Briefly describe five indicators of poor credit risk management with examples.
According to Bangladesh Bank’s Credit Risk Management guidelines, the following are key indicators of poor credit risk management:
Absent or Flawed Credit Culture
The bank lacks a sound credit culture — or the existing culture is materially flawed. Strategic and business plans encourage taking on liberal levels of credit risk. Anxiety for income dominates planning activities over prudent credit selection.
Example: Relationship managers are rewarded solely on loan volume — not on credit quality — leading to rapid growth in risky loans.
Insufficient Due Diligence on New Products
The bank engages in new loan products or initiatives without conducting sufficient due diligence or testing.
Example: A bank launches a mass market personal loan product without testing the repayment capacity of the target segment, resulting in high default rates within the first year.
Unclear Responsibilities and Accountability
Responsibilities and accountabilities in loan origination, administration, or problem loan management are unclear. Staffing levels throughout these functions are inadequate, or skills are insufficient.
Example: No designated officer is responsible for monitoring loan covenants after disbursement — resulting in breaches going undetected until default.
Ignoring or Mismanaging Concentrations
The bank may not identify concentrated exposures, or identify them but take little or no action to limit, reduce, or mitigate the risk. Concentration limits, if any, are exceeded or raised frequently.
Example: A bank’s top 10 borrowers account for 60% of its loan portfolio — far exceeding the single-borrower and group-borrower limits — but no corrective action is taken.
Deficient Credit Analysis and MIS
Credit analysis is superficial, and key risks are overlooked. Risk ratings frequently deviate from Bangladesh Bank’s classifications. Management Information Systems (MIS) have deficiencies — the Board and senior management may not be receiving sufficient information to understand the bank’s credit risk profile.
Example: A bank’s quarterly portfolio report does not flag a 20% increase in Special Mention Account loans in the RMG sector, and the Board remains unaware of the concentration until a major default occurs.
