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Board Memo: 2014/ Date: May 5, 2014

To : The Board of Directors, Prime Bank Limited, Dhaka.

From : The Managing Director, Prime Bank Limited, Dhaka.

Subject: Proposal for approval of counter party limits for (I) Money Market, Foreign Exchange and
other transactions with different Bank’s and (II) Fixed Deposits and overnight placement
with different Non-Bank Financial Institutions (NBFI’s).

Our existing Bank and NBFI limits were approved vide Board memo no. -----------------respectively. All
these limits were approved based on 2003 & 2002 Financials. All the Banks and NBFI’s have published
their 2012 financials and based on their latest audited financials we would like to revise their existing
limits and include new limits for some new banks & NBFI’s.

These new proposals are prepared as per our existing Banks and NBFI's CRG rating procedures, in line
with Bangladesh Bank CRG guidelines. Therefore, we are proposing:

1. Limit for Money Market, Foreign Exchange and other transactions with different
counterparty Bank’s and
2. Limits for Fixed Deposits and overnight Placements with different Non-Bank Financial
Institutions (NBFI’s).

Areas where counter party Limits are applicable:

a) Money Market Transactions.

b) Foreign Exchange Transactions.
c) Other Transactions:
a. Local Documentary bill purchase.
b. Foreign Documentary bill purchase.
c. Exposure against other banks FDR etc.

Type of Risks in Transactions:

a) Credit Risk:
In the market one borrows and another lends or places fund. There is no credit risk when we
borrow. However, on the lending side there is always a risk that the borrower may be unable
to repay the funds or unable to repay on due date.

b) Interest Rate Risk:

This is a market driven risk and arises mainly due to balance sheet gap and unexpected
movement of interest rate in the market. For example, when we lend funds for 3 months by
borrowing at call, we are taking an interest rate risk as the call rates are uncertain and may
rise thereby affecting the profitability of the said transaction.

c) Liquidity Risk:
Liquidity risk arises when funds are not available or when borrowers are unable to pay due to
unavailability of funds. Liquidity risk can be an outcome of market crisis, inefficient fund
management or lack of alternative credit lines with other financial institutions.

d) Price/Market Risk:
This risk is related to foreign exchange transactions. It arises mainly due to market price
movement of any particular currency pair. In terms of potential loss, market risk is less risky
than credit risk, because due to adverse change in market price the potential loss can be a
percentage of the underlying asset but in case of credit risk the whole underlying asset can be
at default.

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 e) Operational Risk:
This is mainly related to operational efficiency of any institution. Any risk or breach of
commitment due to operational inefficiency is termed as operational risk and it can be caused
due to inefficient management, lack of product knowledge, unskilled human resources, failure
of settlement due to failure or malfunctioning of technology etc.

Ways to Mitigate Risk:

(i) The Credit Risk is controlled primarily by establishing lines for placements with each
counter party based on their financial strength and a number of parameters (described
in the later part of this memo). This will limit our exposure on each counter party.
Thereby, setting a counter party limit by following a standard ‘Credit Risk Grading’
methodology ensures control of an unduly high percentage of risk in the total money
market portfolio.
(ii) We have set limits on each Bank and NBFI considering its liquidity situation and ability
to meet its obligation on due time. However, we have also set a process which will
monitor periodic exposure on each counterpart and will report to management of any
unusual development and any untoward incident which may draw our attention on
their liquidity and balance sheet condition.
(iii) We will restrict foreign exchange exposure on each bank based on its past trading
record, competence of management and operational efficiency. In our analysis we
have assigned certain points for management & operational efficiency.

Practices in Our Bank:

In past counterparty limits were proposed based on counterparty banks and FI’s net worth, market
share, market reputation and business relationship with them. Financial analysis was involved with
the whole process and banks & FI’s were divided in to three categories:
1. Nationalized commercial Banks and FI’s: No limit restriction on them, unrestricted limit.
2. Multinational Banks: No limit restriction on them, unrestricted limit.
3. Private Commercial Banks and FI’s: Limit is set as a percentage of net worth, and the
percentage of net worth is derived from the grading achieved by the Private commercial bank
and FI’s from the credit grade score sheet.

This limit was approved by the Board in its 182 nd Meeting dated 18th August 2003. (Board Memo no.
2003/4057). This time we are proposing credit lines on each banks and financial institutions as per
the new CRG issued by Bangladesh Bank. In this approach we have analyzed each banks and FI’s
financials for the past three years and based on their financials and management competence we
have proposed credit lines on each bank and FI’s.

Rating Methodology:

Counter-party limit is generally set by considering the credit rating along with the qualitative and
quantitative aspects of Banks and NBFI’s. We have reviewed both qualitative and quantitative
aspects. Our review methodology provided a score and rating for the counter party Bank’s and
NBFI’s. Banks and NBFI limits are proposed on the basis of assessment of their financial performance,
operating efficiency, management quality, past experience etc. rated and placed in range of 1-8
ratings, on the basis of their credit quality. These ratings are: (1) Superior; (2) Good; (3) Acceptable; (4)
Marginal; (5) Special Mention; (6) Sub-standard; (7) Doubtful and (8) Bad & Loss.

The Key Parameters:

The key parameters considered for evaluation of the Banks and NBFI’s for counter party limit are:

a) Capital Adequacy
b) Asset Quality
c) Management
d) Earning/ Profitability
e) Liquidity
f) Type of Bank/Ownership

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 g) Other considerations (Qualitative Aspects)

Spread Sheet:
Financial data has been analyzed with our pre-developed Microsoft Excel Based spread sheet, in
order to find out and evaluate financial performance. The spread sheet incorporated Income
Statement, Balance Sheet and Key Financial Ratios e.g. Growth Ratio, Liquidity Ratio, Asset Quality,
Leverage, Profitability, Efficiency and information on Market share, Balance Sheet Highlights etc.
Based on these, scoring has been done as follows. Summary of the spread sheet and score sheet is
enclosed with the Memo.

Risk Rating:
Score Sheet: For Commercial Banks (including FCB’s) and NBFI’s.
Categories Maximum Score Score Obtained (Example)
Capital Adequacy 15 12
Asset Quality 15 12
Management 15 12
Earning/ Profitability 15 12
Liquidity 15 15
Type of Bank / Ownership 15 12
Other Considerations 10 10
Total Score 100 86
Bank/NBFI Rating Good

Score Sheet: For State Owned Commercial Banks.

Categories Maximum Score Score Obtained (Example)
Capital Adequacy 10 8
Asset Quality 10 8
Management 15 12
Earning/ Profitability 10 8
Liquidity 15 12
Type of Bank / Ownership 30 30
Other Considerations 10 8
Total Score 100 86
Bank/NBFI Rating Good

The score sheet of State-owned Commercial Banks has been differentiated from other commercial
Banks and NBFI’s operating in the country considering the Sovereign Guarantee that they enjoy
because of being State Owned Bank.

Rating Based on Score Range:

The Banks and NBFI’s have been rated on the basis of score obtained. The Rating scales are as under:

Score Risk
PBL Ratings Rank Risk Description
Range Category
 Credit facilities, which are fully secured i.e. fully cash
covered.
Superior 1 100 No risk  Credit facilities fully covered government guarantee.
 Credit facilities fully covered by the guarantee of a top tier
International Bank.
 Strong repayment capacity of the borrower
 The borrower has excellent liquidity and low leverage.
 The company demonstrates consistently strong earnings
and cash flow.
 Borrower has well established, strong market share.
Good 2 >= 85 Low risk  Very good management skill & expertise.
 All security documentation should be in place.
 Credit facilities fully covered by the guarantee of a top tier
local Bank.
 Aggregate Score of 85 or greater based on the Risk Grade
Score Sheet.

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  These borrowers are not as strong as GOOD Grade
borrowers, but still demonstrate consistent earnings, cash
flow and have a good track record.
 Borrowers have adequate liquidity, cash flow and
earnings.
 Credit in this grade would normally be secured by
Acceptable 3 75-84 Satisfactory
acceptable collateral (1st charge over inventory /
risk
receivables / equipment / property).
 Acceptable management
 Acceptable parent/sister company guarantee
 Aggregate Score of 75-84 based on the Risk Grade Score
Sheet.
 This grade warrants greater attention due to conditions
affecting the borrower, the industry or the economic
environment.
 These borrowers have an above average risk due to
strained liquidity, higher than normal leverage, thin cash
flow and/or inconsistent earnings.
 Weaker business credit & early warning signals of
Marginal 4 65-74 Modest risk emerging business credit detected.
 The borrower incurs a loss
 Loan repayments routinely fall past due
 Account conduct is poor, or other untoward factors are
present.
 Credit requires attention
 Aggregate Score of 65-74 based on the Risk Grade Score
Sheet.
 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.
 Severe management problems exist.
Special Risk Watch
5 55-64  Facilities should be downgraded to this grade if sustained
Mention Listed
deterioration in financial condition is noted (consecutive
losses, negative net worth, excessive leverage),
 An Aggregate Score of 55-64 based on the Risk Grade
Score Sheet.
 Financial condition is weak and capacity or inclination to
repay is in doubt.
 These weaknesses jeopardize the full settlement of loans.
Sub-
6 45-54 High Risk  Bangladesh Bank criteria for sub-standard credit shall
standard
apply.
 An Aggregate Score of 45-54 based on the Risk Grade
Score Sheet.
 Full repayment of principal and interest is unlikely and the
possibility of loss is extremely high.
 However, due to specifically identifiable pending factors,
such as litigation, liquidation procedures or capital
Doubtful 7 35-44 High Risk
injection, the asset is not yet classified as Bad & Loss.
 Bangladesh Bank criteria for doubtful credit shall apply.
 An Aggregate Score of 35-44 based on the Risk Grade
Score Sheet.
Bad & Loss 8 <35 High Risk  Credit of this grade has long outstanding with no progress
in obtaining repayment or on the verge of wind
up/liquidation.
 Prospect of recovery is poor and legal options have been
pursued.
 Proceeds expected from the liquidation or realization of
security may be awaited. The continuance of the loan as a
bankable asset is not warranted, and the anticipated loss
should have been provided for.
 This classification reflects that it is not practical or
desirable to defer writing off this basically valueless asset
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 even though partial recovery may be affected in the
future. Bangladesh Bank guidelines for timely write off of
bad loans must be adhered to. Legal procedures/suit
initiated.
 Bangladesh Bank criteria for bad & loss credit shall apply.
 An Aggregate Score of less than 35 based on the Risk
Grade Score Sheet.

Reviewing Bank Limit:

We have analyzed spreadsheet of 40 Banks (out of total 56 Banks including 9 new banks) and rated
them accordingly. We could not rate the new banks since their financials are yet to be published and
the remaining banks could not be rated as their full financials were not available. Counter party limits
for total 49 banks have been proposed. Rating of all Banks with major ratios and corresponding
proposed Limits are presented in Appendix-A based on the following matrix.

Proposed Limit as % of Total Capital of the Bank’s

Rank Rating
rated
1 Superior 25.00%
2 Good 20.00%
3 Acceptable 15.00%
4 Marginal 7.50%
5 Special Mention 5.00%
6 Sub-standard n/a
7 Doubtful n/a
8 Bad & Loss n/a
9 New Bank 5.00% (Paid-Up Capital)

The Bank Limits has been proposed on above percentage of total capital. Limit for Bank’s can be
reviewed on an annual basis. Interim revision may also be placed to the Board for Approval. Any
exception to Bank limits to be pre-approved by Head of Credit Risk Management and Managing
Director or his delegated personnel.

Exceptions:
1. Exception has been done while determining limit of new 9 (nine) Banks. Due to unavailability of
their financials for the last 3 (three) years, we have proposed their limit @ 5.00% of their paid
up capital based on their paid up capital and market reputation.
2. Exception has been made in determining Overnight placement limit of Agrani Bank ltd. An
excess of BDT 100.00 Crore has been added on top of calculated Overnight placement Limit of
BDT 21.50 crore.

Loan Equivalent Risk (LER):

Foreign Exchange risk is not as high as Money Market risk. On an average, as per international
standard, Loan Equivalent Risk (LER) is 100% of Money Market transaction and for Foreign Exchange
Transaction the LER is 10%. So, for the purpose of simplicity we have proposed a flat LER of 10% for
any Foreign Exchange Transaction (other than Term Lending) and 100% for Money Market
transactions and transactions under other categories. That means for any Foreign Exchange
Transaction (other than Term Lending) 10% of the transaction value will be blocked from the foreign
Exchange Limit, only in case of Foreign Currency Term Lending 100% of the transaction value will be
blocked from the foreign Exchange Limit.

Bank Limits classified in to 3 (Three) categories:

We are proposing Total counter party Bank limit of BDT 6,552.00 crore into 3 (Three) categories; i)
Money Market limit = 40% of total limit, ii) Foreign Exchange limit = 30% of Total limit, iii) Others =
30% of total limit, for other business line (LDBP, FDBP & Loan against FDR). Money market limit is
again divided in to 2 (two) categories; 1) Fixed Deposit limit 50% of Money Market limit and 2)
Overnight Placement Limit 50% of Money Market Limit. These limits are proposed considering both
quantitative and qualitative aspects (detailed in Appendix-A).

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Setting Limit for NBFI’s:
We have analyzed spreadsheet of 16 NBFI’s to set limit for them (where there are existing and
potential business opportunities). Rating of the NBFI’s with major ratios and corresponding proposed
Limits are presented in Appendix-B based on the following matrix.

Rank Rating Proposed Limit as % of Total Capital of the Bank’s rated

1 Superior 25.00%
2 Good 20.00%
3 Acceptable 15.00%
4 Marginal 7.50%
5 Special Mention n/a
6 Sub-standard n/a
7 Doubtful n/a
8 Bad & Loss n/a
Limit for NBFI’s has been proposed on above percentage of total capital. Limit for NBFI’s can be
reviewed on an annual basis. Interim revision may also be placed to the Board for Approval. Any
exception to NBFI limits to be pre-approved by Head of Credit Risk Management and Managing
Director or his delegated personnel.

NBFI’s Limit into two categories:

We are proposing Total Counter Party Limit for 16 (Sixteen) NBFI’s as BDT 760.00 crore into 2
categories; Fixed Deposit limit 50% of Total limit and Overnight Placement Limit 50% of total Limit
(Detailed in Appendix-B).

Special Clause:
No EOL approval will be required for Bank’s as long as total Loan Equivalent Risk Outstanding (10% for
FX and 100% for MM and Others) on any specific bank/NBFI is within its total Loan Equivalent limit
with exception for limit for LDBP/FDBP, but prior approval from Head of Treasury is mandatory in
case of using MM & other limit for FX limit and FX & other limit for MM limit. EOL is required from
appropriate authority for booking any bill discount without recourse in excess of the prescribed bank
limit for this category.
No EOL approval will be required for NBFI’s as long as total outstanding of Fixed Deposit and
Overnight is within the total limit for any single NBFI, but prior approval from Head of Treasury is
mandatory in case of using over night placement line for Term Deposit and vice versa.

Block of Limit:
Bank’s having CAR (Capital Adequacy Ratio) less than 10% (other than state owned Banks) will be
allocated limit but the limit will remain blocked for all transactions having LER more than 10%. Only
transaction having LER equal to or less than 10% can be conducted. The limit will be opened for use
as soon as the Banks improve their CAR i.e. more than 10.0%.

EOL and Revision of Limit:

For quick business decision and business continuity, we would like to propose followings:
1. EOL: In case of any EOL on any Bank or NBFI, Managing Director and/CEO can approve EOL up-
to 15% of total Bank or NBFI approved limit.
2. Revision of Existing Limit: Incase of any revision of any Bank or NBFI limit based on latest
audited financials, any enhancement request more than current limit will be placed in-front of
the Board.
3. Decrease of Existing Limit: Incase of any new placement the new limit has to be considered
after being approved and the existing placements have to be adjusted as per the latest limit
on rundown basis.
Modus Operandi:
The usage and monitoring of Bank and NBFI limits will be monitored as per the following modus
operandi:

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 1. The approved Limits of Banks and NBFI’s shall be forwarded to Treasury Back office/ Middle
Office/CRM.
2. Treasury front office must check with Treasury Back office/ Middle office regarding limit
availability on any Bank/NBFI.
3. Treasury Back Office/ Middle Office will advice the Limits to Treasury Front office, all
authorized dealer branches and credit administration division on utilization of limits.
4. No transaction by branches will be booked without taking clearance from Back Office/Mid
Office on availability of limits. Branches must retain copy of acceptance in soft/hard form as a
record of clearance from Back Office/Mid Office.
5. In case of any cancelled transaction against which the limit was booked earlier, branches must
inform Back Office/Mid Office immediately to free the line so that other branches can use the
line.
6. Back Office/Mid Office will prepare MIS and report to senior management and ALCO members
as and when required/ monthly basis on the utilization of the bank limits.
7. Any exceptions or waiver on the Limit to be approved by the Managing Director and/CEO.
8. Any changes in Modus Operandi to be approved by Managing Director and/CEO
9. Bangladesh Bank Guidelines through Focus Group report- Managing Core Risk in Banking on
Asset Liability Management and Foreign Exchange Risk Management to be adhered to.
Proposed Limit:

Amount in BDT Crore

Calculated Proposed Calculate Proposed
SL Name of the Bank Limit Limit SL Name of the Bank d Limit Limit
1 AB Bank 240.51 200 26 Rupali Bank 174.83 150
2 Agrani Bank 107.45 207 27 SCB 428.4 400
3 Al-Arafah Bank 186.39 100 28 Shahjalal Islami Bank 144.69 100
4 Bank Asia 195.68 195 29 SIBL 152.73 100
Commercial Bank of
5 Ceylon 96.22 90 30 Southeast Bank 297.05 200
6 BASIC Bank 96.91 40 31 Standard Bank 123.37 100
7 BRAC Bank 152.25 150 32 The City Bank 269.42 150
8 Citi Bank N.A. 182.17 180 33 Trust Bank 97.69 95
9 Dutch-Bangla Bank 217.11 200 34 United Commercial Bank 272.57 200
10 Dhaka Bank 145.25 145 35 Uttara Bank 146.95 140
11 Eastern Bank 342.19 300 36 National Bank of Pakistan 16.53 10
12 EXIM Bank 249.63 200 37 Bank Al-Falah 34.8 30
First Security Islami
13 Bank 28.32 10 38 State Bank of India 129.52 125
14 HSBC 386.6 385 39 HABIB Bank 64.91 60
15 Islami Bank BD 795.11 500 40 Sonali Bank 336 330
16 IFIC Bank 103.01 100 41 TOTAL 7,684.72 6,372.00

17 Jamuna Bank 124.87 80 42 New Banks

18 Janata Bank 258.09 250 43 Meghna Bank n/a 20
19 Mercantile Bank 163.87 100 44 Midland Bank n/a 20
20 Mutual Trust Bank 72.95 50 45 Modhumoti Bank n/a 20
21 National Bank 167.81 150 46 NRB Bank n/a 20
22 NCC Bank 182.04 150 47 NRB Commercial Bank n/a 20
23 ONE Bank 111.35 100 48 NRB Global Bank n/a 20
South Bangla Agriculture
24 Premier Bank 107.42 50 49 and Commerce Bank n/a 20
25 Pubali Bank 282.07 250 50 Farmers Bank n/a 20
Union Bank n/a 20
TOTAL   180.00
TOTAL (OLD + NEW)   6,552.00

Amount in BDT Crore

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 SL Name of NBFI Calculated Limit Proposed Limit
1 IDLC 76.00 75.00
2 BIFC 18.00 5.00
3 United Leasing Company (ULC) 39.00 30.00
4 International Leasing (ILFSL) 31.00 20.00
5 LANKABANGLA 77.00 25.00
6 Prime Finance ltd (PFL) 86.00 40.00
7 Investment corporation of Bangladesh (ICB) 422.00 400.00
8 PREMIER LEASING 19.00 5.00
9 PHONIX FINANCE 43.00 20.00
10 IIDFC 19.00 15.00
11 BAY LEASING 44.00 20.00
12 UNION CAPITAL 20.00 10.00
13 FAREAST FINANCE 21.00 10.00
14 NATIONAL HOUSING 14.00 5.00
15 UTTARA FINANCE 99.00 50.00
16 Delta Brac Housing (DBH) 32.00 30.00
TOTAL 1060.00 760.00

Placed for kind information and approval of the Board of Directors.

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