6.2 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.
6.3 PROJECT APPRAISAL
“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 is:
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.
6.4 SECURITY VALUATION
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.
6.4.1 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.
- The ex-mill/factory price of market price whichever is lower is case of domestically manufactured commodities as evidenced by invoice.
- The wholesale price/competitive market price duly verified by the Branch and approved by Head Office.
6.4.2 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.
6.6 APPROVAL AUTHORITY
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.
6.7 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.
6.7.1 INVESTMENT RISK MANAGEMENT (CRM) DEPARTMENT
The key responsibilities of the above functions are
- 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.
6.7.2 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.
6.7.3 INVESTMENT ADMINISTRATION
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.
- 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.
6.7.4 INVESTMENT MONITORING
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
7.1 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.
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 especially 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.
7.2 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. ROA gives an idea as to how efficient management is at using its assets to generate earnings. The higher the ROA number, the better, because the company is earning more money on less investment. This year Bank improved its ROA. This is positive sign for investor.
Return on Investment (Share & Securities)
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. Greater ROI is a good sign for investors. This year bank’s ROI is more than 3 times of previous year.
Return on Equity
Return on Equity=Earnings after Tax/Total equity. The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. Higher ROE represents good performance of the Bank.
Price Earnings Ratio
Price Earnings Ratio = Current market share/price Earnings per share. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. Recent P/E ration is decreased. However, the P/E ratio doesn’t tell us the whole story by itself.
Capital Adequacy Ratio
Capital Adequacy Ratio (CAR) = (Tier One Capital + Tier Two Capital)/Risk Weighted Capital. Measurement of bank’s capital. It is expressed as a percentage of a bank’s risk weighted credit exposures. This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.
EPS (Earning per Share)
Earnings per Share=Net profit after tax/No. of Shares outstanding. The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company’s profitability. Earnings Per share are generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio. This year EPS is twice than previous year. It shows improvement of EXIM bank.
7.3 DISBURSEMENT OF LOAN
At least 2% of EXIM bank’s 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:
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) Healthcare service
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 take care of the beneficiaries throughout their student life. EXIM Bank Scholarship Program, 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 2010. They are enrolled in the this program 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 program.
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 program 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 2010, 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.
8.1FINDINGS 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, current growth rate of deposit and investment is 26.54%, 40.27% respectively. For investment sanctioning it is observable that in this year loss from general investment is about .004% and bad loan was 1.34% of total investment. Overall their growth rate is well from the date of establishment.
9.1CONCLUSION & RECOMMENDATIONS
EXIM bank within a short period of just few years has made good progress in terms of profitability and growth rate of deposits and loans and advances despite tremendous competition in the industry and world economic crisis. 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.
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