This internship report has been prepared to fulfill the requirement for getting BBA degree. As a part of my course, it is mandatory to get involved with an organization for a certain period of time to acquire the practical knowledge. Following my completion of 11 courses of BBA program, the placement committee of Finance Department, SUB places me at EXIM Bank for doing my internship from September to December. This report is the outcome of my internship in EXIM Bank on the above stated date.
The report covers organizational aspects of EXIM Bank and a project title “Investment Programs of EXIM Bank”
Its important function is to receive deposits, lend money, discount bills, and finance foreign trade issue guarantee and transfer money. In industrial sector, the highest disbursement of EXIM Bank is in Textile and readymade Garments sector.
In the organization part, I have focused on brief acquaintance of EXIM Bank, its mission, objectives, activities, functions and operations of different departments of Head office. I also tried to present the numerical data of different aspects related to the discussion. In the project part, I was required to analyze the overall Export Business, Import Business and Remittance.
All the discussions are presented in detail in the project part of the report. Hope it will help the reader to have a distinct picture of the whole project work. Any kind of criticism is welcome for the betterment of the project.
DEFINITIONS OF BANK
A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses.
Definitions of Bank:
¯ Depository financial institution: a financial institution that accepts deposits and channels the money into lending activities.
Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. The current sets of global bank capital standards are called Basel II. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of a cross-share holding entity known as the keiretsu.
An organization, usually a corporation, chartered by a state or federal government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor’s checks; and issues drafts and cashier’s checks.
OBJECTIVE OF THE BANK
The main objective of commercial banks is to maintain higher profitability by maintaining circular and efficient flow of amount of money deposited by the customers and the lenders. Commercial banks contribute to the economic cycle by keeping the money circulation among households, government and corporate businesses. The commercial banks lend money to the economic agents through their various products and services by earning interest income on the borrowed money.
BANKING OPERATION IN BANGLADESH
The commercial banking system dominates Bangladesh’s financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system is composed of three state-owned commercial banks, thirty one private commercial Banks, nine foreign commercial banks and five specialized development banks.
The commercial banking system dominates Bangladesh’s financial sector. Bangladesh Bank is the Central Bank of Bangladesh and the chief regulatory authority in the sector. The banking system is composed of four state-owned commercial banks, five specialized development banks, thirty private commercial Banks and nine foreign commercial banks. The Nobel-prize winning Grameen Bank is a specialized micro-finance institution, which revolutionized the concept of micro-credit and contributed greatly towards poverty reduction and the empowerment of women in Bangladesh.
State-owned Commercial Banks
The banking system of Bangladesh is dominated by the 4 Nationalized Commercial Banks , which together controlled more than 54% of deposits and operated 3388 branches (54% of the total) as of December 31, 2004. The nationalized commercial banks are:
Specialized Bank of Bangladesh:–
Karmosangesthan Bank, Bangladesh Krishi Bank, Sonali Bank, Janata Bank, Agrani Bank ,Rupali Bank.
Private Commercial Banks
Private banks are the highest growth sector due to the dismal performances of government banks (above). They tend to offer better service and products.
AB Bank Ltd, BRAC Bank Limited, Eastern Bank Limited, Dutch Bangla Bank Limited, Dhaka Bank Limited, Islami Bank Bangladesh Ltd, Pubali Bank Limited, Uttara Bank Limited, IFIC Bank Limited, National Bank Limited, The City Bank Limited, United Commercial Bank Limited, NCC
Bank Limited, Prime Bank Limited, SouthEast Bank Limited, Al-Arafah Islami Bank Limited, Social Islami Bank Limited, Standard Bank Limited, One Bank Limited ,Exim Bank Limited, Mercantile Bank Limited, Bangladesh Commerce Bank Limited, Mutual Trust Bank Limited, First Security Islami Bank Limited, The Premier Bank Limited, Bank AsiaLimited,Trust Bank Limited, Shahjalal Islami Bank Limited,Jamuna Bank Limited, ICB Islami Bank
Foreign Commercial Banks
Citibank, HSBC, Standard Chartered Bank, Commercial Bank of Ceylon, State Bank of India, Habib Bank, National Bank of Pakistan, Woori Bank, Bank Alfalah
Specialized Development Banks
Out of the specialized banks, two (Bangladesh Krishi Bank and Rajshahi Krishi Unnayan Bank) were created to meet the credit needs of the agricultural sector while the other two ( Bangladesh Shilpa Bank (BSB) & Bangladesh Shilpa Rin Sangtha (BSRS) are for extending term loans to the industrial sector. The Specialized banks are:
Grameen Bank, The Dhaka Mercantile Co-operative Bank ltd, Bangladesh Krishi Bank, Bangladesh Development Bank Ltd, Rajshahi Krishi Unnayan Bank, BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited),Bangladesh Somobay Bank Limited(Cooperative Bank), Ansar VDP Unnyan Bank
“An Islamic Bank is a Financial Institution whose statutes, rules and procedures expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operation.”
This paper is an attempt to evaluate the Different Modes Investment of EXIM Bank Bangladesh Ltd. in terms of productivity and effectiveness.
Reason of the Report
To have an overall idea about Islamic Banking System that is based on the Al-Quran and Sunnah.
To know about the interest free Banking System and how it could be processed.
To find out the difference between conventional banking system and shariah based banking system.
In order to conduct such a study the report preparer must follows some specific methods. They are given below-
- Variables – in the report variables are used banking system. Two variables are-
a) Islamic system
b) Conventional system
- Analytical Method
- Descriptive method
- Conventional versus Islamic banking
- Performance and Growth
- SWOT analysis
Sources of Data
- Ø Sources of Data:
All the relevant data regarding this study are collected from two sources:
- 1. Primary Sources:
- Interviewing with the bank officials of EXIM Bank Ltd., Moulvibazar Branch.
- Official records and observing practical work.
- Practical desk work
- Face to face conversation with the officer
- Direct observations
- 2. Secondary Sources:
- Annual report of EXIM Bank Ltd.
- Published Booklet of the Bank.
- Website of EXIM Bank Ltd.
- Various published documents.
Scope of the Study
This report has been prepared through extensive discussion with bank employees and with the clients. Prospectus provided by the bank also helps to prepare the report. At the time of preparing the report, I had a great opportunity to have an in depth knowledge of all the banking activities practiced by the Exim Bank Limited.
Limitations of the Study
The officers are very co-operative but they are too busy to give me time to get knowledge about practical activities. Moreover they have to deal in a very competitive environment based on money related activities. I have to prepare this report alone. Every task has some limitations. I faced some usual constraints during the course of my internship. These are as follows:
a)Short of time:
I had to complete this report writing within a shorter period of time. So the time constraint of the study hindering the course of vast area and time for preparing a report within the mentioned period is really difficult.
b)Busy working environment:
The officials had some times been unable to provide information because of their huge routine work.
C)Lack of sufficient well informed officials:
Many officials of the branch are not well informed about different systems of Exim bank. They know but less. I had to face much difficulty to collect this information.
d)Insufficient data: Some desired information could not be collected due to confidentially of business.
PROFILE OF EXIM BANK
Export Import Bank of Bangladesh Limited (EXIM Bank), a scheduled commercial bank in the private sector, started its banking operation on the 3rd of August, 1999. From 1st July, 2004 the bank converted its banking operation into Islamic Banking based on Islamic Shariah from traditional banking operation. During the same year, the bank issued 3,138,750 ordinary shares through IPO placement. The bank carries out its banking activities through twenty-eight branches operating as per Islamic Shariah in the country. Within a short period of time the bank has earned good reputation among the people of this country. This is clearly evidenced by the tremendous growth of its business and operating results. Of its very beginning EXIM Bank Bangladesh limited was known as BEXIM Bank Limited. But some legal constraints the bank renamed as EXIM Bank, which means Export Import Bank of Bangladesh Limited.
From 1st of July of 2004 the bank became Shariah Based Islamic Bank and from then it is rendering banking services according to Islamic banking principles. For smooth operations the Board of Directors established a Shariah Board, which decides on the banking principles according to which the bank will operate its business.
The bank’s vision and mission are the following:
The bank has chalked out the following corporate objectives in order to ensure smooth achievement of its goals:
- To be the most caring and customer friendly and service oriented bank .
- To create a technology based most efficient banking environment for its customers.
- To ensure ethics and transparency in all levels.
- To ensure sustainable growth and establish full value of the honorable shareholders and
- Above all, to add effective contribution to the national economy
Eventually the bank emphasizes on:
- Providing high quality financial services in export and import trade
- Providing efficient customer service
- Maintaining efficient customer service
- Maintaining corporate and business ethics
- Being trusted repository of customer’s money and their financial adviser
- Making its products superior and rewarding to the customers
- Display team spirit and professionalism
- Sound Capital base
- Enhancement of shareholders wealth
- Fulfilling its social commitments by expanding its charitable and humanitarian activities
The gist of the vision is ‘Together, Towards, Tomorrow’. Export Import Bank of Bangladesh Limited believes in togetherness with its customers, in its march on the road to growth and progress with services. To achieve the desired goal, there will be pursuit of excellence at all stages with a climate of continuous improvement, because, in EXIM Bank, they believe, the line of excellence is never ending. Bank’s strategic plans and networking will strengthen its competitive edge over others in rapidly changing competitive environments. Its personalized quality services to the customers with the trend of constant improvement will be cornerstone to achieve their operational success.
The purpose of banking business is obvious to earn profit, but the promoters and the equity holders are aware of their commitment to their society to which they belong. A chunk of the profit is kept aside and/or spends for socio economic development through trustee and in patronization of art, culture and sports of the country. The institution wants to make a substantive contribution to the society where it operates, to the extent of its separable resources.
Like other commercial banks, the bank provides all traditional banking services including the wide range of savings and credit scheme products, foreign exchange and ancillary services. However, the main focus of the bank is on export and import, trade handling and on the development of entrepreneurship and patronization of private sectors.
The core business of the bank comprises of trade finance, term finance, working capital finance and corporate finance. The bank is also providing personal credit services related to local and foreign remittances and several product related services. The schemes of the bank, which are designed to help the fixed income group in raising standard of living are competitively priced and have been widely appreciated by the customers.
PRODUCTS & SERVICES
- L/C (Import & Export) Products
EXIM Bank is posed to extend L/C facilities to its importers / exporters through establishment of correspondent relations and Nostro Accounts with leading banks all over the world.
- Investment Products
The bank provides credit services such as, corporate finance, industrial finance, lease finance, hire purchase finance, commercial investments, and project finance and syndicate loans.
- Deposit Products
The bank introduced a number of financial products and services since its banking operation. Among them Mudaraba Savings Deposit,Mudaraba Short Term Deposit Mudaraba Term Deposit, Mudaraba Monthly Income Scheme, Mudaraba Monthly Saving Scheme, Mudaraba Super Savings Scheme, Mudaraba Hajj Scheme.
- Foreign Exchange
Non Resident Foreign Currency Deposit Account (NFCD)
Foreign Currency Deposit Account
Letter of Credit (L/C) facilities through establishment of correspondent relations with leading banks all over the world.
- E-cash/ ATM Service
The bank is currently providing Credit Card Service (Master Card) to the privileged customers of the bank in collaboration with the Standard Chartered Bank.
- Other Services
Other services include utility bill collection for Grameen Phone from its users in all the branches and for Palli Biddut somity of Gazipur from its consumers in Gazipur branch.
OVERALL PERFORMANCE OF EXIM BANK (core tk)
|6||Investment ( Shares on Bonds)||154.30||163.30||223.33||245.77||289.40|
|7||Foreign Exchange Business||4931.24||7294.00||9617.51||11790.01||15643.46|
|a) Import Business||2678.10||4143.20||4959.67||6139.94||7854.05|
|b) Export Business||2241.84||3128.50||4623.46||5579.04||7646.56|
|9||Loan as a % of total Deposit||101.33%||91.97%||93.18%||96.75%||93.14%|
|10||No. of Foreign Correspondent||200||222||246||246||278|
|11||Number of Employees||768||934||1020||1104||1312|
|12||Number of Branches||28||28||30||35||42|
|13||Return on Assets||1.57%||1.65%||1.73%||2.00%||1.83%|
HISTORICAL BACKGROUND OF THE BANKING INSTITUTIONS IN BANGLADES
The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 percent of total advances.
The government’s encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent. . The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh’s system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh’s system of financial intermediation early in 1987, many of which were built into a three-year compens Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than 2 months worth of imports. This represented a 20-percent increase of reserves over the previous year, largely the result of higher remittances by Bangladeshi workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion. Because of Bangladesh’s status as a least developed country receiving concessional loans, private creditors accounted for only about 6 percent of outstanding public debt. The external public debt was US$6.4 billion, and annual debt service payments were US$467 million at the end of FY 1986.
Branch Information (EXIM Bank has 55 Branches in Bangladesh)
EXIM Bank Limited established 55 branches up to this year. Those are – Local office, Motijheel Branch, Panthapath Branch, Gazipur Chowrasta Branch, Imamgonji Branch, Gulshan Branch, Nawabpur Branch, Naranyangonj Branch, Shimrail Branch, Rajuk Avance Branch, New Eskaton Branch, Uttara Branch, Mirpur Branch, Elephant Road Branch, Mawna Branch, Malibagh Branch, Ashulia Branch, Ashugonj Branch, Sat Mosjid Road Branch, Bashundhara Road , Branch, Savar Branch , Karwan Bazar Branch , Head Office Corporate Branch, Naria Branch, Agrabad Branch, Khatungonj Branch, Jublee Road Branch, Sonaimuri Branch, Laksham Branch, CDA Avenue Branch, Chowmuhana Branch, Comilla Branch, Modaffargonj Branch, Chhagalnaiya Branch, Pahartoli Branch , Sylhet Branch, Fenchugonj Branch, Moulvi Bazar Branch , Golapgonj Branch , Jessore Branch, Kushtia Branch, Khulna Branch, Rangpur Branch, Rajshahi Branch.
CHAPTER-03 :INVESTMENT PROGRAMS OF EXIM BANK
Investment is the action of deploying funds with the intention and expectation that they will earn a positive return for the owner. Funds may be invested in either real assets or financial assets. When resources are used for purchasing fixed and current assets in a production process or for a trading purpose, then it can be termed as real investment. The establishment of a factory or the purchase of raw materials and machinery for production purposes are examples in point. On the other hand, the purchase of a legal right to receive income in the form of capital gains or dividends would be indicative of financial investments. Specific examples of financial investments are: deposits of money in a bank account, the purchase of Mudaraba Savings Bonds or stock in a company. Ultimately, the savings of investors in financial assets are invested by the respective company into real assets in the form of the expansion of plant and equipment. When money is deposited with an Islamic Bank, the bank, in turn, makes investments in different forms approved by the Islamic Shariah with the intent to earn a profit. Not only a bank, but also an individual or organization can use Islamic modes of investment to earn profits for wealth maximization
Investment of EXIM BANK
The total amount of investment of the bank stood at tk. 53,637,68 million as on December 31, 2009 as against tk. 40195.24 million as on December 31,2008 showing an increase of tk. 13,442.44 million with the growth rate of 33.44%. Investments are the core asset of the bank. The bank gives emphasis to acquire quality assets and does appropriate investment risk analysis while approving commercial and trade investment to clients.
|Year||Investment (Tk. in million)|
Investment Objectives Of EXIM BANK
The objectives and principles of investment operations of the Banks are:
The investment fund strictly in accordance with the principles of Islamic Shariah.
To diversifies its portfolio by size of investment, by sectors (public and private), by economic purpose, by securities and by geographical area including industrial, commercial and agricultural.
To ensure mutual benefit both for the Bank and the investment client by professional appraisal of investment proposals, judicious sanction of investment, close and constant supervision and monitoring therefore.
To make investment keeping the socio-economic requirement of the country in view.
To increase the number of potential investors by making participatory and productive investment.
To finance various developments schemes for poverty alleviation, income and employment generation with a view to accelerating sustainable socio-economic growth and up-liftment of the society.
To invest in the form of goods and commodities rather than give out cash money to the investment clients.
Industry and Business Segment Focus
The bank provides suitable investment services & products for the following sectors
Table2: Sector-wise Loan Facilities
|a) Steel & Engineering.||j) Brick Fields.|
|b) Food & Allied.||k) Edible Oil.|
|c) Agriculture||l) Assembling Industry.|
|d) Textile & Garments.||m) Collage Industry.|
|e) Pharmaceuticals & Chemicals.||n) Electronics & Electrical Commodities.|
|f) Paper & Paper Products.||o) Construction Company.|
|g) Service Industries.||p) Trading (Retail/Whole sale)|
|h) Housing & Real Estate.||q) Others.|
Source: Investment Policy of EXIM Bank
Major Investment Categories
The Bank has primarily divided all investment facilities into two major categories. In this section they are discussed in details.
Izara Bill Baia: These are the investment made by the Bank with fixed repayment schedules.
The terms of investment are:
Short term : Up to 12 months
Medium term : More than 12 and up to 36 months
Long term : More than 36 months.
Investment facility available under this category is:
- Izara Bill Baia (General): Short term, Medium term & long term investment allowed to individual/firm/industries for a specific purpose but for a definite period and generally repayable by installments fall under this head. This type of investment is mainly allowed to accommodate financing under the categories (i) Large & Medium Scale Industry and (ii) Small & Cottage industry. Very often term financing for agriculture & others.
q Continuing loans These are investment having no fixed repayment schedule, but have an expiry date at which it is renewable on satisfactory performance. Investment facilities available under this category are:
- Bai-Muazzal: Continuous Investment allowed to individual/firm for trading as well as wholesale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is allowed under the categories (i) “Commercial Lending” when the customer is other than an industry and (ii) “Working Capital” when the customer is an industry.
- Murabaha: Financial accommodations to individual/firm for trading as well as for wholesale or to industries as working capital against pledge of goods as primary security fall under this head of investment. It is also a continuous investment and like the above allowed under the categories (i) “Commercial Lending” and (ii) “Working Capital”.
Other Major Categories of Investment
Investment facilities of the Bank are also categorized under 7 prime categories:
Investment facilities to the agricultural sector fall under this category. It is subdivided into two major heads:
a) Investment to primary producers: Financing under these categories refers to the investment facilities allowed to production units engaged in farming, fishing, forestry or livestock.
b) Investment to dealers/distributors: It refers to the financing allowed to input dealers and (or) distributors in the agricultural sectors.
Izara Bill Baia for Large & Medium Scale Industry
This category of investment accommodates the medium and long term financing for capital structure formation of new industries or for expansion of the existing units who are engaged in manufacturing goods and services. Investment Facility available under this category is:
- Izara (Lease Finance): It is one of the most convenient sources of acquiring capital machinery and equipment whereby a client is given the opportunity to have an exclusive right to use an asset usually for an agreed period of time against payment of rent. It is a term financing repayable by installment.
Izara Bill Baia to Small & Cottage Industries
These are the medium and long term investment allowed to small & cottage manufacturing industries.
Investment allowed to the manufacturing units to meet their working capital requirements, irrespective of their size-big, medium or small, fall under the category. These are usually continuing investment and as such fall under the head “Bai-Muazzal”
Investment on Export
Investment facilities allowed to facilitate export of all items against Letter of Credit and/or confirmed export orders fall under this category. Investment Facilities available under this category are:
- Musharaka Pre-shipment (Export Cash Credit): Financial accommodation allowed to a customer for exports of goods fall under this head and is categorized as “Investment on Export”. The loans are liquidated out of export proceeds with 180 days.
- Musharaka Pre-shipment (Packing Credit): Investment allowed to a customer against specific L/C contract for processing/packing of goods to be exported falls under this head and is categorized as “Mushraka Pre-shipment”. The investments are adjusted from proceeds of the relevant exports within 180 days.
- Foreign Documentary Bill Purchase (F.D.B.P): Payment made to a customer through purchase/negotiation of a foreign documentary bills falls under this head. This temporary investment is adjustable from the proceeds of the shipping/export documents.
- Local Documentary Bill Purchase (LDBP): Payment made against documents representing sell of goods to Local export oriented industries that are deemed as exports and which are denominated in Local Currency/Foreign Currency falls under this head. This temporary liability is adjustable from proceeds of the Bill.
- Foreign Bill Purchase (FBP): Payment made to a customer through purchase of foreign currency cheques/drafts fall under this head. This temporary loan is adjustable from the proceeds of the cheque/draft.
Short-term loans and continuing investments allowed for commercial purposes fall under this category. It includes export-import financing, financing for internal trade, service establishment etc. No medium and long-term investments are accommodated here. Loan Facilities available under this category are:
- Bai-Muazzal (Export): investments allowed for purchasing foreign currency for payment against L/Cs (Back to Back) where the exports do not materialize before the date of import Payment fall under this head. This is also a investment for temporary period, which is known as export finance.
- Murabaha Import Bills (MIB): Payment made by the Bank against lodgment of shipping documents of goods imported through L/C falls under this head. It is an interim investment connected with import and is generally liquidated against paymentusually made by the party for retirement of the documents for release of imported goods from the customs authority.
- Murabaha Post Import (MPI) Loans allowed for retirement of shipping documents and release of goods imported through L/C taking effective control over the goods by pledge in go down under bank’s lock & key fall under this type of investment. This is a temporary investment connected with import that is known as post-import finance.
- Trust Receipt (TR) Loan allowed for retirement of shipping documents and release of goods imported through L/C falls under this head. The goods are handed over to the importer under trust with the arrangement that sale proceeds should be deposited to liquidate the investment within a given period. This is also a temporary loan connected with import and known as post-import finance.
- Inland Bills Purchase (IBP) Payment made through purchase of inland bills/cheques to meet urgent requirement of the customer falls under this type of loan facility. This temporary loan is adjustable from the proceeds of bills/cheques purchased for connection.
Any investment that does not fall in any of the above categories is considered under the category “Others”. It includes loans to i) Transport equipments, ii) Construction works including house (commercial/residential), iii) work order finance, iv) personal loan etc. Investment Facilities available under this category are:
- Izara Bill Baia (House Building): Investment allowed to individual/enterprises for construction of building for commercial purpose fall under this type of investment. The amount is repayable by monthly installment with a specified period.
- Izara Bill Baia (Staff House Building): investment allowed to Bank’s employees for purchase/construction of house falls under this Loan.
- Other Loan to Staff: Investment allowed to employees other than for House Building is grouped under head Staff Izara Bill Baia (General).
- Izara Bill Baia (Hire Purchase): It is a type of installment-based loan under which the purchaser agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as profit for adjustment of the loan within a specified period.
- House Hold Durable Scheme (HDS): It is a special investment scheme of the Bank to finance purchase of consumer durable to the fixed income group to raise their standard of living. The investments are allowed on soft terms against personal guarantee and deposit of specified percentage of equity by the customers. The investment is repayable by monthly installment within a fixed period.
- Quard (General/Financial Obligation): Investment allowed to individual/firms against financial obligation (i.e. lien on MTDR/PSP/BSP/Insurance Policy/Share etc.).
- Bai-Muazzal (Work Order): Investment allowed against assignment of work order for execution of contractual work falls under this head. This investment is generally allowed for a definite period and specific purpose not for continuous purpose.
Loan Facilities for single borrower/Group or syndication
The bank from time to time allows loan facilities to a single customer/Group (Funded & non funded) up its 50% of total capital out of which funded facilities does not exceed 25% of total capital. In case a proposal in submitted to Head Office, then the Bank considers the extent of the Bank’s global exposure (risk) to that customer group.
Investment Facility Parameters
Bank does not ordinarily go for any loan facilities for long-term basis.
- Short-term loan facilities are for 3 months to 12 months.
- Medium term loan facilities are for 12 months to 36 months.
- Long-term loan facilities are for more than 36 months.
i) Maximum 50% (Funded & non-funded) of total capital of the Bank.
ii) Maximum 25% (funded) facilities of total capital of the Bank.
All assets (Bai-Muazzal & Murabaha) are to be covered under proper insurance risk with enlisted Insurance Companies.
CHAPTER4:- PROCESSING, RULES AND RESTRICTIONS
Lending facilities restrictions
The bank establishes a specific industry sector exposure cap by preparing a sector wise loan budget in order to avoid over concentration in any one-industry sector. The
budget is approved by the Board in the month of January every year and includes the following points:
- Total Facilities: The aggregated of all cash facilities is kept at 80% of customer’s deposits. It is also governed by the statutory and liquidity reserve requirement of Bangladesh Bank.
- Term Facilities: Aggregated long-term facilities are restricted to 20% of the total loan portfolio and are not allowed for a period more than 5 (five) year.
- Unsecured Facilities: Aggregate bank loans to corporate or individual customers who are not secured by collateral and are allowed on the strength of customer’s personal integrity and financial standing or the corporate customer’s balance sheet, with or without hypothecation of stock is restricted to 30% of the total loan portfolio.
- Sector-wise Allocation: Sector-wise allocation of loan budget is made in the month of January of each year with the approval of Executive Committee/Board of Directors. This is reviewed from time to time.
- Security: Security accepted against loan facilities is properly valued and is affected in accordance with the laws of the country in which the security is held. An appropriate margin of security is taken to reflect such factors as the disposal cost or potential price movement of the underlying assets.
Investment facilities not provided for Business Types
The Bank does not provide loan facilities to the following businesses:
¯ Military Equipment/Weapon Finance.
¯ Highly Leveraged Transactions.
¯ Finance of Speculative Loans.
¯ Logging, Mineral Extraction/Mining, or other activity that is ethically of Environmental sensitive.
¯ Lending to companies listed on CIB black list or known defaulters.
¯ Counter parties in countries subject to UN sanctions.
¯ Share lending.
¯ Taking an equity stake in Borrowers.
¯ Lending to Holding Companies.
¯ Bridge Loans relying on equity/debt issuance as a source of repayment.
¯ Tannery Finance.
¯ Izara Bill Baia (HB-residential) who has no other business with the Bank.
GENERAL LENDING PRINCIPLES OF EXIM BANK
Lending of funds to the traders, businesses and industrial enterprises constitutes the main business of the bank. A major part of the bank’s income is earned from interest and discount on the funds so lent. The business of lending, nevertheless, is not without certain inherent risks. Largely depending on the borrowed funds, a banker cannot afford to take
Undue risks in lending. While lending its fund, the bank, therefore, follows a very cautious policy and conducts its business on the basis of the well-known principles of sound lending in order to minimize the risks. The bank usually follows the following lending principles in its credit management operations:
- Safety: As the bank lends the funds entrusted to it by the depositors, the first and foremost principle of lending is to ensure the safety of the funds lent. By safety it is meant that the borrower is in position to repay the loan, along with interest, according to the terms of the loan contract. The bank takes utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully and is a person of integrity, good character and reputation.
- Purpose: The bank does not grant loan for each and every purpose. Bank has its own policy regarding the purpose for which it provides loans. Loans are normally provided for productive purposes only such as working capital, trading, agricultural, transport, export-import etc. The bank does not grant loans for purely speculative purposes, unproductive purpose such as social functions or holiday or for repayment of prior loans and business having negative net-worth if it is not covered by cash/quasi cash securities with adequate margin.
- Profitability: Since the bank is a profit-earning institution, it employs its funds profitability so as to earn sufficient income out of which to pay interest to the depositors, salaries to staff and to meet various other establishment expenses and distribute dividend to shareholders. The bank usually considers high yielding, short-term, and self-liquidating with ancillary business/compensating deposits and prefers quality advances. The bank keeps a spread of lending rate over its expenses that include deposit interest payment and other operating and overhead expenses. The bank is free to determine its interest rates.
- Liquidity: Bank lends funds for short periods. The loans are, therefore, largely payable on demand. The bank ensures that the borrower is able to repay the loan on demand or within a short period. The bank grants loans on the security of assets, which are easily marketable without much loss.
- Dispersal/Diversification: The bank keeps its investment portfolio as much broad based as possible and in conformity with the deposit structure. The bank does not provide investments in oneParticular direction/industry/activity or one or few borrowers because any adversity faced by that particular industry will have serious adverse affect on the bank. Again, investment s are not concentrated in one area alone. The bank spreads its loans against different securities, industries/activities, borrowers, areas, etc. This way the bank diversifies its risks.
- National interest/social benefit: The Bank grants loan if the purpose of the investment is for overall plans necessitating flow of credit to priority sector in the larger national interest. National interest for financing in some areas, especially in advances to agriculture, small industries, export oriented industries, and assuming great importance. The bank also looks at the social and environmental implication of the project or business that it is financing.
Bank may allow investment facilities to a single customer/Group (Funded & non funded) up to its 50% of total capital out of which funded facilities must not exceed 25% of total capital. All proposal submitted to Head Office will also be required to indicate the extent of the Bank’s global exposure to that customer group.
Group exposure shall be deemed to include the total investment facilities as detailed below:
- Investment facility in the name of the borrower.
- Investment facility in the name of the firms & companies in which the borrower or its partner or its director is the proprietor or a partner or a Director.
- Investment facility in the name of any firm of company in which the borrower or its partner or its director owns 20% or more share even if not a Director.
- Any Investment facility guaranteed by the borrower or its partner, or its Director.
However, definition of group exposure if given by Bangladesh Bank shall be followed regardless of the above definition.
Investments favoring various client groups:
|Amount in Taka|
Abul Khair Group
S. Alam Group
Shamsul Alamin Group
Shah Sharif Group
Nurul Alam Master Group
Lending is one of the most important functions of a bank. Therefore, It is of paramount importance that the bank chooses a reliable borrower. For this the bank places the kind of mechanism(s) that helps it identify the borrower who can be creditworthy. This section deals with some of the mechanisms that the bank employs for this end.
- Investment Application form: A investment application form usually contains information pertaining to the name of the concern, constitution, nature and place of business, year of establishment, borrower’s experience in the line, particulars of assets and liabilities, purpose of advance, amount required, period of advance required for, nature of security offered, sources of repayment, names of present bankers with detailed borrowing and other facilities. This is the first step of knowing about the borrower.
- Personal Interview: The bank arranges interview with the borrower to know more about his specific requirements, the prospects of his employing the funds prudently, his capacity to repay and the suitability of the security offered. The main points that are covered in the interview are: his business, all legal documents required for operation of his business (Memorandum and Article of Association, trade and import license), his capital with reference to working capital, his experience in the business, results of financial statements of at least three years, amount of investment and period, purpose of advance, source of repayment, terms of payment, security documents that are offered, types of charge available. The bank officials who conduct the interview try to analyze and judge for themselves the correctness or otherwise of the various statements and documents of the prospective borrower and to arrive at a balanced opinion regarding the acceptability or otherwise of the proposal.If, after the initial interview, the commercial credit officer decides that the loan request meets basic bank lending criteria, the next step is to conduct a more in-depth investigation, relying upon the documents obtained from the client and from bank’s own and outside sources.
The bank has a Recovery Unit (RU) under CRM. It directly manages account with sustained deterioration (a Risk Rating of Sub Standard (6) or worse).
The RU’s primary function is:
- Determine Account Action Plan/Recovery Strategy.
- Pursue all options to maximize recovery.
- Ensure adequate and timely investment loss provisions are made based on actual and expected losses.
- Regular review of grade 6 or worse account
Capital and Reserve Fund
The authorized and Paid up Capital of the Bank “‘(as Tk.1000 million and Tk225.00 million while it started its Banking operation in 1999. The Capital and reserve of the Bank as on 31st December 2009 stood at Tk.1400.00 million. The Bank also made a 1% general provision on unclassified investments of the Bank, which amounted to Tk.188.22 Million.
PERFORMANCE OF INVESTMENT DIVISION
PERFORMING INVESTMEN OR CLASSIFIED INVESTMENT ACCOUNT MANAGEMENT
All PIs are assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account, and serves as the primary customer contact after the account is downgraded to substandard.
Types of classified investment
Loan classification is required to have a real picture of the loan and advances provided by the Bank. It helps to monitor and take appropriate decision regarding each loan account. All types of loans fall into following four scales:
Categories of investments and advances of a bank:
a. Un-classified: The repayment of investment and advances are regular.
b. Sub-standard: The repayment of investment and advances are irregular but has reasonable prospect of improvement.
c. Doubtful debt: It is unlikely to be repaid but special collection efforts may result in partial recovery.
d. Bad/loss: There is little chance of recovery of investments and advances.
Basis for loan Classification
There are two ways loans are classified: 1) Objective Criteria, 2) Qualitative Criteria.
- Continuous investment: A continuous loan will be treated as irregular/overdue if the advance has not been renewed, that is expiration date is passed. Criterions for loan classification are given in table
Table4 -: Criteria for Loan Classification of Continuous Loan
|Irregular for 3 months or more but less than 6 months.||Irregular for 6 months or more but less than 12 months.||Irregular for 12 months or above.|
- Term investment:
If any installment of a term loan is not repaid within as per repayment schedule the unpaid amount will be treated as overdue installment.
Criteria for Investment Classification of Term Investment Payable within 5 Years
|If the amount of overdue installment stands equal or more than the amounts which is repayable 6 months||If the amount of overdue installment stands equal or more than the amounts which is repayable 12 months||If the amount of overdue installment stands equal or more than the amounts which is repayable 18 months.|
The investment (continuous, demand, and term loan) are classified by the bank whenever it has reason to believe the borrower may not be able to repay the loan due to change is the circumstances under which the loan was originally sanctioned.
The investment is classified as sub-standard on the basis of qualitative judgment, if there is a possibility to change the present situation by taking appropriate steps, although there is a possibility to become loss of the investment. When the loans are categorized as sub- standard it means the repayment of investment and advances are irregular but has reasonable prospect of improvement.
But if there is no possibility of recovery of loan after taking adequate steps, then the loan is treated as doubtful.
But it is not possible to recovery the loan even after taking all out efforts then the loan is treated as bad/loss.
Recovery Units ensure that the followings are carried out when an account is classified as Sub Standard or worse:
- Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or loans are restricted, and only approved after careful scrutiny and approval.
- CIB reporting is updated according to Bangladesh Bank Guidelines and the borrower’s Risk Grade is changed as appropriate.
- Investment loss provisions are taken based on Forced Sale Value (FSV).
- Investments are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling is based on projected future cash flows and is strictly monitored.
- Prompt legal action is taken if the borrower is uncooperative.
RATIO OF CLASSIFIED INVESTMENT OVER TOTAL ASSETS AND INVESTMENT
The most important indicators intended to identify problems with asset quality in the loan portfolio are the percentage of gross non-performing loans (NPLs or classified loans) to total assets and percentage of gross non-performing loans to total loans. The lower figures indicate better asset quality.
Asset Quality of EXIM Bank
|Classified Investment to Total Assets Ratio|| |
|Classified Investment to Total investment Ratio|| |
Since the Bank is a newly established bank it had no classified loan in 2000 and 2001. The ratios show an upward trend indicates that the bank has far better asset quality.
Status of investment is one of the criterions of judging the performance of a bank. In case of classified or unsound investment EXIM Bank’s performance has not been so quite impressive. With the increase of investment disbursement the amount of classified investment, especially substandard investment, has increased quite fast in 2009. In 2009 bad/loss loan also increased than previous year.
Classification of Unsound investment Table-5
(Tk. In crore)
|Year||Substandard||Doubtful||Bad/loss||Total Classified Loan|
Sources: Annual report of EXIM Bank ltd.
PERCENTAGE OF SUB-STANDARD, DOUBTFUL AND BAD LOANS TO TOTAL CLASSIFIED INVESTMENT (TCL):
The share of bad/loss loan, which has no possibility of recovery other than legal measures, is very high in 2005 and 2006 Table shows almost 60% of total classified loan is bad in 2005. This has risen quite sharply just over one year.
Table-6: Percentage of Sub-standard, Doubtful and bad investment to Total Classified investment
|Year||Sub-standard Investment |
as % of TCL
as % of TCL
as % of TCL
SECTOR WISE INVESTMENT CONCENTRATION
It is particularly important to monitor whether the increase in loans in the economy is concentrated in sectors that are vulnerable to shifts in economic activity. Investment concentration in a specific economic sector or activity (measured as a share of total loans) makes banks vulnerable to adverse developments in that sector or activity. Hence, the quality of a financial institution’s investment portfolios is closely related to the financial health and profitability of its borrowers.
Table shows that the most of the loans from 2005 to 2009are concentrated in the industrial investment (around 35.91%) followed by trade (16.53%). The bank allocates lowest amount of its loans for transport sector. (2.59%).
Sector wise loans and advancesTable-7
|Industry(Leather, Pharma,Textile,food etc.)||13.60%||18.74%||23.15%||34.1%||35.91%|
|Working Capital Financing||15.52%||15.73%||12.02%||–||–|
The trend analyses of sector wise loans are given below:
From the above graphical presentation, it is observable that EXIM Bank underscores to the trade & industry sector. In 2009, EXIM Bank invests in trade 16.53% but in 2007 it was 54.17%. Proportion of investment in industrial sector is gradually increases from 2005. Transport & communication sector are more or less same in the year to year basis. Working capital financing sector investment was 12.02% in 2007.Investment in Housing sector was increasing which was 6.19% in 2008 than the year 2007 & 2008which was 4.89% & 4.75 % respectively.
SECTOR WISE INVESTMENT GROWTH
Table:-8 a. Agriculture Industry: (In crore Tk)
|Growth of agriculture industry||1.58%||1146.34%||-5.07%||-11.68%|
b. Industry (Leather, Pharma, Textile,food etc.)
Table-9 (In crore Tk)
|Industry (Leather, Pharma,Textile,food etc.)||26964||46183||67381||89823||130630|
c. Transport& Communication
Table10 (In crore Tk)
|Trade (In crore Tk)||109492||136951||53350||63324||88652|
e.Table11 Service Industries (In crore Tk)
Comment: Growth of investment of EXIM Bank in different sector is in satisfactory level. Investments growth in service sector is so much satisfactory than other sector. The Bank should be concentrated on agriculture industry. It reduces its investment in this sector which is our main industry.
INCOME FROM INVESTMENT
Income derived from investments from the year 2005 to 2009 is given below
Trend of investment income
|Year||Investment Income [In crore Tk]|
sources annual report of bank
As EXIM Bank increases its investments from year to year, so it is logical that it income from sanctioning investments are more. The bank has achieved the highest profit in 2009from any other previous year. So performance of providing investments of the bank is not dissatisfaction.
There are six divisions in our country. But there are some branches where EXIM Bank has no activities. Division wise loans and advances of EXIM Bank Bangladesh limited is given below:
Table13- Division-wise investment (In crore Tk)
Graphically it can be presented,
Source: Based on above information
From the above presentation it can conclude that EXIM Bank emphasizes its investment in Dhaka division which is larger than any division and any year. In 2009 this bank sanctions 4116.69crore taka in Dhaka division which is larger than previous any year.
DEPOSIT MOBILIZATION AND INVESTMENT DISBURSEMENT
A bank exists mainly on the deposit resources and loan disbursement. Day by day the deposits generation is becoming harder due to immense competition in this sector, changes in people saving motive as well as government rules and regulation. The bank introduced some deposit schemes with attractive return for depositors in recent years to increase deposits. As Loans and advances are major revenue-generating assets for any bank, the performance of the bank depends very much on these assets.
Table shows the state of deposit and Investment of the bank in 2005 to 2009. Deposits stand at Tk. 5759 crore Tk in 2009 from Tk. 1908 crore Tk in 2005. Investment stand at Tk. 5364 crore Tk from 1933 crore Tk in 2005. The relation of deposit and investment of EXIM Bank is given below
Relation of deposit and investment in graphically
Sources: Annual report of EXIM Bank Fig-12
From the above figure it can be concluded that deposit is higher from investment in all year except in the year 2005. This year bank had to acquire loan for their investment proposal.
The ratio indicates the proportion of the bank’s deposits is disbursed as investment. This ratio also indicates the efficiency of the bank in raising funds and utilizing them. The bank managed to lend out most of its funds. This way it generated high income in all years. However, this ratio exceeded 100% in 2005. Although this may be risky. The investment to deposit ratio is given below
Trend of investment to deposit ratio
|Year||Investment to deposit ratio|
Source: Annual report of Bank
Comment:It is observable that in 2005 loans and advances exceeded from deposit.For non Islamic bank Bangladesh bank rules is that eighty percent of total deposit.
CHAPTER 6:-CREDIT ASSESSMENT AND RISK GRADING
Definition of CRG
The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.
- A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure.
- Credit Risk Grading is the basic module for developing a Credit Risk Management system.
Use of CRG The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole.
- As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other
decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis.
- Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.
How to Compute CRG
The following step-wise activities outline the detail process for arriving at credit risk grading.
Credit risk for counterparty arises from an aggregation of the following:
- Financial Risk
- Business/Industry Risk
- Management Risk
- Security Risk
- Relationship Risk
Each of the above mentioned key risk areas require be evaluating and aggregating to arrive at an overall risk grading measure.
Evaluation of Financial Risk:
Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow.
a) Evaluation of Business/Industry Risk:
Risk that adverse industry situation or unfavorable business condition will impact borrowers’ capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share & poor industry growth.
b) Evaluation of Management Risk:
Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work.
c) Evaluation of Security Risk:
Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security & collateral, location of collateral and support.
d) Evaluation of Relationship Risk:
These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship.
According to the importance of risk profile, the following weight ages are proposed for corresponding principal risks.
Principal Risk Components: Weight:
- Financial Risk 50%
- Business/Industry Risk 18%
- Management Risk 12%
- Security Risk 10%
- Relationship Risk 10%
|Principal Risk Components|
|Financial Risk||Leverage, Liquidity, Profitability & Coverage ratio|
|Business/Industry Risk||Size of Business, Age of Business, Business Outlook, Industry Growth, Competition & Barriers to Business|
|Management Risk||Experience, Succession & Team Work.|
|Security Risk||Security Coverage, Collateral Coverage and Support.|
|Relationship Risk||Account Conduct, Utilization of Limit, Compliance of covenants/conditions & Personal Deposit.|
|LOANS & ADVANCES CRITERIA OF EXPORT IMPORT BANK OF BANGLADESH LTD.|
|A. Financial Risk 50%|
|1. Leverage: (15%)||Less than 0.25×||15|
|Debt Equity Ratio (×) – Times||0.26× to 0.35 x||14|
|Total Liabilities to Tangible Net worth||0.36× to 0.50 x||13|
|0.51× to 0.75 x||12|
|All calculations should be based on||0.76× to 1.25 x||11|
|annual financial statements of the||1.26× to 2.00 x||10|
|borrower (audited preferred)||2.01× to 2.50 x||8|
|2.51× to 2.75 x||7|
|More than 2.75×||0|
|2. Liquidity: (15%)||Greater than 2.74×||15|
|Current Ratio (×) –Times||2.50× to 2.74 x||14|
|Current Assets to Current Liabilities||2.00× to 2.49 x||13|
|1.50× to 1.99 x||12|
|1.10× to 1.49 x||11|
|0.90× to 1.09 x||10|
|0.80× to 0.89 x||8|
|0.70× to 0.79 x||7|
|Less than 0.70×||0|
|3. Profitability: (15%)||Greater than 25%||15|
|Operating Profit Margin (%)||20% to 24%||14|
|(Operating Profit/Sales) X 100||15% to 19%||13|
|10% to 14%||12|
|7% to 9%||10|
|4% to 6%||9|
|1% to 3%||7|
|Less than 1%||0|
|4. Coverage: (5%)|
|Interest Coverage Ratio (×) – Times|
|Earning before interest & tax (EBIT)||More than 2.00×||5|
|Interest on debt||More than 1.51× Less than 2.00×||4|
|More than 1.25× Less than 1.50×||3|
|More than 1.00× Less than 1.24×||2|
|Less than 1.00×||0|
|Total Score- Financial Risk||50|
|B. Business/ Industry Risk 18%|
|1. Size of Business (in BDT crore)||> 60.00||5|
|30.00 – 59.99||4|
|The size of the borrower’s business||10.00 – 29.99||3|
|measured by the most recent year’s||5.00 – 9.99||2|
|total sales. Preferably audited numbers.||2.50 – 4.99||1|
|2. Age of Business||> 10 Years||3|
|> 5 – 10 Years||2|
|The number of years the borrower||2 – 5 Years||1|
|engaged in the primary line of business||< 2 Years||0|
|3. Business Outlook||Favorable|| 3|
|Critical assesment of medium term||Stable||2|
|prospects of industry, market share||Slightly Uncertain||1|
|and economic factors.||Cause for Concern||0|
|4. Industry Growth||Strong (10%+)||3|
|Good (>5% – 10%)||2|
|No Growth (<1%)||0|
|5. Market Competition||Dominant Player||2|
|6. Entry/Exit Barriers||Difficult||2|
|Total Score- Business/Industry Risk||18|
|C. Management Risk 12%|
|1. Experience||More than 10 years in the related line of business||5|
|Quality of management based on total||5–10 years in the related line of business||3|
|No of years of experience of the senior||1–5 years in the related line of business||2|
|Management in the Industry.||No experience||0|
|2. Second Line/ Succession||Ready Succession||4|
|Succession within 1-2 years||3|
|Succession within 2-3 years||2|
After the risk identification & weight age assignment process (as mentioned above), the next steps will be to input actual parameter in the score sheet to arrive at the scores corresponding to the actual parameters.
The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor.
|Number||Risk Grading||Short Name||Score|
|8||Bad & Loss||BL||<35|
Investment Assessment & Risk Management
A thorough loan and risk assessment is conducted prior to the granting of loans and at least annually thereafter for all facilities. The results of this assessment are presented in a loan proposal to Head of Loan Division for approval. The guiding principles for a bank official while collecting and recording information are to remain uninfluenced by extraneous considerations and secondly he maintains contact with all those who can be of assistance.
The following steps for completion of Loan Risk assessment for each facility are followed by the bank in conjunction with the guidelines/instructions given in Head Office circulars issued from time to time.
The following risk areas are addressed for risk management:
Borrower Analysis: The majority shareholders, management team and group of affiliate companies are assessed. Any issues regarding lack of management depth, complicated ownership structure or inter group transactions are addressed, and risk mitigated. The bank collects credit information from CIB regarding the borrower’s past credit status and exchanges of credit information from other banks or bank opinions. CIB report reflects/includes the name of all the lenders with facility, limit and outstanding.
Industry Analysis: The key risk factors of the borrower’s industry are assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces are addressed and strengths and weaknesses of the borrower relative to its competitors are identified.
Supplier/Buyer Analysis: Any customer or supplier concentration is assessed. Any issues regarding the borrower’s position in the industry, overall industry concern or competitive forces are addressed and the strengths and weaknesses of the borrower relative to its competition are identified.
Historical Financial Analysis: An analysis of a minimum of 3 years historical financial statements of the borrower are presented. Where reliance is placed on a corporate guarantor, guarantor’s financial statements are analyzed. The analysis addresses the quality and sustainability of earnings, cash flow and the strength of the Borrower’s balance sheet. Specifically, cash flow, leverage and profitability are analyzed.
Project Financial Performance: Where term facilities (tenor greater than 1 year) are being proposed, a projection of the borrower’s future financial performance are provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans are not granted if projected cash flow is insufficient to repay debts.
Accounts Conduct: For existing borrowers, the historic performance in meeting repayment obligations (Trade payment, cheques, profit and principal payments, etc.) is assessed.
Mitigating Factors: Mitigating factors for risk identified in the loan assessment are identified. Possible risks include margin sustainability and/or volatility, high debt loan (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion, management changes or succession issues; customer or supplier concentration; and lack of transparency of industry issues.
Loan structure: The amounts and tenors of financing of loan are justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increase the risk of fund diversion and any adversely impact the borrower’s repayment ability.
Security: A current valuation of collateral is obtained and the quality and priority of security being proposed are assessed. Adequacy and the extent of the insurance coverage are also assessed.
Name lending: Loan proposal and the granting of loans are based on sound fundamental, supported by a thorough financial and risk analysis and not by an over reliance on the sponsoring principal’s reputation
“Project appraisal” means pre-loan analysis of a loan-project with a view to determine its commercial and socioeconomic feasibility. It is an essential tool for judicious loan decision and project selection
When the bank receives project based financing proposal from, for example, a garments manufacturer, it appraises the project from a number of point of view. The bank officials critically appraise the proposals to assess viability of the project in consideration of:
- Management appraisal.
- Market appraisal
- Technical appraisal
- Financial appraisal
- Economic appraisal.
A good project may fail if the management is incompetent. It is necessary to evaluate the following managerial aspects:
Overall background of the promoters.
Business and industrial experience.
Past performance & market reputation.
Credit worthiness and
The bank makes sure that the product, which the borrower has been manufacturing/dealing with has a good demand in the market. Market appraisal is done on the basis of following factors.
Consumption trends in the past and the present consumption level
Past and present supply position
Production possibilities and constraints
Imports and exports
Structure of competition
The importance of technical appraisal in project evaluation is beyond any question. Technical appraisal broadly involves a critical study of the following:
Location’ and Site
Raw material supplies
The size of the plant or scale of operation
Production capacity and working capital requirement of the unit and actual exports made by the company during the last 3 years.
The factory premises of the Garments unit applying for credit facilities.
Financial appraisal seeks to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide capital. The aspects looked into while conducting financial appraisal are:
Loan outlay and cost of the project
Means of financing
Cost of capital
Cash flows of the project
Level of risk
Different techniques to assess the financial viability of a project
Economic appraisal, also referred to as social cost benefit analysis, is concerned with judging a project from the larger social point of view.
Security is a cover against loans and advances. It ensures recovery of loans and advances. Securities play an extremely important role in a loan granting decision.
Valuation of Primary Security
Primary security means the security offered by the borrower himself as cover for the loan. It refers to the asset, which has been bought with the help of the bank. Such as when machinery or some goods have been bought with the help of the bank the machinery and goods constitute the primary security.
Primary Security may be either personal security or impersonal security or both. Personal security is given by a borrower by way of duty-executed promissory note, acceptance/endorsement on a bill of exchange and personal covenants in mortgage deeds or loan agreements. Impersonal security is given when a charge is created by way of pledge/hypothecation/mortgage over the borrower’s tangible assets, such as goods and commodity, fixed assets, bills receivables, book debts.
- Murabaha Post Import (MPI) MPI facility is allowed, as post-import finance against imported goods under the Bank’s L/Cs. MPI facility does not exceed invoice value net of L/C margin unless the Bank agrees to finance duties/VAT. However, where market price of the goods is lower than landed cost banks makes necessary arrangement with the customer to obtain additional deposit. Head Office approves the price at which MPI goods to be released to customer or it may be at market price or landed cost whichever is higher.
- Murabaha Valuation of the goods to be pledged to the Bank against Murabaha limit in no case exceeds:
- The landed cost or market prices whichever is lower in case of imported goods.
II. The ex-mill/factory price of market price whichever is lower is case of domestically manufactured commodities as evidenced by invoice.
III. The wholesale price/competitive market price duly verified by the Branch and approved by Head Office.
Valuation of Collateral Security
All other additional security other than the primary securities such as land or building etc. are considered as collateral securities which may be offered or deposited by the borrower or, by any other third party.
The Bank follows the following steps for valuation of collateral security:
- The property is physically inspected and verified jointly by 2 (two) bank’s Officers. A valuation certificate mentioning market value and forced sale value is prepared in a designated form supplied to the officials and is jointly signed by the inspecting officers of the Bank. The forced sale value of the collateral security is to be 1.5 times higher than the facility/facilities allowed.
- “A Site Plan” and “Map” along with 3R size district photographs of the mortgaged property covering full exposure from 3 angles mentioning detailed particulars on the back of the photographs.
- The collateral security must be in the physical possession of the mortgagor and the mortgagor/owner has valid title over it.
- A letter of satisfaction from the Bank’s Lawyer is obtained that the mortgage formality has been properly created.
The bank does not disburse any loan facility until the required documentation is properly completed. After completion of credit investigation, the bank official begins to prepare loan proposal. The loan proposal defines clearly amount and type of loans, the purpose of the facility, summary of the results of risk assessment, the sources of repayment, tenor, covenants, the agreed repayment schedule, interest and value of security.
The credit officer identifies any particular documents required for each facility. The officer is responsible for the completion of the documentation. The officer enlists outside legal assistance where necessary e.g. when drawing up special consortium / term loan agreements etc.
Where security is to be accepted as collateral for the facility all documentation relating to the security are to be in the approved form. All approval procedures and required documentation are completed and all securities are in place, prior to the disbursement of the facilities. There may be requirement of specific banking or legal documents to secure a investment according to sanction terms and conditions. All required documents are required before any loan is disbursed.
After the loan proposal is completely prepared by the branch officers, it is sent to the head office for approval to the approval authority. To ensure proper and orderly conduct of the business of the Bank, the Board of Director empowers the Managing Director and other Executives of the Bank to lend up to certain amount under certain terms and conditions at their discretion. The lending authority is broadly categorized as follows:
(1) Board/Executive Committee.
(2) Managing Directors
(3) Head of Loan Division
Authority and responsibilities of each of the above are as follows:
a) Board of Directors
- Establishes overall policies and procedures for approving & reviewing loans.
- Delegate’s authority to approve and review Loans.
- Approves loan for which authority is not delegated.
- Approves all extension of loan that is contrary to Bank’s written loan policies.
b) Executive Committee of the Board
- Approves loan facilities as delegated by the Board of Directors.
- Supervises the implementation of the directives of the Board of Directors.
- Reviews of each extension of loan approval by the Head Office Loan Committee/Managing Director.
c) Managing Director and Head of Loan Division, Head Office
The Managing Director and Head Office Investment Committee constitute a committee and it is responsible for:
- Reviewing, analyzing and recommending for extension of investment in accordance with authority established and delegated by the Board of Directors.
- Ensuring that all elements of the investment proposal i.e. forms, analysis, statement and other papers have been obtained and in order.
- Confirming that the transaction is consistent with existing loan policy and Bangladesh Bank guidelines.
ORGANIZATIONAL STRUCTURE& RESPONSIBILITIES FOR INVESTMENT MANAGEMENT
To organize and manage the lending activities smoothly, the bank divided the credit department into different functions. This was also been done to improve the knowledge levels and expertise in Investment (Loan) Department, to impose controls over the disbursement of authorized loan facilities and to obtain an objective and independent judgment of loan proposals.
The overall operation of credit of the bank is organized under following functions as shown the figure below.
The key responsibilities of the above functions are:
Investment Risk Management (CRM) Department:
- Oversight of the bank’s investment policies, procedures and controls.
- Oversight of the bank’s asset quality.
- Direct management all substandard, doubtful & bad loss accounts and ensuring appropriate and timely investment loss provisions.
- Approval or rejection loan applications recommended by Relationship Manager.
- Advice/assistance regarding all loan matters to Relationship Manager.
- Ensures that all security documentation comply with the terms of approval and is enforceable.
- Monitors insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral.
- Controls investment disbursements.
- Maintains control over all security documentation.
- Monitors borrower’s compliance with covenant and agreed terms and conditions.
Relationship Management/Marketing (RM) Department:
- Acts as the primary bank contact with borrowers.
- Conducts investigation of the borrower fully.
- Complies with the applicable instruction, manuals, circulars and other rules of the Bank as well as those of Bangladesh Bank.
- Ensures that investment proposals submitted to Head Office are complete and consistent with established policies & procedure.
- Reviews and analyzes all issues related to investment risk proposals covering any obligator.
- Submits investment proposal for new proposals and annual reviews timely and accurate, taking into account the investment assessment requirements.
- Highlights any deterioration in borrower’s financial standing and amend the borrower’s Risk Grade in a timely manner.
- Seeks assistance/advice from CRM regarding the structuring of facilities, potential deterioration in accounts or for any investment related issues.
The investment Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement loan facilities.
- § Disbursement under loan facilities is only made when all security documentations are in place, all formalities regarding loan approval have been completed, all loan Approval terms have been met and sanction letter in duplicate copies detailing the terms and conditions under which the sanction has been made and the same has been obtained from the customer duly signed by him.
b) Custodian Duties
- Investment disbursements and the preparation and storage of security documents are centralized in the regional loan centers.
- Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets pledged as collateral.
- Security documentation is held under strict control, preferably in locked fireproof storage.
To minimize loan losses, the bank put in place monitoring procedures and systems that provide an early indication of the deteriorating financial health of a borrower. The bank officials monitor the followings:
- Past due principal or profit payments, past due trade bills, account excesses, and branch of loan covenants;
- Investment terms and conditions, financial statements on a regular basis, and any covenant breaches or exceptions for timely follow up.
- Timely corrective action to address findings of any internal, external or regular inspection/audit.
Computer systems and where automated systems are not available manual processes are used to produce accurate exception reports. Exceptions are followed up on and corrective action taken in a timely manner before the account deteriorated further.
SWOT Analysis ON EXIM Bank Ltd.
SWOT is an acronym for the internal Strength and Weakness of the firm and the environmental Opportunity and Threat facing that firm. So, if we consider EXIM bank as a business firm and analyze its strength, weakness, opportunity and threats the scenario will be as follows:
- First strength is that it is a sharia based bank.
- By this time it has established an integral, customer friendly relationship with its clients.
- It has prominent saving scheme named DPS for a fixed or lower income group of people of this society.
- It provides services even after the banking hour to special clients.
- Sound profitability growth and high asset quality.
- Experienced management.
- Honest, sincere, and dedicated employee competency.
- Wide market share and stable source of fund.
- High attention on recovery of overdue amount and or pre-overdue situation.
- Close monitoring on investment clients.
- High attention on individual performance.
- High attention on making quality investment and disposal of proposals.
- All the officials/ manpower are dedicated and honest to serve its own duty.
- As a whole the human resource is the main capital/ assets of the division.
- Business ethics of the division is similar to the ethics ands values of mass people of our country.
- Traditional network system and lack of full scale automation.
- Lack of required ideas in modern investment products.
- Poor marketing of investment products.
- Lack of required information spec EXIMally on SME.
- No growth on carrier advancement. So the employee wants to switch elsewhere.
- Lack of experienced, competent as well as proficient manpower in almost every department.
- EXIM Bank ltd does not have an individual marketing department.
- They have limited advertising strategy on behalf on their bank and accompanied by conservatism rule in this sector.
- Customers switch to her banks or have an account with other banks due to the services that EXIM Bank does not provide and lacking behind relative to those prevailing customer services.
- EXIM Bank Ltd. does not use the share mode of investment
- They have no such program to finance to the new entrepreneur or creating the same.
- Scope of market penetration through diversified investment products.
- Increasing awareness of Islamic banking among the clients.
- Scope of develop new committed entrepreneurs.
- Country wide branches having wide opportunities to access in different kinds of business.
- Service charges in other banks are comparatively higher than EXIM Bank Ltd.
- No other banks could provide as much integral working atmosphere as EXIM
- EXIM Bank Ltd enjoys the training packages, workshops and has their own training institutes that generate a task for combining of competent, innovative and sophisticated business professionals.
- Bank introduce Islamic card, which is a first time in Bangladesh.
- Because of the intense competition, most of the competitor banks of EXIM Bank Ltd are coming up with new service line ATM.
- The competitor banks of EXIM Bank Ltd have more geographical coverage than EXIM Bank Ltd.
- State law defers with the Islamic Shariah.
- In the money market of Bangladesh there is no call money system of Islamic Shariah.
- Some other conventional banks have open their Islamic banking branch
BCG growth matrix
EXIM Bank Limited introduced many new services. Through their well-built network they have been able to grab a significant share of the market. But recently due to some government regulation and intense competition from some new players in the market EXIM Bank Ltd. could not maintain the same growth as usual. So, as a whole, EXIM is in the cash cow quadrant in the Boston Box.
Financial Ratio Analysis
Ratio analysis is a relatively simple yet powerful tool in diagnosing the financial condition of an organization. No single ratio could begin to meet the burden imposed be different needs. Thus five major categories of financial ratios have been developed, each designed to address important aspect of the firm’s financial condition.
1. Liquidity ratio: Such as current ratio measure the quality and adequacy of current assets to meet current liabilities as they come due.
2. Activity ratio: Such as fixed turnover, total assets turnover measure the efficiency with which the firm is using its resources.
3. Financial leverage Ratio: SUCH AS Debt-ratio, Debt-equity ratio measure a firm’s ability to service its debt.
4. Profitability Ratio: Such as gross profit Margin, Operating profit margin, return on total asset, etc. measure management effectiveness as indicated by the return on sales, assets and owner’s equity.
Return on Asset:
Return on Asset=Earnings after tax/Total Assets
Table 14: Return on Assets (ROA) (%)
From above table we can say that the Return on Assets increase year to year
Return on Equity:
Return on Equity=Earnings after Tax/Total equity
Table 15: Return on Equity (ROE) (%)
Return on equity sometime increase and sometime decrease
Price Earnings Ratio:
Price Earnings Ratio = Current market share/price Earnings per share
Table 16: Price Earnings Ratio
|Year||Price Earnings Ratio|
Price Earnings Ratio Sometime increase and sometime decrease
Capital Adequacy Ratio:
Capital Adequacy Ratio (CAR) = (Tier One Capital + Tier Two Capital)/Risk Weighted Capital
Table 17: Capital Adequacy Ratio
Capital Adequacy Ratio (CAR) Sometime increase and sometime decrease
EPS (Earning per Share):
Earnings per Share=Net profit for Shareholders/No. of Shares
Table 18: Earnings per Share
Earnings per Share of EXIM BANK fluctuate in different year.
Disbursement of loan At least 2% of our annual profit of every year is put aside for the foundation to conduct Corporate Social Responsibilities(CSR) activities. The mainstream CSR activities that are carried out through this foundation are :
- Healthcare service.
- Scholarship program for brilliant poor student.
- Education Promotion Scheme(Interest free loan).
- Helping people affected by natural calamities.
- Helping people in slum areas.
- Donation to educational institutions to setup computer lab.
- Beautification of Dhaka City.
A 5 storied building having 10,000 sft floor space at 840 Kazi Para, Rokeya Sarani,Mirpur, Dhaka-1216 has been hired to set up Exim Bank Hospital. The decoration of this hospital is going on in full swing. A doctor has been recruited who is working as a resident director of the hospital. Other doctors and hospital staffs have been in the process of selection through recruitment notice already published in the national dailies. They will be appointed as soon as the decoration of the hospital is complete.
b)Scholarship program for brilliant poor student
This is a stipend package for poor and meritorious students that takes care of the beneficiaries throughout their student life. EXIM Bank Scholarship Programme, launched in 2006 with 61 poor and meritorious students selected from different reputed educational institutions of Dhaka City including Govt. Laboratory High School, Viqarunnissa Noon School and College, Dhaka University, BUET, Dhaka Medical College, etc. enrolled as many as 1000 students from around 150 reputed educational institutions across the country by 31 December 2008. They are enrolled in the this programme to be taken care of for their whole educational life subject to their fulfillment of the eligibility criteria that include satisfactory academic results, non-involvement in student politics, financial insolvency etc. So far Tk. 19.3 million has been disbursed as scholarship under this programme.
C)Education Promotion Scheme(Interest free loan)
Under Education Promotion Scheme, quard or interest-free loan is provided for poor and meritorious students to help them bear monthly educational expenditure including academic expenses, food, accommodation, etc. The quard is disbursed to the selected students in monthly installments till their accomplishing the master degree. Under this programme the students are required to repay the amount (only the principal amount) in long-term monthly installments after they have joined a confirmed job accomplishing their education properly. By 31 December 2008, Tk. 19.7 million was sanctioned to take care of around 138 poor and meritorious students from a number of reputed educational institutions like Dhaka University, Chittagong University, Dhaka Medical College, BUET, Bangladesh Agricultural University, Shahjalal University of Science and Technology etc.
d)Helping people affected by natural calamities
Another vital area we are dealing with as part of our CSR activities is helping people survive natural calamities. Under this welfare programme, EXIM Bank provides relief in cash and kind for flood, fire or cyclone victims and cold-stricken people. The aim of these CSR activities is to help the target group overcome their provisional handicap and contribute to the socio-economic growth as soon as possible.
e)Helping people in slum areas
Besides natural calamities, fire breaks out sometimes in slum areas that guts the shanties and renders the affected people totally helpless. In that situation, we help the victims fight against the hard days and return to normal life.
f)Donation to educational institutions to setup computer lab
We have donated to Dhaka University and Chittagong University to set up two computer labs that help the students of those universities acquire ICT knowledge. This will certainly help the students to be ready to take the challenges of this information society.
g)Beautification of Dhaka City
In response to the call of the Dhaka City Corporation, EXIM Bank has been sharing a good portion of the mammoth task of beautifying the capital since 2005. To make the capital a modern city enriched with adequate urban amenities, EXIM Bank always joins hands with the government.
FINDINGS OF THE STUDY
The main focus of this paper is on investment management of EXIM Bank. Besides this the paper also looked at the Islamic banking in Bangladesh as the EXIM bank was converted to an Islamic shariah based bank in July 2005
Islamic banking in Bangladesh has been a tremendous success over the last decade or so. The annual growth rate of Islamic banking is 30%. Islamic banking is based on cardinal two principles laid down in Shariah: 1) prohibition of interest 2) replacing it with profit sharing wherever feasible and desirable.
The bank has a well-organized credit management process in place. The study found that the bank has a well-developed lending policy. The bank follows certain general principle of lending such as safety, purpose, liquidity and diversification. All the investment applications go through each of the steps of the investment granting process. The bank uses its own investment risk evaluation process in addition to LRA Manual of Bangladesh Bank and project appraisal method for evaluating investment proposals. The bank also has a proper investment administration to ensure proper documentation, monitoring and follow up of each investment granted by it.
A banker can not sleep well with bad debts in his portfolio. The failure of commercial banks occurs mainly due to bad loans, which occurs due to inefficient management of the loans and advances portfolio. Therefore any banks must be extremely cautious about its lending portfolio and credit policy. So far the Bank has been able to manage its credit portfolio skillfully and kept the classified loan at a very lower rate
The bank grants investment to a number of sectors through various loan facilities for short, medium and long period. The bank’s lending activities mainly focus on trade and industry sector
In this paper bank’s deposit mobilization and loan disbursement, the average growth rate of deposit and investment from 2005 to 2009 was 45.38% respectively. For investment sanctioning it is observable that in 2005 and 2006 bad loss of giving investment is near about 60% which is not good for the bank. Besides their investment in 2005 is greater than deposit amount. Overall their growth rate is good from the date of establishment.
CONCLUSION AND RECOMMENDATIONS
EXIM bank within a short period of just five years has made good progress in terms of profitability and growth rate of deposits and loans and advances despite tremendous competition in the industry. The bank has to keep updating its credit operation. Although for the time being the figures are good but the trend in the figure indicate that unless the bank becomes more prudent in its loan granting process it can become laden with heavy bad loans.
To improve its overall performance the bank can do the following:
- The segregation of duties will improve the knowledge levels and expertise in each department.
- The organization structure should have to be changed to put in place the segregation of the Marketing/ Relationship Management function from Approval / Risk Management / Administration function.
- The responsibilities of the key persons of the above function must also be clearly specified.
- An Early Alert Account system should be introduced to have adequate monitoring, supervision or close attention by management.( An early Alert Account is one that has risk and potential weaknesses of a material nature)
- There should be a Recovery Unit to manage directly accounts with sustained deterioration. To encourage Recovery Unit incentive program may also introduced.
- The bank can establish a Marketing department to increase deposits
- The bank can open ATM booths and internet banking facilities
- The bank should introduce up to date baking software solutions designed to speed up banking process and delivery of services
- The bank should give its loan products to customers by publishing brochures and advertising them under different ‘brand’ names.
- Ensure proper training of its staff.
REFERENCES AND BIBLIOGRAPHY
Annual Report of Export and Import Bank of Ltd. 2005 to 2009 Prospectus of EXIM Bank
Website of EXIM Bank- www.eximbd.com
Brochures Of EXIM Bank Ltd
Reading materials of credit policy of EXIM Bank