;

Commercial Bank
Management
-A Report on Credit Risk
Grading of Khulna Power
Company Limited

(Individual Report)

Total 12 pages
excluding appendix

Course Instruction

Commercial Bank Management

F-402

Khulna Power Company Limited 17-066

Submitted to
Md. Sajib Hossain
Lecturer
Department of Finance
University of Dhaka

Submitted by
Md. Rakibul Hassan
17-066

Member of
Section: B
BBA 17th BATCH
Department of Finance
University of Dhaka

Submission Date: 25-June-2014

Page 2 of 25

Letter of Transmittal
25 June, 2014
Md. Sajib Hossain
Lecturer
Department of Finance
University of Dhaka

Khulna Power Company Limited 17-066

Subject: Submission of the report Credit Risk Grading of Khulna Power Company
Limited.

Dear Sir,

As per the requirements of the course Commercial Bank Management (F-402) offered
at Department of Finance, University of Dhaka under your supervision, I submit
herewith my report on Credit Risk Grading of Khulna Power Company Limited that you
assigned us to prepare.
My final report is based on, mainly, data published in the Khulna Power Companys
Limited. In some cases, I need to apply assumptions and intuitions. I believe that the
knowledge and experience that I gained will be of great importance both for future
courses and work lives.
I would also like to state that the sole purpose of creating the report is for the completion
of the course work. No part of this report will be reproduced for use in any other form of
publication in the future without your written permission.
I shall be available for any clarification, if required.
Sincerely,
Md. Rakibul Hassan
ID: 17-066
Section: B
BBA 17 Batch
Department of Finance
University of Dhaka
Page 3 of 25

Executive Summary
The objective of this report is to provide an extensive analysis of the credit risk grading
of Khulna Power Company Limited, first private independent power Producer Company
in Bangladesh.
The report is mainly divided into two sections i.e. assumptions and description of
principal risk component and its key parameters.

Khulna Power Company Limited 17-066

In preparing the report, I made several assumptions to give the report a realistic view.
The annual reports of last five years of Khulna Power Company Limited were analysed
to derive the inputs of the key parameters. By totalling the score of different principal
risk components (namely financial risk [40], business risk [17], management risk [12],
security risk [10], and relationship risk [8]) the company is marked as Good in the
CRG scale with a total score of 87.

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Table of Contents
Introduction_______________________________________________________________6
Company overview_______________________________________________________6
Assumptions______________________________________________________________7
Principal Risk Components and their Key Parameters_________________7
Financial Risk_________________________________________________________________7

2.

Business/Industry Risk _______________________________________________________8

3.

Management Risk_____________________________________________________________9

4.

Security Risk _______________________________________________________________10

5.

Relationship Risk____________________________________________________________11

Khulna Power Company Limited 17-066

1.

Conclusion_______________________________________________________________12
Key References__________________________________________________________12
Appendix_________________________________________________________________13

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Introduction
Khulna Power Limited Company (KPCL) is the first private sector power company in
Bangladesh. Initially, the company started with a capacity of 110 MW to empower
Bangladesh and now it has a capacity of 265 MW in total.
The report starts with an overview of Khulna Power Company Limited. Then, the report
highlights the assumptions that were made to prepare to report. Later on, a
comprehensive analysis of the credit risk grading of KPCL with illustrations of risk

Khulna Power Company Limited 17-066

components and their parameters is given.

Company overview

Established under the Private Sector Power Generation Policy of Bangladesh, KPCL is
the first independent power producer in Bangladesh. With an objective to alleviate the
electric power crisis, The Company was incorporated as a private limited company on
October 15, 1997 and was converted into a public limited company on July 19, 2009.
The company was listed in Dhaka Stock Exchange in 2010 (DSE, 2014). The company
is in operation for the last 16 years and has 100% local ownership (KPCL, 2010) with
majority of shares are owned by the United group of Bangladesh (35.28%) and Summit
group of Bangladesh (35.28%) jointly. The rest of the shares (29.41%) are owned by
general investors of Bangladesh. At present, the company has two subsidiaries namely
Khulna Power Company Unit II Ltd. and Khan Jahan Ali Power Company Ltd both of
which are located at Khulna. KPCL power plant has a capacity of 100 MW and the
former subsidiary have combined capacity of 155 (115+40). MW (KPCL, 2013, p. 5-14).

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Assumptions
As all the information is not available, the following assumptions are made in preparing
the reporta. I work for Standard Chartered Bank, a current banker and lender of KPCL.
b. The company want a loan BDT 1000 million for investing in plants and

Khulna Power Company Limited 17-066

equipment.
c. The loan will be secured by the power plant, vehicles and buildings.
d. The purpose is to import capital machinery.

Principal Risk Components and their Key Parameters

According to BRPD Circular No.18 on May, 2005 (BB, 2014) the principals risk
component and their parameters are described below in view of KPCL1. Financial Risk (40)
Financial risk is the probability of failure to meet obligation due to financial distress. The
company has scored 40 out of the 50 at this risk component. The explanations of the
key parameters are given belowI.

Leverage (11)
From the analysis of the financial spreadsheet (FSS), I found the company
use very low leverage which had fall in each successive years. From the
chairmans statement it is evident that the company has strategic
decisions to reduce its dependence on debt in future years (KPCL, 2013,

II.

p. 19).
Liquidity (10)
The companys liquidity position had an upward trend. The company has
line of credit arrange with different banks to pay obligations. Also, it can

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finance its short term loans through intercompany loans (KPCL, 2013, p.
88)
III.

Profitability(14)
I found both operating and net profit margins were significantly higher in
2012 & 2013 than previous years because of low fuel cost and favourable
exchange rates (KPCL, 2012, p. 30).

IV.

Coverage (5)
The company took the access to ease foreign loans. The company had
financed two of its subsidiaries with foreign loans which will be paid in
instalment over different years (KPCL, 2013, p. 81). Hence, its debt

Khulna Power Company Limited 17-066

structure is excellent. The company has full line of credit facilities with
different banks.

2. Business/Industry Risk (17)

Business risk is the risk that arises from adverse Industrial situation /unfavourable
business conditions. The company scored 17 out of 18 at this risk component. The
explanations of the key parameters are given belowI.

II.

Size of the business (5)

The company had an asset base of BDT 13542 million 10 as of 31
December, 2013. The reduction in asset base from last year can be
attributed the decrease in the value of non-current assets as part of phase
wise retirement (KPCL, 2013, p. 60).
Age of the business (3)
The company was established in 15 December, 1997. Therefore, it was in
operations for more than 16 years.

III.

Business outlook (3)

From the analysis of the directors report, it was evident that the demand
for electricity is yet to meet (KPCL, 2013, p.20-33). Also, Govt. had
declared positive incentives for power companies. Therefore, it can be
said that the business has got a positive outlook.

IV.

Industry growth (2)

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According to Bangladesh Power Sector Master Plan, the electricity

demand would be 34,000 MW by the year 2030 to attain 8% GDP (Power
Division, BD Govt., 2011. Therefore, it can be said that power industry has
a relationship with the GDP growth rate of the country. As our GDP
forecasted GPD is less than 10%, power industry might have a growth
ranging 1%-10%.
V.

Market competition (2)

Private power sectors are operated under Private Sector Power
Generation Policy. Power companies sale is made directly to government
entities (KPCL, 2013, p. 87) at contractual price. Hence, market

Khulna Power Company Limited 17-066

completion is very low.

VI.

Entry/exit barriers (2)

To establish private electric power plant, govt. license is required (KPCL,
2013, p. 26) which is extremely dependent on political consideration. Also,
the investments and equipment needed demands high amount of
investment. Therefore, the exit/ entry barrier is very high.

3. Management Risk (12)

Management risk is the probability of default due to poor management ability. The
company scored 12 out of 12 at this risk component. The explanations of the key
parameters are given below-

I.

Experience (5)
From the analysis directors and senior management bibliography (KPCL,
2013, p. 45-51), it can be said that the company got an experienced
management team. Note that Muhammed Aziz Khan, chairman of KPCL,
is the pioneer in setting up the private sector power firms and policies.

II.

Succession (4)
The company invests to develop its key personnel (KPCL, 2013, p. 32)
because it treats human resource as the important resource. Out of the
three key position of the senior management committee two positions
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were filled by the same person in all the successive years (KPCL, 2009,
p.31, KPCL, 2010, p. 35, KPCL, 2011, p.39, KPCL, 2012, p. 53, KPCL,
2013, p. 51). The company had only 13 permanent employees in total
(KPCL, 2013, p.96). So, it can be said the company has ready succession.
III.

Team work (3)

The companys internal governance system ensures optimal utilization of
resources. Also, the managing directors had cited employees team work
as one of the reason for the companys success (KPCL, 2013, p. 33)

4. Security Risk (10)

Security risk is the probability of default due to poor quality of security. The company
Khulna Power Company Limited 17-066

scored 10 out of 10 at this risk component. The explanations of the key parameters are
given belowI.

II.

III.

Security coverage (4)

Against the loan of BDT 100 million, the company will give its power plant,
vehicles and buildings as collateral whose total current market value
exceeds the total amount of the loan (KPCL, 2013, p. 72, 81). From the
analysis of the other two term loans, it has been found that they also
accepted same sort of collateral.
Collateral coverage (4)
The power plant mentioned are very costly to import. Also, it process is
very time consuming. Therefore, any local company will want to purchase
them locally if the bank needs to sell it.
Support (2)
The net equity of the company amount to BDT 3440.81 million as of
December 31, 2013. Therefore, the companys owners have enough to
pay off our loan from their own wallet.

5. Relationship Risk (8)

Relationship risk is the probability of failure to meet obligation due to financial distress.
The company scored 4 out of 4 at this risk component. The explanations of the key
parameters are given belowPage 10 of 25

I.

Account conduct (5)

The company has account with my employer standard chartered bank.
From the analysis of the record, I found that the accounts were clean with

II.

no dues.
Utilization of limit (2)
From the analysis of our previous loan, I found that KPCL has used the full

III.

amount of their limit.

Compliance of covenants (1)
Maintaining proper book of accounts is one of the prime requirement of
loan covenants. The company has restated its financial statements of year

Khulna Power Company Limited 17-066

IV.

2009 and 2010 while my bank have dues to them (KPCL, 2010, p. 28)
Personal deposit (0)
I presume that the key business personnel or sponsors have no personal
depositor relationship with Standard Charted Bank to ignore any selfserving bias.

Conclusion
By totalling the score of the entire risk component on different key parameters, I found a
score of 87 (See Appendix). According to the CRG scale, an aggregate score of 85 or
greater based on the Risk Grade Score Sheet dictates Good category. Hence, the
company is in the Good (GD) category. So, I can say current grading warrants that the
company is appropriate for lending fund.

Key References
Bangladesh Bank [BB] 2014, Circular Letters, viewed on 23 June 2014,
<http://www.bangladesh-bank.org/mediaroom/circulars/brpd/cregradnbbankjun07.pdf>
Dhaka Stock Exchange [DSE] 2014, Company Name: Khulna Power Company Limited,
viewed on 24 June, 2014, < http://www.dsebd.org/displayCompany.php?name=KPCL>

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Khulna Power Company Limited [KPCL] 2010, Company History, viewed on 24 June,
2014, < http://www.khulnapower.com/history.php>
KPCL 2013, Annual Report 2013, Khulna Power Company Limited, Bangladesh, viewed
on 23 June 2014, < http://www.khulnapower.com/financial_reports.php>
KPCL 2013, Annual Report 2012, Khulna Power Company Limited, Bangladesh, viewed
on 23 June 2014, < http://www.khulnapower.com/financial_reports.php>
KPCL 2013, Annual Report 2011, Khulna Power Company Limited, Bangladesh, viewed
on 23 June 2014, < http://www.khulnapower.com/financial_reports.php>
KPCL 2013, Annual Report 2010, Khulna Power Company Limited, Bangladesh, viewed
on 23 June 2014, < http://www.khulnapower.com/financial_reports.php>

Khulna Power Company Limited 17-066

KPCL 2013, Annual Report 2019, Khulna Power Company Limited, Bangladesh, viewed
on 23 June 2014, < http://www.khulnapower.com/financial_reports.php>
Power Division, Ministry of Power, Energy and Mineral Resources, Government of the
Peoples Republic of the Bangladesh [Power Division, BD Govt.], 2011, Power System
Master
Plan
2010,
viewed
on
20
June,
2014
<
http://www.powerdivision.gov.bd/user/brec/40/55>

Appendix

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