One of the important functions of the commerial banks is lending money to borrowers against deposits they receive in the form of savings, current, short-notice deposits, fixed deposits or special schemes in various names from the depositors which are the products of banks. Deposits are liability for banks as payable to depositors while loans and advances made to the them(borrowers) are receivable i.e. assets for the banks.  If borrowers fail to meet their obligation and do not repay such loans and advances, the same  are turned to classifed loans. Banks’ efforts for rescheduling of classified loans, interest-waiver or write-off may not work always, resultant facts  are  escalation of classified loans that may put the economy in trouble. The situation my push banks to liquidity crisis whcih is a big problem for them and hinder growth and development of economy.  Credit risk management is a big issue because credit facilities extended to borrowers may not be recovered either due to intentional behaviour of borrowers or for any other circumstances which are beyond their control. Credit risk arises from the possibility that a borrower will fail to meet his/her obligations in accordance with agreed terms. Basel Committee on Banking Supervision (BCBS) defined it as possibility of counterparty default.
Bangladesh Bank, the regulatory authority has issued sets of guidelines regarding core risks management of banks such as i. internal control and compliance risk, ii. asset-liability management risk, credit risk, foreign exchange risk, money laundering risk, information and communication technology security risk and environmental risk management checklist in line with internationally accepted risk management principles. While the issue of credit risk management arises,  other risks management also become relevant as credit risks are associated with other core-risks management of banks. Therefore banks need to identify, measure, monitor and control risks while extending credit to the borrowers so that loans and advances disbursed are not turned to classified loans.
While considering a loan proposal banks need to adopt series of procedures: credit assesment such as purpose of loan, credit ratings, borrower analysis, industry analysis, supplier/buyer analysis, historical financial analysis, projected financial analysis, account conduct etc. relevant to lending guidelines. Liquidity aspect of loan and advances is important.
While extending loans and advances for long term, ultimate contribution to economy and possibility of recovery need to be considered prudentially. Qualitative aspect, security of  proposed advances, environment aspect, low-risk based projects and national interest must be taken into account. Borrower’s SWOT(strength, weakness opportunity & threat)  analysis should be done. CIB report to be collected from central bank. Credit Risk Grading (CRG) components such as: Financial risk(leverage, liquidity,profitbility & coverage) ,Business/industry risk(size of business, age of business, business outlook, industry growth, market competition, entry/exit barrier) , management risk(experience, second line/succession & team), security risk(primary security coverage, collateral coverage & support)  and relationship risk(account conduct, utilization of given limit, compliance of condition, deposit strength) analysis need to be done.
The tiers of credit risk management are: Board of a bank, senior management, organizational structures at Head office’s lending divisions, recovery division, legal matters division, inspection/audit division, classification division, general manager’s office, principal office, regional office and branch level committees exist and they adopt multiple exposures for credit risks management.
There are procedural guidelines for processing approval, appeal, administration, disbursement, custodial duties, compliance requirement, monitorring, early alert system, recovery, non-performing asset management, provisioning, writing-off, management and incentive programme,  are all the steps in various stages of credit risks management. For mitigation of risks, adequate and eligible collateral securities/mortgages have to be obtained.
As banking system holds unique position in the growth and development of economy, a bank portfolio is not only limited to profit making; rather goes to social aspects as well. In all aspects, banks are obligated to follow central bank’s guidelines and government strategies and policies for the overall development of economy and the society. Sonali Bank limited the largest state-owned commercial bank of the country, in addition to treasury function and socio-economic activities extend / provide credit to all sectors of the economy.
  In view of the global warming or greenhouse effects, credit policy and management aim at financing  green banking projects like bio-gass plant, bio-mass plant, waste water management plant, effulent treatment plant etc. , extending loans to small and medium enterprises, agriculture and micro credit, financing in industrial projects, agricultural projects, import and export sector, etc.
For credit risks management, single tool will not work, rather multiple exposures/technique as illustrated will be required. Credit risks management is necessary for timely recovery of disbursed loans and advances, to minimize default loan and manage non-performing assets, ensure loans and advances for real and honest borrowers, to maintain optimum provision, ensure capital adequacy, running trade and commerce smoothly and growth and development of economy. Banks need to work seriously for managing credit risks for their own sustainability and that of the economy.

The writer is a banker. He is also executive secretary of national
anti-tobacco organisation, Adhunik