Definition of Credit Risk Grading (CRG)

 The Credit Risk Grading (CRG) is a collective definition based on the pre- specified scale and
reflects the underlying credit-risk for a given exposure.
 A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator
of risks associated with a credit exposure.
 Credit Risk Grading is the basic module for developing a Credit Risk Management system.

1.2.2 Risk Grading

All Banks should adopt a credit risk grading system. The system should define the risk
profile of borrower’s to ensure that account management, structure and pricing are
commensurate with the risk involved. Risk grading is a key measurement of a Bank’s
asset quality, and as such, it is essential that grading is a robust process. All facilities
should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade
assigned to a borrower and its facilities should be immediately changed. Borrower Risk
Grades should be clearly stated on Credit Applications.

The following Risk Grade Matrix is provided as an example. Refer also to the Risk
Grade Scorecard attached as Appendix 1.2.2. The more conservative risk grade (higher)
should be applied if there is a difference between the personal judgement and the Risk
Grade Scorecard results. It is recognized that the banks may have more or less Risk
Grades, however, monitoring standards and account management must be appropriate
given the assigned Risk Grade:

Risk Rating Grade Definition

Superior – Low Risk 1 Facilities are fully secured by cash deposits,
government bonds or a counter guarantee from a top
tier international bank. All security documentation
should be in place.
Good – Satisfactory Risk 2 The repayment capacity of the borrower is strong.
The borrower should have excellent liquidity and
low leverage. The company should demonstrate
consistently strong earnings and cash flow and have
an unblemished track record. All security
documentation should be in place. Aggregate Score
of 95 or greater based on the Risk Grade Scorecard.
Acceptable – Fair Risk 3 Adequate financial condition though may not be
able to sustain any major or continued setbacks.
These borrowers are not as strong as Grade 2
borrowers, but should still demonstrate consistent
earnings, cash flow and have a good track record.
A borrower should not be graded better than 3 if
realistic audited financial statements are not
received. These assets would normally be secured
by acceptable collateral (1st charge over stocks /
 debtors / equipment / property). Borrowers should
have adequate liquidity, cash flow and earnings.
An Aggregate Score of 75-94 based on the Risk
Grade Scorecard.
Marginal - Watch list 4 Grade 4 assets warrant greater attention due to
conditions affecting the borrower, the industry or
the economic environment. These borrowers have
an above average risk due to strained liquidity,
higher than normal leverage, thin cash flow and/or
inconsistent earnings. Facilities should be
downgraded to 4 if the borrower incurs a loss, loan
payments routinely fall past due, account conduct is
poor, or other untoward factors are present. An
Aggregate Score of 65-74 based on the Risk Grade
Scorecard.
Special Mention 5 Grade 5 assets have potential weaknesses that
deserve management’s close attention. If left
uncorrected, these weaknesses may result in a
deterioration of the repayment prospects of the
borrower. Facilities should be downgraded to 5 if
sustained deterioration in financial condition is
noted (consecutive losses, negative net worth,
excessive leverage), if loan payments remain past
due for 30-60 days, or if a significant petition or
claim is lodged against the borrower. Full
repayment of facilities is still expected and interest
can still be taken into profits. An Aggregate Score
of 55-64 based on the Risk Grade Scorecard.
Substandard 6 Financial condition is weak and capacity or

Risk Rating Grade Definition

inclination to repay is in doubt. These weaknesses
jeopardize the full settlement of loans. Loans
should be downgraded to 6 if loan payments remain
past due for 60-90 days, if the customer intends to
create a lender group for debt restructuring
purposes, the operation has ceased trading or any
indication suggesting the winding up or closure of
the borrower is discovered. Not yet considered
non-performing as the correction of the deficiencies
may result in an improved condition, and interest
can still be taken into profits. An Aggregate Score
of 45-54 based on the Risk Grade Scorecard.
Doubtful and Bad 7 Full repayment of principal and interest is unlikely
(non-performing) and the possibility of loss is extremely high.
However, due to specifically identifiable pending
factors, such as litigation, liquidation procedures or
capital injection, the asset is not yet classified as
Loss. Assets should be downgraded to 7 if loan
payments remain past due in excess of 90 days, and
interest income should be taken into suspense (non-
accrual). Loan loss provisions must be raised
against the estimated unrealisable amount of all
facilities. The adequacy of provisions must be
reviewed at least quarterly on all non-performing
loans, and the bank should pursue legal options to
enforce security to obtain repayment or negotiate an
appropriate loan rescheduling. In all cases, the
requirements of Bangladesh Bank in CIB reporting,
loan rescheduling and provisioning must be
followed. An Aggregate Score of 35-44 based on
the Risk Grade Scorecard
Loss 8 Assets graded 8 are long outstanding with no
(non-perfo rming) progress in obtaining repayment (in excess of 180
days past due) or in the late stages of wind
up/liquidation. The prospect of recovery is poor
and legal options have been pursued. The proceeds
expected from the liquidation or realization of
security may be awaited. The continuance of the
loan as a bankable asset is not warranted, and the
anticipated loss should have been provided for.
This classification reflects that it is not practical or
desirable to defer writing off this basically
worthless asset even though partial recovery may be
effected in the future. Bangladesh Bank guidelines
for timely write off of bad loans must be adhered to.
An Aggregate Score of 35 or less based on the Risk
Grade Scorecard
At least top twenty five clients/obligors of the Bank may preferably be rated by an outside
credit rating agency.
 Appendix 1.2.2
Risk Grade Scorecard
Borrower /
Group: Score Risk Grade
Industry Code:
95+ 2 Aggregate Score: ________
75-94 3
Date of Grading: 65-74 4
Date of 55-64 5
Financials: 45-54 6 Risk Grade: ________
35-44 7
Completed by: < 35 8

Criteria Weight Parameter Points Actual Points Weighted Score

(Points *
Weight)
Gearing 20%
< 0.25 100
The ratio of a borrower’s 0.26 – 0.35 95
Total 0.36 – 0.50 90
Debt to Tangible Net
Worth. 0.51 – 0.75 85
0.76 – 1.25 80
1.26 – 2.00 75
All calculations should be 2.01 – 2.25 70
based on annual financial 2.26 – 2.50 65
statements of the borrower 2.51 – 2.75 60
(audited
preferred). 2.76 – 3.00 55
> 3.00 0

Criteria Weight Parameter Points Actual Points Weighted Score

(Points *
Weight)
Liquidity 20% > 3.50 100
3.0
0 – 3.49 95
2.7
The ratio of a borrower’s 5 – 2.99 90
2.5
Current Assets to Current 0 – 2.74 85
2.0
Liabilities 0 – 2.49 80
1.5
0 – 1.99 75
1.1
0 – 1.49 70
0.9 – 1.09 65
 0
0.8
0 – 0.89 60
0.7
0 – 0.79 55
< 0.70 0

Profitability 20%
> 0.30 100
0.2
5 - 0.29 95
0.2
The ratio of a borrower’s 0 - 0.25 85
0.1
Operating Profit to Sales. 5 - 0.19 80
0.1
Operating Profit defined as 0 - 0.14 75
Gross Profit 0.0
minus all 5 - 0.09 70
0.0
expenses. 2 - 0.04 65
0.0 - 0.01 50
<0 0

Account
Conduct 10%
Customer for more
than 2 years, with
no 100
past dues and
faultless
record.
Customer for more
than 6 months up
to 90
2 years with
faultless
behavior.
New Account with
known satisfactory 80
dealings with other
banks.
Some late
payments
or bounced
cheques, 75
though always
cleared
 in 15 days or less.
Frequent past
dues,
irregular items or 0
bounced cheques.
Business
Outlook 10%
Exceptional 100
A critical assessment of
the
medium term prospects of
the Favourable 90
borrower, taking into
account
the industry, market share
and Stable 80
economic factors.
Slightly Uncertain 70
Cause for Concern 0
Criteria
Weight Parameter PointsActual Points Weighted Score
(Points * Weight)
Management 5%
> 30 years 100
The quality of
management 25 – 30 years 90
based on the aggregate 20 – 24 years 80
number
of years that the Senior 15 – 19 years 75
Management Team (top 5 10 – 14 years 65
executives) has been in the
industry. < 10 years or any
succession issues or 0
other management
weaknesses are
identified.
Personal
Deposits 5% All personal
accounts
The extent to which the are maintained in
bank the 100
maintains a personal bank, with
banking significant
deposits.
relationship with the key
business
sponsors/principals.
Principals maintain
 some accounts, but
have 75
relationship with
other
banks.
No relationship 0
Age of Business 5%
> 25 years 100
The number of years the 20 – 25 years 95
borrower has been
engaged in 15 – 20 years 85
the primary line of
business. 10 – 15 years 80
5 – 10 years 75
2 – 5 years 70
< 2 years 0

Size of Business 5% Sales in

BDT Millions
The size of the borrower’s
business measured by the
most > 1,000 100
recent year’s total sales. 750 – 1,000 95
Preferably based on
audited 500 – 750 90
financial
statements. 250 – 500 85
100 – 250 80
50 – 100 75
25 – 50 70
< 25 0