. to pay installments, then the Operations department informs the corresponding RM and the SAM team through email and then the non performing loan is monitored by the SAM personnel. The SAM department follows different recovery action procedures based on the age of overdue which are mentioned in the following table:

|Age of over due |Steps Followed |
| | |
|1-3 Months |Immediate phone calls |
| |Try to get a specific commitment from the overdue clients. Committed date should not be more than 7 days |
| |If there is no response within 7 days, the clients are called again in order to ascertain reasons for delay |
| |and obtain another specific date for payment |
| |In case of failure to reach the client through phone calls within 7 days from the due date of payment, |
| |reminder letters are sent and office of the client is visited |
|4-5 Months |Try to get a specific date through phone calls and also through repeated visits |
| |Try to get written commitments along with instruments (if required) |
| |Reminder letters are sent wnhin 3 days of default of fourth installment. If required, the reminder letter |
| |contains a clause indicating that legal actions may follow. |

| |The security status of the client is reviewed and based on the nature of the default the following measures |
|Above 5 Months |are taken: |
| | |
| |Final reminder is sent to the defaulting client, allowing them time up to 15 days to pay the overdue. The |
| |letter contains various measures that would be taken, if deadline for payment expires, as per the law of the |
| |land or regulatory authorities |
| |In case of no development, legal notices are sent through lawyers after receipt of senior management's |
| |approval |
| |Based on the nature of the default, Collection Agents/repossession Agents may be appointed with management |
| |approval |
| | |
| |If no improvement takes place after the above actions, the following measures are initiated |
| | |
| |Legal actions as per the merit of the security of the defaulting clients |
| | |
| |1. Filing case under the Negotiable Instrument Act |
| |2. Filing case in the Money Loan Court or in the Bankruptcy Court |
| | |
| |The name of the defaulting borrower is circulated to their banks and also to other banks and Fls |

11.2 RESCHEDULING

Fl's should follow clear guideline for rescheduling of their problem accounts and monitor accordingly rescheduling of problem accounts should be aimed at a timely resolution of actual or expected problem accounts with a view to effecting maximum recovery within a reasonable period of time.

Purpose of Rescheduling: ➢ To provide for borrower's changed business condition. ➢ For better overdue management ➢ For amicable settlement of problem accounts

IDLC Perspective:

IDLC Finance Limited is in full compliance in this respect with the central bank CRM guideline for the Fls.

Cases for Rescheduling:
Rescheduling is considered only under the following cases: • Overdue has been accumulated or likely to be accumulated due to change in business conditions for internal or external factors and the borrower is no way able to pay up the entire accumulated overdue in a single shot. • The borrower should be in operation and the assets have a productive value and life for servicing the outstanding liabilities. • The borrower must be capable of and willing to pay as per revised arrangement.

Modes of Rescheduling: Rescheduling can be done through adopting one or more of the following means: • Extension of financing term keeping lending rate unchanged • Reduction of lending rate keeping financing term unchanged • Both reductions of lending rate and extension of financing term • Bodily shifting of payment schedule • Deferment of payment for a short-term period with or without extending the maturity date (this may be a temporary relief to prevent the inevitable collapse of a company).
However, under any circumstances reschedule period must not exceed economic life of the asset.

Post Rescheduling Requirements:

• Rescheduling of a contract must require prior approval of CRM and management • All rescheduled accounts are to be kept in a separate watch list so that post rescheduling performance of the accounts can be monitored closely • An individual account cannot be rescheduled more than three times

11.3 Non Performing Loan (NPL) Monitoring

On a quarterly basis, a Classified Loan Review (CLR) (the reporting format specified by the central bank) should be prepared by the RU Account Manager to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modify the Fl's strategy as appropriate. The Board may decide the level of authority for approving the CLR based on percentage of equity.

IDLC Perspective:

IDLC Finance Limited has partial compliance in this regard. The personnel of SAM department, responsible for monitoring non-performing loans, do not prepare any Classified Loan Review (CLR) report that is in violence of the central bank guideline. However they follow a very structured "Recovery Action" plan, for which the SAM team has been able to show improved performance that, is obvious from the ratios and trends shown in the next page. This was mainly possible due to strictly following more conservative policies which is also encouraged by the central bank.
The NPL ratio decreased to 4.62% in 2007 from 8.38% in 2002. The NPL ratio in December 2007 was the lowest among the 12-month NPL ratios in 2007.

|YEAR |NPL |
| 2002 |8.38% |
|2003 |7.01% |
|2004 |5.93% |
|2005 |5.00% |
|2006 |4.74% |
|2007 |4.62% |

Table 11.2 NPL Ratio Trend (Yearly)

|Month |NPL Ratio |
|January |5.20% |
|February | 5.24% |
|March |5.39% |
|April |5.51% |
|May |7.11% |
|June |5.00% |
|July |5.69% |
|August |6.00% |
|September |6.35% |
|October |5.82% |
|November |5.90% |
|December |4.62% |

11.4 NPL Provisioning and Write Off

The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off of bad and doubtful debts, and suspension of interest should be followed in