Main objective of this report is to analysis the Evaluation of Credit Management in IFIC Bank, Specially on Loans advance. Other objectives are find out the sector in which IFIC Bank provides credit and analysis a time series analysis of Credit Disbursement. Finally find out the problems of IFIC Bank in providing Credits to people for their development and suggest some solutions related on Credit Management problem.
Objective of The Report
i) Identify the main objectives of IFIC Bank Credit Disbursement.
ii) To find out the sector in which IFIC Bank provides credit.
iii) To find out a time series analysis of Credit Disbursement.
iv) To get a clear idea of the role of IFIC Bank in improving the condition of the people.
v) To find out the problems of IFIC Bank in providing Credits to people for their development.
vi) And above all to suggest some solutions of this problem.
History of The IFIC Bank Ltd.:
The IFIC Bank, what we see today, came into existence in 1976 as a finance company under the name and style International Finance & Investment Company Limited (IFIC). IFIC was incorporated as public limited company on October 08, 1976 and commenced its operation on February 28, 1977.
IFIC was established, at the instance of the government with primary objectives of carrying on banking business abroad through subsidiaries, affiliates, branches & investment and financial business in the country. During the meantime in May 1979, IFIC secured permission of the Bangladesh Bank to function as merchant Bank in the country.
Consequent upon the Government decision to allow Banks in the private sector, International Finance and Investment Limited was converted into a Banking company under the name & style “International Finance Investment and Commerce Bank Limited (IFIC Bank Ltd.)” with composition of ownership held by private sponsors, general stockholders, government & started full fledged commercial Banking with effect from June 24, 1983. The Government held 49 per cent shares and the rest 51 per cent were held by the sponsors and general public.
On 24th June, 1983 IFIC Bank Limited started banking operations in Bangladesh. All types of banking business including foreign exchange are conducted by the bank. It has correspondent arrangement with all major banks all over the world.
Objectives of The IFIC Bank Ltd.
The main objectives of the IFIC Bank are as follows:
a) To establish, maintain, carry on, transact, undertake and conduct all types of banking, financial, investment and trust business of in Bangladesh and abroad.
b) To form, establish and organize any bank, company, institutions or organization either singly and/or in joint collaboration of partnership with any individual company, financial institution, bank, organization or any government and or government agency for the purpose of carrying on banking, financial investment and trust business and/or any other business as provided hereafter.
c) To carry on any business relating to Wage Earner Scheme as may be allowed by Bangladesh Bank from time to time including maintaining of foreign currency accounts and any other matter related there to.
d) To contract or negotiate all kinds of loan and/or assistance, private or public from any source, local or foreign, and to take all such steps as may be required to be complete such deals.
e) To form, organize assets, participate or aid in forming, promoting or organizing any company, bank, syndicate, consortium institute or any holding and subsidiary company in Bangladesh or abroad for the purpose of undertaking any banking financial investment and trust business.
f) To take part in the formation, management, supervision or control of business or operations of any company or undertaking and for that purpose to render technical managerial and administrative services and act as administrator, manager and secretary.
g) To purpose, or otherwise acquire, undertake, the whole or any part of or any interest in the business, goodwill, properly, contract, agreement, right, private assets and liabilities of any other company bank corporation, partnership, body person or persons carrying on, or having ceased to carry on, any business which the company is authorized to carry on such terms and may be deemed expedient.
h) To encourage sponsor and facilitate participation of private capital in financial industrial or commercial investment, share and securities and in particular by providing finance in the form of long, medium or short term loans or share participation by way of subscription to the promoter shares, or underwriting supports or bridge finance loans and/or by any manner.
i) To amalgamate or reconstruct or recognize with any commercial bank, or body corporate or association in cooperation with any person, commercial bank or association.
j) To establish and open offices and branches to carry on all or any of the above business abroad and within the country, provided prior permission is obtained from the Bangladesh Bank.
k) To establish provident fund, gratuity, pension, and other fund for the welfare and benefit of the employees and staffs, former or present and any matter related thereon.
l) To act as official liquidator and receiver.
m) To receive, borrow or raise money on deposit, loan or otherwise upon such terms as The IFIC Bank may approve and to give guarantee and indemnity in respect of any debt or contract.
n) To appoint officials, staff, experts, advisers, consultants, auditors, Legal advisers and provide for their suitable remunerations.
o) To advance, deposit or lend money to or with such persons or bodies, corporate, unincorporated, statutory, govt. and/or its agencies on such terms as the IFIC Bank may approve.
Capital And Reserves
IFIC Bank has been consistently maintaining the ‘Capital Adequacy Ratio’, as prescribed by Bangladesh Bank. This has been made possible by a policy of building up both capital and reserves. It started with an Authorized and Paid-up Capital of Tk. 100 million and Tk. 63.20 million respectively in 1983. Authorized and Paid-up Capital increased to Tk. 500 million and Tk. 406.39 million respectively in 2004. In addition to paid-up-capital, the Bank has built up a strong reserve base over the years. As against Tk. 21.20 million only in 1983, reserves and surplus increased to Tk. 737.19 million in 2003. Besides, the Bank had 1% General Reserve worth Tk. 393.31 million as on December 31, 2004.
Strength And Performance
With the active support and guidance from the Government, Central Bank, clients and patrons, the Bank has been maintaining sound financial strength and showing a steady and impressive business performance. IFIC Bank is one of the few mentionable banks which maintains Capital Adequacy ratio and has more than required provision as per Bangladesh Bank criteria.
Starting with a modest deposit of only Tk. 863.40 million in 1983, the Bank had closed its business with a deposit of Tk. 20774.47 million as of 31sl December, 2004. Total credit stood at Tk. 21280.88 million as on 31.12.2004 against Tk. 20450.90 million last year. Bank has posted a pre-tax (un-audited) profit of Tk. 740.25 million during the year ended 31st December, 2004.
Credit Policy And Portfolio
Credit policy of the Bank works within the framework of three main objectives, namely, maintenance and improvement of quality of assets, recovery on time and building-up of an efficient customer oriented credit delivery system.
The portfolio includes working capital financing, project financing, import-export financing and domestic trade financing etc. The Bank continued to extend working capital facilities to customers to ensure smooth and uninterrupted operation of their business. At the same time, it expanded project financing portfolio to meet the growing demands of the economy for long term finance in a depressed capital market.
Project loans were extended for setting up of new projects and BMRE of the existing projects as well. Due emphasis was given to financing export oriented and export linked industries without loosing sight of the need for long term loans by other domestic market based industries and ventures. So far the Bank has financed 343 projects. Among them 48 projects were financed during 2004 amounting to Tk. 1534.57 million. In long term portfolio, the bank has been diversifying from Textile and RMG industries to steel industries, paper products, CNG filling stations, Shipping, Power Sector, Micro Credit and health services etc. Moreover the bank has also been financing the Agro-based industries in accordance with Govt. policy. For improved customer services, the Bank now extends One Stop services to corporate clients who require term loan, working capital and import-export financing etc. The Bank also participates in Syndicate Financing and so far has sanctioned Tk. 1153.00 million in 12 projects.
The Bank successfully handled two credit lines viz-IDA credit No.2340 and ADB loan No. 1070 BAN (SF) with recovery rate of 100% and 87% respectively. Under these programmes the Bank sanctioned loans of Tk. 428.00 million to as many as 53 units. It helped local entrepreneurs to successfully implement small and medium sized industries.
International Division at the Head Office is fully equipped with expertise including computerized operations to deal with foreign trade and foreign exchange operations of all kinds including Letters of Credit, Bills, Traveler’s Cheques, Foreign Drafts, TTs, Remittances from Bangladeshi expatriates abroad and handling students remittances studying abroad etc. Such operations are conducted through 19 AD (Authorized Dealer) branches throughout the country. All our 19 Authorized Dealer (AD) Branches have been brought under SWIFT connectivity.
Functions of The IFIC Bank Ltd.
The IFIC Bank performs all types of functions of a modern commercial bank which is generally includes:
a) Mobilization of savings of the people and safe keeping of all types of deposit account.
b) Making advances especially for productive activities and generally for the other commercial and socio-economic needs.
c) Providing banking services to common people through the undertake of branches.
d) Handling of export and import trade and foreign remittances and with special support to export activities.
e) Introduce modem Banking services in the country.
f) Discounting and purchasing bills.
g) Providing various information, guidance and suggestions for promotion of trade and industry keeping in view of the overall economic development of the country.
The principle function of a bank is to lend. Lending is a dynamic activity. It is through the medium of lending the banking industry promotes economic activity: instill and encourages, at the individual level, the principle of self-reliance, and yields earnings for the bank. It is lending alone that brings banking into a more meaningful and purposeful contract with public and, therefore, has the greatest impact upon them.
It is a fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to repay, rather than the security held by the banker. Security is required by the banker as a protection against unexpected default in repayment by the customer. Thus, the object of both external and internal controls is to ensure the employment of bank funds in a profitable manner without undue risk of loss to the capital.
Although all lending involves some degree of risk, it is necessary for any bank to develop sound and safe lending policies and new lending techniques in order to keep the risk to a minimum. The principles of sound lending may, therefore, be summarized on below:
1) Safety: Safety is the first guiding principle of a prudent banker. A bank is in business to make money. It mainly uses depositor’s fund as a means of its earnings. The money of the depositor’s being repayable on demand or, after a short notice, determines the capacity of a bank as to the period for which he can safely lend it out without an uncalculated risk. Safety should never be sacrificed for profitability. Once the confidence of the depositor’s is shaken, the banker cannot carry on the banking business. On principle he, therefore, cannot indulge in unsecured or long term advances. Advances should be expected to come back to resort to legal action or to sell the securities to liquidate the advance.
The repayment of the loan depends upon the borrower’s- i) capacity to pay, and ii) willingness to pay.
2) Liquidity: Liquidity is the availability of bank funds on short notice. It is not enough that the money will come back, it is also necessary that it must come back on demand or in accordance with agreed terms of repayment. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made; otherwise, the liquidity position of the bank is endangered.
3) Profitability: Commercial bank has to distribute its resources in a manner that they meet the twin requirements of liquidity and profitability. A banker has; therefore, to see that major portion of the assets owned by it are not only liquid but also aim at earning a good profit.
The working funds of a bank are collected mainly by means of deposits from the public and interest has to be paid on these deposits. They have also to meet their establishment charge and other expenses. They have to make provision for depreciation of their fixed assets and also for any possible bad or doubtful debts. Interest earned by a bank on its advances is the main source of its income. The difference between the interest received on advances and the interest paid on deposits constitutes a major portion of the banker’s income. The bank will not, however, enter into a transaction unless a fair return is assured. So, there is little point in a banker granting facilities which do not bring directly or indirectly some returns.
4) Purpose: A banker would not throw away money for any purpose for which the borrower wants. The purpose should be productive so that the money not only remains safe but also provides a definite source of repayment. The banker should study the purpose for which loan is required and the resources from which the borrower is expected to repay. If the funds borrowed are employed for unproductive purposes like marriage ceremony, pleasure trip, repayment of old debts etc. or speculative activities, the repayment in the normal course will become uncertain. Banks also discourage advances for hoarding of stocks.
5) Security: It is the practice of banks not to lend money without any security. The security offered for an advance is insurance or a cushion to fall back upon in case of need. A banker would normally like to recover the advance from the sale of the security. They would prefer an advance to come back from the normal source. The importance of an adequate and acceptable security can, however, be hardly over emphasized. Security serves as a safety valve for an unexpected emergency. An element of risk is always present in every advances however securities are not insisted upon, there are chances that the borrower may raise funds elsewhere by charging them to others and thereby the banker’s position is jeopardized.
Security taken by banks can be classified into two broad categories, such as:
a) Primary Security may be either personal security or impersonal security or both. Personal security is given by a borrower by way of duly 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.
b) Collateral Security may be direct or indirect. Collateral security obtained from the borrower himself to secure his own account is known as direct collateral security. For example, advance against hypothecation of stock-in-trade is strengthened by equitable mortgage of the title deeds of house property of the borrower. Indirect collateral security means any form of security given by a third person to secure a customer’s account. A guarantee given by a third party is an indirect collateral security.
6) Disposal: The advances should be as much broad-based as possible and must be in keeping with the deposit structure. The advances must not be in one particular direction or to one particular industry; because any adversity faced by that particular industry will have serious repercussions on the bank. Again, advances must not be granted in one area alone. There should be spread of advances against different securities, industries as well as areas. Thus, by a diversification of the advance a banker will be able to spread his risks and considerably improve the safety of advances.
7) National Interest: Banking industry has significant role to play in the economic development of a country. The banker would lend if the purpose of the advance is for overall national development plans necessitating flow of credit to priority sector in the larger national interest. Sometimes the need of the borrower may be considered so essential for the benefit of the national economy that despite heavy risks involved the advance may be granted. In the changing concept of banking, national interest for financing in some areas, especially in advances to agriculture, small industries, small borrowers, and export-oriented industries, are assuming great importance.
ROLE OF CIB IN CREDIT MANAGEMENT
Due to irregular and insufficient flow of credit information in the banking system the proportion of classified loan in relation to the total credit is very high. This proportion of classified loan operated a bad culture in the banking sector. In order to eliminate the bad culture & to equip the banks with proper credit information for loan application processing, proposal for creation of (CIB) was put forward by different committees and organizations and it was established in 1992.
The main objectives of the CIB are to collect all sorts of information in respect of the borrowers from the scheduled banks and other non-bank financial institutions & creation of computer database in order to feedback the same information to the banks & other non-bank financial institutions for quick processing of new loan application, rescheduling, etc and preparation of various reports for MIS purposes to be used in Bangladesh Bank & ministry concerned.
The Following Are The Main Functions Of CIB:
1) To standardize information flow on loans/ credits within the Bangladesh banking system.
2) To increase the speed & accuracy with which the credit information is made available to banker assessing credit role.
3) To combine the information gathered on classified loans with the information on newly sanctioned loans to the borrowers thereby making available on integrated information package.
4) To integrate the default loan information in the CIB and its timely submission to the banks for loan application processing.
5) To collect credit information on quarterly basis from Banks.
6) To make policy for keeping utmost security & confidentiality of CIB data & reports thereon.
7) To convey the CIB information to Banks as quickly as possible for quick disposal of loan application.
8) To prepare various reports on credit information of the borrowers.
9) To help the commercial Banks to generate their own (automatic) database system for time reduction in submitting the credit report to CIB for assimilation.
10) To conduct itself supervisory job (survey) in case of need to review the correctness of the information submitted by Banks.
11) To prepare summary reports on available information at CIB for management purposes.
From the above discussion, we can conclude CIB database is one of the most important information canters for the financial institutions. This information, if used properly, will definitely improve the relationship between the Bank & its customers and ultimately be helpful to eliminate the present bad culture in banking sector.
IMPORTANCE OF BANK CREDIT:
MACRO & MICRO ASPECTS
The word “credit” derives from the Latin word “credere” to trust. The fundamental nature of credit is that an element of trust exists between buyers & sellers -whether of goods or of money. It may be defined broadly and narrowly. Broadly, credit is finance made available by one party (Lenders, Sellers) to another party (Borrowers, Buyers).
Narrowly, credit is simply the opposite of department debt is the obligation to make future payments. Credit is the claim to receive these payments.
The chief function of credit is to relax balanced budget constraints that allow promoting savings, investments, better allocation of resources and growth of economy.
Bank credit is the only one form of finance. In a modern economy, there are several other sources of credit. Bank as a financial intermediary provides finance from surplus units to deficit spenders of an economy. Financial intermediation is an important activity in the economy because it allows funds to be channeled from those who might otherwise not put them to productive use to those who will. In this way, financial intermediaries can help promote a more efficient & dynamic economy. Banks accept deposits from individuals & institutions and make loans.
The credit facilities may be broadly classified into four types:
- Cash Credits
- Bills Purchased & Discounted.
Importance of Bank Credit- Macro Aspects:
i) Credit influences and is influenced by quantity of money, level of economic activity (GNP), imports and net foreign assets.
ii) Credit provides vital linkage among government sector, private sector, financial sector and foreign sector.
iii) Credit is an important determinant of money creation and hence of production, consumption and national income.
iv) Credit influences imports and capital movements, and hence the outcome of balance of payments.
The macro aspect of credit planning has to take into account the overall volume of credit expansion to meet the requirements of the economy in the context of overall increase in money supply and the trends in real output.
Central Banking authority would have to take a direct and active role:
Firstly, in creating or helping to create the machinery needed for financing development activities all over the country.
Secondly, in ensuring that the finance available flows in the directions intended.
It may be necessary to direct special credit facilities to certain lines of high priority. Emphasis should be given on reduction of regional and sectoral imbalances in the availability of banking facilities and also the credit particularly to the weaker sections and neglected sectors.
Importance of Bank Credit – Micro Aspects:
i) Credit influences behavior of economic sectors (industry, agriculture) and behavior of economic agents (business, financial institutions, households).
ii) Two way relationship between credit and deposit.
iii) Credit is the most important activity of banks, because interest on loans constitutes the major part of bank income. Hence vital importance of making good loans.
There should be greater efforts on the part of individual banks to formulate appropriate credit budgets at the micro level in the context of available loan able resources and in the light of directions and guideline by Bangladesh Bank on broad sectoral deployment of credit.
At micro level the planners have also the important task of enlarging the flow of credit to the so called selected and priority sectors, agriculture, small scale business units, expenses, new entrepreneurs and economically backward regions.
Meaning of Credit Policy
Policy entails projected course of action. Each bank should have its own policy of granting credit although credit is always a matter of judgment applying common sense in the light of one’s own experience.
A sound credit policy includes among other things safety of funds invested vis-a-vis profitability of the bank. Encouraging maximum number of small loans is better than concentration in a particular type of advances which ensures sufficient liquidity with least incidence of bad debts.
It has to be borne in mind that a good loan allowed to a properly selected borrower is half collected. In order to make a good loan there should have a good loan policy.
Objective of Credit Policy
There are some objectives behind a written credit policy that are as follows:
- To provide a guideline for giving loan.
- Prompt response to the customer need.
- Shorten the procedure of giving loan.
- Reduce the volume of work from top level management.
- Delegation of authority to the middle level management.
- To check and balance the operational activities.
Importance of Credit Policy:
The necessity of a written credit policy is to provide a framework of standards and points of reference within which individual lending personnel can operate with confidence, relative uniformity, and flexibility. Lending officers will then be able to make their own decisions within delegated authority, without the necessity for constant referral to higher management.
Without such a written policy, there is a tendency to concentrate all decision making in one or two people at or near the top, with the obvious disadvantages of slower decisions and the inability of loan officers to develop their full potential. The other tendency is to foster a dangerous diversity of lending practices and philosophies within the organization, probably leading ultimately to an in-ordinate number of problem loans. In addition to establishing uniform guidelines for loan officers and satisfying the regulator agencies, a written credit policy can aid bank management in defining the objectives of the bank. Like any other business, the commercial banks establish particular objectives to be met.
Formulation of Credit Policy:
One of the questions that should arise in a discussion of credit policy is who should formulate the policy. Although the ultimate responsibility lays at the highest level in the organization i.e. the board of directors, yet the actual drafting shall have to be done by the senior lending officer in consultation with the chief executive officer and with contributions from senior officers, associates and subordinates. Obviously, the level of origin will vary with the size and structure of the organization. The matter than be referred to the board for approval after careful examination, consideration and discussion.
Essential Components of A Sound Credit Policy:
There can be some variations based on the needs of a particular organization, but at least the following areas should be covered in any comprehensive statement of credit policy:
- Legal consideration: The bank’s legal lending limit and other legal constraints should be set forth to avoid inadvertent violation of banking regulations.
- Delegation of authority: Each individual authorized to extend credit should know precisely how much and under what conditions he or she may commit the bank’s funds. These authorities should be approved, at least annually, by written resolution of the board of directors and kept current at all times.
- Types of credit extension: One of the most substances parts of a loan policy is a delineation of which types of loans are acceptable and which type are not.
- Pricing: In any profit motivated endeavor, the price to be charged for the goods or services rendered is of paramount. Without it, individuals have few guidelines for quoting rates or fees, and the variations resulting from human nature will be a source of customer dissatisfaction.
- Market area: Each bank should establish its proper market area, based upon, among other things, the size and sophistication of its organization, its capital standpoint, defining one’s market area is probably more important in the lending function than in any other aspect of banking.
- Loan standards: This is a definition of the types of credit to be extended, wherein the qualitative standards for acceptable loans are set forth.
- Credit granting procedures: This subject may be covered in a separate manual, and usual is in larger banks. At any rate, it should not be overlooked because proper procedures are essential in loan establishing policy and standards. Without proper procedures for granting credit and constant policing to ensure that these procedures are meticulous carried out, the best conceived loan policy will not function and, inevitably, problems will develop.
LOANS & ADVANCES
Banking business is like all other profit-oriented business. It depends mainly on how much profit they can make. Profit is the yardstick for the bank to move on. Banking is a business that deals only with money and credit. They work as reserves of “savings” of the community and also as lenders or investors for trade business and industry. Banks are profit oriented. They invest their funds in many to earn income. Huge amount of income derives from loans and advances. Credit is continuous process. Recovery of one credit gives rise to another credit. In this process of revolving of funds, bank earns income in the form of interest. A bank can invest its fund in many ways. Banks bake loans and advances to traders, businessmen, and industrialists against the security. Moreover nature of credit may differ in terms of security requirement, disbursement provision, terms and conditions etc. The IFIC Bank should take proper caution in lending otherwise the risk of default in repayment may arise.
Target Customers of The IFIC Bank Ltd.
The customers for the loan services are categories as follows:
- Individual person.
- Sole proprietorship firms.
- Partnership firms.
- Private limited company.
- Public limited company.
- Government and semi government organization.
- Bank employees.
Different Types of Borrowers
A borrower should be legally competent to enter into a contract, as borrowing is a contract between the lender and the borrower. Minors, lunatics, drunkards and undercharged insolvents cannot enter into a valid contract and cannot, therefore, be entertained as borrowers. Before entertaining an application for loans and advances, banker should verify borrower’s capacity to contract and, his power to borrow, so as to effectively charge the security offered as a cover for the advances.
i) Minor—any person below the age of 18 years is a minor and, therefore, not ordinarily competent to contract. The minor’s contract is voidable in English law but void according to the contract act. So, under the contract act the contract entered into by a minor is void, i.e., neither he can sue nor he can be sued.
ii) Lunatics—A lunatics is a person who lacks the power of understanding, and rational judgement. Under the contract act, lunatic is a person of unsound mind and is incompetent to enter into a contract. A person of unsound mind can avoid a debt, if his legal representative can prove that he was of unsound mind at the time of borrowing. As such, no advance should be granted to a lunatic.
iii) Drunken or Intoxicated Persons—One of the conditions of a valid contract is that it must be entered into between persons who are of sound mind. Contracts entered into by person in a state of drunkenness are not considered valid.
iv) Insolvents—When a person is unable to pay his debt in full and upon his adjudication as an insolvent, his property, in certain circumstances, is taken possession of by the official receiver or the official assignee under the orders of the court. A bank should not lend with or without security to an undercharged insolvent or a person against whom insolvency proceeding are pending.
v) Pardah Nashin Lady—A contract entered into by a Pardah Nashin Lady is not free from all defects. It is, therefore, very risky to deal with this type of borrower and, it is always preferable to have her statement attested in the presence of a 1st class Magistrate.
vi) Married Women—A married women has, in law, the same capacity to enter into a contract as any other person to the extent of her separate estate. She does not require any consent from her husband while dealing with her self-acquired property and, the property she may acquire, hold and dispose of as an independent person.
vii) Sole Proprietorship—A sole proprietory concern is a business carried on by an individual owner in his own name or a trade name. While lending to a sole proprietorship, the banker should take a declaration from the owner that he is the sole proprietor and no other person has any interest in the business as partner or otherwise.
viii) Joint Accounts—A joint account is a bank account conducted in the name of two or more persons, who are neither partners nor administrators nor executors nor trustees. It is necessary that before opening an account in joint names, signatures of all should be obtained with clear instructions as to who will operate the account or to whom money will be payable in case of death of any one or more of joint account holders.
ix) Joint Account in the name of Husband and Wife—The rights and obligations of husband and wife would appear to be in no way different from those of other joint account holders.
x) Joint Hindu Family—A business carried on by a joint Hindu family is governed by the provisions of Hindu law. A banker should know well the laws and customs relating to succession and transfer of rights among Hindus before granting any financial accommodation to such a family.
xi) Executors and Administrators—On the death of the person, the conduct of his affairs sometimes become vested on administrator or executors who perform the same duties, i.e., to realize the assets of the deceased and to pay off his debts.
xii) Agents and Attorney—An agent has no authority to bind his principal by borrowing money, either by overdrawing an account or otherwise, without either an express or implied prior authority from the principal.
xiii) Local Bodies—These are Municipal Corporation, Municipal Committee, District Council/Board, Town Committee, Union Parishad, Upazila Parishad, Zilla Parishad etc. local authorities have no implied power to borrow money unless some statutory power exists authorizing the borrowing.
xiv) Trustees—A trustee is a person in which confidence is reposed. He is given control of an estate, usually of the deceased, for the benefit of certain person. A banker should thoroughly study the trust deed while having business dealings with the trustees. Advances to trusts are not quite common.
xv) Liquidators—Liquidators are appointed at the time of the winding up of a company to realize its assets and to collect sums. If any, due from the shareholders and to apply these funds in paying off the liabilities of the company. Advances to a company in liquidation is not a bank’s normal business.
xvi) Club, Association, Society, School, College etc.—These are non-trading concerns formed for charitable, cultural, scientific, recreational, educational and similar other purposes, in the advancement of literary, scientific, cultural, educational and recreational pursuits. Ordinarily, these institutions have no inherent powers to borrow.
xvii) Partnership—Partnership firms engaged in business activity have implied power to borrow, subject, however, to restrictions, if any, given in their constitution. Before allowing any advance to a partnership firm, banker should scrutinize the deed of partnership to ascertain whether there is any condition or restriction regarding borrowing.
xviii) Limited Company as Borrower—When a proposal for an advance to a limited company is to be considered, the banker will observe all formalities required for the opening of an account of a limited company. These are Memorandum of Association and The Articles of Association etc.
Reasons For Providing Loans And Advances
Loans and advances are the survival unit of the bank because until and unless the success of this section, the survival is a question to every bank. If this section is not properly working, the bank itself may become bankrupt. This is important because this is the earning unit of the bank. Banks are accepting deposits from the depositors in condition of providing interest to them as well as safe keeping their interest. Now the question may gradually arise how the bank will provide interest to the clients and the simple answer is advance.
Why the bank provides advances to the borrowers
- To earn interest from the borrowers and give the depositors interest back.
- To accelerate economic development by providing different industrial as well as agricultural advances.
- To create employment by providing industrial loans.
- To pay the employees as well as meeting the interest groups.
We often use loans and advances as an alternative to one another. But academically this concept is incorrect. Academically advance is the combination of such items where loan is a part only. For this credit section of this bank is known as advance section.
When the repayment schedule of a borrower is disrupted then the question of classification arises. Every bank has to send a quarterly CIB report to the Bangladesh Bank for amounts due up to Tk 50000 mentioning the name of the borrower and the purpose for which loan has been sanctioned and a monthly statement for the amount due more than TK 1 crore. Bangladesh Bank provides CF (Classified Form) to every bank for preparing this report. The procedure for loan classification is given by Bangladesh Bank under BRPD circular no. 16, dated 06/12/1998. According to Bangladesh Bank there are 4 types of loan. If any borrower fails to repay his amount or installment within the time period then it will fall under the following classification status:
|Classification||Continuous loan C/C, O/D||Demand Loan (LIM, PAD, FBD, IBP)||Term Loan up to 5 years||TR above 5 years.|
|Unclassified||Less than 3 months||Less than 3 months||Less than 6 months||Less than 12 months|
|Substandard||More than 3 months but less than 6 months||More than 3 months but less than 6 months||6 months or more||12 months or more|
|Doubtful||More than 6 months but less than 12 months||More than 6 months but less than 12 months||12 months or more||18 months or more|
|Bad Loan||12 months or more||12 months or more||1 8 months or more||24 months or more|
Bank should preserve the following provisions for continuous, forced and term loan:
- For loan unclassified ———1%
- For loan classified ———20%
- For loan doubtful ———50%
- For loan bad debt ———100%
RECOVERY OF LOANS AND ADVANCES
To lend money is an easy matter. To be sure of recovery of the loan is not that easy. No banker whatsoever careful and diligent he is in granting advances succeeds on getting all the money that has been advanced. With the outcome of social responsibilities of the commercial banks to make advances to the priority sectors the situation has been becoming more and more complex. The most serious problem that affects the entire banking industry today is the problem of recovery of bank advances.
In whatever from bank advances is granted, they are repayable on demand or at the expiry of some fixed period. Overdraft and Cash Credit are legally repayable on demand. Loans are repayable on the expiry of the periods for which they are granted. In case loan is repayable in installments and default occurs in the payment of any installment, entire loan usually becomes immediately recoverable at the option of the bank. Bills of Exchange discounted are payable on maturity. Banker has to keep a close watch on the borrower and to take adequate follow-up measures for ensuring that recovery of advance is smooth and timely. A sound practice to follow in handling advance, the systematic plan of repayment. From the bank’s point of view, this is important for at least two reasons:
i) If the borrower has no or has indefinite plans for repayment of the advance, it may indicate that the loan is too risky or is too speculative for the bank to handle.
ii) If the borrower has a plan for the repayment of the loan, the banker is placed in a position to consider the source from which the funds will come for repayment and to analyze the risk involved more intelligently.
Reasons for non-recovery of loans/advances
a) Not careful about the weak points while preparing credit proposal.
- Negligence in carefully implementing terms of sanction letter, as a result, loans remain faulty.
- Borrowers take advantage of the situation.
- Failure of the controlling office in monitoring the recovery.
b) Selection of borrower’s essential pre-requests of good loan not properly done.
- His 3 C’s 3 R’s or 5 C’s or 6 C’s not properly assessed, hence recovery becomes difficult.
c) Feasibility study not properly done, project not properly implemented leading to loan becoming undue.
d) All important required papers not obtained before disbursement, law officer not consulted legal actions become difficult.
e) Wrong valuation of pledged goods mortgaged properly over valuation. Branch managers in some cases not aware that goods actually pledged.
f) Loans/advances do not become overdue overnight -corrective measures are not taken when symptoms detected.
g) Lack of control and proper supervision, diversion,
h) Inspection of go-downs/factories not done.
- Stereotype inspection.
- Borrowers take advantages.
- Goods are either damaged or destroyed or removed for want of timely action.
Procedure For Recovery
If a borrower fails to make repayment of the dues the bank has to consider what steps need to be taken to recover the debt. Banker will eventually have to take the following steps to recover the stuck up advances.
a) Existing loans (all categories):
- Diarizing due dates of repayment.
- Regular follow-up.
- Periodical inspection.
- Surprise visits.
b) Overdue loans/advances:
- Preparation of quarterly lists: Branch copy, controlling office copy and head office copy.
- Attempts made for adjustment of loans before application of quarterly interest.
- Must be adjusted before being classified.
c) Classified loans/advances (Substandard, doubtful and bad.):
- Targets for recovery.
- Steps for declassification.
d) Interest exemption:
- Quick decision.
- Communication of decision quickly.
Remedial Measures of Loan Recovery
- Ascertain reasons for non-payment.
- Training and motivating of staff.
- Classification of Borrowers to A, B, C & D.
- Manager handles “D” type customer.
Strategies For Recovering of Loan
Following are some strategies that yielded appreciable results:
- Tailor-made strategies for different problems must be prescribed.
- Timely wisdom alone works as timely strategy.
- Recovery often proves effective when follow-up done with co-obligates.
- Old loans cleared to secure new loans to be taken advantage.
- Clean loans not recovered are regularized by taking some sort of security to have some hold on borrowers.
- Friendship and exchange of courtesies with dites of the place like DC, SP, elected representatives credit moral impact on borrowers.
- Material change.
- Management composition.
- Economic trends- local and international.
- Client performance versus budget.
- Bank versus client relationship.
- Evidence of weakness in borrowers.
- Understand client’s business.
- Analyze Client’s financials.
- Frequent visits to clients.
- Perfected legal documentation.
- Security covers for Bank’s risk.
- Investigate market rumors.
- Use credit bureau checking.
CLASSIFIED LOANS AND ADVANCES OF THE IFIC BANK. MOTIJHEEL BRANCH:
(Figure In Thousands Taka)
|Classified Status||No. of Accounts||Amounts Outstanding||Interests Suspense|
|4. Bad & Loss||279||1496773||460950|
|5. Total Classified||337||3215277||504142|
|6. Total As Per CL||1405||8082823||559229|
|7. Staff Loan Against PF||204||33381||000|
|8. Staff House Building Loan||174||210517||000|
|9. Consumer Credit Scheme||50||1340||000|
CLEARING HOUSE REPORT FOR 1 WEEK:
|Days||No. of Cheque Withdrawal||Amounts (In Crore)||No. of Returned Cheque||Amounts (In Crore)|
Assessment of Comparative Strengths, Weakness. Opportunity & Threat of IFIC Bank
- IFIC Bank Limited has nation wide image of providing quality service. It provides excellent and prompt services with higher degree of secrecy to corporate and mass level of customers.
- It has an excellent management team and disciplined workforce.
- NCC abides by a set of core values that reflects high commitment to customer:
- Responsive to customers needs.
- Flexible in approach
- Professional in manner
- Strive for service excellence.
- A group of qualified, experienced, dedicated and well-trained personnel employing the best effort to accomplish the organizational objective.
- String network through out the country and correspondent relationship with almost all international and local banks operating in Bangladesh created a good accessibility and relationship with people.
- Most to the employees are not properly trained.
- The appropriate employees are not in the appropriate position.
- Attractive salary package for the employees so they are well motivated.
- Bonus is given four times in a year this is another reason of the employee satisfaction.
- Promotion system of IFIC Bank is perfectly structure for the employee inspiration. Generally promotion has been every three years after.
- Incentives are given to the employee from profit.
- Rewards are offered to the employees who are able to arrange handsome amount of deposit.
Some foreign banks and private banks are coming threat to IFIC Bank. At present in retail banking Standard Chartered-Gfittdteys- Bank and in business banking American Express Bank, Hong Kong Shanghai Banking Corporation, CITY Bank N.A. are arch rival of IFIC Bank. Also some private banks like Dutch-Bangla, Eastern Bank, Dhaka Bank. Prime Bank. Bank Asia etc. are becoming the new competitions for the bank and will be creating a competitive pressure on IFIC Bank.
Now a days different foreign and private bank are also offering similar type of retail lending products like IFIC Bank. So, if all competitions fight with the same weapons, the natural result is declining profit.
Bangladesh bank provides some rules and regulations for all banking institutions. Whether the rules and regulations suit the organization or not, it must obey these that sometimes impose barriers on daily normal operation.
During the three months internship program at Motijheel Branch, almost all the desks have been observed more or less. This internship program, in first, has been arranged for gaining knowledge of practical banking and to compare this practical knowledge with theoretical knowledge. Comparing practical knowledge with theoretical involves identification of weakness in the branch activities and making recommendations for solving the weakness identified. Though all departments and sections are covered in the internship program, it is not possible to go to the depth of each activities of branch because of time limitation. So, the objectives of this internship program have not been fulfilled with complete satisfaction. However, highest effort has been given to achieve the objectives the internship program.
During the internship, it is found that the branch provides all the conventional banking services as well as some specialized financing activities to the economy. Foreign exchange services department the largest department of the branch in terms of manpower and profit earned. In this year, it earns more than 60% of branch’s total profit. This department provides all the services related to international and disburse credit if the proposal is sound. As specialized financing, it provides term finance to medium and small-scale industries. The branch also provides house-building loan. Thus by providing this various services, IFIC Bank, Motijheel Branch, is playing an important role in the banking system and in the payment system of Bangladesh.
Though I am not in any position to provide any assistance for the betterment of this branch, but I am expressing my task from three months observation. Some of my observations are not mentioned here rather it has given as recommendation directly.
a) General Observation-
- The decoration of the branch is not competitive.
- The manager of this branch is a very dynamic person holding a personality and well capable of handling a branch like this in the most efficiently and effective manner.
- Cordial relation among the employees exists.
- Most of the employees are experienced banker.
- The employees are highly committed to their job.
- The employees especially in the Credit & Export-Import departments are smoking in the office. This will hamper the status & Goodwill of the staffs of the bank.
b) Banking Observation-
- IFIC Bank does not allow any high rated fixed deposit from the borrower.
- IFIC Bank has sufficient deposit to provide long term advances in the industrial sector.
- IFIC Bank does not have any so called IT section. So, the maintenance of the computer is very unsound and the bank does not have any permanent personnel for that purpose. Hence, it is bearing a large monthly expanse in this regard.
Although this branch is making huge amount of profit and generating large volume of deposit, a number of problems have been detected while working this branch. These problems along with the recommendations for solving them are stated here:
- Branch should increase its quality of customer services.
- Speed up processing of loan application.
- L/C should be opened promptly.
- Bank should be innovative and diversified in its services.
- Bank should immediately enter into the credit card market.
- Bank should introduce modern technology.
- Information system should be developed.
- Development of Human Resources.
- Chain of doing job in the branch should be made clear.
- Marketing for selling the services should be encouraged.
- Detail Manual should be prepared for accurate credit operation.
- Some discretionary power should be given to the branch management.
- Reduce classified loan on an emergency basis.