The central bank has introduced guidelines on the Internal Credit Risk Rating System (ICRRS), aiming to reduce the volume of classified loans through maintaining credit risk exposure within acceptable levels.
The guidelines along with a model will be a valuable addition to the credit risk management tools, which will help the banks develop and maintain a better-quality credit portfolio, officials said.
"It will also play an important role in reducing non-performing loans (NPLs) in the country's banking sector," a senior official of the Bangladesh Bank (BB) told the FE.
Some 20 sub-sectors under four key sectors have been included in the model considering financial risks and efficiency of the borrow management, the central banker explained.
The existing Risk Grading System (RGS) along with ICRRS and the model will be functional simultaneously until June 30, 2019, he added.
"But the banks must implement the ICRRS along with the mode from July 01, 2019," the BB official noted.
The ICRRS refers to the system to analyse a borrower's repayment ability based on information about a customer's financial condition, including their liquidity, cash flow, profitability, debt profile, market indicators, industry and operational background, management capabilities and other indicators.
It also describes the creditworthiness of the borrower of a particular sector based on the assessment criteria set for that sector, according to the guidelines, issued by the BB on Tuesday.
The ICRRS also said banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual borrower transaction.
"The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation," it added.
Since exposure to credit risk continues to be the leading source of problems in banks, they should have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and they are adequately compensated for risks incurred, according to the ICRRS.
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