Credit risk management and performance evaluation of Southeast Bank Limited

Abstract

Credit risk is one of the most vital risks for any commercial bank. Credit risk arises from non performance by a borrower. It may arise from either an inability or an unwillingness to perform in the pre-commitment contracted manner. The real risk from credit is the deviation of portfolio performance from its expected value. The credit risk of a bank is also effect the book value of a bank. The more credit of a particular is in risk, the more probability of a bank to be insolvent. Therefore, the status of depositor in the bank is at risk and probability of incurring loss from their deposited value. In other way the risk of a commercial bank is calculated through long term and short term rating by the credit rating agencies. Southeast Bank Limited is a scheduled commercial bank in Bangladesh. This is one of the leading private commercial banks which is established under the banking companies Act 1991, the bank began its operation on 1995 with a primary objective of offering all types of commercial banking services mostly emphasizing on promoting small and medium entrepreneurs all over the country. This report is the fulfillment of the requirement for the evaluation process of the internship program. The main purpose of the report is to have an overall idea about function and process of credit risk management, analyzing tools and techniques used to evaluate credit proposal, analyzing steps taken to recover Bank’s bad portfolio of Southeast Bank Limited. Lending is one of the main functions of a bank. The objective of Credit Risk management of Southeast Bank Limited is to minimize the risk and maximize banks risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters. The Credit Risk Management department is responsible for upholding the integrity of the Bank’s risk/return profile. Credit Risk Management Department of Southeast Bank Limited conducted their functions by six wings. Central Collection Unit collects the credit. Special Asset Management wings help the bank to recover Banks bad portfolio. For credit approval, the Bank has a team who approve the credit. Different tools and techniques are being used to evaluate a credit proposal. Retail Credit, Cards Credit, Authorization and Fraud Control, Central Verification Unit (CVU) are related with retail underwriting. Credit Collection Unit of Southeast Bank Limited collects credit based on the level of delinquencies of credit. Special Asset Management wings help the Bank to recover bad portfolio by taking different types of steps. To understand the performance of the present credit risk management process, the year by year ratio of loans which are grouped on basis of classification rules in the total loan and advances has analyzed. From the performance analysis, it is found that the collection of Standard Loan decline in year 2009 because of the national and global economic situation which reflects a low ratio of Standard Loan to total loans and advances. As a result, the balance of SMA, Sub standard, Doubtful and Bad/Loss loan increases in year 2009. Since 2009, national as well as global economy started to fallen in a dangerous phase of slowing growth and rising risk. But with the right initiatives taken by the top management of Southeast Bank Limited i.e. establishment of regional Credit Risk Management Centers, introduction of new wing called Special Asset Management & Credit Inspection, since the following year 2010 the situation has become normal which reflects the economy Bangladesh where economy starts back to upward growth phase from the impact of global recession. Although Southeast Bank Limited is successfully operating credit risk management, the Bank should improve in some areas which will take help the Bank to become the leader of banking sector.