Credit Risk Grading (CRG)”. Risk is inherent in all aspects of a commercial bank’s operation; however one of the most significant risks a bank is exposed to is credit risk. CRG is a combination of both qualitative and quantitative instruments used to calculate a “score” representing the applicants’ probability of default and to sort borrowers into different default class. CRG is also needed for outstretching the available limit or renewal of the credit facility.
With the world moving toward Basal II the need to introduce a Risk Grading System (RGS) for the banking industry became immensely essential. In 2003, Bangladesh Bank made the Core Risk Management Guidelines (CRMG) mandatory. For the first time CRMG was introduced for grading unclassified accounts. The CRMG however was not detailed enough for banks to fully implement a RGS. Therefore in January 2005, BIBM, was instruct by governor Bangladesh Bank to produce credit risk grading manual based on the core risks management guidelines. The CRGM is a mandatory replacement of Lending Risk Analysis (LRA) and will be applicable for all exposures (irrespective of amount) other then those covered under consumer and small Enterprises Financing prudential guidelines and also under the short- term agriculture and Micro- Credit.
CRG needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders.
by Mainul Islam