Risk is the element of uncertainty or possibility of loss that prevail in any business transaction in any place, in any mode and at any time. Risk is an integral part of financing business. Risk management entails the adoption of several measures to strengthen the ability of an organization to cope with the vagaries of the complex business environment in which it operates.
IDLC always concentrates on delivering high value to its stakeholders through appropriate trade off between risk and return. A well structured and proactive risk management system is in place within the Company to address risks relating to credit, market, liquidity and operations. Risk grading is assigned at the inception of lending considering the industry, business, financial and management risk associated with the financing. The Company has different committees for risk management and appropriate internal control measures are also in place to mitigate risk.
In addition to the industry best practices for assessing, identifying and measuring risks, IDLC also considers guidelines for managing core risks of financial institutions issued by the Country's Central Bank, Bangladesh Bank, vide FID Circular No. 10 dated September 18, 2005 for management of risks.
Credit Risk
Credit risk is the possibility that a borrower or counter party will fail to meet agreed obligations. Thus managing credit risk for efficient management of a financial institution (FI) has become the most crucial task. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, and consolidation it is essential that FIs have robust credit risk management policies and procedures that are sensitive and responsive to these changes. At IDLC, credit risk may arise in the following forms:
- Default risk
- Exposure risk
- Recovery risk
- Counter party risk
- Related party risk
- Legal risk
- Political risk
To encounter and mitigate credit risk the following control measures are in place at IDLC:
- Multilayer approval process
- Policy for maximum sector and group exposure limit
- Policy for customers maximum asset exposure limit
- Mandatory search for credit report from Credit Information Bureau
- Looking into payment performance of customer before financing
- Annual review of clients
- Adequate insurance coverage for funded assets
- Vigorous monitoring and follow up by Special Assets Management Team
- Strong follow up of compliance of credit policies by Operational Risk Management Department
- Taking collateral
- Seeking external legal opinion
- Maintaining neutrality in politics and following arm's length approach in related party transactions
- Regular review of market situation and industry exposure
The Credit Evaluation Committee (CEC) regularly meets to review the market and credit risk related to lending and recommend and implement appropriate measures to counter associated risks. The CEC critically reviews projects considering the current global financial crisis and its probable impact on the project.
An independent Credit Risk Management Department is in place, at IDLC, to scrutinize projects from a risk-weighted point of view and assist the management in creating a high quality credit portfolio and maximize returns from risk assets.
Market Risk
Market risk refers to the risk of fluctuation in a variety of markets such as interest rates, prices of securities where the values of assets and liabilities can change and there exists the risk of incurring losses.
The Asset Liability Committee (ALCO) of the Company regularly meets to assess the changes in interest rate, market conditions, carry out asset liability maturity gap analysis, re-pricing of products and thereby takes effective measures to monitor and control interest rate risk. To encounter market risk we are negotiating for facilities that match the maturity structure with ideal interest rate, maintaining a balanced diversification in investments and maintaining prudent provisioning policies. IDLC has also strong access to money market and credit lines at a competitive rate through good reputation, strong earnings, financial strength and credit rating.
However, in order to mitigate any adverse effect that results from fluctuating interest rate in future, we are planning to issue bonds, commercial papers and fixed rate long term loans to raise funds.
Liquidity Risk
Liquidity risk arises when a company is unable to meet the short term obligation to its lenders and stakeholders. This arises from the adverse mismatch of maturities of assets and liabilities.
Liquidity requirements are managed on a day-to-day basis by the Treasury Division which is responsible for ensuring that sufficient funds are available to meet short term obligations, even in a crisis scenario, and for maintaining a diversity of funding sources. Treasury Division maintains liquidity based on historical requirements anticipated funding requirements from operation, current liquidity position, collections from financing, available sources of funds and risks and returns.
The Asset Liability Committee also oversees the asset liability maturity position and recommend and implement appropriate measure to encounter liquidity risk.
Operational Risk
Operational risk is the potential loss arising from a breakdown in company's systems and procedures, internal control, compliance requirements or corporate governance practices that results in human error, fraud, failure, damage of reputations, delay to perform or compromise of the company's interests by employees. Operational risk may also arise from the following:
- Turnover of trained staff
- Risk of insider dealings
- Leakage of sensitive information
- Shortcomings of organizational structure
- Risk of falling in credit ratings
- Money laundering
- Changes in statutory requirements
- Technological obsolescence
Appropriate internal control measures are in place, at IDLC, to address operational risks. IDLC has also established an Operational Risk Management Department (ORMD) to address operational risk and to frame and implement policies to encounter such risks. ORMD assesses operational risk across the Company as a whole and ensures that an appropriate framework exists to identify, assess and mange operational risk. The function of ORMD is to constant vigilance against leakage of Shareholders value by identify, assess, measure, manage and transfer operational risk resulting from inadequate or failed internal processes, people and system or from external events.
ORMD also develops policies, processes and procedures for managing operational risk in all of the company products, activities, processes and systems by identifying and assessing the operational risk inherent in all our products, activities, processes and systems.
In particular, the following risk management measures are present at IDLC to address operational risk:
- Effective internal audit function throughout the organisation with direct access of Chief Internal
- Auditor to the Audit Committee and Board
- Suitable delegated authority level
- Awareness throughout the organisation on "Know Your Customer" policy
- Maintenance of assets through maintenance agreement with vendor
- Proper risk transfer measure by taking insurance coverage for all assets of the Company
- Infusing organisational values and ethics in employees
- Strict compliance of Employees Code of Conducts
- Regular compliance audit in relation to reporting requirements to regulatory bodies and other stakeholders
- Creating conducive working environment for the staff
- Implementation of computer based MIS system
- Implementation of proper back up system
- Regular upgrading of hardware and software to keep it up to state of the art level.
Business volume risks
At IDLC, business volume risk may arise in the form of risk of falling business volumes and market share, risk of being overtaken and losing leadership position and risk of over trading which may affect profitability due to volatile revenues and reduced spread earnings, credit rating and reputation. Risk of over trading may lead to insufficient capital. To encounter and mitigate business volume risk the following risk mitigation measures are in place, at IDLC:
- Regular review of impact of global economic meltdown and taking appropriate measure
- Innovative and convenient financial products and services
- Taking prompt action on customer complaints
- Frequent assessment of clients satisfaction
- Regular review of performance against budget and targets
- Review and analysis of competitor's performance.
Assessment of the riskiness of the operation
We estimate our risk exposure based on our own assessment of the operations as well as the market perception to be as follows:
| Type of Risk |
Rating |
| Credit Risk |
Moderate |
| Market Risk |
Moderate |
| Liquidity risk |
Moderate |
| Operational risk |
Low |
| Business volume risk |
Low |
To encounter and mitigate credit risk the following control measures are in place at IDLC:
- Multilayer approval process
- Policy for maximum sector and group exposure limit
- Policy for customers maximum asset exposure limit
- Mandatory search for credit report from Credit Information Bureau
- Looking into payment performance of customer before financing
- Annual review of clients
- Adequate insurance coverage for funded assets
- Vigorous monitoring and follow up by Special Assets Management Team
- Strong follow up of compliance of credit policies by Operational Risk Management Department
- Taking collateral
- Seeking external legal opinion
- Maintaining neutrality in politics and following arm's length approach in related party transactions
- Regular review of market situation and industry exposure
The Credit Evaluation Committee (CEC) regularly meets to review the market and credit risks related to lending and recommend and implement appropriate measures to counter associated risks. The CEC critically reviews projects considering the current global financial crisis and its probable impact on the project.
An independent Credit Risk Management Department is in place, at IDLC, to scrutinize projects from a risk-weighted point of view and assist the management in creating a high quality credit portfolio and maximize returns from risk assets.
Market Risk
Market risk refers to the risk of fluctuation in a variety of markets such as interest rates, prices of securities where the values of assets and liabilities can change and there exists the risk of incurring losses.
The Asset Liability Committee (ALCO) of the Company regularly meets to assess the changes in interest rate, market conditions, carry out asset liability maturity gap analysis, re-pricing of products and thereby takes effective measures to monitor and control interest rate risk.
To encounter market risk we are negotiating for facilities that match the maturity structure with ideal interest rate, maintaining a balanced diversification in investments and maintaining prudent provisioning policies. IDLC has also strong access to money market and credit lines, at a competitive rate, on accounts of its good reputation, strong earnings, financial strength and credit rating.
However, in order to mitigate any adverse effect that results from fluctuating interest rate in future, we are planning to issue bonds, commercial papers and negotiate fixed rate long term loans to raise funds.
Liquidity Risk
Liquidity risk arises when a company is unable to meet the short term obligations to its lenders and stakeholders. This arises from the adverse mismatch of maturities of assets and liabilities.
Liquidity requirements are managed on a day-to-day basis by the Treasury Division, which is responsible for ensuring that sufficient funds are available to meet short term obligations, even in a crisis, and for maintaining a diversity of funding sources. The Treasury Division maintains liquidity based on historical requirements, anticipated funding requirements from operation, current liquidity position, collections from financing, available sources of funds and risks and returns.
The Asset Liability Committee also oversees the asset liability maturity position and recommends and implements appropriate measures to encounter liquidity risk.
Operational Risk
Operational risk is the potential loss arising from a breakdown in company's systems and procedures, internal control, compliance requirements or corporate governance practices that results in human error, fraud, failure, damage of reputations, delay to perform or compromise of the company's interests by employees. Operational risk may also arise from the following:
- Turnover of trained staff
- Risk of insider dealings
- Leakage of sensitive information
- Shortcomings of organizational structure
- Risk of worsening credit ratings
- Money laundering
- Changes in statutory requirements
- Technological obsolescence
Appropriate internal control measures are in place, at IDLC, to address operational risks. IDLC has also established an Operational Risk Management Department (ORMD) to address operational risks and to frame and implement policies to encounter such risks. ORMD assesses operational risk across the Company, as a whole, and ensures that an appropriate framework exists to identify, assess and manage operational risk. The function of ORMD is to constant vigilance against leakage of Shareholders value by identifying, assessing, measuring, managing and transferring operational risk resulting from inadequate or failed internal processes, people and system or from external events.
ORMD also develops policies, processes and procedures for managing operational risk in all of the company products, activities, processes and systems by identifying and assessing the operational risk inherent in all our products, activities, processes and systems.
In particular, the following risk management measures are present at IDLC to address operational risks:
- Effective internal audit function throughout the organization with direct access of Chief Internal Auditor to the Audit Committee and Board
- Suitable delegated authority level
- Awareness throughout the organisation on "Know Your Customer" policy
- Maintenance of assets through maintenance agreement with vendor
- Proper risk transfer measures by taking insurance coverage for all assets of the Company
- Infusing organisational values and ethics in employees
- Strict compliance of Employees Code of Conduct
- Regular compliance audit in relation to reporting requirements to regulatory bodies and other
Stakeholders
- Creating conducive working environment for the staff
- Implementation of computer based MIS system
- Implementation of proper back up system
- Regular upgrading of hardware and software to keep it up to state-of-the-art level.
Business volume risks
At IDLC, business volume risk may arise in the form of risk of falling business volumes and market share, risk of being overtaken and losing leadership position and risk of over trading which may affect profitability due to volatile revenues and reduced spread earnings, credit rating and reputation. Risk of over trading may lead to insufficient capital. To encounter and mitigate business volume risk the following risk mitigation measures are in place, at IDLC:
- Regular review of impact of global economic meltdown and taking appropriate measures
- Innovative and convenient financial products and services
- Taking prompt action on customer complaints
- Frequent assessment of clients satisfaction
- Regular review of performance against budget and targets
- Review and analysis of competitor's performance
Assessment of the riskiness of the operation
We estimate our risk exposure based on our own assessment of the operations as well as the market perception to be as follows:
| Type of Risk |
Rating |
| Credit Risk |
Moderate |
| Market Risk |
Moderate |
| Liquidity risk |
Moderate |
| Operational risk |
Low |
| Business volume risk |
Low |
