Chapter Five- Methodology

Chapter Five- Methodology

5.1 Research Design

The research design of the study uses an organized approach to gain insight into several different
factors of credit risk and its management inside the bank.

5.2 Data Collection

The necessary data are collected from a variety of sources. While secondary data is obtained
from annual reports, primary data is gathered through interviews with bank employees. The data
collecting procedure guarantees participant confidentiality and anonymity while abiding by
ethical standards.

5.3 Variables
The variables for credit risk analysis are-

1. Non performing loans (NPL)

2. Loan to Asset Ratio
3. Loan to Deposit Ratio
4. Loan Loss Provision Ratio
5. Liabilities to Equity Ratio
6. Return on Equity (ROE)
7. Return on Assets (ROA)
8. Size of Bank
9. Credit Rating

These variables are calculated for both Eastern Bank PLC and the peer group. Disparities
between EBL's ratios and peer group average are carefully examined to identify areas of superior
or inferior performance. Understanding EBL's competitive position, financial strengths,
weaknesses, and potential exposure to credit risk is made easier by the insights gained from this
research.

5.4 Limitations
Acknowledging the inherent limits of the study, such as time restrictions, data accessibility, and
sample representativeness, concerted efforts are undertaken to reduce biases and uncertainties by
means of a cautious analysis of the findings.

5.5 Ethical Considerations

The study complies with ethical guidelines that include informed consent, privacy, and accuracy
in the collection, use, and dissemination of data. Throughout the research process, participants'
privacy and confidentiality are protected.
 Chapter 6- Analysis & Management of
Credit Risk at Eastern Bank Limited

Chapter 6- Analysis & Management of Credit Risk at

Eastern Bank Limited

6.1 Overview of the Topic

All commercial operations involve some level of risk, but credit risk is a crucial component that
banks and other financial organizations must manage. The chance that a borrower or counter
party won't fulfill its responsibilities in line with the terms of the agreement is known as credit
risk. Thus, the bank's interactions with and lending to businesses, private citizens, and other
banks or financial institutions give rise to credit risk. Thus, the bank's interactions with and
lending to businesses, private citizens, and other banks or financial institutions give rise to credit
risk.

In light of the rapidly evolving global economy and the mounting pressures of globalization,
liberalization, consolidation, and disintermediation, banks must have strong policies and
procedures in place for managing credit risk that are both sensitive to and adaptable to these
developments.

Since credit lending is the primary business of commercial banks, credit risk management is one
of the most important aspects of bank management dynamics. This section of the research will
discuss Eastern Bank Limited's credit risk management procedures in detail before contrasting
and comparing them with Bangladesh Bank's prudential guidelines. Next, there will be a
simultaneous discussion of two crucial credit management practices: how to handle non-
performing loans and how to classify loans.

6.2 Credit Risk

Credit risk is the possibility of suffering a loss if a counter-party defaults on payments under the
terms and conditions that have been agreed upon, or if their creditworthiness declines. Both the
trading book and the banking book may present a credit risk. The Board's policies and
procedures of EBL offers a framework for managing credit risk. EBL has clearly segregated
responsibilities between the originator and approver of a business transaction in the risk function.

6.3 Procedures to Measure Credit Risk

The loan's quality must be known in order to gauge the bank's level of credit risk. The bank
won't take on too much credit risk if the loans are of good quality.
Nevertheless, the bank is undoubtedly taking on too much credit risk if the percentage of low-
quality loans is significant.

However, since this information is kept confidential by the company, it is hard to determine
which loans are low quality and which are good quality without internal access. Therefore, in the
event that qualitative information on the loans is unavailable and an analysis of a bank's credit
risk is attempted using external data, such as the numerical information regarding loans and
advances from the bank's annual report, the credit risk ratios of the bank should be calculated
first to compare with the peer group average (Islam, 2001). This process has been used to
calculate Eastern Bank Ltd.'s credit risk.

6.4 Indicators Used in Credit Risk Analysis & Management

The loan's quality must be known in order to gauge the bank's level of credit risk. The bank
won't take on too much credit risk if the loans are of good quality.
Nevertheless, the bank is undoubtedly taking on too much credit risk if the percentage of low-
quality loans is significant.

However, since this information is kept confidential by the company, it is hard to determine
which loans are low quality and which are good quality without internal access. Therefore, in the
event that qualitative information on the loans is unavailable and an analysis of a bank's credit
risk is attempted using external data, such as the numerical information regarding loans and
advances from the bank's annual report, the credit risk ratios of the bank should be calculated
first to compare with the peer group average (Islam, 2001). This process has been used to
calculate Eastern Bank Ltd.'s credit risk.

This section delves into some key metrics used to evaluate credit risk in the case of Eastern Bank
PLC. These metrics help in understanding and management of credit risk at EBL.
The parameters are shown in the table below.

Table 1: Credit risk indicators

Variables Measure
1. NPL (Non-performing loans) to Total Total NPL
Loans Total outstanding loans

2. Loan to Asset Ratio Total outstanding loans

Total assets

3. Loan to Deposit Ratio Total outstanding loans

Total deposits

4. Loan Loss Provision Ratio Loan loss provision

Total outstanding loan

5. Risk Weighted Assets Obtained from annual report

6. Loan Classification with NPL Obtained from annual report

7. Written-off Loans as Percentage of Total written−off loans

NPL Total NPL

8. Provision Coverage Ratio Loan loss provision

Total non performing loans

9. Credit Rating Obtained from annual report

10. Capital Adequacy Ratio Obtained from annual report

The three rival banks of Eastern Bank Ltd. — City Bank, Mutual Trust Bank Ltd & BRAC Bank
— were used to compute the peer group average of the ratios.

6.4.1 NPL to Total Loans

An important metric for evaluating the credit risk of a bank's loan portfolio is non-performing
loans, or NPLs. They are loans for which the borrowers have not made the agreed-upon
installments, suggesting the possibility of default or possible financial issues. Banks can protect
their financial stability and profitability by successfully identifying and managing credit risk
through the monitoring of non-performing loans (NPLs).
 Table 2: Comparison Between NPL to Total Loans of EBL & Peer Group
Average

Year EBL Peer Group Average

2017 0.025 0.0442

2018 0.0235 0.0460

2019 0.0335 0.0379

2020 0.0272 0.0318

2021 0.037 0.0374

2022 0.0274 0.0329

Throughout the six-year period, EBL continuously kept its NPL ratio below the peer group
average, demonstrating comparatively stronger credit risk management.
EBL's non-performing loan (NPL) ratio fluctuated, but overall it stayed below the peer group
average, indicating conservative lending practices and successful risk mitigation techniques.
Additionally, EBL's NPL ratio temporarily increased to 0.037 in 2021, which was still less than
the 0.0364 peer group average. This suggests that even though EBL encountered difficulties, it
handled NPLs more skillfully than its competitors in the sector.

A healthier loan portfolio is the result of EBL's ability to maintain NPLs below the peer group
average, which points to the need for proactive approaches in credit assessment, monitoring, and
recovery activities.

6.4.2 Loan to Asset Ratio

The loan to assets ratio shows how much of an asset is used for loans compared to other types of
assets like cash, securities, and machinery and plant. It calculates the proportion of loans and
advances to the bank's overall assets. Even yet, the majority of any commercial bank's assets on
its balance sheet typically consist of loans and advances. However, a big loan and advance also
means a significant credit risk because investing in loans has a larger possibility of not being
repaid than investing in securities. Because investments in securities, machinery, and plants may
yield a specific return with relatively little risk. However, investing in loans carries a very
significant default risk. Therefore, a bank with a significant provision for loan losses shouldn't
grow its loan portfolio without carefully weighing all loan sanctioning factors.

Table 3: Comparison Between Loan to Asset Ratio of EBL & Peer Group Average

Year EBL Peer Group Average

2017 0.6471 0.5335

2018 0.6833 0.3967

2019 0.6923 0.5920

2020 0.4891 0.6066

2021 0.5892 0.5935

2022 0.5668 0.5993

Over the course of the six years, EBL's loan to asset ratio shifted, pointing to changes in the
company's lending activity and asset mix.

EBL's Loan to Asset Ratio was constantly higher in 2017 and 2018 compared to the average for
the peer group, indicating a more aggressive lending approach and possibly increased exposure
to credit risk. But afterwards, EBL's ratio decreased, getting closer to or even below the peer
group average, pointing to a change in direction toward conservative lending practices and more
cautious management of lending policies.

6.4.3 Loan to Deposit Ratio

One important measure that banks use to evaluate their exposure to credit risk and liquidity is the
Loan to Deposit Ratio. It indicates how much a bank depends on client deposits to fund its
lending operations by calculating the ratio of total loans to total deposits. An elevated Loan to
Deposit Ratio could imply heightened credit risk, since it could signify a bank's reliance on
outside funding sources or possible limitations on liquidity.
A high loan-to-deposit ratio may also indicate that the bank is lending more aggressively, which
could lead to more risk and profitability. However, a low LDR might also mean that a bank is not
lending out enough money, which could lead to reduced earnings in addition to lower risk.
 Table 4: Comparison Between Loan to Deposit Ratio of EBL & Peer Group Average

Year EBL Peer Group Average

2017 0.9798 0.8326

2018 0.9668 0.4586

2019 0.9662 0.8131

2020 0.9446 0.7975

2021 0.8622 0.8704

2022 0.8221 0.8384

EBL's Loan to Deposit Ratio starting from the year 2017 to 2020 was considerably higher than
the average for its peer group, indicating more reliance on loans than deposits to fund its lending
operations. However in the following two years EBL , EBL's ratio decreased, getting below the
peer group average, suggesting a move in the direction of a more balanced funding structure and
maybe less exposure to credit risk. It also indicates EBL adapted to the changing industry
dynamics and managed risk effectively.

6.4.4 Loan Loss Provision Ratio

Banks use the Loan Loss Provision Ratio as an important measure to evaluate how adequately
they have set aside for possible loan losses. It calculates the percentage of all loans made by a
bank that are set aside as reserves for anticipated credit losses. While a lower ratio can point to
greater credit risk exposure or insufficient provisioning procedures, a higher loan loss provision
ratio might indicate proactive risk management and sufficient provisioning for any credit losses.
Table 5: Comparison Between Loan Loss Provision Ratio of EBL & Peer Group Average

Year EBL Peer Group Average

2017 0.0169 0.0510

2018 0.0113 0.0879

2019 0.0056 0.0077

2020 0.0047 0.0058

2021 0.0047 0.0091

2022 0.0016 0.0117

EBL's Loan Loss Provision Ratio in the six year period stayed much lower than the average for
the peer group, which may have been due to more cautious provisioning procedures or a lower
assessment of credit risk at the time. This also indicates comparatively superior risk management
and provisioning procedures.

Notably, EBL's ratio significantly decreased in 2022 to 0.001686563744, implying possibly

improved risk mitigation strategies or higher credit quality.

Overall, EBL's lower Loan Loss Provision Ratio in comparison to the industry average points to
careful provisioning and efficient credit risk management.

6.4.5 Risk Weighted Asset

The Risk Weighted Asset (RWA) metric is used by financial institutions to evaluate the degree
of risk attached to their assets, specifically loans and investments, in compliance with regulatory
requirements. It shows the entire asset worth of a bank after each asset class's risk level has been
taken into account. Lower-risk assets are given lower weights, and greater-risk assets are given
larger weights. RWA offers information about the asset portfolio risk profile of a bank. Banks
can determine the overall amount of credit risk to which they are exposed by allocating weights
to various asset classes according to their riskiness. This facilitates the identification of possible
risk concentration locations and the application of suitable risk reduction techniques. Banks must
keep sufficient capital reserves to offset possible losses from credit risk, according to regulatory
bodies. Basel III and other frameworks use RWA as the basis for determining regulatory capital
needs. To maintain financial stability and adhere to statutory capital adequacy ratios, banks must
maintain an adequate level of capital in relation to their RWA.

Table 6: Comparison Between RWA of EBL & Peer Group Average

Year EBL Peer Group Average

2017 165,435,329,078 183,822,664,539

2018 202,655,010,057 231,034,005,029

2019 207,437,099,388 226,181,049,694

2020 217,653,889,659 243,487,944,830

2021 253,387,602,954 279,290,801,477

2022 279,015,847,153 319,960,923,577

The RWA values show how much credit risk a company like EBL is exposed to, as well as how
complicated its asset portfolios are.

EBL's RWA exhibits a steady increase trend between 2017 and 2022, which may be due to the
bank's growing exposure to credit risk as well as the expansion of its assets. Even with this
increase, EBL's RWA values often stay lower than those of its peer group, indicating that it is
exposed to comparatively less credit risk than its peers.

Even while EBL's RWA continuously lags behind the peer group, with time, the difference gets
closer. This can be a sign that EBL is working to broaden its asset base and raise its exposure to
credit risk in order to stay competitive in the market.

Overall, the way EBL has managed its Risk Weighted Asset shows that it has struck a
compromise between risk management procedures and growth objectives. In spite of having a
lower RWA than its competitors, EBL has established a reputation for stability and resilience in
the banking industry through consistent expansion and careful risk management.
6.4.6 Loan Classification with NPL

Effective loan classification is essential for determining prospective risks and evaluating credit
quality. When categorizing loans according to their performance, Eastern Bank PLC complies
with regulatory requirements, paying special attention to Non-Performing Loans (NPL).

Table 7: Loan Classification of EBL with NPL (Figures are in million)

Classification status of loans and advances

2017 2018 2019 2020 2021 2022

Unclassifie
d loans:

Standard
(Excluding 174,470 198,458 220,039 219,480 255,564 294,480
Staff Loan)

Special
Mention 4,957 4,380 2,711 1,732 2,028 4,200
Accounts
(SMA)

Classified
loans:

Sub-
 standard 1,101 1,070 1,122 1,032 925 1,351

Doubtful 260 633 371 287 603 594

Bad/Loss 3,240 3,222 6,277 4,906 8,449 6,632

Executives
& staffs - 1,540 1,527 1,504 1,822 1,655
(HR loan

Total 184,027 209,306 232,051 228,943 269,393 308,915

Loans

Percentage
of
Classified 2.50% 2.35% 3.35% 2.72% 3.70% 2.78%
Loans &
Advances/
NPL of
EBL

Industry 9.31% 10.30% 9.32% 7.66% 7.93% 8.16%

NPL ratio

The percentage of classified loans and advances relative to total loans serve as an indicator of
NPL. It shows significant fluctuations over the years. It implies that proactive problem loan
identification, sufficient provisioning, and ongoing monitoring are essential in order to reduce
credit risk and preserve the overall condition of the loan portfolio. However, in 2022 EBL has a
commendable NPL ratio of 2.78% compared to the industry average of 8.16%. Besides, EBL has
consistently maintained a significantly low NPL ratio than the industry which can be attributed to
the cooperative efforts of its business units, credit risk management, special asset management,
senior management, and the diligent oversight of its esteemed Board of Directors. Additional
factors contributing to EBL's success include a proven track record of preserving high-quality
assets and implementing a rigorous underwriting process for top-notch corporate clients. These
factors together with their prudent underwriting practice, diligent portfolio monitoring, and
sound governance practices are responsible for the accomplishment.

6.4.7 Written-off Loans as Percentage of NPL

In the highly competitive banking industry, Eastern Bank PLC's written-off loan management
performance as a percentage of non-performing loans (NPL) is a critical metric for assessing
the effectiveness of its credit risk management strategies. Loans that a bank or other financial
institution has declared uncollectible and, as a result, deleted from its balance sheet are known
as written-off loans. Because of the borrower's continuous default, bankruptcy, or insolvency,
these loans are usually regarded as irrecoverable. While writing off a debt recognizes the
likelihood of not getting the entire amount repaid, it does not release the borrower from
repayment obligations. Written-off loans to NPL is an essential tool when it comes to evaluating
a bank's credit risk management procedures and the condition of its loan portfolio. The ratio
offers information on how well the bank's loan underwriting, risk assessment, and collection
procedures are functioning.

A high written-off loan to non-performing loan (NPL) ratio points to unsatisfactory asset quality
along with potential flaws in the bank's lending procedures. It implies that there is a sizable
amount of credit risk because a sizable share of the bank's loan portfolio is either in default or
has already defaulted. Moreover, a bank's profitability and financial performance are directly
impacted by written-off loans. The bank suffers immediate losses as a result of the loan write-
off, which lowers its asset base and profitability. Thus, a high write-off loan to non-performing
loan (NPL) ratio can reduce the bank's capital reserves and make it harder for it to withstand
losses in the future.

The effectiveness of the bank's credit risk management strategies can be assessed over time
by tracking the trend of written-off loans as a percentage of NPL. While an increasing trend
might suggest declining credit quality and insufficient risk mitigation strategies, a decreasing
trend might point to advancements in risk assessment, loan monitoring, and collection efforts.

Table 8: Comparison Between Written-off Loans as Percentage of NPL of EBL & Banking
Sector

Year EBL Banking Sector

2017 53.83% 67.96%

2018 80.11% 61.27%

2019 0.00% 52.07%

2020 0.00% 57.73%

2021 1.58% 48.77%

2022 35.40% 57.34%

In 2017 EBL’s written-off loan percentage was lower than the banking sector which indicates
EBL performed better than its rival banks. However in 2018 EBL had a greater percentage of
written-off loans, suggesting possible difficulties with credit risk management and loan recovery
this year. In the next two years, Eastern Bank PLC had no written-off loans, exhibiting efficient
credit risk management techniques that surpassed the industry averages for banks. However the
written-off loan percentage increased significantly in 2022 though remaining much lower than
the banking industry. This spike may indicate new difficulties in managing credit risk or
changing financial circumstances that affect how well loans perform.

In conclusion, as compared to the banking industry, Eastern Bank PLC's performance in

handling written-off loans as a percentage of NPL has fluctuated abruptly over time. Even if the
bank has shown that it can manage risk during certain times, ongoing efforts are needed to keep a
competitive edge and successfully reduce credit risk in the face of shifting market conditions.

6.4.8 Provision Coverage Ratio

A crucial financial indicator that evaluates a bank's capacity to withstand possible credit losses
from non-performing loans (NPLs) is the provision coverage ratio (PCR). It quantifies the
amount of reserves (loan loss provisions) that a bank has set aside to offset any losses from its
loan portfolio. A higher PCR shows the bank's caution in handling possible loan defaults and
denotes a better level of protection against credit risk. A higher PCR indicates better asset
quality and implies that the bank has made sufficient provisions for possible loan defaults. A
crucial sign of a bank's risk management procedures is PCR. A better PCR indicates a proactive
approach to risk identification, assessment, and mitigation by the bank. It proves the bank's
capacity to foresee possible losses and take preventative action to preserve its financial
stability.

Bangladesh's commercial banks are experiencing a provision shortage due to the banks' inability
to fulfill their core security obligations which indicates the industry's financial health is
declining. According to Dhaka Tribune, in 2023, the commercial banks of the nation were
required to set aside Tk98,900 crore for provisioning against their outstanding loans of
Tk1,618,000 crore. However, they were only able to retain Tk79,700 crore, resulting in a roughly
75% deficit.

Table 7: Comparison Between Provision Coverage Ratio of EBL & Banking Sector
 Year EBL Banking Sector
2017 68.03% 84.70%

2018 48.23% 88.40%

2019 16.87% 89.20%

2020 17.55% 99.80%

2021 27.30% 92.10%

2022 30.79% 89.90%

Over the period from 2017 to 2022, Eastern Bank PLC's performance in managing its provision
coverage ratio (PCR) shows notable variances when compared to the banking sector. We can see
that EBL has performed poorly in maintaining provision for loan losses compared to the
banking sector as the ratios are significantly lower. The ratio improved over 2020-2022
indicating improvements in the bank's credit loss provisioning and other risk management
procedures. It also suggests that EBL took effective measures to reinforce its risk management
system to reduce credit risk and improve overall financial resilience.

6.4.9 Credit Rating

Since credit rating offers an unbiased evaluation of a company's capacity to fulfill its financial
commitments, it is an essential component of credit risk assessment. Credit rating agencies
examine a range of variables, including market position, industry prospects, management caliber,
and financial performance, in order to determine a company's creditworthiness. Higher credit
ratings, like AAA or AA, imply a lower default risk and reassure creditors about the relative
safety of their loans or investments. On the other hand, a lower credit score indicates a larger
default risk.

Table 10: Comparison Between Credit Rating of EBL & Peer Group
 Bank Credit Rating

Eastern Bank Ltd AAA

BRAC Bank AAA

City Bank AA1

Mutual Trust Bank Ltd AA+

Source: Bangladesh Bank Website

The highest credit rating possible, AAA, is given to EBL and denotes exceptionally strong
creditworthiness. This implies that EBL has a very low default risk and a high likelihood of
fulfilling its financial commitments completely and on schedule. The fact that EBL has a AAA
credit rating speaks well of its overall risk profile, managerial caliber, and financial stability.
With a AAA credit rating, BRAC Bank and EBL are rated similarly. This suggests that BRAC
Bank is likewise quite creditworthy and that it will most likely be able to pay its debts. However,
City bank and Mutual Trust Bank Ltd lags behind EBL which suggests EBL is a better performer
than most of its competitors in terms of managing credit risk.

6.4.10 Capital Adequacy Ratio

The capital adequacy ratio, which is the ratio of a bank's capital reserves (both Tier 1 and Tier 2
capital) to its risk-weighted assets (RWAs), assesses the capital adequacy of a bank in relation
to its RWAs. A greater CAR denotes a more robust financial standing and enhanced resilience
to unfavorable economic circumstances and credit risk incidents.

An adequate CAR acts as a safety net against future losses brought on by credit risk events like
defaulted loans or recessions. It guarantees that banks maintain sufficient capital reserves to
withstand unforeseen losses without endangering their capacity to maintain sound financial
standing or meet their duties to stakeholders, including depositors. In order to preserve the
stability of the financial system and secure the interests of depositors, regulatory bodies impose
minimum capital adequacy requirements on banks. Adherence to the CAR requirements is
indicative of a bank's capacity to exercise caution and sustain enough capital buffers to sustain
its activities and mitigate possible losses.

Table 11: Comparison Between Capital Adequacy Ratio of EBL & Banking Sector
 Year EBL Banking Sector
2017 10.24% 10.80%

2018 9.33% 10.80%

2019 14.74% 12.10%

2020 15.23% 11.60%

2021 14.08% 12.50%

2022 14.61% 11.60%

The bank's capital adequacy and resilience to credit risk events are indicated by the CAR
values in relation to the banking industry overall.

EBL's CAR changes periodically within a relatively small range between 2017 and 2022. Even in
the face of these fluctuations, EBL often keeps its CAR values either slightly below or on par
with the banking industry, demonstrating a steady and well-capitalized position.

Even though EBL's CAR periodically falls short of the industry average for banks, it constantly
has a superior capital adequacy ratio in comparison to its rivals. This shows that over the years,
EBL has successfully managed its capital resources to sustain its operations and reduce its
exposure to credit risk.

6.4.11 Loan Concentration

The degree to which a bank's loan portfolio is significantly skewed toward particular borrowers,
businesses, sectors, or geographic areas is known as loan concentration. It gauges the level of
risk connected to the loans' distribution within the portfolio, emphasizing the potential for
vulnerabilities brought on by an excessive reliance on particular industries or entities. If
unfavorable events affect the concentrated sectors, there is a higher chance of credit losses
associated with high loan concentration.

From Eastern Bank PLC's perspective, loan concentration is an important component of credit
risk management that requires consideration. To evaluate the possible risk exposure linked to
concentration in particular businesses, sectors, or borrower categories, the bank's loan portfolio
composition is analyzed.

Table 12: Loan Concentration of EBL

 Concentration Risk Appetite EBL’s Position

2017 2018 2019 2020 2021 2022

Large loan Less than 56% 47.45 49.26 45.56 32.10 33.28 31.00
% % % % % %

On top 20 Less than 25% 20.25 17.55 27.45 25.83 23.10 26.89
borrowers % % % % % %

EBL's risk appetite for large loans ranged from 31.00% to 47.45% between 2017 and 2022,
although it never exceeded 56%. This suggests that EBL has set a cautious ceiling on the
percentage of its large loans relative to its entire loan portfolio. The bank has generally kept its
significant loan exposure within the designated threshold, despite variations, indicating a
methodical approach to controlling concentration risk in this segment of the market. In addition,
EBL exhibits an even tighter control on concentration risk with their risk appetite on the top 20
borrowers, which is set at less than 25%. The bank's performance from 2017 to 2022
demonstrates percentages that continuously remain within the specified range, ranging from
17.55% to 27.45%. This suggests that EBL is taking a cautious approach to minimizing
concentration risk, especially with regard to loans from its top 20 borrowers , which, if
concentrated too much, could provide a serious credit concern.

EBL's proactive approach to controlling loan concentration and credit risk mitigation is
demonstrated by its adherence to predetermined risk appetite criteria on large loans. EBL
exhibits a dedication to preserving a well-balanced and diverse loan portfolio by instituting
prudent restrictions and continuously assessing its exposure to large loans. Although changes in
market conditions or strategic modifications may cause fluctuations in loan concentration
percentages, EBL's overall record indicates successful control of concentration risk within
reasonable bounds.
6.5 Credit Risk Management Department in EBL

In order to maximize productivity, the credit risk management department is appropriately

positioned within the organizational dynamics. This specific section of the bank approves all
requests from corporations and SMEs. The department's activities comprise:

• Monitoring the bank's asset quality;

• Supervising the credit policies, processes, and controls pertaining to all credit risks emerging
from corporate, commercial, and institutional banking, personal banking, and treasury
operations.
• Oversee the direct management of all loss, doubtful, and substandard accounts in order to
optimize recovery and guarantee that timely and suitable loan loss provisions have been made.
• To accept (or reject) credit applications that RM recommends, within the bounds of power
assigned to them. To suggest approval to the MD or CEO when the total borrower exposure
exceeds the approved limitations.
• To advise and support line management and RMs on any credit-related issues.
• To guarantee that loan executives has the necessary skills and/or experience to do their jobs
well.

The bank's framework for managing credit risk is organized by the Board of Directors (BoD),
which also assigns power to management to establish processes. The Credit Policy Manual is
intended to satisfy current organizational needs while also offering flexibility for the future. It
comprises the fundamental guidelines for determining, assessing, authorizing, and managing
credit risk in the bank. These guidelines are the bank's minimal requirements for extending
credit; they do not replace expertise and sound judgment.

The department possesses the necessary tools to manage a wide range of business dynamics
challenges. The department has established a unique position for itself within the company
owing to its excellent technological facilities and ample workforce. The team leader, who's
highly qualified, leads the group of seven members. The department's standard operating
procedures for SME sectors are outlined in the sections that follow.

6.6 Credit Policies & Procedures

The fundamental guidelines for determining, assessing, authorizing, and overseeing credit risk
inside EBL are found in the Credit Policy Manual. The Board of Directors has adopted these
policies, which are intended to be both flexible enough for the future and to satisfy current
organizational requirements. These guidelines are the bank's minimal requirements for extending
credit; they do not replace expertise and sound judgment. The policy covers retail, small and
SMEs , and corporate risks. Together, policies and procedures have created a systematic and
standardized approach to managing credit risk at the portfolio and obligor levels.
Industry/business risk, management risk, financial risk, facility structural risk, security risk,
environmental risk, reputational risk, and account performance risk are all included in a thorough
credit evaluation process. In order to improve internal control and oversight and lessen conflicts
of interest, the credit risk management function operates independently of business-originating
departments. Credit risk management is clearly the responsibility of the Head of Credit Risk
Management (HoCRM).

6.7 Credit Risk Grading Manual of Bangladesh Bank

Bangladesh Bank's Credit Risk Grading (CRG) Manual offers a set of guidelines for evaluating
the credit risk connected to lending. It describes the implications, applications, and quantity of
credit risk grades in the CRG system in addition to their abbreviations. The grades indicate the
quality of credit and range from "Superior" to "Bad & Loss." Additionally, the handbook explains
how to compute credit risk grading, including how to identify the main risk components, assign
weights, and determine the final grading based on the overall score received. Sound credit risk
grading systems help banks stay safe and sound by enabling well-informed decision-making.
Credit risk is measured by grading systems, which also distinguish between individual credits
and credit groupings based on the risk they represent. It allows examiners and bank
management to keep an eye on variations and patterns in risk levels. Additionally, the
procedure enables bank management to control risk and maximize returns.

The 8 categories of CRG scale proposed by Bangladesh Bank are as follows

1. Superior
2. Good
3. Acceptable
4. Marginal/Watchlist
5. Special Mention
6. Sub standard
7. Doubtful
8. Bad & Loss

Bangladesh Bank instructs the banks to follow the following Credit Risk Grading process:

● A bank shall complete credit risk grading for any exposures (regardless of magnitude)
that aren't covered by the Short-Term Agricultural and Micro-Credit as well as the
Consumer and Small Enterprises Financing Prudential Guidelines.
● The score sheet is not suitable for Superior Risk Grading (SUP-1). The standard for
superior grade accounts, which is 100% cash covered and backed by bank and
government guarantees, will serve as the basis for this.
 ● If fundamental information about a borrowing customer is available, current, reliable, and
includes parameters/risk, then a credit risk grading matrix could be helpful in analyzing
credit proposals, new or renewal for regular limits, or specific transactions. Factors are
carefully and impartially evaluated.
● In order to determine a realistic earning status for the borrower, the relationship manager
should make sure that the Limit Utilization Form is correctly completed.
● In order to provide the proper grading, risk variables must be properly assessed and
weighted based on the most recent and trustworthy data, and total objectivity must be
guaranteed. Entering the actual parameter in the Credit Risk Grading Score Sheet is
necessary.
● The relationship manager should be the one to start the credit risk grading activity, and it
should be a constant and ongoing procedure. The relationship manager is responsible
for filling out the Credit Risk Grading Score Sheet, determining the risk grade after
consulting with a senior relationship manager, and documenting the grade according to
the Credit Risk Grading Form.
● All credit proposals, whether they are for new or renewed facilities, should include a)
Data Collection Checklist, b) Limit Utilization Form c) Credit Risk Grading Score Sheet,
and d) Credit Risk Grading Form.
● The authorized Credit Risk Grading Form would subsequently be given by the credit
officers to the Corporate Banking, Line of Business, Recovery Unit, and Credit
Administration Department for updating their records and MIS.
● Any subsequent modification, such as an upgrade or downgrade in credit risk grade,
must be approved by the relevant approving authority using the same Credit Risk
Grading Form.

EBL adheres to the proposed Credit Risk Grading process in the assessment of its credit risk.

6.8 Classification of Credit Risk

For the purpose of risk management, Eastern Bank Limited has divided its credit risks into four
major categories. Every kind of risk has an own approach to risk management. The four main
risk categories that the bank has internally established are as follows:

Class A: Client credit facilities are guaranteed by-

• 100% cash, secured by funds in EBL's cash margin account;
• 100% EBL fixed deposits, fully pledged and lienable in the bank's favor
• 100% fully pledged and encumbered in the form of Govt. Sanchya Patra

Class B: Credit facilities that are provided to customers and guaranteed by:
• Business asset hypothecation, including inventory, book debts and assets, and plant and
machinery
• Debt repayment of real estate and other fixed assets, such as factory land and buildings
• Guarantees from reputable financial institutions or liens on their fixed deposits;
• Guarantees from individuals or businesses;
• Government guarantees via the Ministry of Finance

Class C: Exchange fluctuation risk refers to credit facilities that are granted to cover or hedge
foreign currency risk against letters of credit. EBL's clients purchase a product known as
Forward Contract (FWD FX), which is further detailed as follows:
• Risk of Exchange Fluctuation
• Contract forwarding in opposition to credit letters
• Hedge EBL/other bank letters of credit's foreign exchange risk
• Maximum Risk for 180/360 Days

Class D: This type of risk can be further stated as follows and pertains solely to risks assumed by
banking financial institutions:
• The risk associated with banking financial institutions (FI), such as Bangladesh Bank
• Call,STD,Time placement with banks
• Term Exposure on banking institutions
• Financing against acceptances of banking institutions
• Negotiation of Export documents against valid exports
• Pay Order/Demand Draft drawn by a banking financial institutions purchasing
• Maintaing Nostro Account with other banking Financial Institutions
• Treasury Bills purchase from Bangladesh Bank

6.9 SME Department’s Responsibility

Bringing business to the bank is the main responsibility of the SME section. The clients are
managed by Relationship Managers in various branches; they draft proposals following a
uniform structure (an example credit application package is included in the appendix) and
forward them straight to the Head Office's SME section. The SME team reviews the proposal to
look for any potential problems and checks the paperwork. The proposal is then forwarded to the
CRM division. Only the SME bids are allocated to three of the seven credit officers. Every credit
officer has been assigned to a certain branch. The SME department therefore submits ideas to the
officers based on branch allocation.

6.10 The Loan Database

A specific loan proposal is entered into a database called "Log Sheet" once it is received.
Keeping track of all the proposals assigned to each credit officer is the main purpose of this
database. Finding each file's current state at any given time is the main goal. The Head of CRM
receives a weekly report from the database, while the Head of SME receives a monthly report on
SME proposals from the database. Proposals are submitted to the appropriate credit officers after
being entered into the database.

After that, the credit officers begin looking over the loan proposal. The main goal is to determine
the customer's precise financial requirement, allocate funds appropriately, and reduce the bank's
exposure to risk in the process. The suggestions can be roughly categorized as one-time and
regular in terms of frequency. One-time offers include bank guarantees, LC, FBPD, LBPD, and
so on. The approval of new credit, such as cash credit, demand loans, and time loans, is referred
to as the regular proposals. Pay order, labor order for a time loan, facility reorganization, etc. The
time each officer needed, on average, to examine these two main categories of proposals is listed
below:

Proposal Type Required review period

One time 2 days

Regular 9 days

In accordance with regular operating practice, the officers examine the files at these times.

6.11 The Workflow

After receiving the loan proposal, the officer reviews it. He submits questions to the appropriate RM if he
has any observations or questions that are not included in the proposal. Following receipt of the query
replies, he develops his analysis and, on the basis of that, the proposal's recommendation. The officer's
immediate supervisor must first accept the suggestion. Once the supervisor does, the officer submits the
recommendation and the loan request to the HOCRM. HOCRM makes a conclusion after considering the
suggestions. The limit is then entered into the system by the Credit Administration division. The figure
below depicts a typical loan review activity performed by a credit officer.
 RM prepares Credit Application

SME Center, Head Office

Credit Officer, CRM

Approving Authority

Credit Administration

Figure 1: Activity of a Credit Officer

6.12 Renewal Proposal

A proposition known as a renewal extends the current relationship for an additional length of
time. The prior relationship was authorized for a specific amount of time, say a year. If the
customer wishes to maintain the relationship beyond the allotted term, they should get in touch
with the relevant branch's RM. The RM then drafts the renewal request in accordance with
regular procedure. It should be noted that this is known as "Renewal with enhancement" when
the prior limit is raised for the current year. The phrase "Renewal with reduction" refers to
reducing the prior limit, while "Restructure and renewal" refers to restructuring the previous
proposal.
First, the credit officer compares the new proposal's "facilities table" with those from the prior
proposal in the Credit Memorandum (CM) and Application for Limit (AFL) to check for any
differences. If there is, RM fixes the issue for him.

The steps taken during the evaluation process are-

❖ The current plan was previously approved for a specific amount of time. If the limit is not
paid in full after that date, it will become past due. The client will suffer as a result, and
Bangladesh Bank's CIB report will note this. Therefore, it is imperative that the petition
for renewal be filed long before the current expiration date. In order to save the customer
the shame, a time extension proposal could be accepted if there are any problems, such as
mortgage modifications or other complications.
❖ The bank must have sufficient insurance coverage for risks like fire, water, and other
hazards to its security. One hundred and ten percent is the precise insurance amount.
During evaluation, it is necessary to verify if the insurance has been renewed with the
firm.
❖ Periodically, the minimum interest rate is changed. Additionally, a higher authority must
approve any interest rate decrease, therefore it is important to confirm if the rate is being
lowered or not.
❖ The customer's address is often given, but the officer needs to make sure that it is still
listed and hasn't changed.

❖ Searching for any declaration from the Credit Administration Department is crucial.
Prior to the restriction being sanctioned, the declaration about paperwork and other
processes must be in place. Thus, the officer verifies whether or not all of the declarations
are in place.
❖ Verifying whether or not the CIB report has been acquired is another crucial step. This is
crucial since it allows for the identification of each client's loan status. A recent CIB
report, no more than six months old, is customarily attached to a loan proposal.

If the credit officer is happy with the limit's justification after doing all the analysis, he will
prepare his recommendation. He then presents the recommendations to his immediate supervisor
for approval. At last, HOCRM receives all of the documentation and grants his permission.
Following permission from HOCRM, the officer drafts a sanction letter in the bank's normal
format. A copy of the sanction letter is forwarded to the Credit Administration department,
which handles entering the credit limit into the system so that the customer may get his loan. The
original papers are kept in the client's credit file. The credit officer does a standard renewal
review in this manner.

6.13 Types of Credit Risk Management

Credit risk can be categorized in the ways listed below:

❖ Credit default risk: This risk is the possibility of suffering a loss because a debtor is not
likely to repay a loan in full or because a debtor has past due a significant amount of
money by more than ninety days. All credit-sensitive transactions, such as loans,
securities, and derivatives, might be impacted by default risk.
❖ Concentration risk: The risk attached to any one exposure, or set of exposures, that has
the potential to result in losses significant enough to jeopardize a bank's primary business
activities. It might manifest as an industry concentration or as a concentration of one
single name.
❖ Country risk: Country risk is the possibility of suffering a loss if a sovereign state
defaults on its debts or freezes payments in foreign currencies.

6.14 Problem Credit Management

The Special Asset Management Division (SMAD) of Eastern Bank Limited is responsible for the
management, settlement, and recovery of problem credits. Its primary duty is to develop
strategies and action plans for risk minimization, loss prevention, recovery maximization,
restructuring, direct recovery, and/or legal actions. The Division adheres to central bank
guidelines regarding asset impairment, and the Central Bank sets loan impairment/classification
criteria and provisioning policies through BRPD Circular No. 5 dated June 5, 2006. The
quantitative loan classification criteria and provisioning requirements are summarized as follows.
6.15 Credit Administration Department (CAD) of EBL

At its fundamental level, the Credit Administration Department's activities include the following:
1. Loan documentation
2. Loan disbursement

3. Credit Investigation
4. The Early Alert System
5. Sending reports to Bangladesh Bank

6.16 Special Asset Management Department (SAMD)

The bank's loan portfolio comprises all accounts categorized under the Special Asset
Management Department's purview. The following lists the three categorization categories that
the department maintains:

● Sub Standard
● Doubtful
● Bad and loss

6.17 Responsibility Sectors of SAMD

1. Maintaining and managing the classified accounts via quarterly reviews and updates and
monthly reporting.
2. Actively pursue recovery with the debtors,
3. When possible, rescheduling and restructuring loans either independently or in collaboration
with the relevant Relationship Manager, Unit Head, Area Head, Line of Business, and Head
Office Credit Risk Management.

4. SAMD presents a review for a rescheduling, restructuring, waiver, or write-off together with
any essential inputs from the relevant unit, branch, or line of business. The proposal is submitted
in accordance with the format and includes all necessary documentation, support, and
information to speed up the approval process from the relevant authorities, as indicated by the
CEO, Managing Director, and Head of Credit Risk Management.
5. Inform the client of the rescheduling, restructuring, or waiver letter following the EBL Board's
appropriate approval.
6. The Head Office Credit Risk Management releases the approved restructure, reschedule,
waive, or write-off proposal to the Credit Administration Department. This department is in
charge of notifying the client of the decision in conjunction with the Head of SAMD and starting
the process of making changes to the unit or branch's books of accounts.
7. SAMD is tasked with following up on such waiver, reschedule, and write-off loans.

Additionally, SAMD generates a Consolidated Report, which is sent to the Managing Director
and CEO together with the Head of Credit Risk Management on a quarterly basis, listing all
problematic loans that have been written off.

6.18 NPL Detection Process

The primary duty of all Relationship Managers, Sales & Service Managers, and Credit Managers
is to spot a problematic credit early on by spotting the warning indications of decline. These
indications comprise, but are not restricted to, the following:

i) Failure to pay principle or interest on due dates, past due amounts that are unpaid after a
reasonable amount of time, or recurrent past due amounts.

ii) No movement in the account for an extended length of time in the event of an overdraft, cash
credit, or other similar facility.

iii) According to the client's most recent financial accounts, there has been a decline in the
client's financial situation.

iv) A deficiency in collateral coverage, especially if the loan was granted solely on the basis of
the collateral or if the collateral played a major role in the decision-making process (i.e., fully
secured transactions).

v) The passing away or leaving the company of a major owner or managers.

vi) A business that files for bankruptcy or dissolves voluntarily.

vii) A negative market analysis of the business or its major investors.

6.19 Actions Taken for Classification of NPL

In these circumstances, the actions to take are:

i) CAD rechecks the account for any outstanding balances, including those in the names of the
owners, partners, or directors, as well as any outstanding balances in affiliated or related
companies.

ii) CAD carefully examines loan documents to ensure that "the bank has what the bank needs,"
that they are current, well completed, and in correct form (i.e., not time barred). A thorough
examination of the documents is a useful way for the Bank to be reminded of its legal rights
about the debtor, principle owner, guarantors, etc.

iii) CAD gets up-to-date numbers in order to examine them strictly on a liquidation basis. This
involves carefully examining the assets and liabilities to ascertain who has a prior lien or
preferential claim over which assets. A title search is conducted for Limited Liability
corporations at the RJSC office, the location of all submitted charges.

iv) Should guarantors be engaged, CAD carefully examines the net worth statement and takes
action to safeguard EBL's rights in relation to other creditors. Put another way, if at all feasible,
establish liens on the guarantor's property or send the guarantee a demand notice.

v) Credit lines are frozen concurrently with the scenario evaluation, with warning given to all
parties involved, based on the "damage control" concept, after the account is assessed as
substandard.

vi) To categorize the account, a report is filed in the required format according to standard
guidelines. In the Portfolio Review Format, a contemporaneous initial action plan to improve or
restore the outstanding is also submitted for approval.

vii) After conducting a thorough analysis of the account's problem scenario, the reviewer
determines the possible solutions-

• Workout without postponing it

• Arrange for a suitable rescheduling agreement, as well as any necessary new paperwork and
renegotiated collateral security, in order to reschedule.
• Legal action, which is done right away (with prior consent from the relevant approving
authority) when it is determined that there is a need to prevent the borrower or the guarantor's
assets from being transferred or disposed of.

6.20 Classification Method

The following rules are adhered to in order to determine an account's "Classified" status.
i) The rigorous implementation of the risk rating evaluation, which is required for every
borrowing relationship, is the first step in the classification procedure of an account. Any account
that is thought to be classified must be submitted via a Portfolio Review Form or be directly
categorized by Head Office Credit Risk Management which are

● Special Mention

• Sub standard
• Doubtful
• Bad & Loss

ii) The most important Rules of Thumb that cause the classification to occur, nevertheless,
continue to be unpaid interest, principal, expired limits, or past due principal that keeps coming
up every 90 days or longer.

6.21 Downgrading or Upgrading Classified Accounts

The methods for raising or lowering the classified accounts are as follows:

a) The onus is mostly on the involved Relationship Manager to start the classification process by
promptly submitting the Portfolio Review Form.

b) Should anyone in charge of the account in the tiers neglect to recognize and report a classified
name, this obligation initially escalates upstream to the Unit Head/Sales & Service Manager
before moving laterally to Relationship Managers.

c) The concerned Relationship Manager/Unit Head/Area Head, Head of Line of Business,

reviews the Portfolio Review Form as soon as it is submitted. In the end, the latter suggests an
action plan to upgrade or recover outstanding along with the classification category or severity.
The categorization and the associated action plan for recovery or upgrade are reviewed by the
head of credit risk management and approved by the managing director and CEO.

d) The concerned Relationship Manager/Unit Head/Area Head, Head of Line of Business,

reviews the Portfolio Review Form as soon as it is submitted. In the end, the latter suggests an
action plan to upgrade or recover outstanding along with the classification category or severity.
The categorization and the associated action plan for recovery or upgrade are reviewed by the
head of credit risk management and approved by the managing director and CEO.
Copies of the approved Portfolio Review Form must be released and distributed by Head Office
Credit Risk Management to the following:
1. Area Head, Corporate Banking / Head of Line of Business

2. The concerned manager of sales and services or unit head

3. Head of the Department of Special Asset Management

e) During a routine review of the loan portfolio at a branch or unit, Head Office Credit Risk
Management may also independently categorize an account.

In such a case, Head Office Credit Risk Management will fill up the Portfolio Review Form and
forward it for information to the relevant Relationship Manager, Unit Head, Area Corporate
Head, Head of Line of Business, and/or Head of Special Asset Management Department. After
consulting with RM, Unit Head, Area Head, and Head of Line of Business, the Head of Special
Asset Management Department will propose the recovery/upgrade action plan to the Managing
Director, CEO, and Head of Credit Risk Management for approval.

f) The regulating agency (Bangladesh Bank) may replace this classification with one that is more
severe, or downgrade it.

g) When necessary, Head Office Credit Risk Management or an internal auditor may carry out an
independent evaluation of the classified credit and record the reasons why the credit declined and
the errors that occurred.

h) The exclusive authority to upgrade a classified account is held by the Head of Credit Risk
Management, Managing Director, and CEO; however, the suggestion must come from the Head
of Special Asset Management Department. The approval of the Head of Line of Business or Area
Head of Corporate Banking, with appropriate rationale, is necessary to continue the business
strategy (if any) for the upgraded account.

i) Every officer who recommends an upgrade for a classified account must provide a thorough
and impartial justification for the upgrade. Any upgrade should essentially start with the total
removal of the reason(s) for classification.
j) The Special Asset Management Department receives Classified Accounts in the following
manner:

• Every single account that has been reduced to Sub Standard classification.

• All accounts that have been lowered to the status of Doubtful or Bad & Loss.
• The RM completes a Request for Action and a Handover/Downgrade Checklist and sends them
to SAMD for acknowledgment within 7 days of an account being demoted to substandard (SS-
5).

• The account is given to a SAMD account manager, who will then draft an action plan for
recovery or upgrade and get it approved by the managing director and CEO as well as the head
of credit risk management after consulting with the relevant relationship managers, unit heads,
area heads, and heads of line of business.

• An officer in the Special Asset Management Department receives credit files from Corporate
Banking/Line of Business and transfers them to their department. They are responsible for
handling accounts classed as Substandard, Doubtful, Bad, and Loss, and they will keep track of
any upgrades or downgrades.

• To guarantee loan documentation review on his or her end, an officer in the Special Asset
Management Department must sign the Loan Documentation Checklist.
• To create a recovery/upgrade action plan that works, an officer in the special asset management
department must analyze the stock report and stock inspection report of classified accounts.
Attached are the stock inspection report and specimen of stock report.

• Proposals for reorganization, rescheduling, or waiver for classified accounts are processed by
the Special Asset Management team using the usual waiver procedure. The proposal must
include copies of all prior approvals, the client's most recent sanction letter acceptance, the
lawyer's assessment, and the most recent progress update on the loan documentation.

k) In the framework of • Recovery, the Head of Special Asset Management in H.O. collaborates
with the Managing Director, CEO, and Head Office Credit Risk Management on all upgrading
and recovery initiatives in case of recovery, loan loss provision and restructure, REschedule,
waivers or write-offs.

6.22 Classified Accounts Reporting Process

The following is a summary of the classified account reporting process:

i) Managing Director & CEO and Head Office Credit Risk Management must receive a separate
monthly report on accounts that were previously classified but were not upgraded or recovered.
It is imperative to maintain complete accuracy while reporting their names. The Department of
Credit Administration is the source of these reports.
ii) Head Office Credit Risk Management and Managing Director & CEO receive monthly reports
from the Head of Special Asset Management Department regarding the recovery status of all
newly and currently classified accounts.

iii) The Managing Director & CEO and Head Office Credit Risk Management get a quarterly
report on Classified Accounts from the Head of the Special Asset Management Department.

6.23 Non-earning Loans

The following policies are carefully adhered to while handling unpaid or uncollected interest in
accounts that are categorized as such:

i) If interest is not already classed as Special Mention Non Earning or even lower (like Sub-
standard), it must be so if it is overdue by more than ninety days.

ii) Interest is assessed on any loan that is categorized as Special Mention, Substandard, or
Doubtful; nevertheless, this interest cannot be recognized as income. All of this interest is
credited to Interest Suspense (Credits) A/C. or any other account that Bangladesh Bank has
specifically set up for this purpose.

iii) Interest is not charged after a loan is designated as bad or loss; instead, it is suspended from
the date of the classification. A memorandum or contingent entry is made for the suspended
interest, which is subsequently reversed or brought back as actual liability upon filing a lawsuit
for recovery or in the event of a restructuring, waiver, or settlement. These contingent or memo
items are monitored and reported to the head of credit risk management and the managing
director & CEO on a quarterly basis by the head of the special asset management department.

iv) An appropriately managed overdraft facility may be deemed profitable as long as the amount
owed and the interest charged to the account stay below the authorized and legal limit. However,
unless specifically authorized by the Head of Line of Business, the Area Head Corporate, the
Sales & Service Managers, or both, it is not permitted to extend overdraft limits in order to
absorb interest charges; this is only allowed if the interest is repaid by a cash deposit into the
account within 60 days of the debits.

v) Substandard loans may undergo restructuring or rescheduling, subject to the requirement that
accrued unpaid interest be capitalized as part of the new arrangement. Exceptions to the
aforementioned regulation may only be made under certain specific circumstances, and only
then:
a) Based on a "Work-out" credit proposal, the relevant approving authorities approve the
restructuring or rescheduling.

b) Only once all rescheduling-related paperwork has been completed and all prerequisite
requirements have been met is the interest to be capitalized with principal reserved from interest
suspense accounts.

vi) Classified accounts that have been approved for reorganization or rescheduling may be
upgraded or declassified to Marginal/Watchlist-3, or put under earning status, if the next two
requirements are satisfied.

a) The borrower consistently fulfills their repayment obligations in line with the repayment plan.

b) There is a guarantee of prompt repayment of all contractually owed principal and interest.

However, Head Office Credit Risk Management's prior approval is required before returning
such accounts to earning status under this pretense.

vii) Previously, in order to declassify or upgrade an account in accordance with Bangladesh

Bank's requirements, pre-fact clearance from Bangladesh Bank was required for accounts that
the bank's auditors had classified during their inspection. However, BB has amended its policy to
allow the bank's board of directors to declassify an account. But in this instance, BB has to be
notified of this phenomenon.

6.24 Classified Accounts Review

Classified accounts such as substandard, doubtful, and bad and loss are examined every three
months in accordance with the bank's Obligor Risk Rating (ORR) policies.

In the event that the relationship manager determines that normal lines should not be renewed
due to irregularities, past dues, etc., but rather that the outstanding amounts should be placed on
liquidation basis (i.e., adjustment purpose), a renewal work out CM covering

a) The outstanding, with particular maturities,

b) The anticipated date of liquidation or the facilities' expiration and

c) A plan of action for upgrading or finishing recovery needs to be completed normally, and the
account needs to be graded Special Mention.
Relationship Managers should submit renewals based on the most recent accessible financials if
the most recent ones are not available. The CM needs to be accompanied by more than a cursory
trade or bank check.

6.25 Creating Loan Loss Provision

The Bank is making the Loan Loss Provision exercise essential for all Head of Special Asset
Management and Line of Business employees as part of a practical and cautious strategy to
maintain the quality of the Bank's loan portfolio and, consequently, the income stream.
Such an exercise is mandated by:

a) Widely recognized banking practices;

b) A conservative approach to evaluating the quality of risk assets, whereby the Bank's books
reflect the most accurate health of the Loan Portfolio; and

c) Adherence to Bangladesh Bank guidelines and instructions regarding provisioning.

The guidelines listed below are adhered to:

i) According to the prudential provision practice, the provision exercise should be ongoing, with
the necessary provision made whenever an account is classified and stays classified, rather than
waiting until the end of the fiscal year. Based on reports on Classified Accounts pertaining to the
previous quarter, the provision exercise must be completed by the end of each quarter.

ii) The Loan Loss Provision exercise is conducted in accordance with the instructions and
guidelines provided by the Bangladesh Bank.

iii) Loan Loss Provision Policy, unless amended by Bangladesh Bank.

"Eligible Securities" refers to the following for the purposes of provisions against categorized
loans:

-100% of the deposit under deposit against the loan

-100% of the market value of gold or gold ornaments pledged with the Bank

- 50% of the market value of an easily marketable product held under bank control

- 100% of the value of a government bond or Sanchayapatra under lien

-50% of the market value of any land and buildings that are mortgaged by the bank
-50% of the face value of any shares listed on the stock exchange, or 50% of the average market
value for the previous six months, whichever is less.

6.26 Guidelines for Lending

The bank has produced Credit Policies (also known as "Lending Guidelines") that specify the
requirements that must be met in order for loans to be granted, as well as the priorities that senior
management believes should be focused on business development. All lending and marketing
officers receive a copy of the Lending Guidelines, which are updated at least once a year to take
into account shifts in the bank's loan portfolio and the state of the economy. Based on the
approval of the bank's Head of Corporate/Commercial Banking and Head of Credit Risk
Management, the Managing Director/CEO and Board of Directors adopt the Lending
Guidelines.Credit applications clearly state any departures or deviations from the Lending
Guidelines and offer a rationale for their acceptance.

6.27 Assessment of Credit

Before any loans are granted, a comprehensive credit and risk evaluation is carried out for each
facility, and this is done at least once a year after that. The assessment's findings are included in a
credit application that is approved by credit risk management (CRM) and comes from the
relationship manager/account officer ("RM"). As the proprietor of the customer relationship, the
RM bears the responsibility of guaranteeing the completeness and correctness of the credit
application that is presented for approval. Since they are knowledgeable about the bank's lending
guidelines, RMs should investigate potential new borrowers, principals, and guarantors.
To make sure new borrowers, principals, and guarantors are who they say they are, RMs must
get to know their clients and perform due research on them. The bank has set money laundering
and know your customer (KYC) policies, which are followed at all times.

Credit applications include an overview of the RMs risk assessment findings and should at the
very least contain the following information:

• The kind and amount of the proposed loan(s).

• The reason behind loans.

• Loan Structure (Interest, Tenor, Covenants, and Repayment Schedule)

• Arrangement of Security
6.28 Division of Duties

The following lending functions are segregated by EBL:

• Approval of Credit and Risk Management

• Marketing and Relationship Management

• Management of Credit

The goal of segregation is to raise the standards of knowledge and proficiency in each area,
manage the distribution of approved loan facilities, and acquire an impartial assessment of credit
proposals.

6.29 Parameters of Loan Facility

Where the bank's security posture is weaker than that of any other financial institution, the bank will not
issue facilities.

Security-related assets are always adequately covered. To be exact, EBL guarantees 110% insurance on
the security that is hypothesized for a given institution. The customer can obtain insurance from the
bank's own roster of insurance providers.

Before loans are approved, the property that has been taken as collateral is valued. A reputable
independent professional valuation business is also assigned to carry out the valuations.

6.30 Monitoring of Credit

Systems and procedures for monitoring are in place to give an early warning of a borrower's
declining financial health in order to reduce credit losses. Systems are in place, at the very least,
to notify the appropriate executives in the CRM and RM team of the following exceptions:

- Past-due trade invoices, account excesses, past-due principal or interest payments, and loan
covenant violations;

- Financial statements are regularly received, loan terms and conditions are tracked, and any
exceptions or breaches of covenants are reported to the RM team and CRM for prompt follow-
up.
- In response to the results of any internal, external, or regulatory inspection or audit, prompt
corrective action is done.

- Every year, or more often, a Credit Application must be submitted in order for all borrower
connections and lending facilities to be evaluated and approved.