CREDIT RISK GRADING MANUAL NBFI. Non Banking Financial Institution

Transcription

1 CREDIT RISK GRADING MANUAL NBFI Non Banking Financial Institution JUNE, 2007 Credit Risk Grading Manual - NBFI 1

2 CREDIT RISK GRADING MANUAL - NBFI Bangladesh Bank vide its BRPD Circular No.18 dated December 11, 2005 advised all Banks to implement Credit Risk Grading for their borrowing clients as per Credit Risk Grading Manual. The Credit Risk Grading Manual released earlier was applicable only in case of lending to commercial clients. The area which required to be focused was how to risk rate an obligor if it is a Banking Company or a Non-Banking Financial Institution. Basel II compliance also calls for risk rating of the obligor which includes all clients like commercial, banking and non-banking financial institution. Keeping the above objective in mind, Credit Risk Grading Manual for Non Banking Financial Institution (NBFI) has been developed. The Credit Risk Grading Manual for NBFI was completed and reviewed by a review committee consisting of members from NCBs, PCBs, FCBs and NBFIs who are specifically involved in credit approval function.. Special thanks to Mr. Niaz Habib, Deputy Managing Director, United Commercial Bank Limited for his endeavor and time in preparing this guidelines. This Credit Risk Grading Manual NBFI is now made mandatory and will be applicable for all exposures extended to a Non Banking Financial Institution by a Bank. Md. Nazrul Huda Deputy Governor June Credit Risk Grading Manual - NBFI 2

3 Credit Risk Grading Manual - NBFI 3

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5 Table of Contents Contents Page Preamble... 6 Introduction... 7 Definition of Credit Risk Grading (CRG) 8 Functions of Credit Risk Grading... 8 Use of Credit Risk Grading.. 8 Number and Short Name of Grades Used in the CRG.. 8 Credit Risk Grading Definitions. 9 Superior - (SUP) Good - (GD) Acceptable - (ACCPT) Marginal/Watchlist - (MG/WL) Special Mention - (SM) Sub standard - (SS) Doubtful - (DF). 11 Bad & Loss (8).. 11 Regulatory Credit Risk Grading of NBFI How to Compute Credit Risk Grading of NBFI Step I Identify all the Principal Risk Components. 12 Step II Allocate weightages to Principal Risk Components. 12 Flow chart- Credit Risk- Principal Risk Components (PRC) 13 Step III Establish the Key Parameters. 14 Financial Spread Sheet (FSS). 17 Step IV Assign weightages to each of the Key Parameters. 17 Step V Input data to arrive at the score on the key parameters 17 Step VI Arrive at the Credit Risk Grading based on total score obtained. 18 Credit Risk Grading Process.. 18 Early Warning Signals (EWS). 19 Exceptions to Credit Risk Grading 20 Credit Risk Grading Review 21 MIS on Credit Risk Grading 21 Appendices Appendix-A Financial Spread Sheet (FSS) - NBFI Appendix-B Credit Risk Grading Score Sheet - NBFI Appendix-C Data Collection Checklist - NBFI Appendix-D Limit Utilization Form - NBFI Appendix-E Credit Risk Grading Form - NBFI Appendix-F MIS Reports on Credit Risk Grading - NBFI Enclosed: MS Excel file named, CRG - Score Sheet - NBFI in CD ROM for use. Credit Risk Grading Manual - NBFI 5

6 Preamble Credit Risk Grading Manual of Bangladesh Bank was circulated by Bangladesh Bank vide BRPD Circular No. 18 dated December 11, 2005 on Implementation of Credit Risk Grading Manual which is primarily in use for assessing the credit risk grading before a bank lend to its borrowing clients. Since the nature of business as well as leverage level of Banks and Non Banking Financial Institutions is different from that of other borrowing clients, the need for a separate Credit Risk Grading Manual has been felt. Keeping this in mind and with a view to properly risk rate a NBFI in order to set up counter party limits for providing credit products extended by one bank to a NBFI this Credit Risk Grading Manual for the NBFI has been produced. The Credit Risk Grading Manual developed for rating a non banking financial institution shall be an effective tool to help a Bank to take a sound decision in analyzing credit risk on a non banking financial institution and to set up a credit limit for money market and other business operations. This Credit Risk Grading Manual has taken into consideration the important aspects required in order to correctly assess the operation of a Non Banking Financial Institution and will ensure a very objective approach to credit risk grading and is easier to implement. All Banks should adopt this credit risk grading system outlined in this manual for assessing the credit risk in case they need to take exposure on a non banking financial institution. Credit Risk Grading Manual - NBFI 6

7 INTRODUCTION Credit Risk Grading is an important tool for credit risk management as it helps a Banks to understand various dimensions of risk involved in different credit transactions. 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 pricing for a particular exposure, what should be the extent of exposure, what should be the appropriate credit facility and the various risk mitigation tools. At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. Having considered the significance and necessity of credit risk grading for a non banking financial institution, it becomes imperative to develop a credit risk grading model which meets the objective outlined above. This manual describes in detail the process required to spread and analyze the financial statement of a non banking financial institution (NBFI), identify the critical risk elements, mitigate these risk and provide appropriate weightage and marking to the risk element and thereby arrive at a systematic risk grading for an effective credit decision. Credit Risk Grading Manual - NBFI 7

8 DEFINITION OF CREDIT RISK GRADING (CRG) 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. FUNCTIONS OF CREDIT RISK GRADING Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns. USE 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 an individual obligor and the credit portfolio as a whole. As evident, the CRG outputs would be relevant for credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (creditspread) and specific features of the credit facility. Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile. It is also relevant for portfolio level analysis. NUMBER AND SHORT NAME OF GRADES USED IN THE CRG The proposed CRG scale for a non banking financial institution (NBFI) consists of 8 categories with Short names and Numbers are provided as follows: GRADING SHORT NAME NUMBER Superior SUP 1 Good GD 2 Acceptable ACCPT 3 Marginal/Watchlist MG/WL 4 Special Mention SM 5 Sub standard SS 6 Doubtful DF 7 Bad & Loss BL 8 Credit Risk Grading Manual - NBFI 8

9 CREDIT RISK GRADING DEFINITIONS A clear definition of the different categories of Credit Risk Grading is given as follows: Superior - (SUP) - 1 Strongest NBFI Excellent Financials Healthy and productive franchises Excellent operating environment Exceptionally strong capabilities for timely payment of financial commitments Highly unlikely to be adversely affected by foreseeable events Credit facilities, which are fully secured i.e. fully cash covered or near cash. Credit facilities fully covered by government guarantee. Credit facilities fully covered by the guarantee of a top tier international Bank. Aggregate Score of based on the Risk Grade Score Sheet Good - (GD) - 2 Strong NBFI Very good Financials Healthy and productive franchises Excellent operating environment Strong capability for timely payment of financial commitments Very low probability to be adversely affected by foreseeable events Excellent liquidity and low leverage. Well established cliental base and strong market share. Very good management skill & expertise. Credit facilities fully covered by the guarantee of a top tier local Bank. Aggregate Score of based on the Risk Grade Score Sheet Acceptable - (ACCPT) - 3 Solid NBFI Good Financials Valuable and operating business franchises Stable operating environment Above average capacity for timely payment of financial commitments Low probability to be adversely affected by foreseeable events Not as strong as GOOD Grade NBFIs but still demonstrate consistent earnings and have a good track record. Adequate liquidity and earnings. Acceptable management Aggregate Score of based on the Risk Grade Score Sheet Credit Risk Grading Manual - NBFI 9

10 Marginal/Watchlist - (MG/WL) - 4 Average NBFI Average Financials Valuable and defensible business franchises Average operating environment Average capability for timely payment of financial commitments Financial commitments although being met but continuity of this may be contingent upon a sustained, favorable business and economic environment 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 and/or inconsistent earnings. Weaker business credit & early warning signals of emerging business credit detected. The NBFI incurs a loss Aggregate Score of based on the Risk Grade Score Sheet Special Mention - (SM) - 5 Weak financial strength Weak financial fundamentals Vulnerable business franchises Unstable operating environment Financial commitments although being met but continuity of this may be in question This grade has potential weaknesses that deserve 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), An Aggregate Score of based on the Risk Grade Score Sheet. Credit Risk Grading Manual - NBFI 10

11 Substandard - (SS) - 6 Very weak intrinsic financial strength. Severe management problems exist. Requiring periodic outside support. Capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Bangladesh Bank criteria for Sub-Standard credit shall apply. An Aggregate Score of based on the Risk Grade Score Sheet. Doubtful - (DF) - 7 Financial fundamentals are seriously deficient. Highly unstable operating environment. Default is a real possibility. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss. Bangladesh Bank criteria for Doubtful credit shall apply. An Aggregate Score of based on the Risk Grade Score Sheet. Bad & Loss - (BL) - 8 Credit of this grade has long outstanding with no progress in 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. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Bangladesh Bank criteria for Bad & Loss credit shall apply. An Aggregate Score of less than 24 based on the Risk Grade Score Sheet. REGULATORY CREDIT GRADING OF THE NBFI Irrespective of credit score obtained by a particular NBFI and irrespective of credit risk rating assigned to a particular NBFI in line with this Manual, grading of any NBFI by the Bangladesh Bank inferior to this rating shall be mandatory and all banks should adjust its credit rating in line with Bangladesh Bank rating (if any). This means that if a credit rating by Bangladesh Bank is inferior then the credit rating as arrived as per this Manual then the Bangladesh Bank credit rating for the NBFIs shall prevail and the lender Bank has to adjust its credit rating accordingly. Grading of the classified names should be in line with Bangladesh Bank guidelines on classified accounts. Credit Risk Grading Manual - NBFI 11

12 HOW TO COMPUTE CREDIT RISK GRADING OF A NBFI The following step-wise activities outline the detail process for arriving at credit risk grading. Step I : Identify all the Principal Risk Components (Quantitative & Qualitative) Credit risk for counterparty may be broadly categories under Quantitative and Qualitative factors which arise from an aggregation of the following: QUANTITATIVE FACTOR: Capital Adequacy Asset Quality Earnings Quality Liquidity and Capacity of External Fund Mobilization Size of the Company & Market Presence QUALITATIVE FACTOR: Management Regulatory Environment & Compliance Risk Management Sensitivity to Market Risk Ownership (Share holding pattern) & Corporate Governance Accounting Quality Franchise Value Step II : Allocate weightages to Principal Risk Components According to the importance of risk profile, the following weightages are proposed for corresponding principal risks components (Quantitative and Qualitative factors). Principal Risk Components: Weight: QUANTITATIVE FACTOR: 60% Capital Adequacy 15% Asset Quality 15% Earnings Quality 15% Liquidity and Capacity of External Fund Mobilization 10% Size of the Company & Market Presence 5% QUALITATIVE FACTOR: 40% Management 10% Regulatory Environment & Compliance 10% Risk Management 5% Sensitivity to Market Risk 5% Ownership (Share holding pattern) & Corporate Governance 5% Accounting Quality 3% Franchise Value 2% The flow chart shown below also reflects the weightage provided for the Principal Risk Components (PRC): Credit Risk Grading Manual - NBFI 12

13 CREDIT RISK GRADING (PRC) Quantitative Factor (60%) Qualitative Factor (40%) Capital Adequacy (15%) Asset Quality (15%) Earnings Quality (15%) Management (10%) Regulatory Environment & Compliance (10%) Ownership & Corporate Governance (5%) Accounting Quality (3%) Liquidity & Capacity of External Fund Mobilization (10%) Risk Management (5%) Franchise Value (2%) Size of the Company & Market Presence (5%) Sensitivity to Market Risk (5%) Credit Risk Grading Manual - NBFI 13

14 Step III : Establish the Key Parameters Once weightage are allocated to the Principal Risk Components (Quantitative and Qualitative Factors) the next task is to arrive at key parameters corresponding to the Principal Risk Components. Principal Risk Components: QUANTITATIVE FACTOR: Capital Adequacy Asset Quality Earnings Quality Liquidity and Capacity of External Fund Mobilization Size of the Company & Market Presence Key Parameters: Key parameters corresponding to the Principal Risk Components of Quantitative Factors are detailed as follows: Each of the key parameters mentioned below shall be evaluated, analyzed and reviewed in order to conclude on the credit risk grading of a non banking financial institution and which are as follows: Key Parameters for Capital Adequacy Company s plan to raise equity to support its growth (Internal Capital Generation) Minimum Equity Requirement set by Bangladesh Bank, Company s leverage ratio is satisfactory Dividend policy of the Company Key Parameters for Asset Quality Pre-approval and post approval process are in place and effective Credit risk Grading of client in place and effective Portfolio Management System Level of non performing loans Amount of largest exposure to a single client/group, who are these and how many are nonperforming Sector from where the gross NPL are coming from Are classified loans being followed regularly with clear action plan for recovery? Portfolio Diversity (Industry wise breakdown of loans) & sectoral Concentration Nature of security/collateral and the frequency of valuation Quality of non-industrial lending Key Parameters for Earnings Quality Level of earnings Diversity of earnings Return on Assets (ROA) Return on Equity (ROE) Interest Rate Management, Interest rate policy (extent of change in lending and deposit rates and how this is likely to affect margins and profitability) Average cost of fund, Average lending rate Average net spread Net Interest Income Margin (NIIM) trend is satisfactory Yield per taka staff cost Credit Risk Grading Manual - NBFI 14

15 Key Parameters for Liquidity and Capacity of External Fund Mobilization Statutory Liquidity Reserve (SLR), Cash Reserve Requirement (CRR) & Loan to Deposit Ratio compliance Asset liability maturity structure Required level of liquidity is maintained through proper management of maturity mismatches Company s liquidity ratio is satisfactory Core asset funded by core liabilities Impact on interest rate volatility on deposit and its trend Ability to raise fund through stable sources in cost effective manner Credibility of funding sources in distress situation Key Parameters for Size of the Company & Market Presence: Number of branch network and employees Level of automation Products and services offered Principal Risk Components: QUALITATIVE FACTOR: Management Regulatory Environment & Compliance Risk Management Sensitivity to Market Risk Ownership (Share holding pattern) & Corporate Governance Accounting Quality Franchise Value Key Parameters: Key parameters corresponding to the Principal Risk Components of Qualitative Factors are detailed as follows: Each of the key parameters mentioned below shall be evaluated, analyzed and reviewed in order to conclude on the credit risk grading of a banking company and which are as follows: Key Parameters for Management: Human resource based institutions Quality of Management (details of Senior Management, background of MD and other top executives) Experience and educational background of the senior, mid level and junior management Management Philosophy (Vision & Mission) Human resource development plans Quality of training being offered Management operating efficiency calculated on the basis of earning Emphasis placed on system & process based banking Staff turnover Emphasis to Information Technology and staff knowledge in this area Credit Risk Grading Manual - NBFI 15

16 Key Parameters for Regulatory Environment & Compliance: Policy on loan classification and provisioning Policy on large loans Loan against Shares, Debentures etc. Disclosure requirement for Company Delegation of power at operating level Instructions for compliance of provisions of Money Laundering Prevention Act, 2002 Foreign Exchange Risk Management Company operating satisfactorily in compliance of SEC and other related bodies Internal Control and Compliance mechanism Key Parameters for Risk Management: Implementation of risk management in the areas of Credit Risk Implementation of risk management in the areas of Operational Risk Implementation of risk management in the areas of Market Risk Key Parameters for Sensitivity to Market Risk Degree to which changes in interest rates can adversely affect company s earnings. Borrowing of long-term funds at fixed rate are properly matched with the interest rate on Company's lease recovery plan Changes in foreign exchange rate materially affect company s earnings Key Parameters for Ownership (Share holding Pattern) & Corporate Governance: Ownership and composition of Board (current shareholding with names of promoters) Conflict of interest issues in the operational management Personal policy and employee satisfaction Application of information technology in the system Key Parameters for Accounting Quality: Policies for income recognition Provisioning and valuation of investment are examined Quality of Auditors Key Parameters for Franchise Value: Joint Venture Partner or Strategic Alliance Management Contract or Technical Collaboration Alliance/arrangement with World Bank/ADB/IFC/SEDF or any awards/certification/recognition Credit Risk Grading Manual - NBFI 16

17 FINANCIAL SPREAD SHEET (FSS) Before evaluation of the risk element of key parameters it is required to obtain Audited Financial Statement of a non banking financial institution (NBFI) for at least 3 years period and should be spread in the Financial Spread Sheet which will help to properly analyze the financial trend of a particular NBFI on whom exposures are being taken. A Financial Spread Sheet (FSS) has been developed which may be used for analyzing the credit risk elements of a non banking financial institution from financial point of view. The FSS is well designed and programmed software having two parts. Input and Output Sheets. The financial numbers of a non banking financial institution (NBFI) need to be inputted in the Input Sheets which will then automatically generate the Output Sheets. Spread Sheet with file named Financial Spread Sheet - NBFI is attached as Appendix - A. Step IV : Assign weightages to each of the key parameters. Once the above mentioned key risk parameters are evaluated, analyzed and reviewed properly the next step will be to further assign weightage against each key parameter depending on its strength and merits. The weightage assigned to the Principal Risk Components and its corresponding key parameters are shown in score sheet with file named CRG - Score Sheet - NBFI is enclosed as Appendix - B. Once the above mentioned key risk parameters are identified the next step will be to assign points to each key parameter depending on their importance and standing. Step V : Input data to arrive at the score on the key parameters. After the risk identification & weightage assignment process (as mentioned above), the next steps will be to input actual score obtained by the NBFI (under review process) against the key parameters in the score sheet to arrive at the total scores obtained. This manual also provides a well programmed MS Excel based credit risk scoring sheet to arrive at a total score on each NBFI being reviewed. The excel program requires inputting data accurately in particular cells for input and will automatically calculate the risk grade for a particular obligor based on the total score obtained. The following steps are to be followed while using the MS Excel program. a) Open the MS XL file named, CRG - Score Sheet - NBFI b) The entire XL sheet named, CRG is protected except the particular cells to input data. c) Input data accurately in the cells which are colored LIGHT BLUE. d) All the cells provided for input must be filled in order to arrive at accurate risk grade. Also enclosed is the MS Excel file named, CRG - Score Sheet - NBFI in CD ROM for use. Credit Risk Grading Manual - NBFI 17

18 Step VI : Arrive at the Credit Risk Grading based on total score obtained. The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor (i.e. a non banking financial institution - NBFI). Number Risk Grading Short Name Score 1 Superior SUP Credit facilities fully cash covered (100%) or near cash. Government guarantee International Bank guarantee 2 Good GD Acceptable ACCPT Marginal/Watchlist MG/WL Special Mention SM Sub standard SS Doubtful DF Bad & Loss BL < 25 CREDIT RISK GRADING PROCESS Credit Risk Grading should be completed by a Bank for its counterparty i.e. a non banking financial institution for facilities extended to them. If any credit facilities are extended to a non banking financial institution against 100% cash covered or near cash covered securities or covered by Government Guarantee or Guarantee by a top tier International Bank then the Credit Risk Grading should be Superior - 1(SUP-1) and in that case the CRG score sheet is not required. Credit risk grading matrix would be useful in analyzing credit proposal, new or renewal for regular limits or specific transactions, if basic information on a borrowing client to determine the degree of each factor is a) readily available, b) current, c) dependable, and d) parameters/risk factors are assessed judiciously and objectively. The Relationship Manager as per Data Collection Checklist as shown in Appendix - C should collect required information. Relationship Manager should ensure to correctly fill up the Limit Utilization Form as shown in Appendix - D in order to arrive at a realistic earning status for the borrower. Key Risk Parameters are to be evaluated and weighted very carefully, on the basis of most upto-date and reliable data and complete objectivity must be ensured to assign the correct grading. Credit Risk Grading Manual - NBFI 18

19 Credit risk grading exercise should be originated by Relationship Manager and should be an ongoing and continuous process. Relationship Manager shall complete the Credit Risk Grading Score Sheet and shall arrive at a risk grading and document it as per Credit Risk Grading Form as shown in Appendix - E which shall then be concurred by a Credit Officer. All credit proposals whether new, renewal or specific facility should consist of a) Financial Spread Sheet (FSS), b) Data Collection Checklist, c) Limit Utilization Form d) Credit Risk Grading Score Sheet, and e) Credit Risk Grading Form. The credit officers then would pass the approved Credit Risk Grading Form to Credit Administration Department and Corporate Banking/Line of Business/Recovery Unit for updating their MIS/record. The appropriate approving authority through the same Credit Risk Grading Form shall approve any subsequent change/revision i.e. upgrade or downgrade in credit risk grade. EARLY WARNING SIGNALS (EWS) Early Warning Signals (EWS) indicate risks or potential weaknesses of an exposure requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects in the NBFI s assets at some future date with a likely prospect of being downgraded to classified assets. Early identification, prompt reporting and proactive management of Early Warning Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis. Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Bank s interest. The symptoms of early warning signals as mentioned below are by no means exhaustive and hence, if there are other concerns, like breach of loan covenants or adverse market rumors that warrant additional caution, a Credit Risk Grading Form (Appendix - E) should be presented. Credit Risk Grading Manual - NBFI 19

20 Irrespective of credit score obtained by any obligor (i.e. a NBFI) as per the proposed risk grade score sheet, the grading of the account highlighted as Early Warning Signals (EWS) accounts shall have the following risk symptoms. a) Marginal/Watchlist (MG/WL - 4): if - Any loan is past due/overdue for 60 days and above but less than 90 days. Frequent drop in security value or shortfall in drawing power exists if credit facilities are based entirely on cash covered or near cash covered basis. b) Special Mention (SM - 5): if - Any loan is past due/overdue for 90 days and above but less than 180 days Major document deficiency prevails. A significant petition or claim is lodged against the obligor (i.e. a NBFI). The Credit Risk Grading Form of accounts having Early Warning Signals should be completed by the Relationship Manager and sent to the approving authority in Credit Risk Management Department. The Credit Risk Grading should be updated as soon as possible and no delay should be there in referring Early Warning Signal accounts or any problem accounts to the Credit Risk Management Department for their early involvement and assistance in recovery. EXCEPTIONS TO CREDIT RISK GRADING Head of Credit Risk Management may also downgrade credit risk grading of a non banking financial institution in the normal course of inspection or during the periodic portfolio review. In such event, the Credit Risk Grading Form will then be filled up by Credit Risk Management Department and will be referred to Corporate Banking/Line of Business/Credit Administration Department/Recovery Unit for updating their MIS/records. Recommendation for upgrading of an account has to be well justified by the recommending officers. Essentially complete removal of the reasons for downgrade should be the basis of any upgrading. In case an account is rated Marginal/Watchlist, Special Mention or unacceptable credit risk as per the risk grading score sheet, this may be substantiated and credit risk may be accepted if the exposure is additionally collateralized through cash collateral, good tangible collaterals or strong guarantees. These are exceptions and should be exceptionally approved by the appropriate approving authority. Credit Risk Grading Manual - NBFI 20

21 Whenever required an independent assessment of the credit risk grading of an individual account may be conducted by the Head of Credit Risk Management or by the Internal Auditor documenting as to why the credit deteriorated and also pointing out the lapses. If a Bank has its own well established risk grading system to risk rate a Non Banking Financial Institution equivalent to the proposed credit risk grading or stricter, then they will have the option to continue with their own credit risk grading system. CREDIT RISK GRADING REVIEW Credit Risk Grading for each obligor should be assigned at the inception of lending and should be periodically updated. Frequencies of the review of the credit risk grading are mentioned below; Number Risk Grading Short Review frequency (at least) 1 Superior SUP Annually 2 Good GD Annually 3 Acceptable ACCPT Annually 4 Marginal/Watchlist MG/WL Half yearly 5 Special Mention SM Quarterly 6 Sub standard SS Quarterly 7 Doubtful DF Quarterly 6 Bad & Loss BL Quarterly MIS ON CREDIT RISK GRADING Bank should have comprehensive MIS reports on credit risk grading to evaluate its exposure on a non banking financial institution. Format of such MIS reports on credit risk grading has been presented in Appendix - F. MIS reports as mentioned above should be prepared and circulated at least on a quarterly basis. Credit Risk Grading Manual - NBFI 21

22 APPENDIX - A FINANCIAL SPREAD SHEET - NBFI Credit Risk Grading Manual - NBFI 22

23 FINANCIAL SPREAD SHEET - NBFI PROFIT & LOSS ACCOUNT INTERNATIONAL LEASING Figures are in Thousand Taka AUDITOR Audited Audited Audited ANALYST PERIOD 31-Dec Dec Dec-05 REVENUE INCOME FROM LEASE FINANCE 342, ,859 INCOME FROM TERM FINANCE 103, ,120 INCOME FROM SHORT TERM FINANCE INCOME FROM SALE OF SECURITIES/DIVIDEND INTEREST INCOME ON DEPOSITS FEES INCOME, COMMISSIONS & OTHERS FOREIGN EXCHANGE GAIN OTHER OPERATING INCOME 34,576 55,602 INCOME FROM HIRE PURCHASE OPERATING EXPENSES DEPRECIATION ON LEASED ASSETS DEPRECIATION ON FIXED ASSETS 2,360 2,440 FINANCIAL EXPENSES 278, ,503 SALARIES/BENEFITS & ALLOWANCES ADMINISTRATIVE/MANAGEMENT EXPENSES 19,053 21,820 AMORTIZATION OF INTANGIBLE ASSETS OTHER OPERATING EXPENSES 4,978 31,982 NON-OPERATING INCOME PROFIT FROM SALE OF FIXED ASSETS INCOME FROM DIVIDEND OTHER NON-OPERATING INCOME ALLOWANCE FOR D'FUL A/C & FUTURE LOSSES 35,000 50,000 PROVISION FOR REVENUE SUSPENSION CURRENT TAX PROVISION DEFERRED TAX PROVISION 18,164 (12,000) ADD:RETAINED EARNINGS CARRIED FORWARD 56, ,749 LESS:PROPOSED DIVIDEND 94,733 LESS:TRANSFER TO STAT.RESERVE LESS:GENERAL RESERVE 23,510 29,590 LESS:DIVIDEND EQUALISATION FUND 31,578 LESS:OTHERS 20,841 RETAINED EARNINGS 0 102, ,262 BALANCE TRUE TRUE TRUE Difference (if any) INTERNATIONAL LEASING 31-Dec Dec Dec-05 EXTERNAL RATING (MANDATORY) MOODY/S&P RATING CONTINGENT LIABILITIES NUMBER OF SHARES 1,578 1,578 NUMBER OF BRANCH NUMBER OF EMPLOYEES PROVISION FOR CLASSIFIED LOANS 89, ,500 NON PERFORMING ASSET Credit Risk Grading Manual - NBFI Page 23

24 FINANCIAL SPREAD SHEET - NBFI BALANCE SHEET INTERNATIONAL LEASING Figures are in Thousand Taka AUDITOR Audited Audited Audited ANALYST PERIOD 31-Dec Dec Dec-05 CURRENT ASSETS CASH & CASH EQUIVALENT 89,813 60,593 CORRESPONDENCE (BAL. OTHER BANKS) CURRENT MATURITY OF LEASED ASSETS 850, ,915 CURRENT MATURITY OF TERM FINANCE SHORT TERM FINANCE LESS: PROVISION FOR SHORT TERM FINANCE CALL & TERM PLACEMENT LOANS & ADVANCES AR AGAINST INVESTMENT IN LEASE AND FINANCES 483, ,032 ADVANCE, DEPOSITS & PREPAYMENTS 17,894 18,641 ADVANCE INCOME TAX BILLS DISCOUNTED & PURCHASED 2,500 INVESTMENTS IN SHARES & DEBENTURES(TRADABLE) LESS: PROVISION FOR SHARES & DEB.(TRADABLE) TREASURY BILLS BRANCH ADJUSTMENTS OTHER CURRENT ASSETS CURRENT MATURITY OF DIRECT FINANCE 1,470, ,493 LONG TERM ASSETS FIXED ASSETS - AT COST LESS DEPRECIATION 6,154 5,632 LEASED ASSET 233, ,654 LESS: PROVISION FOR LEASED ASSET TERM LOAN LESS: PROVISION FOR TERM LOAN TERM LOANS/TERM FINANCE (NET OF CM) ADVANCE AGAINST ASSETS TO BE LEASED GROSS LEASES RENTAL RECEIVABLES(NET OF CM) 1,389,703 1,962,920 DEFERRED REVENUE EXPENDITURE INTANGIBLE ASSETS SUNDRIES INVESTMENTS IN SHARES & DEB.(NON-TRADABLE) LESS: PROVISION FOR SHARES & DEB.(NON-TRADABLE) OTHER LONG TERM INVESTMENT 38,421 36,407 LESS: PROVISION FOR OTHER LONG TERM INVESTMENT DIRECT FINANCE - NET OF CM 338, ,198 Credit Risk Grading Manual - NBFI Page 24

25 FINANCIAL SPREAD SHEET - NBFI BALANCE SHEET INTERNATIONAL LEASING Figures are in Thousand Taka AUDITOR Audited Audited Audited ANALYST PERIOD 31-Dec Dec Dec-05 CURRENT LIABILITIES CURRENT MATURITY OF LONG TERM LOANS 443, ,606 CURRENT MATURITY OF ADVANCE INSTALMENT CURRENT MATURITY OF LEASE RENTAL DEPOSITS 17,569 17,300 CURRENT MATURITY OF DEPOSITS 518, ,398 SHORT TERM LOANS/OVERDRAFT/BORROWINGS 1,424, ,137 PROVISION FOR TAXATION LIABILITY FOR OTHER FINANCES LIABILITY FOR EXPENSES 43,578 72,685 BILLS & OTHER PAYABLES 44,273 33,123 UNDISTRIBUTED DIVIDEND UNEARNED INCOME INTEREST SUSPENSE ACCOUNT 26,181 OTHER CURRENT LIABILITIES 291, ,000 LONG TERM LIABILITIES LONG TERM LOANS (NET OF CURRENT MATURITY) 1,002,172 1,578,146 REFINANCE FROM BANGLADESH BANK OTHER LONG TERM FUNDS (IDA FUND) TERM DEPOSITS 521, ,788 LEASE RENTAL DEPOSITS/ADVANCES PROMISSORY NOTES ADVANCE INSTALMENTS ON INVESTMENT BONDS CASH SECURITY 108, ,825 DEFERRED TAX LIABILITY 82,000 70,000 DEFERRED LIABILITY-EMPLOYEE GRATUITY 1,254 1,697 PORTFOLIO INVESTORS FUND 182 LIABILITY UNDER FINANCE LEASE PROVISION FOR DOUBTFUL A/C AND FUTURE LOSSES 89, ,500 CAPITAL FUND & RESERVES SHARE CAPITAL/PAID UP CAPITAL 126, ,889 SHARE MONEY DEPOSIT SHARE PREMIUM CAPITAL FUNDS STATUTORY RESERVES GENERAL RESERVE 70, ,000 PROPOSED DIVIDEND 31,577 85,266 DIVIDEND EQUALISATION RESERVES ASSET REVALUATION PREFERENCE SHARES SUBORDINATED LOANS RETAINED EARNINGS 102, ,262 BALANCE TRUE TRUE TRUE Difference (if any) Credit Risk Grading Manual - NBFI Page 25

26 FINANCIAL SPREAD SHEET - NBFI INTERNATIONAL LEASING Figures are in Thousand Taka AUDITOR Audited % Audited % Audited % % Var ANALYST PERIOD 31-Dec-03 TOR 31-Dec-04 TOR 31-Dec-05 TOR B/(W) REVENUE INCOME FROM LEASE FINANCE , , INCOME FROM TERM FINANCE , , INCOME FROM SHORT TERM FINANCE INCOME FROM SALE OF SECURITIES/DIVIDEND INTEREST INCOME ON DEPOSITS FEES INCOME, COMMISSIONS & OTHERS FOREIGN EXCHANGE GAIN OTHER OPERATING INCOME , , INCOME FROM HIRE PURCHASE TOTAL OPERATING REVENUE , , OPERATING EXPENSES DEPRECIATION ON LEASED ASSETS DEPRECIATION ON FIXED ASSETS 0 0 2, , FINANCIAL EXPENSES , , SALARIES/BENEFITS & ALLOWANCES ADMINISTRATIVE/MANAGEMENT EXPENSES , , AMORTIZATION OF INTANGIBLE ASSETS OTHER OPERATING EXPENSES 0 0 4, , TOTAL OPERATING EXPENSES , , TOTAL OPERATING INCOME , , NON-OPERATING INCOME PROFIT FROM SALE OF FIXED ASSETS INCOME FROM DIVIDEND OTHER NON-OPERATING INCOME TOTAL NON-OPERATING INCOME PROFIT BEFORE PROVISION & TAXES , , ALLOWANCE FOR D'FUL A/C & FUTURE LOSSE , , PROVISION FOR REVENUE SUSPENSION PROFIT BEFORE TAXES , , (6) CURRENT TAX PROVISION DEFERRED TAX PROVISION ,164 4 (12,000) (2) (166) NET PROFIT AFTER TAXES , , ADD:RETAINED EARNINGS CARRIED FORWAR , , LESS:PROPOSED DIVIDEND , LESS:TRANSFER TO STAT.RESERVE LESS:GENERAL RESERVE , , LESS:DIVIDEND EQUALISATION FUND , (100) LESS:OTHERS , (100) RETAINED EARNINGS , , Credit Risk Grading Manual - NBFI Page 26

27 FINANCIAL SPREAD SHEET - NBFI INTERNATIONAL LEASING Figures are in Thousand Taka AUDITOR Audited % Audited % Audited % % Var ANALYST PERIOD 0 31-Dec-03 TBS 0 31-Dec-04 TBS 0 31-Dec-05 TBS B/(W) CURRENT ASSETS CASH & CASH EQUIVALENT 0 0% 89,813 2% 60,593 1% -33% CORRESPONDENCE (BAL. OTHER BANKS) 0 0% 0 0% 0 0% 0% CURRENT MATURITY OF LEASED ASSETS 0 0% 850,731 17% 758,915 13% -11% CURRENT MATURITY OF TERM FINANCE 0 0% 0 0% 0 0% 0% SHORT TERM FINANCE 0 0% 0 0% 0 0% 0% LESS: PROVISION FOR SHORT TERM FINANCE 0 0% 0 0% 0 0% 0% CALL & TERM PLACEMENT 0 0% 0 0% 0 0% 0% LOANS & ADVANCES 0 0% 0 0% 0 0% 0% AR AGAINST INVESTMENT IN LEASE AND FINANCES 0 0% 483,404 10% 804,032 14% 66% ADVANCE, DEPOSITS & PREPAYMENTS 0 0% 17,894 0% 18,641 0% 4% ADVANCE INCOME TAX 0 0% 0 0% 0 0% 0% BILLS DISCOUNTED & PURCHASED 0 0% 0 0% 2,500 0% 0% INVESTMENTS IN SHARES & DEBENTURES(TRADABLE) 0 0% 0 0% 0 0% 0% LESS: PROVISION FOR SHARES & DEB.(TRADABLE) 0 0% 0 0% 0 0% 0% TREASURY BILLS 0 0% 0 0% 0 0% 0% BRANCH ADJUSTMENTS 0 0% 0 0% 0 0% 0% OTHER CURRENT ASSETS 0 0% 0 0% 0 0% 0% CURRENT MATURITY OF DIRECT FINANCE 0 0% 1,470,836 30% 897,493 16% -39% 0 0 0% 0 0% 0 0% 0% TOTAL CURRENT ASSETS 0 0% 2,912,678 59% 2,542,174 44% -13% LONG TERM ASSETS FIXED ASSETS - AT COST LESS DEPRECIATION 0 0% 6,154 0% 5,632 0% -8% LEASED ASSET 0 0% 233,293 5% 597,654 10% 156% LESS: PROVISION FOR LEASED ASSET 0 0% 0 0% 0 0% 0% TERM LOAN 0 0% 0 0% 0 0% 0% LESS: PROVISION FOR TERM LOAN 0 0% 0 0% 0 0% 0% TERM LOANS/TERM FINANCE (NET OF CM) 0 0% 0 0% 0 0% 0% ADVANCE AGAINST ASSETS TO BE LEASED 0 0% 0 0% 0 0% 0% GROSS LEASES RENTAL RECEIVABLES(NET OF CM) 0 0% 1,389,703 28% 1,962,920 34% 41% DEFERRED REVENUE EXPENDITURE 0 0% 0 0% 0 0% 0% INTANGIBLE ASSETS 0 0% 0 0% 0 0% 0% SUNDRIES 0 0% 0 0% 0 0% 0% INVESTMENTS IN SHARES & DEB.(NON-TRADABLE) 0 0% 0 0% 0 0% 0% LESS: PROVISION FOR SHARES & DEB.(NON-TRADABLE 0 0% 0 0% 0 0% 0% OTHER LONG TERM INVESTMENT 0 0% 38,421 1% 36,407 1% -5% LESS: PROVISION FOR OTHER LONG TERM INVESTMEN 0 0% 0 0% 0 0% 0% DIRECT FINANCE - NET OF CM 0 0% 338,497 7% 606,198 11% 79% 0 0 0% 0 0% 0 0% 0% TOTAL LONG TERM ASSETS 0 0% 2,006,068 41% 3,208,811 56% 60% TOTAL ASSETS 0 0% 4,918, % 5,750, % 17% Credit Risk Grading Manual - NBFI Page 27

28 FINANCIAL SPREAD SHEET - NBFI INTERNATIONAL LEASING Figures are in Thousand Taka AUDITOR Audited % Audited % Audited % % Var PERIOD 31-Dec-03 TBS 31-Dec-04 TBS 31-Dec-05 TBS B/(W) CURRENT LIABILITIES CURRENT MATURITY OF LONG TERM LOANS 0 0% 443,359 9% 606,606 11% 37% CURRENT MATURITY OF ADVANCE INSTALMENT 0 0% 0 0% 0 0% 0% CURRENT MATURITY OF LEASE RENTAL DEPOSITS 0 0% 17,569 0% 17,300 0% -2% CURRENT MATURITY OF DEPOSITS 0 0% 518,369 11% 755,398 13% 46% SHORT TERM LOANS/OVERDRAFT/BORROWINGS 0 0% 1,424,651 29% 529,137 9% -63% PROVISION FOR TAXATION 0 0% 0 0% 0 0% 0% LIABILITY FOR OTHER FINANCES 0 0% 0 0% 0 0% 0% LIABILITY FOR EXPENSES 0 0% 43,578 1% 72,685 1% 67% BILLS & OTHER PAYABLES 0 0% 44,273 1% 33,123 1% -25% UNDISTRIBUTED DIVIDEND 0 0% 0 0% 0 0% 0% UNEARNED INCOME 0 0% 0 0% 0 0% 0% INTEREST SUSPENSE ACCOUNT 0 0% 0 0% 26,181 0% 0% OTHER CURRENT LIABILITIES 0 0% 291,000 6% 360,000 6% 24% 0 0 0% 0 0% 0 0% 0% 0 0 0% 0 0% 0 0% 0% TOTAL CURRENT LIABILITIES 0 0% 2,782,799 57% 2,400,430 42% -14% LONG TERM LIABILITIES LONG TERM LOANS (NET OF CURRENT MATURITY) 0 0% 1,002,172 20% 1,578,146 27% 57% REFINANCE FROM BANGLADESH BANK 0 0% 0 0% 0 0% 0% OTHER LONG TERM FUNDS (IDA FUND) 0 0% 0 0% 0 0% 0% TERM DEPOSITS 0 0% 521,632 11% 934,788 16% 79% LEASE RENTAL DEPOSITS/ADVANCES 0 0% 0 0% 0 0% 0% PROMISSORY NOTES 0 0% 0 0% 0 0% 0% ADVANCE INSTALMENTS ON INVESTMENT 0 0% 0 0% 0 0% 0% BONDS 0 0% 0 0% 0 0% 0% CASH SECURITY 0 0% 108,343 2% 159,825 3% 48% DEFERRED TAX LIABILITY 0 0% 82,000 2% 70,000 1% -15% DEFERRED LIABILITY-EMPLOYEE GRATUITY 0 0% 1,254 0% 1,697 0% 35% PORTFOLIO INVESTORS FUND 0 0% 0 0% 182 0% 0% LIABILITY UNDER FINANCE LEASE 0 0% 0 0% 0 0% 0% PROVISION FOR DOUBTFUL A/C AND FUTURE LOSSES 0 0% 89,500 2% 139,500 2% 56% 0 0 0% 0 0% 0 0% 0% TOTAL LONG TERM LIABILITIES 0 0% 1,804,901 37% 2,884,138 50% 60% TOTAL LIABILITIES 0 0% 4,587,700 93% 5,284,568 92% 15% CAPITAL FUND & RESERVES SHARE CAPITAL/PAID UP CAPITAL 0 0% 126,311 3% 157,889 3% 25% SHARE MONEY DEPOSIT 0 0% 0 0% 0 0% 0% SHARE PREMIUM 0 0% 0 0% 0 0% 0% CAPITAL FUNDS 0 0% 126,311 3% 157,889 3% 25% STATUTORY RESERVES 0 0% 0 0% 0 0% 0% GENERAL RESERVE 0 0% 70,409 1% 100,000 2% 42% PROPOSED DIVIDEND 0 0% 31,577 1% 85,266 1% 170% DIVIDEND EQUALISATION RESERVES 0 0% 0 0% 0 0% 0% ASSET REVALUATION 0 0% 0 0% 0 0% 0% PREFERENCE SHARES 0 0% 0 0% 0 0% 0% SUBORDINATED LOANS 0 0% 0 0% 0 0% 0% RETAINED EARNINGS 0 0% 102,749 2% 123,262 2% 20% TOTAL RESERVES AND SURPLUS 0 0% 204,735 4% 308,528 5% 51% TOTAL CAPITAL FUND & RESERVES 0 0% 331,046 7% 466,417 8% 41% TOTAL LIABILITIES & CAPITAL FUND & RESERVES 0 0% 4,918, % 5,750, % 17% Credit Risk Grading Manual - NBFI Page 28

29 FINANCIAL SPREAD SHEET -NBFI FINANCIAL INDICATORS - RATIOS INTERNATIONAL LEASING Figures are in Thousand Taka AUDITOR Audited Audited Audited ANALYST PERIOD 31-Dec Dec Dec-05 HIGHLIGHTS TOTAL ASSET 0 4,918,746 5,750,985 TOTAL CAPITAL FUND & RESERVES 0 331, ,417 TOTAL SHORT TERM PORTFOLIO TOTAL LEASE AND TERM LOAN PORTFOLIO 0 233, ,654 TOTAL DEPOSITS 0 521, ,788 NET PROFIT AFTER TAX 0 122, ,836 FUNDING & LIQUIDITY CURRENT RATIO - CURRENT ASSETS TO CURRENT LIAB. (%) 0% 105% 106% LONG TERM LIABILITIES TO TOTAL PORTFOLIO (%) 0% 774% 483% NET LOANS TO TOTAL DEPOSITS & BORROWINGS (%) 0% 109% 45% ST BORROWINGS TO TOTAL DEPOSITS & BORROWING (%) 0% 93% 21% CASH & CORRES. TO CURRENT LIABILITIES(%) 0% 3% 3% TOTAL DEPOSITS TO TOTAL PORTFOLIO (%) 0% 224% 156% CAPITAL FUNDS & RESERVES TO CURRENT LIABILITIES (%) 0% 12% 19% FIXED ASSETS TO CAPITAL FUNDS & RESERVES (%) 0% 2% 1% ASSET QUALITY NON PERFORMING ASSETS TO TOTAL PORTFOLIO (%) 0% 0% 0% NON PERFORMING ASSETS TO CAPITAL FUNDS & RESERVES (%) 0% 0% 0% PROVISION TO TOTAL PORTFOLIO (%) 0% 38% 23% PROVISION TO NON PERFORMING ASSETS (%) 0% 0% 0% CAPITAL ADEQUACY DEBT EQUITY RATIO (TIMES) CAPITAL FUNDS & RESERVES TO TOTAL ASSETS (%) 0% 7% 8% CAPITAL FUNDS & RESERVES TO DEPOSITS & BORROWINGS (%) 0% 22% 19% NET ASSET VALUE PER SHARE (TK) TOTAL PORTFOLIO TO CAPITAL FUNDS & RESERVES (%) 0% 70% 128% CONTINGENT LIABILITY TO TOTAL ASSETS (%) 0% 0% 0% CONT. LIABILITY / CAPITAL FUNDS & RESERVES (TIMES) PROFITABILITY EARNING PER SHARE (EPS)-TK DIVIDEND PER SHARE (IN TK) RETURN ON EQUITY (ROE) (%) 0% 37% 31% RETURN ON ASSETS (ROA) (%) 0% 2% 3% FINANCIAL EXPENSES COVERAGE RATIO (%) 0% 145% 134% FINANCIAL EXPENSES TO OPERATING REVENUE (%) 0% 58% 65% FINANCIAL EXPENSES TO TOTAL EXPENSES (%) 0% 91% 91% EFFICIENCY RATIO CONTINGENT LIABILITIES NUMBER OF SHARES 0 1,578 1,578 NUMBER OF BRANCHES NUMBER OF EMPLOYEES NET PROFIT PER BRANCH ('000' TK) NET PROFIT PER EMPLOYEE ('000'TK) CREDIT RATINGS EXTERNAL RATING (MANDATORY) MOODY/S&P RATING (Other Rating Agencies) Credit Risk Grading Manual - NBFI Page 29

30 APPENDIX - B CREDIT RISK GRADING SCORE SHEET- NBFI Credit Risk Grading Manual - NBFI 23 30

31 CREDIT RISK GRADING SCORE SHEET - NBFI Company Name: Company Address: Analyst Name & Designation: Review Period & Ref. No QUANTITATIVE FACTOR KEY PARAMETERS Points Actual 1. CAPITAL ADEQUACY: 15 POINT Company's plan to raise equity to support its growth is acceptable (Internal Capital Generation) 4.00 Company has maintained the Minimum Equity Requirement set by Bangladesh Bank 4.00 Company's Leverage Ratio is acceptable 4.00 Is the dividend policy of the Company satisfactory keeping in line with capital adequacy requirement ASSET QUALITY: 15 Points Does Credit Risk Management includes exhaustive pre-approval and post -approval process including documentation and covenant compliance 2.00 Have Credit Risk Grading of clients are in place and effective Is Portfolio Management System in place and periodic portfolio review being done 1.00 Is level of non performing assets acceptable 3.00 Review of largest exposure to a single client/group and portion of it being non-performing are regularly reviewed 1.00 Sector from where the gross NPL are coming from are periodically reviewed 1.00 Are classified assets being followed regularly with clear action plan for recovery? 2.00 Portfolio Diversity (Industry wise breakdown of loans) are being ensured by the management 1.00 Nature of security/collateral are clearly analyzed and the frequency of valuation seems justified 1.00 Quality of non-industrial lending are analyzed properly and exposures are satisfactory 1.00 Credit Risk Grading Manual - NBFI Page 31

32 CREDIT RISK GRADING SCORE SHEET - NBFI Company Name: Company Address: Analyst Name & Designation: Review Period & Ref. No QUANTITATIVE FACTOR KEY PARAMETERS Points Actual 3. EARNINGS QUALITY: 15 Points Company is maintaining satisfactory growth in level of earnings 2.00 Diversity of earnings is regularly pursued 1.00 Growth in Return on Assets (ROA) 2.00 Growth in Return on Equity (ROE) 2.00 Company mitigates the Interest Rate Risk by efficient use of interest spread gap analysis Average cost of fund is well under Company's established parameter and are being monitored 1.00 Average lending rates are well under Company's established parameter and are being monitored 1.00 Average net spread is well under Company's established parameter and are being monitored 2.00 Net Interest Income Margin (NIIM) trend is satisfactory 1.00 Yield per taka staff cost is well under Company's control LIQUIDITY AND CAPACITY OF EXTERNAL FUND MOBILIZATION: 10 Points Company is complying to SLR (Statutory Liquidity Reserve), CRR (Cash Reserve Requirement) and Loan to Deposit Ratio 2.00 Asset liability maturity structure are in place and is reviewed in ALCO meeting Required level of liquidity is maintained through proper management of maturity mismatches 1.00 Company's liquidity ratio is satisfactory 1.00 Core asset funded by core liabilities are been identified and proper matching is ensured 1.00 Company regularly review the impact on interest rate volatility and its trend 1.00 Company has the ability to raise funds through stable sources in cost effective manner 1.00 Company has in the past or going forward has the credibility of funding sources in distress situation SIZE OF THE COMPANY & MARKET PRESENCE: 5 Points Number of branch network and employees (Large, medium or small network) 2.00 Level of automation (High, Medium, low or manual environment) 2.00 Products and services offered (Corporate, SME, Consumer, Retail products, Credit Card, SMS etc.) are regularly reviewed 1.00 TOTAL QUANTITATIVE FACTOR Credit Risk Grading Manual - NBFI Page 32

33 CREDIT RISK GRADING SCORE SHEET - NBFI Company Name: Company Address: Analyst Name & Designation: Review Period & Ref. No QUALITATIVE FACTOR KEY PARAMETERS Points Actual 6. MANAGEMENT : 10 POINTS Company is viewed as a human resource based institutions 1.00 Quality of Management (details of Senior Management, background of MD and other top executives) is satisfactory 1.00 Experience and educational background of the senior, mid level and junior management is acceptable 1.00 Management Philosophy is crystallized through a well laid down Vision and Mission 1.00 Company's human resource development plans are properly documented and being properly implemented 1.00 Quality of training being offered by the Company is acceptable 1.00 Management operating efficiency are being calculated on the basis of earning and are properly recognized 1.00 More emphasis are placed on system & process based operation 1.00 Staff turnover rate is acceptable 1.00 Management places emphasis on Information Technology (automation) and continuous enrichment of staff knowledge in this area REGULATORY ENVIRONMENT & COMPLIANCE : 10 Points Policy on loan classification and provisioning are in line with Bangladesh Bank guidelines/circulars 2.00 Policy on large loans are properly monitored and followed per Bangladesh Bank requirements 1.00 Loan against Shares, Debentures etc. are properly approved and monitored as per Bangladesh Bank guidelines 1.00 Disclosure requirement for Company is handled properly 1.00 Delegation of power at operating level are well defined and properly allocated 1.00 Instructions for compliance of provisions of Money Laundering Prevention Act, 2002 are properly handled at required level 2.00 Company has been operating satisfactorily in complying to the regulations of SEC and related bodies 1.00 Internal Control & Compliance mechanism as per Bangladesh Bank guidelines are fully implemented and is operative in all respect RISK MANAGEMENT: 5 Points Is Credit Risk Management Policy & Process Manual in place and fully implemented 2.00 Implementation of risk management in the areas of Operational Risk Management 2.00 Implementation of risk management in the areas of Market Risk Management SENSITIVITY TO MARKET RISK: 5 Points Changes in interest rates substantially affect company s earnings 2.00 Borrowing of long-term funds at fixed rate are properly matched with the interest rate on Company's lease recovery plan 2.00 Changes in foreign exchange rate materially affect company s earnings 1.00 Credit Risk Grading Manual - NBFI Page 33