Guidelines on  Internal Credit Risk Rating (ICRR) system for banks

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Guidelines on  Internal Credit Risk Rating (ICRR) system for banks


Background of Internal Credit Risk Rating System

  • Lending Risk Analysis (LRA)- 1993
  • Credit Risk Grading (CRG) 2005
  • Internal Credit Risk Rating System  2018


Background of Internal Credit Risk Rating System

  • Prepared for 20 Different Sectors .
  • Ideal Assessment Parameters  Fixed on the Analysis of three-year Data of 220 Audited Financial Statements Collected From 22 Scheduled Banks .
  • Data also collected from 54 Companies Listed on Dhaka Stock Exchange




  • ICRRS refers to the system to analyze 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.
  • The summary indicator derived from the system will be called Internal Credit Risk Rating (ICRR).


Use of Internal Credit Risk Rating (ICRR) – (Four Uses)

  • To provide a granular, objective , transparent, and consistent framework for the measurement and assessment of customers’ credit risk.
  • To facilitate the portfolio management activities.
  • To  assess the quality of individual borrower to help the banks to determine the quality of the credit portfolio, line of business, the branch or the Bank as a whole.
  •  To be used for individual credit selection, credit pricing, and setting credit limit and terms and conditions.


Function of ICRR System –(Three Functions)

  • ICRR System a Fully Automated System that calibrates the characteristics of different sector  and industries in one single model;
  • If the borrower is in multiple lines of business, the sector should be used for assessing the line of business generating the highest portion of the revenue &/or profit.
  • If there is no particular line of businesses can be singled out- the ICRRS should be conducted using “other industry- if manufacturing” or “other service-if service”.


General Instructions –(Ten Instructions )

  • Using ICRR by Bangladeshi Bank without making any changes, extensions, modification or deletion.
  • ICRR  for all exposures except consumer loans, small  enterprises having total loans exposure  less than BDT 50 lac, short term agree , micro-credit and loan to bank, NBFI and Insurance.
  • The quantitative part of the ICRR completed by an analyst other than Relationship Manager.
  • Verified by an independent verifier on an on-going basis.
  • Relationship Manager shall complete the qualitative assessment part .
  • ICCR shall be an integral part of the credit approval process.
  • Independent credit risk function responsible for the accuracy and integrity of the rating.
  • The executive summary report of the ICRR of the borrower shall be approved and signed by the Chief Risk Officer (CRO) and
  • Those loans that are approved below the CRO level e.g zonal office or branch office, the executive summary report of the ICRR shall be approved and signed by the final approval authority
  • Banks shall use the latest audited financial statements of the borrower. 
  • All credit proposals whether new, renewal or enhancement shall be gone through the ICRR process .
  • A  set of the ICRR report shall be retained in the credit file.
  • The Relationship Manager shall pass the approved ICRR report to the related department for updating their MIS/record.
  • Banks shall conduct the routine internal audit to check whether the ICRRS is functioning as per the instructions laid down in the guidelines.


Frequency of Credit Risk Scoring

  • ICRR shall be conducted for all credit proposals including renewal or enhancement of the existing proposal;
  • For existing credit relationship, the ICRR shall be reviewed at least annually at the time of annual/regular credit review.


Selected Sectors  :

  1. Industry (14 Sectors)

  Ready Made Garments (RMG), Textile (including spinning, knitting, weaving), Food and Allied Industries, Pharmaceutical, Chemical, Fertilizer, Cement, Ceramic, Ship building, Ship breaking, Jute Mills, Steel Engineering, Power and Gas, Other industry (only to be selected if the borrower falls under industry but does not fit with other 13 specific sub-categories)  


  1. Trade and Commerce
  2. Agro Base and Agro Processing
  3. Service (Four Sectors )
Housing and Construction, Hospitals and Clinics, Telecommunication and Other Service.    


Credit Risk Rating Scores:

  The ICRR consists of 4-notched rating system covering the Quantitative and Qualitative parameters.  



Definitions of Credit Risk Rating:


Excellent :

  • Aggregate score of 80 or greater in ICRR.
  • Strong repayment capacity of the borrower evident by the high liquidity, low leverage, strong earnings, and cash flow
  • Borrower has well established strong market share.
  • Very good management skill & expertise.


Good  :

  • Aggregate score of 70 or greater but less than 80 and the quantitative score of at least 30.
  • These borrowers are not as strong as “Excellent “borrowers, but still demonstrate consistent earnings, cash flow and have a good track record.
  • Borrower is well established and has strong market share.
  • Very good management skill & expertise.


Marginal :

  • Aggregate score of 60 or greater but less than 70 and the quantitative score of at least 30.
  • This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower.



  • Aggregate score of less than 60
  • Financial condition is weak and no capacity or inclination to repay. 
  • Severe management problems exist.
  • Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage).


Management Action Triggers (Seven Triggers):

  • Banks are allowed lending to a borrower if the borrower’s ICRR is “Excellent” or “Good”
  • For the “Marginal “cases, the bank shall take cautionary measures in renewing the facilities or lending new money to the customers.
  • No loan can be sanctioned to borrowers whose ICRR is “Unacceptable” unless the loan is 100% cash covered or guaranteed by the government, sovereign entity or banks or the loan is for any state-owned organization or state-owned project.
  • If the ICRR falls under “Marginal” or “Unacceptable” for any risk criteria (among 16 quantitative and 18 qualitative); whatever the aggregate score is, the relationship manager should evaluate what would be the impacts of such on loan repayment and justify how those risk(s) is(are) mitigated;
  • In deriving ICRR, whatever score a borrower gets in the qualitative analysis if the score in the quantitative part is less than 50%, the borrower’s ICRR shall be “Unacceptable”.
  • Bank can make renewal and enhancement of existing loans for maximum 2 (two) times if the borrower’s ICRR is “Unacceptable”.
  • In conducting qualitative analysis, justifications for all criteria are required to be documented.
  • Bank must maintain portfolio level data base for the asset base with “Excellent”, “Good” “Marginal” and “Unacceptable” category and maintains risk appetite/tolerance level for portfolio.


Exceptions to Credit Risk  Scoring (Seven Exceptions ):


  • For a newly established company with no meaningful financial statement, the bank can apply a manual rating based on the projected financial statements .
  • For the Above , rating of the borrower shall not better than Marginal. However, the bank must run the rating module once the full year audited financial statements are available.
  • For large business conglomerate, rating substitution is allowed based on the rating of Corporate Guarantor (legally enforceable, irrevocable and unconditional) of the performing concern of the same group or holding company.
  • ICRR shall be conducted on the guarantor to determine whether the guarantor has the ability to support the borrower at the time of need.
  • Rating generation is discouraged using outdated financial statements (i.e available audited financial statements are more than 18 months old).
  • In exceptional cases where there is valid reason for delay in audited financial publication, out dated financial statements can be accepted only if up to date unaudited financial statement is submitted, but the rating shall not be better than “Marginal”. In this case, the conditioned mentioned in para 1.10(a) is to be followed.
  • Rating shall be downgraded if there is any internal/external factors or information that have not been captured in the rating/financial statements .
  • For the proprietorship & partnership, un audited financial statement can be used but due diligence should be conducted on financial statements through checking bank statements recording the sales collection, stock/receivable position, peer analysis, bank liabilities etc.
  • If the customer is in multiple lines of business, the most appropriate sector/industry shall be the line of business generating revenue more than 50% of total revenue. If there is no particular line of businesses can be singled out- the rating for “other industry” or “other services” should be used.
  • This guideline and enclosed model will be the minimum standard of risk rating; and banks may adopt more sophisticated risk rating model in line with the size and complexity of their business.


Quantitative Indicators and Associated Weights ( Six Broad Categories):

Quantitative IndicatorsWeightDefinition
1.Leverage (10%)  a) Debt to Tangible Net Worth (DTN)  7Total Interest-bearing liabilities or Financial Debt/ Total Tangible Net Worth
b) Debt to Total Assets (DTA)3Total Interest-Bearing Liabilities or Financial Debt/  Average Total Assets
2.Liquidity (10%)  a)  Current Ratio (CR)7Current Assets/ Current Liabilities
b) Cash Ratio (Cash)3Cash and easily marketable securities/ Current Liabilities
3.Profitability (10%)a) Net Profit Margin (NPM)5 Net profit after tax/ Net Sales
b) Return on Assets (ROA)3Net profit after tax/ Average Total Assets
c) Operating Profit to Operating Assets (OPOA)2Operating Profit/ Average Operating Assets



Quantitative Indicators and Associated Weights:



Quantitative IndicatorsWeightDefinition
4.Coverage 15%  a)Interest Coverage (IC)3Earnings Before Interest and Tax/Interest Expense
b)Debt Service Coverage Ratio (DSCR)5Earnings Before Interest Tax Depreciation Amortization/ Debts to be Serviced
c) Financial Debt to Operating Cash Flow (FDCF)4Financial Debt / Operating Cash Flow
d) Cash flow Coverage Ratio (CCR)3Cash flow from operation / Debts to be Serviced
5.Operational Efficiency (10%)    a) Stock Turnover Days (STD)4(Total Inventory/COGS)*360
b) Trade Debtor Collection Days (TDCD)3(Total Accounts Receivable/ Sales)*360
c) Asset Turnover (AT)3Sales /Average Total Assets
6.Earning Quality (5%)  a) Operating Cash Flow to Sales (CFS)3Operating Cash flow / Sales
b) Cash flow based accrual ratio (CAR)2=NI-(CFO+CFI) /Average Net Operating Assets



Qualitative Indicators and Associated Weights:



1. Performance Behavior10
Performance Behavior With Banks Borrowings9
Performance Behavior With Suppliers/ Creditors1
2. Business and Industry Risk7
Sales Growth2
Age Of Business2
Industry Prospects1
Long-Term External Credit Rating Of The Borrower2
3. Management Risk7
Experience Of The Management2
Existence Of Succession Plan2
Auditing Firms2
Change In Auditors In Last 4 Years1

  Qualitative Indicators and Associated Weights

4. Security Risk11
Primary Security2
Collateral/ Security Coverage5
Type Of Guarantee2
5. Relationship Risk3
Account Conduct3
6. Compliance Risk2
Compliance With Environmental Rules, Regulations And Covenants1
Corporate Governance1



Input Primary Information of Borrower and Select Sector/ Industry of the Borrower:



Bank’s Name:ABC Bank Limited
Branch Name:Gulshan
File/ Reference No:10000/100/10/1
Borrower Name:XYZ Limited
Group Name, if any:PQR
Type of Industry/ Sector:1. RMG
Industry Code:101
Ownership Type:Sole Proprietorship
Registration No/Trade License No:123
CIB Status:Standard
Financials Audit Status::Audited
Name of Audit Farm MNO
Analyst Name, Designation:PQR
Verifier Name, Designation:UBW
Date of Financials:43191
Date of Analysis (DD-MM-YYYY):43191
Date of Verification (DD-MM-YYYY):43191


Input data of balance sheet, profit and loss statement and cash flow statement:

  • In the input sheet of the balance sheet, profit, and loss statement and cash flow statement, Input must be given to all cells that are marked with yellow colors.
  • Moreover, while providing input to the balance sheet, profit and loss statement and cash flow statement following issues should be taken care of:
  1. a) Current Portion of Long-Term Borrowing/Loan

  • Input must be given to this cell. If “Current Portion of Long-Term Borrowing/Loan” is not found in the balance sheet, the analyst shall communicate this to the borrower.
  • If the amount is already added with the total loans in the balances sheet then “Current Portion of Long-Term Borrowing/Loan” must be deducted from the total loans and must insert the split figures in related cells.
  • If the figure is still zero, it means the borrower has no existing long-term borrowings; which is unusual. If found so, the analyst should interview the borrower.
  • If the analyst becomes certain that the borrower has no existing borrowings, then 0.01 shall be inserted in the corresponding cell.
  1. b) Other Current Liabilities:

  • To make the balance sheet balance i.e assets = liabilities + equity, deduct amount 0.01 in this cell, if the same is inserted in row 56: Current Portion of Long-Term borrowing/ Loan.
  1. c) Financial/Interest Expenses

  • Input must be given to this cell. If not found in the P&L, the analyst shall look into the notes of financial statement and communicate with the borrower to determine the amount.
  • If the figure is zero, it means the borrower has no existing borrowings; which is unusual.
  • If the analyst becomes certain that the borrower has no existing borrowings, then figure 1 must be inserted in the corresponding cell.


Qualitative Analysis:

GPerformance Behavior  10
G.1Performance behavior with banks borrowings  
G.1.1How many times the borrower got adversely classified in last 3 years  
 [ Aversely classified means the borrower’s loans classified as per BB loan classifications policy i.e SS, DF, BL]0 time5
 1 time4
  2 times3
  3 times1
  >3 times0
G1.2How many times the borrower’s loans got rescheduled/ restructured in last 3 years  
  0 time4
  1 time3
  2 times2
  3 times1
  >3 times0
G.2Performance behavior with  suppliers/ Creditors  
 Did the borrower pay its Suppliers/ Creditors regularly in last 1 yearYes1


HBusiness and Industry Risk 7
H.1Sales Growth  
 * Sales growth means the growth of sales from previous year sales>10%2
 The formula for calculating sales growth is [(current year sales – previous year sales)/ previous year sales]*1005%-10%1
 Less than 5%0
H.2Age of Business  
 The number of years the borrower>10 years2
 engaged in the primary line of business7 to 10 years1.5
  5 to 7 years1
  4 to 5 years0.5
  <4 years0
H.3Industry Prospects  
 Critical assessment of 5 (five) years prospect of industry and borrower’s sales volatilityGrowing and Low volatility1
 * Volatility denotes sales volatilityStable0.75
 Growing but High Volatility0.5
H.4Long-Term External Credit Rating of the Borrower  
 Rating Grade should be assigned in line with BB Rating Mapping as per BRPD circular 14/2018 on Risk-Based Capital Adequacy in line with Basel III.2&31.5


I Management Risk 7
I.1Experience of the Management  
 Quality of the  management based on total number of years of experience of  the senior management in the Industry.More than 10 years in the related line of business2
 * Senior Management means MD and next two tiers5–10 years in the related line of business1
  Less than 5 years0
I.2Existence of Succession Plan  
  Yes, with good capability of successor2
  Yes, but questionable capacity of successor1
  No successor0
I.3Auditing Firms  
 BSEC listed auditors are considered as recognizedRecognized Auditors2
 Other Auditors1
 Un audited0
I.4Change in Auditors in last 4 years  


JSecurity Risk 11
J.1Primary Security  
  Fully Pledged Facilities2
  Registered Hypothecation (1st Charge/1st Pari passu Charge)1.5
  2nd charge/Inferior charge1
  No security0
  Registered Mortgage on Municipal corporation/Prime Area property2
  Registered Mortgage on Pourashava/Semi-Urban/ Union parishad area property1.5
  Equitable Mortgage or No property but Plant and Machinery as collateral1
  No collateral0
J.3Collateral Coverage  
 The formula of collateral coverage is [forced sale value of collateral/ total loans]>100%5
  80% to 100%4
 * Forced sale value should be determined as per policies of BB. If there is no policy bank should determine their own policy.70% to 80%3
 50% to 70%2
J.4Type of guarantee  
  Bank Guarantee2
 Strong Corporate Guarantee means the credit rating of the guarantor should be at least 1 or 2 as per BB rating mapping mentioned in BRPD circular 18/2014 on Risk Based Capital Adequacy in line with Basel III.  Strong Corporate Guarantee1.5
 Personal Guarantees or Corporate Guarantee without Strong Financial Strength1
  No support/guarantee0


KRelationship Risk 3
K.1Account ConductMore than 3 years Accounts with Faultless Record3
  Less than 3 years Accounts with faultless record2
  Accounts having satisfactory dealings with some late payments.1
  Frequent Past dues & Irregular dealings in account0


LCompliance Risk 2
L.1Compliance with environmental rules, regulations and covenants  
L.2Corporate Governance  
 Independence of ManagementGood Corporate Governance1
  Questionable Corporate Governance0
 Total 40



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