Term Paper on Idlc

limit paper on Functions oF reliance try focus in non b gear uping pecuniary universes (nBFi) in Bangladesh A study on IDLC pay express Submitted to Submitted By picture of Submission letter of Transmittal_______________________ 23rd December 2013 Sh University Subject Submission of term paper of BBA Programme right Madam, It is my great pleasure to submit the term paper on Functions of deferred payment essay oversight in Non slanging financial Institutions (NBFI) in Bangladesh, A study on IDLC finance Ltd which is a part of BBA Programme to you for your conside ration.I do sincere efforts to study related materials, documents, observe operations performed in IDLC pay extra and examine applicable records for preparation of the account statement. Within the time limit, I claim tried my best to compile the pertinent data as encyclopedicly as possible and if you need each further discipline, I depart be glad to assist you. Your most obident pupil, Acknowl pr ogressment ____________________________At frontmost I would like to thank my honorable internship supervisor from BRAC Business School (BBS), BRAC University, SharminShabnam Rahman for providing me such(prenominal) an opportunity to prep be an Internship Report on Functions of recognise fortune perplexity in Non Banking Financial Institutions (NBFI) in Bangladesh, A study on IDLC pay Ltd . Without her functionful counseling, the completion of this capriole was unthinkable. I would like to place my gratitude to the HR of IDLC finance Limited to enable me to complete my internship in their view memorial tablet. Very special thanks goes to Mr.M. Jamal Uddin, Deputy General bus & Head of Corporate and social organisationd finance Division, IDLC finance Limited & Mr. AlamIftekhar Chowdhury, Manager Corporate Division, IDLC pay Limited, for helping me in single phase of the internship process. Their over functioning fight down for my internship gave me the inspiration t o do a discover breed. During my preparation of the project work I have come to very supportive touch of disparate individuals (respondents from IDLC pay Limited) & friends who lend their ideas, time & caring guidance to amplify the typographys contents.I want to convey my heartiest gratitude to them for their valuable responses. Executive Summary_______________________ The non-bank mo sackary insertions (NBFIs) constitute a rapidly evolution segment of the pecuniary system in Bangladesh. The NBFIs have been contributing toward increasing about(prenominal) the whole step and quantity of monetary serve and thus mitigating the lapses of existing financial intermediation to hit the ripening needs of antithetical types of investment in the country. Today either NBFIs ar playing a lively role for the growth of the nations economy with the best of their ability.During the world recession period NBFIs in Bangladesh act in a stringent manner so that their financial syst ems as well as the economy do non collapse. 29 NBFIs argon now contributing to the growth of national economy. IDLC Finance Ltd as a leading and pioneer NBFI started their operation in 1986 and still they be dominating the NBFI do principal(prenominal) as well as contributing to the prosper of scotch development. Their success in this manufacture has invigorate differents to invest their capital in a profitable port.As major note of every(prenominal) NBFIs are providing aim facilities to the business a big with dissimilar types of loan to individual and organizations in that respectfore risk is associated with each and every merchandise they are offering. To minimize this risk every excogitation has its own risk precaution policies. A form of actions are pledgen so that risk associated to their investment stomach be minimized. This report is emphasizes trust risk management in NBFIs in Bangladesh. In this regard IDLC Finance Limited has been thrown as the co nsume organization, its, services, regains and regulation, corporal governance is similarly taken into consideration.Table of Contents_____________________________ Letter of Transmittal Acknowledgement Executive Summary 1. 0 Introduction 1. 1 Introduction 01 1. 2 Origin of the Report 02 1. 3 Objectives of the Report 02 1. 4 methodology 03 1. 5 Limitations 04 1. 6 Structure of the Report 2. 0 The Comp some(prenominal) 04 2. 1 IDLC Finance limited 06 2. 2 Shareholding Structure 07-08 2. 3 Company chronicle 09-10 2. 4 Guidance principle 11-12 2. 5 Organogram 13-14 2. 6 Products & do 14-19 2. 7 Divisions & Department 20 2. 8 SWOT analysis 21-23 2. 9 performance of IDLC Finance Ltd 24-25 2. 9. 1 CAMEL Rating 3. 0 Credit risk of exposure circumspection 25 3. 1 What is put on the line? 27 3. Credit Risk 27-28 3. 3 Credit Risk Management Process 29-38 3. 3. 1 Credit Process ing/ estimation 29-31 3. 3. 2 Credit acclaim /Sanction 32 3. 3. 3 Credit Documentation 32 3. 3. 4 Credit Administration 33 3. 3. 5 Disbursement 34 3. 3. 6 Monitoring & Control of separate Credit 34-35 3. 3. 7 Maintaining the over solely Credit Portfolio 35 3. 3. 8 Classification of Credit 36-37 3. 3. 9 Managing trouble Credits/Recovery 38 4. 0 Findings and Analysis Credit Risk Management by IDLC Finance Ltd. 4. Procedural represent Flow of Lease Marketing 41-44 4. 2 Factors Scrutinized during Appraisal Procedure 45-46 4. 3 saddle asgestural to each Risk Factor 47-48 4. 4 Measures Taken for restoration of Default guest 49 4. 5 Functions of Special plus Management (surface-to-air missile) 49- 4. 5. 1 Recovery Action Plan by SAM 50-52 4. 5. 1. 1 Regular Accounts 50-51 4. 5. 1. 2 Special Accounts 51-52 4. 6 Impact of overdue on Profit Performance of NBFI 52 4. 6. 1 Provisioning Policy of Bangladesh Bank 53 4. 6. 2 Provisioning Policy of IDLC Finance Ltd. 54 4. 7 Trend in Provisioning Volume 54 4. 8 Default guest Characteristics Analysis 55- 4. 8. 1 perseverance Analysis 57-59 4. 8. 2 Cost of projects to sales volume 60 4. 8. 3 addition size of the Borrower 61 4. 8. 4 Debt/Equity ratio 62 4. 8. 5 Interest rate charge 63 4. 8. 6 Sponsors Business Experience 64 4. 8. 7 Security Ratio 65 4. 8. 8 Relationship with the guest 66 4. 8. 9 Sponsors Past Performance 5. 0 Recommendation & Conclusion 66-68 5. 1 Recommendation 70 5. Conclusion 71 1. 1INTRODUCTION The development of financial market has been receiving heightened attention from the policy- drawrs in bleak-fashioned years. one and just now(a) explanation lies in the fundamental shift of development strategy deviseed in the n archaean familiar embrace of the private welkin as an engine of economic growth. The governments in some(prenominal) developed and evolution countries, the i nternational financial institutions which exert tremendous influence on the policy-making apparatus of developing countries and, to a great extent, the intelligentsia have all joined together as ardent advocates of private entrepreneurship.IDLC Finance Ltd, a leading financial institution of the country achieved signifi layaboutt growth in all areas of business up to 3rd quarter of the year 2009. IDLC began its operation in 1985 as the government issue 1 leasing lodge in Bangladesh. In 1995, IDLC was licensed as a Financial Institution by the countrys central bank and during the coating twain decades, the smart set has grown in tandem with the countrys growing economy. The companys wide array of products and services set out from retail products, such as home and ar loans, unified and SME products including assume and term loans, structured finance services ranging from syndications to capital restructuring and capital market services. The company also strengthened its pres ence in the countrys growing stock market with launching a subsidiary-IDLC Securities Limited-which is offering full-fledged brokerage service for retail and institutional customers. . 1. 3 OBJECTIVES OF THE REPORT The main objective of the study is to get a definite idea nigh how CRM plays a vital role in managing the risk associated with each and every product and services of IDLC Finance Limited.Further much, the orientation is very useful to detect whether the theoretical knowledge matches with real life scenario or not. though the title Functions of Credit Risk management in Non Banking Financial Institutions (NBFI) in Bangladesh, A study on IDLC Finance Ltd very lengthy area, the specific objectives are as companions 1. To know the necessity of Credit Risk Management. 2. To learn about the whole CRM procedure. 3. To know the decision making process of CRM. 4. To know the functions of Special summation Management part of CRM 5.To know about the probable modification drop be done in the whole CRM process 6. 1. 4 METHODOLOGY OF THE STU Analysis has been made on the buns of the objectives mentioned before in the context of Functions of Credit Risk management in Non Banking Financial Institutions (NBFI) in Bangladesh, A study on IDLC Finance Ltd The paper allow for be written on the prat of information store from native and secondary sources. (i) Primary Data Discussion with the respective organizations officials. (ii) For the completion of the present study, secondary data has been collected.The main sources of secondary data are * Annual Report of IDLC Finance Limited. ? Website of IDLC Finance Limited. * Data from published reports of SEC, DSE * distinct Books, Journals, Periodicals, News Papers etc. To make a report various aspects and experiences are needed. But I have faced some barriers for making a complete and perfect report. These barriers or limitations, which hinder my work, are as follows * Difficulty in accessing data of its cozy o perations. * Non-Availability of some preceding and in style(p) data. * Some information was withheld to retain the confidentiality of the organization.I was placed for only around 3 months of time operative like a stiff employee hindered the opportunity to put the effort for the study. The time span was not fitted enough to learn all the activities of the organization properly. Therefore, it was very difficult to carry out the whole analysis. 1. 6 STRUCTURE OF THE REPORT The report has ii main parts Part One This is basically introductory part, the objective and scope of the study, limitations, and look into methodology has been highlighted. Brief Introduction of IDLC Finance Limited, its product and service, organizational structure, performance, etc are presented.Part Two Products of NBFIs for which Credit Risk Management has become a key operational nib, how it performs its overall risk analysis and on the basis of the analysis denomination of the ways of decrease the risk, thus maintains the fondness interest of the business. This part also contains the conclusion, course acknowledgement appendix of the report. 2. 0 The Company 2. 1 ILDC finance LIMITED IDLC Finance Ltd commenced its journey, in 1985, as the first leasing company of the country with multinational collaboration and the lead sponsorship of the International Finance Corporation (IFC) of The World Bank Group.Technical assistance was provided by Korean Development Leasing Corporation (KDLC), the largest leasing company of the Republic of South Korea. The unique institutional shareholding structure comprising mostly of financial institutions helps the company to constantly develop finished sharing of experience and overlord approach at the highest policy making level. IDLC offers a diverse array of financial services and solutions to institutional and individual knobs to meet their diverse and unique requirements.The product offerings include Lease Finance, end point Finance, Real demesne Finance, brief Term Finance, Corporate Finance, Merchant Banking, Term Deposit Schemes, Debentures and Corporate Advisory serve. The company has certain capital of Taka 1,000,000,000 (10,000,000 shares of Taka 100 each) and paid up capital of Taka 250,000,000 (2,500,000 ordinary shares of Taka 100 each). IDLC has also established cardinal wholly owned subsidiaries, IDLC Securities Limited and I, Cons Limited to provide nodes with warranter brokerage solutions and IT solutions, respectively. 2. SHAREHOLDING STRUCTURE IDLC was incorporated in the year 1985 as a joint jeopardise public limited company among five irrelevant and three local financial institutions. Now there are no foreign investors the present Shareholding Structure of IDLC Finance Ltd is attached bellow SL. NO. NAME OF SHAREHOLDERS % Sponsors/ handlers 1 The City Bank Ltd. 29. 70 2 SadharanBima Corporation 7. 62 3 IPDC of Bangladesh Ltd. 0. 0002 Sub-Total 37. 33 GENERAL 4 Insti tutions Mer nettile Bank Ltd. 7. 50 trustingness Insurance Co. Ltd. 7. 00 Eskayef Bangladesh Ltd. 8. 00 BD Lamps 1. 32 Transcraft Ltd. 4. 01 Eastern Bank Limited 6. 00 Phonix Finance 1. 00 PartexBaverage 0. 86 Marina Apparels 1. 00 ICB 2. 32 Dhaka line of merchandise commuting Ltd. 0. 95 One Bank Ltd. 0. 5 Star Particle Board 0. 60 Bangladesh Finance Invest. 0. 88 Other institutions 6. 92 Sub constitutional 49. 21 5 Individuals General Public(Individuals) 13. 45 Mr. A. K. M. Shaheed Reza, Director nominated by Mercantile Bank Ltd. 0. 017 Sub total 13. 47 Total Holdings 100. 00 2. 3 family CHRONICLE May 23,1985 Incorporation of the Company February 22,1986 root of leasing business October 1, 1990 Establishment of branch in Chittagong, the main port city March 20,1993 Listed in Dhaka Stock Ex mixed bag February 7, 1995 Licensed as a Non- Banking Financial Institutions under the Financial Institutions Ac t, 1993 November 25, 1996 Listed on the Chittagong Stock Exchange May 27, 1997 Commencement of Home Finance and Short Term Finance trading operations January 22, 1998 Licensed as a Merchant Banker by the Securities and Exchange Commission January 15, 1999 Commencement of Corporate Finance and Merchant Banking Operation January 29, 2004 possible action of Gulshan sub instalment November 22, 2004 Launching of investment funds Management go Cap Invest February 7, 2005 Issuance of Securitized Zero Coupon Bonds by IDLC Securitization Trust 2005 family line 18, 2005 Launching of local anaesthetic Enterprise Investment Centre(LEIC), a centre established for the development of SMEs with the contribution of the Canadian International Development growncy (CIDA) of the Government of Canada January 2, 2006 Opening of SME focused branch at Bogra April 6, 2006 Opening of Branch at UttaraMay18, 2006 Opening Merchant Banking branch in the port city if Chittagong July 1, 2006 Relocation of Companys Registered and Corporate Head Office at own premises at 57, Gulshan Avenue September 18, 2006 Commencement of operation of IDLC Securities Limited, a wholly owned subsidiary of IDLC March 14, 2007 Launching of Discretionary Portfolio Management Services Managed Cap Invest August 5, 2007 Company name changed to IDLC Finance Limited, from Industrial Development Leasing Company of Bangladesh Limited December 3, 2007 IDLC Securities Limited Chittagong Branch commenced operation December 18, 2007 IDLC Securities Limited DOHS Dhaka Branch opened. January 6, 2009 IDLC Finance Limited and IDLC Securities Limited open Sylhet branches August 09, 2009 Opening of IDLC Securities Limited, Gulshan Branch August 26, 2009 Opening of Gazipur SME Booth September 09, 2009 Opening of Imamgonj SME Booth December 2009 Opening of Narayangonj Branch December 2009 Opening of Savar Branch 2. 4 GUIDING PRINCIPLESIDLC is a multi-product financial institution offering an array of diverse financial services and solutions to institutional and individual clients to meet their diverse and unique requirements. Following are the guiding principles that shape the organizational practice of IDLC node first IDLC has grown with its customers, who are believed to be the center of all actions. As the crux of IDLCs corporate philosophy, customer service gets the highest antecedency. Innovation IDLC has continuously introduced new financial products for meeting the needs of the entrepreneurs in a obscure challenging business environment. The concept of innovation is in-built into the working culture.Professional Knowledge IDLC is staffed with qualified masters and innovative minds in the country. age of operational experience, large industrial database and competent work force-out have gives them unparalleled advantages. Professional ethics The professional at IDLC maintain the highest horizontal surface of financial and business ethics in all transactions with the clients. Over the last two decades, IDLC have put in bets efforts to meet the expectations of the clients and investors. One stop solution Work at IDLC begins with the idea generation, and then goes on into the feasibility study followed by arrangement of funding to follow out the project.IDLC advises the clients, finance them and even arrange financing for them via different financing modes, namely go across financing, term loan, span loan, syndication, bridge loan, syndication, ordinary shares, preferred shares and debentures. Vision Become the best performing and most innovative financial solutions provider in the country Mission Create maximum possible pry of all the stakeholders by adhering to the highest ethical standards For the Company Relentless pursuit of customer satisfaction through delivery of top quality services For the Shareholders Maximize shareholders wealth through a sustained return on the investment. For the employees Provide job sati sfaction by making IDLC a center of excellence with opportunity of career development.For the society take to the well-being of the society, in general, by acting as a responsible corporate citizen. Goal longsighted term maximization of Stakeholders value Corporate Philosophy Discharge the functions with proper duty for all actions and results and bring together to the highest ethical standards 2. 5 ORGANOGRAM THE APEX OF THE ORGANIZATION IS THE BOARD OF DIRECTORS, WITH THE MANAGEMENT COMMITTEE AND MANAGING DIRECTOR IN THE interest TIERS. THE BOARD CONSISTS OF THE FOLLOWING DIRECTORS * Chairman from Reliance Insurance Ltd * Five Directors nominated by The City Bank Limited * One from SadharanBima Corporation (SBC) * One from Transcom Group One From Mercantile Bank Limited * One Incountent Director from Monowar Associates ACTIVITIES OF THE BO ARD The Board appoints the Executive Committee (EC), which takes day-to-day decisions on behalf of the company. Every assent aim has to be approved by the EC for sanction and disbursement. EC is also authorized to observe and appraise an separate(prenominal) major day-to-day operational functions including corporate plans, figures and borrowing activities. The composition of the EC is as follows a) quaternion Directors b) Managing Director / Chief Executive Officer and The Company Secretary shall be the Secretary of the Committee ACTIVITIES OF THE MA NAGING DIRECTORThe Managing Director (MD), appointed by Board, manages the overall organizational activities and also plays the role of the figurehead. ACTIVITIES OF THE DEPUTY MANAGING DIRECTOR The DMD establishes the companys policies and redirect examinations the operational performance of the company including eulogy of large credit entry proposals, major fund procurements, budget and planning and diversification decisions. Diagram Organ gram of IDLC Finance Limited 2. 6 PRODUCTS AND SERVICES To determine steady and long term growth as well as to sharpen its competitive edge in a changing and challenging business environment, IDLC always endeavors to diversify into other financial services which have long term prospects.In 1997, it expanded its range of services by introducing Housing Finance and Short Term Finance, which have broadened its customer base and have contributed significantly to IDLCs growth and profitability. In early 1999, after getting license of Merchant Banking from Securities and Exchange Commission, IDLC started its operation of underwriting, issue management, corporate financing and other investment banking related services. The products and services are as follows 1. LEASING additions are maked to clients on predetermined rental basis for a fixed term with a purchase option at the end. 2. TERM bring The customers are offered loan facilities for a determined term at a negotiated rate. 3. EQUITY FINANCINGIDLC invests money into beauteousness of both publicly traded and non-traded companies for dividends and capi tal gain. 4. INTER CORPORATE DEPO SIT ( ICD ) This disbursement scheme is offered to clients under two variations a) Non- Revolving ICD which consists of single disbursement of funds b) Revolving ICD where multiple disbursements and accruements take place 5. WORK disposition/ PURCHASE ORDER FINANCING The clients are financed against their work order or purchase order on a revolving basis. 6. factorization chthonian this scheme, IDLC finances receivables of supply of goods or delivery of services on credit to help the clients envision the maximum portion of their payment soon after they have made the delivery to the buyer.The payment is collected from the customers and the balanced amount is re-reimbursed to the clients. 7. SYNDICATION IDLC helps to raise fund for clients with huge financial requirement through syndication and also help them with the livelihood, execution and administration of the syndicated finance. 8. SECURITIZATION IDLC sell financial instruments of organizati ons in local financial market backed by their asset/cash attends such as loan, lease etc. 9. BRIDGE FINANCE This refers to short-term finance (maturity of not more than 12 months) in anticipation of immediate long term financing such as public issue, private placement, syndication, loan, lease, debenture, etc. 10. CAP INVESTIDLC maintains a non-discretionary portfolio account for clients where they have absolute power to make investment decisions. the portfolio manager provides margin loan to clients and also prepares the list of securities in which they can invest. 11. locate SCHEMES IDLC offer different variety of deposit schemes for clients. * Cumulative Term Deposit * Annual Profit Term Deposit * Monthly Earner Deposit * Double Money Deposit 12. CAR LOAN Term loan are offered to clients for acquiring car, brand new or reconditioned, for their personal use and the ownership is transferred on loan deliverment. 13. HOME LOAN IDLC offers loans to purchase apartment to individuals for their personal use 14. REAL ESTATE FINANCEIDLC finances clients to construct house, renovate and extend house, for office chamber/space for professionals etc. under two different schemes * Developers Finance Scheme oCorporate Finance Scheme 15. PRIVATE PLA CEMENT IDLC places the shares/debenture with both domesticated and overseas investors (institutions or individuals) on private placement basis. 16. UNDERWRITING IDLC makes a univocal and irrevocable commitment with an publication company to conduct to the securities of that company when the existing shareholders or the general public do not subscribe to the securities offered to them. The different types of underwriting offered are * Initial Public offering (IPO) of common stock, preferred stock, debentures etc. Right have it off oUnderwriting of public securities-loan, lease, debenture 17. ISSUE MANAGEMENT Under this bodily function, IDLC plan, coordinate and subordination the blameless issue activity of clients and d irect other agencies for successful trade of securities. 18. FINANCIAL A DVISORY SERVICE IDLC help the existing venture or a new venture by providing various advisory services such as corporate counseling, project counseling, capital restructuring, financial engineering etc. 19. MERGERS AND ACQUISIT IO IDLC help clients to search for the right organization, treasure the concern found on different types of analysis and select the method of m a to make it a profitable deal. 20. TRUSTEESHIP MANAGEME NTWe act as trustee for the debenture holders by accepting security created by the company and take action to safeguard their interest and enforce their rights. Table Product Services offered by IDLC Finance Limited 2. 7 DIVISIONS AND DEPARTMENTS The organization includes divisions which mainly deal with the products and services and plane sections which support in the direct activities. The divisions are the * Corporate * SME * Merchant Banking * Personal Investment * Factoring * Str uctured Finance * Operations The plane sections include * Credit Risk Management (CRM) * Treasury * Human Resource * Accounts and Taxation * Administration and PR Operational Risk Management (ORM)/Internal Control Compliance(ICC) * Special Asset Management(SAM) 2. 8 SWOT compendium The SWOT analysis for IDLC can be described as follows Strengths 1. Reputation and brand image IDLC is well-reputed company and has developed a brand image that is recognized by the customers. IDLC is an international joint-venture company and its shareholders have long records of sustainability and reliability in their respective fields. IDLC is one of the esteemed names in financial market of Bangladesh. Since 1985, IDLC has attach its journey through introduction of various innovative products and thus meeting the needs of large corporate clients. 2 .Product portfolio IDLC has diverse product portfolio for customers which made them second to none in Non-Banking Financial Industry. 3. Quality Custome r Portfolio IDLC has a Credit Risk Management division of Multinational standard which enables the company to maintain a quality customer portfolio. 4. Human Resources The Company has competent management team. The over all work force of the company is considered as key resources for the organization. IDLC personnel are motivated, competent, energetic and creative. The company provides utmost support in terms of both technical and moral. 5. Operational efficiency IDLC provides customized solution to their customers to adjust their need.The company processes the loan applications cursorily and smoothly. The sanction and disbursement of the loans are hassle-free. 6. Employee Empowerment At IDLC decision-making is free flowing and transparent. Every appraiser is effrontery ample opportunity to exercise his/her creativity in accommodating a customer. Approvers are open for any discussion and sanction is largely based upon recommendation of the appraisers. The open and free flow of com munication disciplines clearing of any queries in no timefrom any level of hierarchy. Reasonable suggestions are not only welcome but are highly appreciated. Effective suggestions by the employees are immediately set for action.This flexibility has helped IDLC a lot in shaping up its operations into a level of efficiency and to be an excellent performer in case of loan recuperation. Weaknesses 1. High Cost of fund IDLC as any other NBFIs have high cost of fund in comparison to banks. As NBFIs can take deposit for less than one year from any individuals as banks can do, the deposit base of IDLC is not strong enough to reduce the average cost of fund. 2. more than Focus on Volume Although IDLC has department called Credit Risk Management to monitor the asset quality of the company, still the company some propagation for the interest group of profit and one-time(prenominal) kin provide loans to customers who at the end hamper the portfolio quality of IDLC. 3.Too Much diversifi cation Too much diversification of product and services offering hamper the focus on the mall services of the organization. 4. Less People in Liability Marketing IDLC still employs lesser number of workforces for the pugnacious liability marketing in comparison to banks and NBFI like DBH. Opportunities 1. Continuity of Liberalization Government has continued to liberalise the economy towards more market orientation. This encouraged both local and foreign investors to invest in dictumity sectors. The privatization plan of government is likely to have positive impact on industrialization. 2. Foreign Investment in Prospective Sectors In recent days foreign investment in the various prospective sectors has change magnitude phenomenally.This creates a good opportunity for all financial institutions to enter in the booming new sector. 3. Local banks inefficiency One of the major reasons for thriving of leasing company in Bangladesh is local banks inefficiency of providing project lo an. This phenomenon still persists. Threats 1. Threat from banks In recent times banks are also entering into leasing business which is more often than not considered as functions of Non-Banking Financial Institutions. 2. system control of government The levelheaded framework of Bangladesh is relatively weak. Lack of effective foreclosure laws and manual land put down system creates possibility of forgery and disputes.This whitethorn hinder the loan recovery from the omissioners. 2. 9 PERFORMANCE OF IDLC FINANCE LIMITED 2. 9. 1 CAMEL RATING Rating type Base At 31. 12. 08 Rating 1. Capital sufficiency C Reserve should be 25. 00 crore by the end of 30. 06. 06 16. 113 Crore 1(Strong) 2. Asset Quality A (Classified loan/lease and other assets)/overdue amount*100 6089. 04/153384. 93*100=3. 97% 2(Satisfactory) 3. Management M median(a) of C,A,E L ratios (1+2+1+1)/4=1. 25 1(Strong) 4. Earning Ratio E (NPAT/TA)*100% (NPAT/TE)*100% (4063. 72/167085. 65)*100%=2. 43% ( 4063. 72/16113. 12)*100%=25. 22% 1(Strong) 5. Liquidity Ratio L 1. CRR SLR reserve 2.Interbank colony 3. Profit -Reserved -Less dependent -Strong 1(Strong) CAMEL Sum of 5 Ratios/5 (1+2+1+1+1)/5=1. 20 1(Strong) CAMEL rating has improved to 1 comparing to the last year 2(Satisfactory) 3. 0 Credit Risk Management 3. 1 WHAT IS essay? In general Risk can be define as the probability or threat of a damage, injury, liability, loss, or other negative occurrence, caused by external or internal vulnerabilities, and which may be neutralized through pre-mediated action. But in Finance risk is defined concerning some special factors of market and other externalities which can affect an individual or organizations decision.In Finance risk is defined as Probability that an actual return on an investment will be lower than the expected return. Financial risk is divided into the following general categories (1) Basis risk Changes in interest rates will cause interest-bearing liabil ities (deposits) to re-price at a rate higher than that of the interest-bearing assets (loans). (2) Capital risk Losses from unrecovered loans will affect the financial institutions capital base and may select floating of a new stock (share) issue. Therefore to reduce this risk Banks, NBFIs, and other organizations take various types of measures so that it can be reduced in a minimal affordable limit. In Banks and NBFIs the core risk is credit risk.As Banks, NBFIs performs there major operations on providing loan, lease (for NBFIs) therefore there is a chance of fail at time of repayment. So to reduce this default risk so that number of default payment does not increase and to forecast this probability with divert tools Banks, NBFIs always work on managing their Credit Risk. Several Guideline and standards are prepared so that Credit Risk for individual banks and NBFIs can be reduced. 3. 2 recognize RISK Credit risk is the possibility that a borrower or antagonistic party will fail to meet agreed obligations. Globally, more than 50% of total risk elements in banks and FIs are Credit Risk alone. Thus managing credit risk for efficient management of a FI has step by step become the most crucial task.Credit risk may take the following forms * In direct lease/term finance rentals/principal/and or interest amount may not be repaid * In issuance of guarantees applicant may fail to build up fund for settling claim, if any * In documentary assign applicant may fail to retire import documents and many others * In cypher the bills receivables against which payments were made, may fail to be paid * In treasury operations the payment or serial publication of payments due from the counter parties under the respective contracts may not be forthcoming or ceases * In securities trading businesses funds/ securities settlement may not be effected * In cross-border exposure the approachability and free transfer of foreign currency funds may either cease or restrictions m ay be imposed by the sovereign Credit risk management encompasses identification, measurement, matching mitigations, monitoring and control of the credit risk exposures to ensure hat * The individuals who take or manage risks clearly understand it * The organizations Risk exposure is within the limits established by Board of Risk winning Decisions are in line with the business strategy and objectives set by BOD * The expected payoffs compensate the risks taken * Risk taking decisions are explicit and clear * Sufficient capital as a lover is available to take risk * Directors with respect to sector, group and countrys prevailing situation * Risk taking Decisions are in line with the business strategy and objectives set by BOD 3. 3 CREDIT RISK MANAGEMENT PROCESS Credit risk management process should cover the entire credit cycle starting from the origination of the credit in a financial institutions books to the point the credit is extinguished from the books. It should provide for sound practices in 1. Credit processing/appraisal 2. Credit approval/sanction 3.Credit documentation 4. Credit administration 5. Disbursement 6. Monitoring and control of individual assign 7. Monitoring the overall credit portfolio (stress testing) 8. Credit classification and 9. Managing problem credit/recovery 3. 3. 1 . CREDIT PORCES SING/APPRAISAL Credit processing is the stage where all required information on credit is gathered and applications are screened. Credit application forms should be sufficiently detailed to permit gathering of all information needed for credit assessment at the outset. In this connection, NBFIs should have a checklist to ensure that all required information is, in fact, collected.NBFIs should set out pre-qualification screening criteria, which would act as a guide for their officers to determine the types of credit that are acceptable. For instance, the criteria may include rejecting applications from blacklisted customers. These criteria would help institutions avoid processing and screening applications that would be later rejected. Moreover, all credits should be for legitimate settles and adequate processes should be established to ensure that financial institutions are not used for fraudulent activities or activities that are prohibited by law or are of such nature that if permitted would contravene the provisions of law. Institutions moldiness(prenominal)(prenominal) not expose themselves to reputational risk associated with granting credit to customers of questionable repute and integrity.The next stage to credit screening is credit appraisal where the financial institution assesses the customers ability to meet his obligations. Institutions should establish well designed credit appraisal criteria to ensure that facilities are granted only to creditworthy customers who can make repayments from reasonably determinable sources of cash flow on a timely basis. Financial institutions usually require collateral or guarante es in support of a credit in order to mitigate risk. It must be recognized that collateral and guarantees are merely instruments of risk mitigation. They are, by no means, substitutes for a customers ability to generate sufficient cash flows to honor his contractual repayment obligations. verifying and guarantees cannot obviate or minimize the need for a comprehensive assessment of the customers ability to observe repayment schedule nor should they be allowed to compensate for poor information from the customer. Care should be taken that working capital financing is not based solo on the introduction of collateral or guarantees. Such financing must be supported by a proper analysis of projected levels of sales and cost of sales, prudential working capital ratio, past experience of working capital financing, and contributions to such capital by the borrower itself. Financial institutions must have a policy for valuing collateral, taking into account the requirements of the Banglad esh Bank guidelinesdealing with the matter. Such a policy shall, mong other things, provide for acceptability of various forms of collateral, their periodic valuation, process for ensuring their continuing legal enforceability and realization value. In the case of loan syndication, a participating financial institution should have a policy to ensure that it does not place insupportable reliance on the credit risk analysis carried out by the lead underwriter. The institution must carry out its own due diligence, including credit risk analysis, and an assessment of the terms and conditions of the syndication. The appraisal criteria will of necessity vary mingled with corporate credit applicants and personal credit customers. Corporate credit applicants must provide audited financial statements in support of their applications.As a general rule, the appraisal criteria will focus on * Amount and purpose of facilities and sources of repayment * Integrity and reputation of the applicant as well as his legal capacity to assume the credit obligation * Risk profile of the borrower and the sensitivity of the applicable industry sector to economic fluctuations * Performance of the borrower in any credit previously granted by the financial institution, and other institutions, in which case a credit report should be sought from them * The borrowers capacity to repay based on his business plan, if relevant, and projected cash flows using different scenarios * Cumulative exposure of the borrower to different institutions * Physical inspection of the borrowers business premises as well as the preparedness that is the orbit of the proposed financing * Borrowers business expertise Adequacy and enforceability of collateral or guarantees, taking into account the existence of any previous charges of other institutions on the collateral * Current and forecast operating environment of the borrower * terra firma information on shareholders, directors and beneficial owners for co rporate customers and * Management capacity of corporate customers. 3. 3. 2 . CREDIT adulation/SANCTION A financial institution must have some written guidelines on the credit approval process and the approval regime of individuals or committees as well as the basis of those decisions. Approval authorities should be sanctioned by the board of directors. Approval authorities will cover new credit approvals, renewals of existing credits, and changes in terms and conditions of previously approved credits, particularly credit restructuring, all of which should be fully documented and recorded.Prudent credit practice requires that persons empowered with the credit approval authority should not also have the customer relationship responsibility. Approval authorities of individuals should be commensurate to their positions within management ranks as well as their expertise. Depending on the nature and size of credit, it would be prudent to require approval of two officers on a credit ap plication, in accordance with the Boards policy. The approval process should be based on a system of checks and balances. Some approval authorities will be reticent for the credit committee in view of the size and complexity of the credit transaction. 3. 3. 3 CREDIT DOCUMEN TATIONDocumentation is an prerequisite part of the credit process and is required for each phase of the credit cycle, including credit application, credit analysis, credit approval, credit monitoring, and collateral valuation, and impairment recognition, foreclosure of impaired loan and realization of security. The format of credit files must be standardized and files neatly maintained with an appropriate system of cross-indexing to facilitate review and follow-up. Documentation establishes the relationship between the financial institution and the borrower and forms the basis for any legal action in a court of law. Institutions must ensure that contractual agreements with their borrowers are vetted by their le gal advisers.Credit applications must be documented regardless of their approval or rejection. For security reasons, financial institutions need to consider come uping the copies of critical documents (i. e. , those of legal value, facility letters, and signed loan agreements) in credit files while retaining the originals in more secure custody. Credit files should also be stored in fire-proof cabinets and should not be removed from the institutions premises. 3. 3. 4 CREDIT ADMINIS TRATION Financial institutions must ensure that their credit portfolio is properly administered, that is, loan agreements are duly prepared, renewal notices are sent systematically and credit files are on a regular basis updated.An institution may allocate its credit administration function to a separate department or to designated individuals in credit operations, depending on the size and complexity of its credit portfolio. A financial institutions credit administration function should, as a minimum, e nsure that * Credit files are neatly organized, cross-indexed, and their removal from the premises is not permitted * The borrower has registered the required insurance policy in favour of the bank and is regularly paying the premiums * The borrower is making timely repayments of lease rents in respect of charged leasehold properties * Credit facilities are disbursed only after all the contractual terms and conditions have been met and all the required documents have been received * Collateral value is regularly monitored The borrower is making timely repayments on interest, principal and any agreed to fees and commissions * Information provided to management is both accurate and timely * Funds disbursed under the credit agreement are, in fact, used for the purpose for which they were granted * Back office operations are properly controlled * The established policies and procedures as well as relevant laws and regulations are complied with and On-site inspection visits of the borrow ers business are regularly conducted and assessments documented 3. 3. 5 DISBURSEMENT Once the credit is approved, the customer should be advised of the terms and conditions of the credit by way of a letter of offer. The duplicate of this letter should be duly signed and returned to the institution by the customer.The facility disbursement process should start only upon receipt of this letter and should involve, inter alia, the completion of formalities regarding documentation, the modification of collateral, insurance cover in the institutions favor and the vetting of documents by a legal expert. Under no circumstances shall funds be released prior to compliance with pre-disbursement conditions and approval by the relevant authorities in the financial institution. 3. 3. 6 MONITORING CONTROL OF INDIVIDUAL CREDITS To safeguard financial institutions against potential losses, problem facilities need to be identified early. A proper credit monitoring system will provide the basis for taking prompt corrective actions when warning signs point to deterioration in the financial health of the borrower.Examples of such warning signs include unauthorized drawings, arrears in capital and interest and deterioration in the borrowers operating environment. Financial institutions must have a system in place to officially review the status of the credit and the financial health of the borrower at least once a year. More frequent reviews (e. g. at least quarterly) should be carried out of large credits, problem credits or when the operating environment of the customer is undergoing significant changes. * Funds advanced are used only for the purpose declared in the customers credit application * Financial condition of a borrower is regularly bring in and management advised in a timely fashion * Borrowers are complying with contractual covenants Collateral reporting is regularly assessed and related to the borrowers financial health * The institutions internal risk ratings r eflect the current condition of the customer * Contractual payment delinquencies are identified and emerging problem credits are classified on a timely basis and * Problem credits are readily directed to management for remedial actions. * More specifically, the above monitoring will include a review of up-to-date information on the borrower, encompassing * Opinions from other financial institutions with whom the customer deals * Findings of site visits * Audited financial statements and latest management accounts * Details of customers business plans * Financial budgets and cash flow projections and * Any relevant board resolutions for corporate customers. 3. 3. 7 MAINTAINING THE OVERALL CREDIT PORTFOLIOAn important element of sound credit risk management is analyzing what could potentially go wrong with individual credits and the overall credit portfolio if conditions/environment in which borrowers operate change significantly. The results of this analysis should then be factored into the assessment of the adequacy of provisioning and capital of the institution. Such stress analysis can reveal previously undetected areas of potential credit risk exposure that could arise in times of crisis. Possible scenarios that financial institutions should consider in carrying out stress testing include * Significant economic or industry sector downturns Adverse market-risk events and * Unfavorable liquidity conditions. Financial institutions should have industry profiles in respect of all industries where they have significant exposures. Such profiles must be reviewed /updated every year. 3. 3. 8 classification OF CREDIT Credit classification process grades individual credits in terms of the expected degree of recoverability. Financial institutions must have in place the processes and controls to implement the board approved policies, which will, in turn, be in accord with the proposed guideline. This guideline may also be called as Credit Risk tearing down (CRG), is a collective is a collective efinition based on the pre- qualify 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 faculty 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.The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as set up-sanction stage. Two- types of factors play vital role in modeling the CRG, they are, 1. Quantitative factors 2. Qualitative factors The chart is given in the following page Quanti tative Financial Ratios Loan Repayment performance Credit Ratings Expected Default Frequencies Qualitative Management Quality land tenure in Business Operations Industry/Niche 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, on the basis of the above factors.At the post-sanction stage, the FI can decide about the enlightenment of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. Risk grading should be assign at the inception of lending, and updated at least annually. 3. 3. 9 MANAGING PROBL EM CREDITS/RECOVERY A financial institutions credit risk policy should clearly set out how problem credits are to be managed. The positioning of this responsibility in the credit department of an institution may depend on the size and complexity of credit operations. It may form part of the credit monitoring section of the credit department or located as an independent unit, called the credit workout unit, within the department.Often it is more prudent and indeed preferable to segregate the workout activity from the area that originated the credit in order to achieve a more detached review of problem credits. The workout unit will follow all aspects of the problem credit, including rehabilitation of the borrower, restructuring of credit, monitoring the value of applicable collateral, scrutiny of legal documents, and dealing with liquidator/manager until the recovery matters are finalized. Financial institutions will put in place systems to ensure that management is kept advised on a regular basis on all developments in the recovery process, may that emanate from the credit workout unit or other parts of the credit department.There should be clear evidence on file of the steps that have been taken b y the financial institution in pursuing its claims against a delinquent customer, including any legal steps initiated to realize on the collateral. Where there is a delay in the liquidation of collateral or other credit recovery processes, the rationale should be properly documented and anticipated actions recorded, taking into account any revised plans submitted by the borrower. The accountability of individuals/committees who sanctioned the credit as well as those who subsequently monitored the credit should be revisited and responsibilities ascribed. Lessons learned from the post mortem should be duly recorded on file. 4. 0 Findings and Analysis Credit Risk Management by IDLC Finance Ltd To perform the overall CRM process 3 departments are working together at IDLC Finance Ltd.As a leading NBFI in Bangladesh IDLC has always tried to maintain the quality they achieve through twenty-fourth year business tenure. These three departments are- Collection of Client information and prepa ring Appraisal Report CRM Department afterwards getting the approval from the respective authority Internal Control Internal and Compliance (ICC) do all the Control &documentation processes Compliance Collection of installment and managing the overdue rentals as well Special Asset as dealing with the clients default is Management done by Special Asset Management (SAM) (SAM) * . 4. 1 PROCEDURAL WORK FLOW OF LEASE MARKETING At the initial stage, IDLC hard to establish a market and then enlarge the market.The criteria based on which the market for lease financing has been established are as follows * Diversification of portfolio * Selecting top industrial unit in the respective industry * Financing for Balancing, Modernization, Replacement and Expansion (BMRE) of existing unit * Priority of existing leases * Set up priority based on sector shrewd performance Primary focus of IDLC till now is in the area of financial leasing of industrial and professional equipment and vehicles for t hree to five years term with particular accent mark on BMRE of existing units. Instead of lending funds to purchase equipment, IDLC provides the equipment and extends the exclusive right to its use against specified rental payments at periodic intervals.There are two types of client for which the procedural work flow would be different though the basic part would be the same. The different types of clients are * Existing Clients with whom IDLC has already been working * New Clients with whom IDLC has no business yet The basic procedural work flow is given under The above procedures are briefly described below Collect Client & Loan data consider Credit Risk on the basis of Risk Grade Preparing the appraisal report on the basis of risk Approval by the appropriate authority Documentation Lease/Loan payment collection Creating Provision for default Function of SAM Expiry of Agreement The client applies for required facility through letter. These required facility can vary from diff erent sort of equipments for BMRE to vehicles or expansion projects. The letter generally consists of brief description about the asset to be procured, its price and reason for procurement along with its lease period. * IDLC studies the proposal and sends an offer letter to the client. The offer letter contains acquisition cost, lease period, per month rental and other terms & conditions to be applied if the agreement is done. It is to be noted here that the offer letter is a mere offer and by no means an agreement between the two parties.Thus, the terms & conditions may change upon final agreement. However, it seldom changes as that will hamper the goodwill of the company. * The client accepts the offer and submits an authentic offer letter. If the client agrees to the terms & conditions of the offer letter, they sign & seal the offer letter as authoritative and send it back to IDLC. * IDLC collects initial information about the client. The initial information are * CIB Undertaki ng & haoma XII (if a limited company) for that client to be sent to Bangladesh Bank for CIB Report of the applying client (as per rule of Bangladesh Bank) * IDLC looks for banks opinion for that client The designated Relationship Manager prepares the appraisal report and evaluated the clients proposal. The appraisal report consists of * Background analysis of the company * Management and organization * Cost estimate of equipment/vehicle * Technical and marketing analysis, both from macro and micro level * Financial analysis of the company. i. e. profitability projection, credit report, year wise performance * The appraisal report seeks approval from the appropriate authority. First of all the Relationship Manager places the report to Credit Evaluation Committee (CEC), which consists of representative from Credit Risk Management, Operational Risk Management, General Manager and Deputy Managing Director.After CEC consent, the report is sent to approving authority. * After approval, t he documentation process starts. A sanction record is prepared and a sanction letter is issued in the clients name. However, depending on the nature of negotiation, the documentation procedure varies. * The client collects the asset. * Proper insurance coverage is done depending upon the asset and procurement of asset from a selected pool of insurance companies. * The lease operation starts i. e. a formal agreement is signed by both IDLC and lessee. The lessee starts to pay the rental and the lease continues. * Generally, just after the last rental is paid on a regular basis, the transfer of ownership takes place.Depending upon the negotiated transfer price at the beginning, IDLC transfers the assets ownership to the client and lease expires. However, the lease operation can also be expired early through fond(p) termination or foreclosure. For new clients the following few steps are added * Identification of client the identification of new client is done through relationship man agement. The main sources of information about new clients are * Existing client * Word of Mouth * Internal Connection * Client call * Walk-in Client * Prepare extensive appraisal report and seek formal bank & FI opinion. The documentation procedure can differ depending upon the modes of acquisition of asset.According to the guideline provided by Bangladesh Bank, IDLC considers the following factors while appraising a client and its finance proposal 1. Business Risk Factors * Industry * Size * Maturity * Production * Distribution * Vulnerability * rivalry * Demand- supply situation * Strategic importance for the group and for the country * Concentration * Market reputation 2. Financial Risk Factors * Profitability * Liquidity * Debt management * Post Balance sheet events * Projections * Sensitivity Analysis * lucifer Group Analysis * Other Bank Lines 3. Management Risk Factors * Experience/relevant background * dawn record of management in see through economic cycles * Succession * Reputation 4. Structural Risk Factors * Identify working capital requirement Relate the requirement with asset conversion cycle * intention of the facilities should be clear and thus mode of disbursement should be preferably structured in a manner to make direct payment to the third party through LC, pay order, Bangladesh Bank cheques etc. 5. Security Risk Factors * Perishablilty * Enforceability /Legal structure * Forced Sale Value (calculations of force sale value should be at least guided by Bangladesh Bank guidelines) - 4. 3 WEIGHTS ASSIGNED TO EACH RISK FACTOR CRITERIA WEIGHT LEVERAGING 20% The ratio of a borrowers total debt to tangible net worth. LIQUIDITY 20% The ratio of a borrowers Current Assets to Current Liabilities. PROFITABILITY 20% The ratio of a borrowers Operating Profit to Sales. ACCOUNT CONDUCT 10% Time length of relationship with the client railway line OUTLOOK 10% A critical assessment of the medium term prospects of the borrower, taking into account t he industry, market share and economic factors. CRITERIA WEIGHT MANAGEMENT 5% The quality of management based on the aggregate number of years that the Senior Management Team (top 5 executives) has been in the industry. personalized DEPOSITS 5% The extent to which the bank maintains a personal banking relationship with the key business sponsors/principals. AGE OF BUSINESS 5% The number of years the borrower has been engaged in the primary line of business. SIZE OF BUSINESS 5% The size of the borrowers business measured by the most recent years total sales. Preferably based on audited financial statements. - 4. 4 MEASURES TAKEN FOR RESTORATION OF DEFAULT CLIENTS The Special Asset Management Department of IDLC is responsible for mending and improving the repayment pattern of the default clients.Principal Objectives of the SAM department is keeping overdue situation at possible lowest level so that provision for dues can be minimized so that the negative impact of defaults on t he reported profit of IDLC can be kept at minimum level. For this the department goes through the following procedures 1. Monitoring the overdue situation of the financed projects 2. Initiating procedures as appropriate for each case Some clients fail to make payments of rentals/ installments to the lender/ lessor institution. In several cases, the disaster is temporary, which is eventually paid within a short time. But in other cases, the client continues to default and the situation worsens since it deteriorates the profitability condition of IDLC, just like any other Financial Institution.So, critical measures are taken on the part of IDLC and these measures are mainly undertaken by Special Asset Management Department. 4. 5 FUNCTIONS OF SPECIAL ASSET MANAGEMENT (SAM) The Special Asset Management Department performs a number of activities to keep the overdue situation of IDLC within minimum level. These are 1. Overdue Monitoring- Corporate, SME, Syndication 2. Overdue follow Up- Corporate, SME, Syndication(Phone, Visit, letter) 3. SAM Client Follow Up- (Regular, Difficult, Block, Litigated)- Phone, Visit, Letter, Negotiation 4. Termination, Block & Litigation- Initialization, Follow up, Court Attendance 5. Appointment of Lawyers for different Legal Procedures 6.Recovery component Appointment & Follow up 7. Rescheduling- Negotiation, Approval, Follow up 8. Routine works Receivable Calculation, Closure, Waiver Approval, Adjustments, Reconciliation. 9. Letter Issue- Overdue Clients SAM departmental Targets 1. Collection of Overdue Rentals 2. Reduction of Non- performing Loans (NPL) 3. Reduction of Infection ratio 4. Bad/Loss Provision Management- Incremental Provision Control 4. 5. 1. RECOVERY ACTION PLAN BY SAM Special asset management takes various recovery actions to reduce the overdue amount, thus reducing the infection ratio. These actions differ on the basis of investment classification as follows 4. 5. 1. 1 REGULAR ACCOUNTS (RGACC) Age of overdue One t o Three months * Call immediate ext working day after 1st default installment to remind about overdue. * Try to get specific commitments from client. Committed date should not decease seven days. * In case of no response from client within seven days, call the client again in order to ascertain reasons for delay and obtain another specific