Credit Management and Operation Procedure of Prime Bank
Subject: Management | Topics:

Main purpose of this report is to Finding out the credit management and operational procedure practice by Prime Bank. Other objectives are to identify the Strategies for PBL implementing to combat with competition and risk in constant prosperity of the company. Having a clear-cut concept of credit appraisal and management practice by a prominent bank and to know the effectiveness of credit appraisal in the process of credit approval system and the portfolio of loan and advances and how they manage it.

OBJECTIVES OF THE REPORT                                                                                   

Part A: Organization Part, Feature of the Prime Bank Limited (PBL).

Part B: Project Part: Credit Management and Operational Procedure

  • Finding out the credit management and operational procedure practice by Prime Bank.
  • Performance Analysis of Prime Bank.

Besides the organizational objective, my objective is

  • Identify the Strategies for PBL implementing to combat with competition and risk in constant prosperity of the company.
  • To fulfill academic requirement.
  • Having a clear-cut concept of credit appraisal and management practice by a prominent bank and to know the effectiveness of credit appraisal in the process of credit approval system and the portfolio of loan and advances and how they manage it.
  • To develop my capabilities as an employee in realistic field in the job market.

DATA COLLECTION & METHODOLOGY

Data Collection (Primary & Secondary Sources):

Information collected to furnish this report is both from primary and secondary sources.

The Primary sources are:

  • Practical Desk work
  • Face to face conversation with the officer.
  • Face to face conversation with the clients.
  • Relevant file study as provided by the concerned officer.

The secondary Sources are:

  • Different Circulars issued by Head office and Bangladesh bank.
  • Different “Procedure Manual” published by Prime Bank.
  • Annual Reports (1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006) of Prime Bank and Information obtained from PBL Web-site (www.prime-bank.com).
  • Publications obtained from different libraries and from Internet.

 

INTRODUCTION                                                                                                    

In the backdrop of economic liberalization and financial sector reforms, a group of highly successful local entrepreneurs conceived an idea of floating a commercial bank with different outlook. For them it was competence, excellence and consistent delivery of reliable service s with superior value products. Accordingly, Prime Bank Ltd. Was created and commencement of business started 17th April 1995.

As a fully licensed commercial bank, a highly professional and dedicated team is managing Prime Bank Ltd. with long experience in banking. They constantly focus on understanding and anticipating customer needs. As the banking scenario undergoes changes so is the bank and it repositioned itself in the changed market condition.

Prime Bank Ltd has already made significant progress within a very short period of its existence.

Prime Bank Ltd. was designed to provide commercial and investment banking services to all types of customer ranging from small entrepreneur to big business firms. Besides investment in trade and commerce, the Bank participates in the socioeconomic development through the participation in priority sectors like agriculture, Industry, housing and self-employment. Prime Bank Ltd. want to establish, maintain, carry on transact Undertake and conduct all types of banking, financial all investment and trust business in Bangladesh and abroad.

Prime Bank offers all kinds of Commercial, Corporate and personal banking services covering all segments of society within the framework of Banking Company Act and Rules & Regulations as laid down by Bangladesh bank. Diversification of products and services includes corporate banking, retail banking and customer banking from industry to agriculture and real state to society.

Prime bank has an authorized capital of Taka 1,000 million and paid up capital of Taka 1,000 million. The former Governor of Bangladesh Bank Mr. Lutfar Rahman Sarker was the first Managing Director of this Bank. At present, Managing Director is Mr. M Shahjahan Bhuiyan, who has a long experience in domestic and international banking. The bank has made a significant progress within a very short time due to its very competent board of directors, dynamic management and introduction of various customers’ friendly deposit and loan products. At present bank has 13 Directors, including the Chairman. Present Chairman of the Bank is Mr. Azam. J. Chowdhury, who is one of the renowned and prominent businessman in Bangladesh. The bank holds the first position in the CAMEL rating, published by Bangladesh Bank for the last consecutive five years.

Prime Bank being Banking Company has been registered under the Companies Act 1993 as a Public Limited Company on February 12,1995 with its registered office at 5, Rajuk Avenue, Motijheel Commercial Area, Dhaka-1000, Bangladesh. Later, the office had been shifted to Adamjee Court (Annex Building), Motijheel Commercial Area. It started operation from April 17, 1995 with a commitment to play some social role in addition to normal banking. Its slogan is “Prime Bank Ltd.- a bank with a difference”. From the very beginning, the bank has adopted the policy of diversifying its business. The bank has a plan to open more branches over the next several years at different important commercial places of the country.

VISION OF PRIME BANK LIMITED                                                                        

A Bank with a difference” is the motto of Prime Bank Ltd. So the motto itself is self-explanatory to deliver the vision of the bank. Prime Bank Ltd. is prepared to meet the challenge of the 21st century well ahead of time. To cope with the challenge of the new millennium it hired experienced and well-reputed banker of the country from the inception. The bank has efficient and dedicated professional and equipped with modern technology to provide the best service in the need of the people and thus to realize its vision.

OBJECTIVES OF PRIME BANK LIMITED                                                            

The objectives of Prime Bank Limited are specific and targeted to its vision and to position itself in the mindset of the people as a bank with difference. The objectives of the Prime Bank Limited are as follows:

  • To mobilize the savings and channeling it out as a loan or advance as the company approve.
  • To establish, maintain, carry on, transact and undertake all kinds of investment and financial business including underwriting, managing and distributing the issue of stocks, debentures and other securities.
  • To finance the international trade both in Import and Export.
  • To carry on the foreign Exchange Business, including buying and selling of foreign currency, traveler’s cheque, international credit card issuance etc
  • To develop the standard of living of the limited income group by providing retail credit.
  • To finance the industry, trade and commerce in both the conventional way and by offering customer friendly credit service.
  • Performing the banking operation by their different branches based on interest mode banking i.e. Conventional Banking and investment mode i.e. Islamic Banking.
  • To encourage the new entrepreneurs for investment and thus to develop the country’s industrial sector and contribute to the economic development.

 

DEPARTMENTS OF PRIME BANK LIMITED                                                 

If the jobs are not organized considering their interrelation and are not allocated in a particular department, it would be very difficult to control the system effectively. If the departmentalization is not fitted for the particular works there would be haphazard situation and the performance of a particular department would not be measured. Prime Bank Limited has done this work very well.

Logistic & Support Services Division (L&SSD):

This division was formerly known as General Service Division (GSD). Its main functions relate to procurements and supply of all tangible goods and services to the Branches as well as Head Office of Prime Bank Limited. These include:

  • Every tangible functions of Branch opening such as making lease agreement, interior decoration etc.
  • Print all security papers and Bank Stationeries.
  • Distribution of these stationeries to the Branch.
  • Purchase and distribute all kinds of Bank’s furniture and fixtures.
  • Receives demand of cars, vehicles, telephone etc from branches and different division in Head Office and arrange, purchase and delivery of it to the concerned person/Branch.
  • Install & maintain different facilities in the Branches.

Financial Administration Division (FAD):

Financial Administration Division mainly deals with the account side of the Bank. It deals with all the Head Office transactions with bank and its Branches and all there are controlled under the following heads:

  • Income, Expenditure Posting: Income & expenditures are maintained and posted under these head.
  • Cash Section: Cash section generally handles cash expenditure for office operations and miscellaneous payments.
  • Bill Sections: This section is responsible for inland bills only.
  • Salary & Wages of the Employee: Salary and wages of the Head Office executives, officers and employees are given in this department.
  • Maintenance of Employee Provident Fund: Employee provident fund accounts are maintained here.
  • Consolidation of Branch’s Accounts: All Branches periodically (especially monthly) sends their income and expenditure i.e. profit & loss accounts and Head Office made the consolidated statement of income and expenditure of the Bank. Here branch statements are reviewed. This division also prepares various monthly, quarterly, half-yearly statements and submits to Bangladesh Bank. It also analyzes and interprets financial statements for the management and Board of Directors.

Credit Division :

The main function of this division is to maintain the Bank’s Credit Portfolio. A well-reputed and hard working group of executives & officers operate the functions of this division. These functions are as follows:

  • Receiving Proposals.
  • Proposing and appraising.
  • Getting approval.
  • Communicating & Sanctioning.
  • Monitoring and follow-up.
  • Setting price for credit and ensuring effectiveness of it.
  • Preparing various statements for outward submission to Bangladesh Bank.

International Division (ID):

The objective of this division is to assist management to make international dealing decisions and after decision is made, guide Branches in their implementation. Its functional areas are as follows.

  • Maintaining correspondence relationship.
  • Monitoring foreign rate and exchange dealings.
  • Maintaining Nostro Account and reconciliation.
  • Sending updated exchange rates to the concerned Branches.

IT/ Computer Division :                                                                                             

Prime Bank operates and keeps records of its assets and liabilities in computer by using integrated software to maintain client Ledger and General Ledge. The main functions of this division are:

  • Designing software to support the accounting operation.
  • Updated software, if there is any lagging.
  • Improving software to get best possible output from them.
  • Hardware & Software trouble shooting.
  • Maintaining connectivity through LAN, Intranet & Internet.
  • Providing updated CD’s of online accounts to the Branches.
  • Routine Checking-up of computers of different Branches.

Public Relation Division :                                                                                    

It has to perform certain functions related to all types of communication. The board routine functions can be enumerated as follows:

  • Receiving and Sanctioning of all advertising application.
  • Keeping good relation with different Print Media.
  • Inviting concerned ones for any occasion.
  • Keeping good relation with different officers of Electronic Media.

Sales and Marketing Division :

Marketing Division is involved in two types of marketing:

  • Asset Marketing: Marketing of assets refers to marketing of various kinds of loans and advances. In-order to perform this job, they often visit to large organizations and attract them to borrow from Bank to finance profitable venture.
  • Liability Marketing: The process of liability marketing is more or lees same as Asset marketing. In this case different organizations having excess funds are solicited to deposit their excess fund to the Bank. If the amount of money to be deposited is large, the banks sometimes offer a bit higher price than the prevailing market rate.

Human Resource Division (HRD) :

HRD performs all kind of administrative and personnel related matters. The board functions of the division are as follows:

  • Selection & Recruitment of new personnel.
  • Preparation for all formalities regarding appointment and joining of the successful candidates.
  • Placement of manpower.
  • Dealing with the transfer, promotion and leave of the employees.
  • Training & Development.
  • Termination and retrenchment of the employees.
  • Keeping records and personal file of every employee of the Bank.
  • Employee welfare fund running.
  • Arranges workshops & trainings for employee & executives.

Inspection & Audit Division:

Inspection and Audit division works as internal auditor of the company. With a view to having strong internal control, the Bank strengthened its internal audit team and undertook comprehensive as well as special audit from time to time. The Board conducts its own audit through Audit cell, which lend authenticity to the process. The Audit Committee reviews the audit report and suggests remedial measures and control points for non-recurrences of the lapses in the processes of various business units. The Audit team will now grade the branches as per the business and control risks and frequency of audit will depends on risk grading. The officers of this division randomly go to different Branches examine the necessary documents regarding each single account. If there is any discrepancy arises, they inform the authority concerned to take care of that/those discrepancies. They help the bank to comply with the rules and regulation imposed by the Bangladesh Bank. They ensure the Bangladesh bank about the current position of the rules and regulation followed by the Bank.

Credit Card Division:

Prime Bank obtained the principal membership of Master Card International in the month of May 1999. A separate division is assigned to look after this card. The Marketing Team of this division goes to the potential customers to sell the card. Currently Prime Bank Ltd. offers four types of cards:

  • Local Silver Card.
  • International Card.
  • Local Gold Card.
  • International Card.

Recently Prime Bank has obtained the membership of VISA credit card and soon they will start marketing of it.

Merchant Banking Division:

This division concentrates its operation in the area of underwriting on Initial Public Offering (IPO) and offering Bridge Finance for the company who need finance to entering them into capital market. They also are offering advances against shares. This division also engages in portfolio investment for their Bank. The Bank has a large amount of investment in shares & securities of different corporations as well as government treasury bills and prize bond. The Bank launched a scheme titled “Prime Investment Portfolio Management Services” for the individual and institutional investors to invest in the stock market. It is a non-discretionary investment management services for the investor having the option to avail loan facility as margin.

HUMAN RESOURCE MANAGEMENT OF PRIME BANK LIMITED                                   

The core competencies in banking sector can be created with the help of its personnel. The main thing in banking business is that a bank or financial institution has to avail the trust of the depositor, client for improving its performance. Availing the trust of the general people is not an easy task. Not only the directors attitude and efficiency but also that of the employees are important for achieving the trust of the general people and thus for better performance of the Bank. In the face of the today’s global competition, it is not only essential to assemble the best people to work for the company but also to equip the workforce with the latest skill and technologies and retain the high achievers to compete effectively and efficiently.

To cope with the customers’ need Prime Bank’s human resources policy emphasize on providing job satisfaction, growth opportunities, and due recognition of superior performance. A good working environment reflects and promotes a high level of loyalty and commitment from the employees. Realizing this PBL has placed the utmost importance on continuous development of its human resources, identify the strength and weakness of the employee to assess the individual training needs, they are sent for training for self development. To orient, enhance the banking knowledge of the employees PBL organize both in-house and external training.

PRIME BANK TRAINING INSTITUTE (PBTI):                                                                      

Prime Bank Training Institute had all along supported the Bank through various in house training courses, workshop and seminars. The institute had played a significant role in strengthening the capabilities of their human resources. In constantly worked on improvement of training methods and materials. Most of the programs had been designed in modular form with specific objectives and goals. The trainees measured those for evaluation of performance. PBTI had conducted Foundation Training Courses, Short Courses, and Workshops for new recruit Entry-level officers, mid level management and senior executives. In addition, the institute conducted short courses on Credit operation, International Trade Finance and Laws and Practices of Banking for mid level management.

CONVENTIONAL & ISLAMIC BANKING OPERATIONS:                                       

Prime Bank performs its banking operation in both Islamic and Conventional mode. The separate branch of Prime Bank practices the operations. Prime Bank Limited is operating branches on both conventional interest based banking and Islamic Shariah Principle based Banking. The Islamic Banking operations are completely separate from the conventional Banking.

Prime Bank has started its Islami Banking operation through its first Branch being inaugurated at 19, Dilkusha C/A, Dhaka on 18 December 1995. Since then it has so far has established four more branches at different locations in the Country. Because of its popularity and management’s commitment toward social well being gradual expansion of Prime Bank’s Islami Banking operations is assured. Following are the salient features of Islamic Banking, as is practiced in Prime Bank Limited.

The bank is maintaining a separate set of accounts for Islamic Banking branches, which is completely different from conventional Banking branches to conform with the standard adopted by financial Accounting and Auditing organization for Islamic Financial Institution.

Mode of operation of Islami banking Conducted by PBL are as follows:

  • All activities are conducted according to Islamic Shariah.
  • Interest free monetary operations.
  • Building partnership relation between the Bank and its customers.
  • Following Islamic principles in its investment portfolio.
  • While investing special consideration to social needs is given.
  • Through small and long term deposit schemes providing hope to the poor income group of the society.
  • Client service centric banking, through which making the clients feel special
  • Conduct welfare activates etc.

 

AUTOMATION IN BANKING OPERATION:

Technology integration for automation of business process and procedures is an integral part of PBL customer service. Since the very beginning, PBL have made conscious efforts for induction and upgrading of information technology at various levels to gain competitive edge over the others. Process of selecting top quality banking software was in an advanced stage and the Bank had already short listed three solutions from internationally reputed firms. PBL needed high performance, scalable online Banking software so that customer service was rendered more efficiently and new products were deployed with little loss of time. In that exercise, we were looking into a total solution to their needs. Putting multiple delivery channels had also been considered for extra capacity building in customer service by doing away with limitations of time and space. All the branches of PBL are now in an automated environment as far as customer transactions are concerned and excepting a few branches in locations not accessible by Lease Line all other branches are under a wide area network. For remittance and fund transfer purpose, PBL customers could take the advantage of online facility, PBL has already undertaken initiatives to look into the possibility of connectivity outside BTTB to keep PBL online service at a desired level and without interruptions. PBL has offered a website (www.prime-bank.com) to their customer. The site is always undated with current information about PBL services and products. Rate of interest on various products are also available on the website.

 

Depository Product:

Bank is the largest mobilizer of surplus domestic savings. For poverty alleviation, we need self-employment, for self-employment we need investment and for investment we need savings. In the other words, savings help capital formations and the capital formations help investments in the country. The investment in its turn helps industrialization leading towards creation of wealth of the country. And the wealth finally takes the country on road to progress and prosperity. As such, savings is considered the very basis of prosperity of the country. The more the growth of savings, the more will be the prosperity of the nation.

The savings rate in Bangladesh is one of the lowest in the world. In order to improve the savings rate, Financial Institutions responsible for mobilization of savings should offer attractive Savings Schemes so that the marginal propensity to save increases. The savings do not, of course, depend only on the quantum of income but largely depend on the habit of savings of the people.

Prime Bank Limited is now offering 15 depository products for mobilizing the saving of the general people. There are also accounts for force saving from the exporter that is called Reserve Margin from the export bill.

 

INTRODUCTION TO CREDIT OPERATION

Credit in General Sense means, as act of allowing person or persons immediate use of money with payment until an agreed future date. According to renowned Bank Specialist Professor Dr. A.R. Khan “A credit may be defined as money lent at interest or on profit. It is nothing but temporary parting with one’s (an individual or an institution) resources in order to augment the purchasing power of the receiver of such facility with a promise to return the same with interest/profit or otherwise as mutually agreed upon.”

In a financial system of an economy, a financial market provide a mechanism whereby an individual, firm and household who is a surplus spending unit make funds available to a deficit spending unit who intend to spend more than their current income. In a banking system a bank act as an intermediary between surplus spending unit & deficit spending unit. Bank mobilizes the fund from surplus spending unit as a form of deposit and makes the fund available to the deficit unit is nothing but creation of credit. Credit is in true sense, making provision of fund by one party to another party under certain terms & conditions.

MODES OF CREDIT

Loans and advances primarily have been divided into two major groups. Continuous credit and fixed term loans. Continuous credits are the advances having no fixed repayment schedule, but have an expiry date at which it is renewable on satisfactory performance. Fixed term loans are the advances made by the bank with fixed repayment schedules. The term of loan are defined as follows:

Short Term

Medium Term

Long Term

:

:

:

Up to 12 Months.

More than 12 up to 36 Months.

More Than 36 Months.

As initiated by Bangladesh Bank BCD Circular NO.08 Dated April 25, 1994 different kinds of lending were subdivided into 7 categories for fixation of rates of interest by the individual banks on competitive basis depending on the costs on funds, prevailing market condition and monetary policy of the country.

Agriculture Credit:

Loans to primary producers engaged in farming, fishing, forestry or livestock and loans to input dealers/ distributors fall under this category. Loans to processors or traders of agricultural products are not to be categorized as agricultural Loans.

Agricultural loan may include short, medium and long-term loans as well as continuing credit. As such it may fall under the head Loan (General)/ Hire purchase/ Lease Finance.

Crop CreditNon Crop Credit
  • Credit for food Grain.
  • Credit for fruit.
  • Credit for earning Crops.
  • Credit for cattle.
  • Credit for poultry.
  • Credit for fisheries

 Term Loan for Large & Medium Scale Industry:

Small industries is presently defined as those establishment whose total investment in fixed capital such as land, building, machinery and equipment (excluding taxes and duties) does not exceed 30 million taka and investment in machinery and equipment (excluding taxes and duties) does not exceed 10 million taka. Cottage industries also fall within this definition. Medium and long-term weaver credits are also included under this category.

Bangladesh Bank gives interest subsidy @ 3% to the Banks on Loans extended under this category. Like the Large and Medium Scale Industry it is also allowed in the form of Loan (Gen)/ Hire-purchase/Lease Finance.

Working Capital Loan:

Loans allowed to the manufacturing units to meet their working requirements, irrespective of their size i.e. big, medium or small fall under this category. These are usually continuing credits and as such fall under the head “Cash Credit”.

Export Credit:

Credit facilities allowed facilitating export of all items against Letter of Credit (LC)/ or confirmed export orders fall under this category. It is accommodated under the head Export Cash Credit (ECC)/ Packing Credit (PC)/ Foreign Documentary Bill Purchase (FDBP)/ Local Export Bill Purchased.

Commercial Lending:

Short-term loans and continuing credits allowed for commercial purposes other than export fall under this category. It includes import financing, financing for internal trade, service establishment etc.; no medium and long-term loans are accommodated here. These categories of advances are allowed in the form of:

  • Loan against imported merchandize (LIM).
  • Payment against import documents (PAD).
  • Secured Overdrafts (SOD).
  • Cash Credit (CC).
  • Loan (General).

 Others Credit Facilities:

Any loan that does not fall in any of the above categories is considered under the category “Others”. It includes:

  • Transport equipment.
  • Construction works including housing (commercial/residential).
  • Work order finance.
  • Personal Loans etc.

 

LOAN CLASSIFICATION & PROVISIONING:

Bangladesh Bank introduced new accounting policies with respect to loan classification, provisioning and interest suspense in 1989 with a view to attaining international standard over a period of time. A revised policy for loan classification and provisioning was introduced from 1st January 1999. The revised policy calls for an independent assessment of each loan on the basis of quantitative factors and objective criteria. Each loan is branded with the worst level of classification resulting from these independent assessments.

Loan Classification:

Classification of loan is mandatory for all scheduled commercial banks. It has become obvious due to the bad culture of fabricating the income by window dressing of the financial statement of the commercial banks. It has been observed that sometimes bank income is being calculated by showing the unrealistic expected income. To protect this ill practice, classification of loan has come to the effect basing upon a standard criterion.

Loans are classified into three categories on the basis of the length of overdue. These are as the following

(1)    Substandard.(2)    Doubtful.(3)    Bad or Loss.

The criteria of loan classification are

  • Required Payment.
  • Limit overdrawn.
  • Legal action.
  • Quantitative judgment.

 

Continuous Credit or Demand Loan:

Types of Classified LoanDescription
Sub-standardRemain non performing for 6 months or more
DoubtfulRemain non performing for 9 months or more
Loss (Bad debt)Remain non performing for 12 months or more

Term Loan:(Repayable within a maximum period of 5 years)

Types of Classified LoanDescription
 

Sub-standard

If any installment is not repaid within the specified period and if the time-equivalent of such unadjusted balance is 6 months.
DoubtfulIf the time-equivalent of unadjusted balance is 12 months.
Loss (Bad debt)If the time-equivalent of unadjusted balance is 18 months.

Agricultural Loan & Micro credit

Types of Classified LoanDescription
Sub-standardRemain non performing for 12 months or more
DoubtfulRemain non performing for 36 months or more
Loss (Bad debt)Remain non performing for 60 months or more

Under the existing system scheduled banks are required to maintain provisions against unclassified and substandard loans in addition to doubtful and loss loans. They are allowed to book interest against classified loans only on cash. Whether a credit is classified or not under the objective criteria, it is subjected to classification under quantitative judgment if any doubt arises regarding repayment of loan.

Loan Provisioning:

After getting lists of the classified accounts where no loss is anticipated, partial or total loss is anticipated, audit report by Auditor division and Bangladesh Bank, previous and current portfolio by external Auditors and Branch Managers comments on the classified accounts, Head office Credit Division prepares a list of credit accounts which are considered to be totally or partially be unrecoverable.

Rate of Provisioning:

Prime Bank Limited in the time of loan provisioning to get the real picture of the income mainly follows the Bangladesh Bank guideline. The rate of provisioning used in Prime bank is summarized in the following tables:

ClassShort Term AgricultureAll Other credit
Rate of Provisions
Unclassified (UC)5%1%
Substandard5%20%
Doubtful5%50%
Bad or Loss100%100%

   Source: Bangladesh Bank Circular

Accounting Procedure of Interest of Classified Loan:

The accounting procedure in dealing the interest earned on the classified loan is very important because the treatment may overestimate the earning of the bank. In Prime Bank Limited the accounting procedure that are followed in dealing with interest fee earned are pointed out below:

  • If all credit or advance is classified as substandard or doubtful, the interest will be charged on the credit account but such interest is not transferred to the income account rather it is kept on the interest suspense account.
  • If any loan or advance is classified as Bad or Loss, the interests of that account are suspended instantly. If any suit is required to be filed for recovery of such credit, then it is filed on the total amount of the principal including the interest suspense account.
  • If any classified loan or part of that loan is recovered, the interest will be adjusted first then the original loan will be adjusted.

 

CREDIT MANAGEMENT PROCEDURE:        

The failure of the commercial bank is mainly occurs due to bad loan, which occurs due to inefficient management of the loan and advances portfolio. The objective of the credit management is to minimize the performing asset and the minimization of the non-performing assets as well as ensuring the optimal point of loan and advance and their efficient management. Credit management is a dynamic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximize the return on the invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio is not only constituted the banks asset structure but also a vital factor of the bank’s success. The overall success in credit management depends on the banks credit policy, monitoring, supervision and follow-up of the loan and advances.

 

PORTFOLIO MANAGEMENT OF CREDIT  

Portfolio Management of Credit implies the development of lonable fund among alternative opportunities through proper allocation. The objective of portfolio management of credit is the best and efficient management of loan to ensure profitability. Designing the size and pattern of loan portfolio with accuracy is a tough job. Even then, a prudent loan portfolio management can be done by careful consideration of the factors mentioned in the following:

  • Bank’s Capital position.
  • Deposit mix (Tenure of deposit).
  • Credit Environment.
  • Influence for monetary and fiscal policies.
  • Credit needs of the respective commanding area.
  • Ability & experience of the bank personnel to handle the loan portfolio.

Is designing the loan portfolio, three things should be decided; first, the type of customers the bank wants to serve; Second, involvement of risks with various kinds of loans; and finally, the relative profitability of various kinds of loans. With each and every coin of loan, there is an involvement of risks. So the quantum of risk should be spread over the various types loan through diversification. Diversification of credit into a particular sector or area, product or business should also be observed carefully. If credit is already been concentrated to a particular streamline mentioned earlier, that should be avoided.

Finally, the type & tenure of deposit should be analyzed carefully in determining the loan portfolio of a bank. How much quantum of fund will be earmarked for long term lending and how much for short term depends to a large extent on the deposit structure.

 

PRICING OF LOAN

Loan pricing is an important factor in banking business. Because through pricing, bank usually calculate their margin/profit. So, it is to be determined carefully. In pricing, four components are to be calculated prudently otherwise pricing of that loan will create a definite loss for the bank. The components are:

  • Interest Expense or Cost of Fund.
  • Administrative Cost.
  • Cost of Capital.
  • Risk Premium.

Addition of the first three elements will provide the “Prime rate” beyond which a bank can never go for lending. Magnitude of the risk premium creates margin for the bank. And this rate of risk premium may vary from person to person and even from sector to sector depending upon the value or importance of the client and the prospective priority of the sector. Once upon a time, it was dictated by the Central Bank but now a day, in compliance with open market operation this power has been delegated to the listed commercial banks.

 

PRNCIPALS OF SOUND LENDING

There are a few general principles of good lending followed by bankers while considering proposals for advances. For sound lending inter-alia the following points should be kept in view:

  • Judicious selection of Customers.
  • Adequate return (Profitability).
  • National/Social interest.
  • Credit Control Policy of Bangladesh Bank.

It is to be always remembered that the Bank is the custodian of public money and as such we must be judicious, careful and selective while lending out the depositors’ money to ensure timely recovery. The deciding factors for recovery of loans are selection of right type of borrowers, end-use of credits and effective follow-up and proper supervision.

Despite the maximum risk involved in the credit operation/lending, bank has to go with this operation as most of the revenue generates from this operation. In case of lending to the various customers the bank must follow certain principles so that risk involvement may be kept at minimum or zero. The principles of sound lending may therefore be summarized an safety, liquidity, purpose, profitability, security, dispersal/spread and national interest.

  • Safety: A bank is a business to make money. It mainly uses depositor’s fund as a means of its earnings but safety should never be sacrificed for profitability. The money of the depositors is being repayable on demand or after short notice.
  • Liquidity: Liquidity means availability or readiness of bank funds on short notice. The liquidity of advance means its repayment on demand on due date or after a short notice. The loan must have fair chances of repayment according to repayment schedule otherwise the liquidity position of a bank may be threatened.
  • Purpose: The bank should not lend money for any purposes for which a borrower may The recruitment of the borrower may be free from all risks.
  • Profitability: Banking is essentially a business, which aims 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 those deposits. Bank has also to meet their establishment charges and other expenses. 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.
  • Security: The security offered for an advance is insurance to the banker. A banker would not normally like to recover the advance from the normal source. Security serves as a safety value for an unexpected emergency.
  • Dispersal/Spread: The advance 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 would have serious repercussions on the bank. Again advances must not be granted in one area alone.
  • National Interest: Banking industry has significant role to play in the economic development of a country. They may advance in priority sector in the larger national interest. Such as financial assistance to self employed person, etc. Side by side to promote retail trade, transport business, small businesses etc. are also being taken into consideration.

STEPS IN CREDIT MANAGEMENT & APPRAISAL SYSTEM:

There is no hard and fast procedure of managing credit, yet it should follow the instructions of the Bangladesh Bank, Central Bank of Bangladesh and the Circular of Head office from time to time. The first step of credit proceedings is the request for credit from the clients. Then scrutinizing and collection of information from primary and secondary sources take place. Credit appraisal and evaluation is the most important part of credit management. On the basis of evaluation approval is given by higher authority with certain conditions to be fulfilled. The sanctioning officer, who was the authority to sanction the credits, does sanction of credit. After fulfilling the conditions the credit is disbursed. Credit monitoring and reviewing start at the time of disbursement. Necessary steps should be taken to minimize the risks and increase the return of the Bank. Delegation of Business Power is important in credit sanctioning. Four-tire level is maintained in case of large amount of credit sanctioning. Lending risk analysis is also done in case of credit above TK. 50 Lac.

 Step 1: Request for Credit from the Client

Bank provides Credit facilities to the people who are credit worthy to the Bank. Credit worthiness depends on the credibility, financial capability, and feasibility of the project management ability of the credits to earn profits. When bank is satisfied with all these then the client is provided with the requested credit. At this point it should be mentioned that the client has to go through an interview where his credit potentiality is justified through critical observation. When credit officer is satisfied with the customer he is asked to submit an application and to fill up a form with specific details.

Credit Application:

Completeness of information can best be obtained by requesting the applicant to fill out a comprehensive application. Psychological attitudes toward the seriousness of credit obligations are improved when the application is rather formal and complete.

When the customer fills in the application, it is well for the interviewer to look over the form and to provide supplemental information, which will assure completion of the blanks not filled in, or which probes more deeply into the questionable areas. It is well to provide space on the form for the recording of more information after the customer has left. Points in favor of having the application fill out the form is that fewer skilled credit personnel are necessary and that more customers can be accommodated in the same space.

The client has to provide the following information in the Credit application Form:

  • Mode of Financing and amount of credit sought.
  • Primary information of the Business.
  • Directors name along with their shareholder’s percentage of ownership and net worth and the filled up net-worth statement.
  • Sister concern’s information and working capital related basic information.

Signature and Contract:

It is regarded as goods practice to have the applicant sign the application form. Some credit departments add words above the signature, which make the application a rather formal written contract. The clause may be a testimonial that the information is given for the purpose of obtaining credit and that the facts are complete and correct. The clause may also be recite the terms and be drawn a contract between creditors and debtors.

 

Step 2: Scrutinizing and Collection of Information

Selection of Borrower:

Experience has shown that a banker has to be very careful while choosing a borrower. Security is not the only thing to be relied upon. There has been cases where forged share certificates were offered as security and the banker found to his utter bewilderment, that the advance was really on an unsecured basis. There are also instances where the same godown was pledged to two different bankers and the respective bankers were taken to the godown for inspection through two different entrances, creating an impression on each that it was the godown pledge to him. In the Banker borrower relationship, there may be a number of opportunities to the borrower to take an unfair advantage of the facilities granted to him. Only the honest borrower co-operates with the banker and is fair in his dealings.

Selection of borrower is a significant part of a credit decision. The borrower should be diagnosed prudently. Degree of risk has an inverse relationship with the selection of borrower. Selection of right borrower reduces the risk of non-repayment of the loan. To the contrary, degree of risk of non-repayment increases with the selection of wrong borrower. In our country, the huge volume of non-performing loan is mainly the result of failure in selecting right borrower. So, if it is found that, line of business is prospective and profitable but the potential borrower is not right one, the proposal should be mentioned. There are some parameters for selection of a borrower.

  • Credit character: Credit character refers to reputation of the perspective borrower in meeting obligations of the bank upon maturity. This includes certain moral and mental qualities of integrity, fairness, responsibility, temperance, trustworthiness, industry and the like character is a relative manner.
  • Capacity: Capacity refers to the ability of the potential borrowers of repay the debt when it falls due and is indicative of the borrower’s competence to utilize the loan effectively and profitably. This is very important variable of credit analysis as the customer’s ability to repay is essentially dependent upon his earning capacity.
  • Capital: Capital represents the general financial position of the potential borrower’s firm with special emphasis on tangible net worth and profitability (which indicates ability to generate funds continuously overtime). The net worth figure in the business enterprise is key factor that governs the amount of credit that would be made available to the borrower.
  • Collateral: Collateral represented by assets that may be offered as pledge against loan extension. Collateral thus serves as a cushion or shock absorber if one or several of loans on maturity. Collateral in the form of a pledged assets serves to compensate for a deficiency in one or several of the first three ‘Cs’.
  • Conditions: Conditions imply economic and business conditions that affect the borrower’s ability to earn and repay debt and that are beyond the control of the borrower. Economic conditions include all these factors, which have bearing on economic processes of production, distribution and consumption.

Preliminary Screening of a credit Proposal Submitted by the Borrower:

Screening means critical diagnosis of a credit proposal at the very initial stage. It should be made carefully just after the proposal comes to the bank.

At the time of screening of a credit proposal the preliminary screening should be done on the following premises:

  • Quality of management and the entrepreneurial background of the sponsors.
  • Equity strength i.e. the own capital positions.
  • Position of assets & properties.
  • Line of business, its future prospects and the existing position of the respective industry.
  • Required technology, machinery, equipment and their availability.
  • Location, where the infrastructural facilities are available.
  • Potential contribution to the overall economic development of the country.
  • Proposed security are to be given and the genuinity of the title of documents.

Analyzing the above matters, it is to be convinced that the credit proposal satisfies all the key elements of a sound lending policy such as:

  • Safety of the Fund.
  • Security (easy marketability of the property given as security)
  • Liquidity (the tenure of the Loan)
  • National interest.

In case of clients who have previous record of taking credit facilities, their in-file records are examined to see whether the client has a good record of payments in time.

Information gathers through direct Inquiry:

Direct inquiry one of the common methods of obtaining information to verify facts presented on the application of during the interview of an applicant for an initial credit transaction. A careful distinction is made between obtaining credit information directly from sources having such facts and between buying somewhat similar credit data in the form of prepared reports from the credit reporting bureaus and agencies.

Call Report is a form of direct inquiry where the credit officers directly go to the project sites to prove the physical existence of the project. This report is submitted to the Board when the credit granting decision is taken.

Information gathers through in-file ledger facts:

In-file ledger facts are one of the most important sources of information available to the credit committee whether to accept or reject a large amount of credit from an established credit customer. From the in-file records, credit analysts have at their disposal the experience of the concern with the customer. They know the customer’s payment habits, the complaints registered, the collection efforts, if needed to keep the customer in line with the established terms.

Prime Bank Limited requests the client to provide the following documents when the credit application form is submitted. These documents are used to collect information for processing the loan proposal.

Step 3: Credit Appraising & Presentation of Credit Proposal For Approval

When credit officer is satisfied with his credit worthiness, financial capability, management ability and feasibility of the project through credit appraisal of clients in a prescribed form, he can hope for credit from the bank. Credit appraisal is done through “Credit appraisal Form”. Ratio analysis is given importance in case of project finance. But most of the medium quality loans are given on the basis of financial capability of repaying and credit worthiness of the client. Lending risk analysis is done in a prescribed form in case of large amount of loan, above 50 Lac. There is a prescribed form for the credit proposal of PBL given by the Head Office used as the credit proposal for particular client.

 

SWORT Analysis:

SWORT analysis is a technique by which the credit officer assesses the credit applicant’s organizational efficiency. Here the SWORT means.

  • S = Stands for Strength.
  • W= Stands for Weakness.
  • O = Stands for Opportunities.
  • T = Stands for Threat.

There are specific risks of any projects and to mitigate those there are some suggestions by following which those risk can be reduced. Those are:

Table: Project Risk and Mitigation

RiskResultFeatured to be Checked
Construction RiskIncomplete ProjectData certain completion contracts, cost, performance of the contractor.
Construction Delay
Cost overrun
Operation & Market RisksLate Supply of the input.

Management ability.

Lower equipment performance.

Force Majeur (Acts of good).

Supplier reliability and influence.

Equipment warranty and guarantee.

Insurance for the force majeure.

Credit RiskFailure to pay the debt in time.

Insufficient Cash flows.

Prospect of the goods or services to be produced.

Ø   Buyers’ payment habit & creditworthiness.

Legal risksInsufficient collateral value to pay the debt.

Banks’ take-over problem in case of default.

Ø   Proper valuation of the collateral and lending amount must be lower than the forced sale value.

Ø   Bank’s power to participate in the management meeting and analyzing and suggestion.

Sources: Credit Division of PBL

 

Financial Information:

Financial Statement Analysis:

At the time a borrower, especially a businessman or an industrialist, approaches a banker with a credit proposal, the banker investigates into all aspects of the borrower’s business and also about his personal character , capacity, and capital. In this task of financial appraisal of the credit proposal and the evaluation pof the borrower’s creditworthiness, financial statement of the business are of great value of the banker. The two important financial statements are the balance sheet and the profit and loss account of the business. The balancesheet shows the financial position of the business at a particular point of time. The profit and loss account shows the financial results of the working of an enterprise over a period of time. When these statements of the last few years atudied and analyzed, significant conclusions may be arrived at regarding the changes in the financial position, the important policies followed and the trends in profits etc. Analysis and interpretation of the financial statements has now become an important technique of credit appraisal.

The financial statements are analyzed and interpreted by different classes of persons from different angles and to serve their respective purposes. A banker analyses and interprets the financial statements so as to evaluate;

  1. The financial soundness and stability.
  2. The liquidity position, and
  3. The profitability or the earning capacity of the borrowing concern.

Financial statement is the end use of financial accounting. Financial statements are a process of collecting, formulating & compiling the accounting data in a consistent & logical accounting procedure. Very popularly we used to understand the financial statements simply by Balance sheet & Income statement. But financial statement is in fact a purpose oriented financial picture. Financial statement can be of various forms such as:

  1. Retained Earning Statement.
  2. Fund flow Statement.
  3. Cash flow Statement.
  4. Profit & Loss account.
  5. Manufacturing Account (in case of Manufacturing Company) etc.

Analysis of financial statement is the process of evaluating significant relationship between the components of the financial statement. The purpose of analysis is to obtain a better understanding of the firm’s position & performance.

Assessment of Working Capital:

The Capital, which is needed to meet current obligation and to finance day-to-day operational expenditure of a firm, is working capital. Assessment of working capital bears great importance because excess working capital incurs cost for the firm and in reverse, shortage of working capital may totally upset the smooth operation of the firm. Practically, working capital becomes obvious for the following reasons:

  • For purchase of raw materials, stores & spares.
  • For making advance payment to the raw material supplies.
  • Blocking of fund in Work-in-process and Finished goods.
  • Blocking of fund with sundry debtors.
  • For meeting the day-to-day cash expenditure.

Management Competence’s or Capability Appraisal:

The ability of the management to run the business smoothly and business background of the promoter and the sponsor director and the management are important. Most of the established businessman in Bangladesh are traditional and have no educational background. So it is difficult for a bank to properly judge the competency of the clients. Moreover PBL collect the following information about the client:

  • Brief description of the directors’ educational & business background.
  • Brief profile of the management.
  • Business performance for the last three years as performance of the business implies the capability of the management’s running the business.
  • Equity mobilization of the directors as it implies their risk-taking attitude.

If it is revealed that the directors are in the business for a long time and have operated the business well is said to have the capability to run the business.

The management personnel should also have-

  • Technical skill to use knowledge, method and techniques (acquired from experience, education and training).
  • Human skill to maintain interpersonal relationship within or outside the organization.
  • Conceptual skill to understand the complexities in overall organization.

 

Marketing Aspect:

Marketing aspect is the most significant aspect. Whether a project will be able to generate profit depends largely upon the market position. The market demand for the product of the project is analyzed in this part of appraisal. The following assessments are made under market feasibility test:

  • Past & present demand for the product.
  • Past & present supply of the product.
  • Expected future demand for the product.
  • Demand & Supply Gap.

Existence and impact of complementary goods and the distribution channel or marketing mechanism is critically analyzed in this part of project appraisal.

Technical Aspect:

In this part, the factors those are more or less technical in nature are examined. Examination of the technical factors enables us to know whether the project is technically feasible. The points of observation in this area are:

  • Location or site of the project.
  • Availability of infrastructural facilities such as road & transport, school, college etc.
  • Availability of raw materials.
  • Availability of utilities such as electricity, gas, water etc.
  • Climate position of the project area.
  • Availability of the required machinery.
  • Availability of required labour.
  • Nearness of market for the product.
  • Political factors such as govt. patronage, industrial policy of the govt.

Socio-economic Aspect:

The observation of this aspect is to see whether the project is socially desirable. How much contribution will be made by the project to the GDP and how many numbers of employment will be generated by the project should be ascertained.

Security Appraisal & Valuation

Asset, which is offered as security, must be analyzed thoroughly on the basis of some criteria as different assets and different influencing factors. The factor that has to be considered in the time of asset valuation are briefly discussed below:

Liquidity:

In a word it means, “How quickly an assets can be converted into cash”. The more liquid the asset the greater is the value as collateral. Stock, bonds, and other marketable securities are easily sold and for this reason, these represent attractive value as collateral and highest liquidity.

Depriciability:

Some types of assets lose their value than others. Computers and other electronic assets are continuously upgraded so that last years models are technically obsolete. Dresses suits and apparels also quickly lose their values as public’s fashion taste change frequently. But however real estate and certain other fixed assets may increase in value day by day. These assets are attractive sources as collateral.

Marketability:

The market available for purchasing liquid assets is a vital part of having a good collateral value. Secondly market is necessary for buying and selling the liquid assets. If secondary market is not available the bank has to lose the value of the asset and has to sell it at discount. So if there exists secondary market for the collateral assets, it can yield an attractive value.

Controllability:

This refers to the bank’s ability to locate and hold the assets. The bank can hold bonds and stocks posted as collateral in the banks’ volt easily and highly controllable. Therefore, prior lien, offsets, warranties & other legal claims should be investigated by the credit officer before taking any thing as collateral as the higher the complexity in realizing the collateral the lower the value. Once the collateral loan value is established, the commercial loan officer should deduct the costs that can be expected to be incurred if the collateral is liquidated. The bank may absorb forecasting cost (Legal & Appraisal) and holding cost (Including tax and maintenance costs) before proceeds are realized from the sale of the collateral assets. The amount remaining after deducting all the cost, the bank can expect to apply to the principal, interest and cost of the loan.

In providing loan PBL take mortgage of land and buildings along with PSP, FDR, MBDS. In the time of taking documents the borrower has to disclose all the information related to the land and buildings, which will be offered as collateral against the loan

  • The credit officer must collect all the documents to verify the land’s actual owner and the updated government fees paid receipt.
  • For justification the documents should be communicated with the bank’s lawyer.
  • Whether the sites plan of the land is permitted by the RAJUK (if applicable).
  • The client must have to submit valuation certificate from an engineering firm.
  • Valuation by the two Credit officers must be submitted after visiting the land and discuss with the neighborhood about the value, and the market value and the forced value of the land and/or building must be submitted in prescribe form and duly signed by them as well.
  • Three photographs from three different angles of the mortgage land should be submitted, the credit officer must duly attest the submitted photographs.

The client may seek for credit in terms of Working Capital, Work-Order Finance, and Project loan. The credit officer has to analyze the required amount through the client revealed their credit demand in the credit application. The calculated or assessed amount by the credit officer may be lower than the client’s demand. PBL analyze the financial statements and the amount required as working capital. The credit officers analyze earning forecast, expense estimation.

Credit officer prepares a credit proposal along with the prescribed ‘Credit Proposal Form’. Credit officer measures the risk associated with the credit facility. No credit proposal can be put for approval unless there has been a complete written analysis. It is absolute responsibility of the Proposing Officer to ensure that all necessary proposal documentation have been collected before the facility request is sent to the Sanctioning Officer.

In spite of some limitations, LRA is really appreciable tool in assessing the risk lying with the credit proposal. But it should be modified for the sake of simplicity and consistency in the context of our country to get rid of the drawbacks illustrated.

 

Step 4: Approval of Credit by Higher Authority

Branch Credit Committee:

Branch credit committee is to be headed by the Branch Manager, other members to be selected by the manager in consultation with Head Office Credit Division.

Head Office Credit Committee:

Head office credit committee is to be established in accordance with the authority delegated by the Board of Directors of PBL. The authority and responsibilities of the credit committee are to be given below:

  • Reviewing, analyzing and approving extension of credit in accordance with authority established and delegated by the Board of Directors.
  • Evaluate the quality of tending staff in the bank & take appropriate steps to improve upon.
  • Recommending credit proposal to the Executive committee/Board of Directors, which are beyond the delegated authority.
  • Ensuring, that all elements of credit application i.e. Forms, Analysis of statements and other papers have been obtained and are in other.
  • Confirming that the transaction is consistent with existing loan policy and Bangladesh Bank guidelines & if not the Committee may prepare a recommendation form an exception to or change in policy for consideration by the Executive Committee/Board of Directors.

Executive Committee:

Approving credit facilities as delegated by the Board of Directors. Supervising the implementation of the directives of the Board of Directors. Reviewing of each extension of credit approval by the Head Office Credit Committee/Managing Director. Keeping Board of Directors informed covering all these aspects.

Board of Directors:

Establishing overall policies and procedures for approving and reviewing credits. Delegating authority to approve and review credits. Approving credit for which authority is not delegated. Approving all extensions of credit, which are contrary to bank’s written credit policies.

 

Step 5: Sanction and Disbursement of Credit

Most important step of providing credit facility is the sanctioning of credit. Because sanctioning authority will be held responsible for any discrepancies. In this step all the documentation is completed and the customer is sent an advising letter for the credit facility along with all the terms & conditions.

Norms maintained in sanctioning of credits are described below:

  • Credit will be sanctioned and disbursed strictly in terms of the approved Credit Operational Manual of the Bank and the Head Office Circulars issued from time to time.
  • All norms informed through the Circulars of Credit Division in particular and all other relevant circulars in general, which are to be followed meticulously while exercising power.
  • Credit will be subject of Bangladesh Bank restriction.
  • The party to whom credit will be allowed should be as far as possible within the command area i.e. Area of operation of the Branch. Derivations, if any are to be explicitly explained in the proposal.
  • No Sanctioning Officer can sanction any credit to any of his near relations and to any firm/company where his relations have financial interest. Such cases should be sent to the Head Office.
  • All Sanctioning Officers maintain a Sanctioned Register for recording serially all credits sanctioned by him. Sanctioning officer will accountable for non-recovery due to his injudicious decision.
  • All approval of credit facilities must be conveyed under dual signature. Ideally both the signatories must have the required lending authority. If however, two lending officers of the required lending are not available, one of the signatories must have the required authority.

 

Step 6: Credit Administration and File Maintenance

Credit File Maintenance:

The credit file for each facility shall contain all information necessary to facilitate ready monitoring of that facility. It should contain a through history of the customer relationship to help credit officer tract any problems, assist a newly assigned credit officer in understanding the customer and make the lending process transparent. Primary items in Credit File includes:

  • Credit Application and Credit approval notes/analysis. Evidence of credit approval and data upon which approval was granted together with any comments, if appropriate.
  • Copy of Sanction and Loan Agreement. A checklist along with copies of all legal &banking documents obtained/to be obtained. Details and six months updated information of all related facilities to the named customer group.
  • All supporting data such as financial statements and analysis, references, credit investigation results, CIB & other Bank reports and notes of all discussions with the borrower and other relevant parties with paper clipping.
  • Correspondences call reports, site visit reports, stock report etc. each credit file shall be maintained in a secured location and where access restricted to authorized personnel’s only. Copies of the information may be kept where regular access is required.

Facility Evidence Maintenance:

All charges documents should be maintained in a place of utmost security. All charge documents as prescribed by the bank & legal laws, for the relevant credit facility, Signed credit agreement, Signed guarantees or other evidence of credit security or collateral agreement shall be kept in fire proof safe under the custody of Branch manager or his designate alternative and another officer. A register of charge and security documents should be maintained under the supervision of the Branch Manager. Type of documents to be signed by the client varies depending upon the nature of loan and advances given. Some common documents are listed below:

  • Demand Promissory Note.
  • Letter Arrangement.
  • Letter of Agreement.
  • Letter of Continuity (in case of continuous loan).
  • Letter of pledge (in case of Pledge).
  • Letter of Hypothecation.
  • Letter of Undertaking.
  • Letter of Debt Authority.
  • Letter of Installment (in case of term loan to be paid in installment).
  • Letter of Guarantee (Personal Guarantee).

Step 7: Credit Monitoring and Reviewing

It is the responsibility of the Manager to monitor the overall profile and risk aspect of the credit portfolio in accordance with the criteria set down in the Bank Credit Policy. Such monitoring shall be evidenced from the comments of the Manager in monthly Call/Visit Report and be kept in the Credit File with a copy to the Head Office.

This review shall be formally performed at intervals prescribed by Head Office but it is the responsibility of the Manager to ensure at all times that the credit portfolio meets the standard set forth by the Bank.

Periodic Review and Follow-up should aim at ensuring:

  • Terms of approval have been maintained.
  • Conduct (turnover, regularity of repayment etc) of the borrowing accounts during the period under the review has been satisfactory or as expected.
  • There are no adverse trends in market, economic and political conditions which may endanger the reliability of the facility.
  • Business reciprocity offered and received is commensurate with the facilities allowed.
  • Earning from the account is cost effective (i.e. adequate to meet business cost of funds and leave sufficient margin for adequate risk reward, overheads and profits).
  • Borrowers business is being satisfactorily conducted as reflected through a review and analysis of the financial and operating statements.

 

Assessment of Group Exposure:

If facilities of any one-customer group are booked in a number of locations, an officer designated by Head Office shall be responsible for the management of the Bank’s global exposure to that customer group. Any development in the customer’s which may effect the management of the facility and in particular the credit rating assigned to the customer, shall be documented and advised by the designated officer to the concerned Branch & to the Head Office, Credit Division.

General Norms for Monitoring Credit Facilities:

The Branches will submit a monthly statement of the credits allowed under the discretionary power of the Manager to the Head Office irrespective whether the same are outstanding or not on the date of return. Recovery of loan ensures the recycling of fund. Non-recycling of fund leads a bank or financial institution to become stagnant. So, recovery of loans and advances is a must. But the scenario of loan recovery is undoubtedly poor and inefficient in our country. This is mainly because of inadequate, inefficient and even absence of supervision & monitoring system. Recovery can be ensured or at least making close supervision and monitoring can increase rate of recovery. Supervision can be done in two stages:

Pre-finance Stage Supervision: In this stage, supervision should be made:

  • To select the right borrower i.e., credit worthiness of the borrower.
  • To be sure about the business prospect.
  • To see whether any misstatement made by the borrower etc.

Post finance stage Supervision: Post finance stage supervision is sometimes synonymous to the monitoring. Monitoring is a continuous process of overseeing the borrower, his business, and his trend in repaying the loan. In this stage supervision & monitoring should be made:

  • To see whether the borrower draws the sanctioned credit regularly.
  • To see whether the loans are being properly & fully utilized.
  • To see whether the borrower repays the loan regularly.
  • To see whether any significant change happens in the management of the borrower.
  • To see whether the borrower maintains close contract with bank regulatory.
  • To see whether any significant change happens in the borrower’s business plan.
  • To make the borrower aware about the timely repayment of loan.
  • To make necessary step in case of need.

Supervision & monitoring helps to develop a cooperative attitude between the borrower and the bank. Moreover, close supervision & monitoring make the borrower make the borrower loyal to the Bank and thus supervision & monitoring ensure the recovery of the loan.

 

LOANS AND ADVANCES:

The credit portfolio of the Bank includes both conventional and based on Islamic Shariah. Credit of the Bank increased by TK.13094 million during 2006 registering a growth of 41 percent against the previous year. The growth rate of Retail and SME lending was 38 percent and 27 percent respectively. This indicates gradual positioning of the Bank in the Retail and SME sector. However, Corporate lending remained the major area of operation. Trade finance that includes import and local trade finance was 27 percent of the total loan portfolio and was the highest contributing sector. The growth rate of the sector was 65 percent compared to previous year. The loan to Industry/Project (Large & Medium Scale Industry Loan) accounting for 42 percent of the total loan portfolio. Out of the above Industrial loan, Agricultural Loan grew by 282 percent. Due to expansion of branches in rural areas the growth of lending in rural areas increased by 50 percent. Loans and advances of the Bank grew strongly by 41 percent to 45,010 million in 2006. Bills purchased and discounted increased by 27 percent indicating strong growth in export performance. Investment of Islamic Banking Branches grew by 38 percent and Loans and advances of Conventional Branches grew by 41 percent. Yield on loan increased to 13.51 percent from level of 12.75 percent of previous year.

Prime Bank is maintaining a leading role in syndication market. Prime Bank so far concluded 14 syndicated deals of TK 8,500 million as Lead arranger and agent for its corporate clients. The sectors of financing through syndication now include pharmaceuticals, chemical, ceramic, steel, micro finance, food and allied infrastructure. In the year 2006 Syndication and Structured Finance Unit arranged syndication investment deal of TK 230 Million through Hire Purchase under Shirkatul Melk (HPSM) which is first of this kind under Islamic Shariah in Bangladesh. Besides, to serve its corporate clients and to expand the base of its corporate clients Prime Bank participated in syndication Unit also arranged 15 visits program for participating lenders to observe the operational status and monitor the implementation of the projects.

 

FINDINGS

On the base of survey, theoretical analysis and practical experience of 3 months internship program, the following findings are identified during the research period:

  1. It seemed to me that the bank having a large amount of deposit is not encouraging the large scale producers that much of long term industrial loans to accelerate the economy as well as to help the economy to solve unemployment problem.
  2. Premium Customers should be offered occasional gifts and discounts, which can make the Premium service more attractive and make customer delight. The interest rates on several loan and deposit schemes should be differentiated for the premium customers.
  3. All the lending and savings packages offered to the premium customers are same as offered to the general customers, excepting the waiver of service charges for premium ones. Prime Bank Ltd. should try to introduce more attractive lending and savings scheme to its premium customers to create more business for the bank. The bank can pay more attention to this segment of customers, as it is the most solvent group from which income can be generated if the package is designed properly.
  4. There is no provision of trend analysis in the existing proposal format of PBL. Trend analysis has to be included. Because trend analysis is an analysis of a firm’s financial ratios over time used to determine the improvement or deteriorate in its financial situation. Trend analysis provides information about whether the firm’s financial position is more likely to improve or deteriorate in the future. Trend analysis is done by changing the percentage and comparing the current year with the previous years. Prime Bank, at present does not do trend analysis. Therefore to understand the improvement or deterioration of the financial condition Prime Bank should introduce trend analysis.

Prime Bank closed on a high note and made an impressive progress in many lines of businesses and hold the first position in the CAMEL rating by Bangladesh Bank. For the Banking business this is a good sound of operation. The Prime Bank is now 12 years age of its operation and builds a strong-based capital with having insignificant percentage of non-performing assets. The credit appraisal and loan proposal system is standard but some factors are overlooked.

  • In appraising system the competitive position analysis is not focused while doing the appraisal system.
  • The product appraisal is done on the customer base not any comparison is done with other product.
  • Due to the data unavailability the credit demand assessment is not properly done.
  • The suppliers’ influence is overlooked.

Credit scoring is the way to find out how much cash will be generated by the firm. There are two kinds of credit score: one is Z – score and the other is Y – score. Z – score should be applied to the manufacturing companies and Y-score should be applied to all trading companies. In Prime Bank, the Head Office does the credit scoring. If credit scoring is done in branch then the financial analysis will be more reliable and transparent.

With a view to improving the quality and soundness of loan portfolio, credit risk management methods were updated in 2004. The Bank is now applying a new system of credit risk assessment and lending procedures by striker seperation of responsibilities between risk assessment and lending decisions and monitoring functions. The Bank monitors its exposure to particular sectors of economy on an ongoing basis. The Bank has undertaken the changes in policy of credit risk management, credit risk administration and credit monitoring & recovery in line with the guidelines of Bangladesh Bank, formulated in the last year.

The scope of credit diversification is limited due to shortage of specialist manpower in relevant fields. It is recommended that the PBL authorities consider the deployment of technical manpower in various fields, particularly in the fields of computer software, diagnostic centers etc. in order to diversify the credit areas and increase the credit volume of PBL.

Recently Bangladesh Bank has introduced a circular that any Bank can disburse loan upto 25 percent of its total capital to a single customer. It actually encourages syndicated financing. Because textile/spinning/glass factory and dyeing factory etc. are capital intensive and requires a lot of fund. That’s why for the last several years Prime Bank achieve a landmark progress and maintaining a leading role  in syndication market.

In view of the potential Prime Bank is focusing on expansion of Retail Loans/consumer Credit during last couple of years. The growth rate of business has rapidly increasing. A number of products were developed and existing products were re-launched with better pricing structure and repayment period, which have received good response. In order to give easy access to products and to give best possible services at the doorstep of existing and potential customers, the Bank introduced direct selling services. The objective of the facilities is to increase the buying power of the middle class people, which ultimately leads to increasing the standard of living of the people of Bangladesh.

 

RECOMMENDATION

In credit management, it is conventional that proposals of credit facilities must be supported by a complete analysis of the proposed credit. More importance should be given on refund of loans out of funds generated by the borrower from their business activities instead of realization of money by disposing of the securities held against the advances, which is very much uncertain in present context of Bangladesh where a large numbers of creditors are willful borrowers because of default credit culture.

The credit officer of the branch who deals with respective credit disbursement should accurately measure the risk associated with the credit facilities. He should properly evaluate the viability of the project as well as choose the proper client for credit facility. The credit analysis should covers the selection of right borrowers, credit purposes, viability of the project, loan repayment capacity, right and secured collateral, proper documentation etc. The Branch should improve the file management system to faster the dealings with the clients’ proposal.

Using the five-force model the client must be appraised to identify types of competition it would face and how strong each of the competitive forces are on the business of the client where the following things must be highlighted.

  • The rivalry among the competitor.
  • The potential entry of new competitors in terms of economies of scale, technological know-how, Experience curve effect, resources requirements, access to the distribution network.
  • Bargaining power of the buyer.
  • Suppliers’ influences and bargaining power over the business of the client.
  • Potentiality of the substitute products.

Sensitivity analysis shows how the value of criteria (say NPV, IRR etc.) changes with the changes in the value of any variable in the analysis. This analysis is applicable only in project finance. For example A is a project and the bank is going to finance in that project. We have seen earlier that the bankers do forecasted cost of good sold, financial ratios etc. but if later increase in raw material costs or decrease in sales revenue or increase in manufacturing overhead how sensitive will be the project’s profitability and debt service coverage capacity that is calculated in sensitivity analysis. So Prime Bank Ltd. should include sensitivity analysis in proposal format to analyze project finance.

Product Comparison should be done between competitors in terms of Characteristic, Price, Packaging, Ingredients, Unique Selling Proposition (in case of service analysis).

As it has been observed that, there are some inconsistency in post approval and pre-approval monitoring. Most of the clients does not submit the stock report, monthly statements, and overall stage report in case of large project. To reduce the difficulties in project implementation and supervision and monitoring following clues can be implemented.

A time budget for the project to be implemented with mentioning the exact time of beginning and ending must be collected. So that time over-run while project completion can be avoided. For reducing the cost problem the credit officer must look for whether the construction be given contract and turnkey basis. Disbursement of fund procedure must be improved, the credit officer must become sure that the funds are going to the project in which it is sanctioned. There must be a credit officer assigned to the project and he will be responsible for completing the “Stage Completion Report Form” which will mainly deal with the details of the cost incurred in the previous period and percentage of project work completed. Justification whether the portion of the project works are completed in time. The management must introduce project progress reporting form for better disbursement procedure.

Most of the time the client doesn’t channel their proceeds through the accounts with the Prime Bank though they supposed to. Revenue Cascade and hierarchy of payment must be maintained to ensure that the installments ate in time in right amount, as there is a potentiality that the client will default. The risk that can be arising while implementation of the project must be analyzed and mitigated through the perfect risk taker. The assignment system to supervise and monitor the loan account can reduce the default tendency. If each credit officer are assigned certain amount of client for close contract and supervision, there will be good relation with the client and the recovery will be in time.

Prime Bank has a great image as they have already achieved first position in CAMEL rating consecutive for five years. Using this reputation they should be more service oriented by implementing any branch services, Tele banking and introducing more new product.

The management of Prime Bank may invest in interest sensitive asset by taking deposit of short term and lend for long to reduce maturity gap between its interest rate sensitive assets and interest rate sensitive liabilities.

Proper communication regarding the products and services of the bank should be enforced. As a result confusions will be minimized and customer satisfaction will enhance.

Prime Bank should actively manage the complaints of various customers and encourage customers to give feedback about the services. The management should collect document complaints, use that information to identify dissatisfied customers, correct individual problems where possible and identify common service failure points. Research showed that this strategy would radically improve the overall customer satisfaction.

The Bank should focus more on existing customers in order to build strong and loyal relationship with them as most satisfied customers recommends the bank to friends and relatives. Thus the power of relationship will foster positive Word of Mouth Communication and will attract new customers at a lower cost.

Employee training and workshops should be administered in order to give them knowledge and professionalism in customer interactions. With a more professional base, employees can better satisfy the customers. They should be taught about how to deal with problem customers and problematic situations. The survey showed significantly low scores for employee’s willingness to help. Thus this aspect should be considered.

The scope of credit diversification is limited due to shortage of specialist manpower in relevant fields. It is recommended that the PBL authorities consider the deployment of technical manpower in various fields, particularly in the fields of computer software, diagnostic centers etc. in order to diversify the credit areas and increase the credit volume of PBL.

Bangladesh economy is expected to grew by 6.8-7.00 percent during the fiscal year 2006-2007 due to good harvest, recovery of agricultural output, stable manufacturing growth supported by strong export demand of knit garments, robust service sector growth and steady flows of remittances. The high international prices of crude oil and continuing upward trend in prices of many commodities, interest rate are on rising trends in global economy with associated increase in the inflationary expectation. Bangladesh Bank is alert to contain the inflationary pressure and tightened monetary measures are expected to continue for facilitating smooth credit flow to the productive pursuits only for targeted output growth. The rate of interest of the country has already shown a rising trend due to the tightened measures.

Prime Bank limited is well positioned to meet the challenges of 2007 and will continue to strive to innovate and capture opportunity for growth and value creation. The Bank will focus on its large customer base to generate more business from existing customers. This strategy is supported by wide spectrum of product and services and level of customer service delivery. The Bank will continue to harness the potential of Retail, Credit Card, SME and Remittance market. However, continued pressure on interest margins, fees, exchange earnings and increased provision requirement for Retail, Credit Card and SME will pose a challenge to the financial institutions during 2007 also. In its pursuit for growth, the Bank will always adhere to good corporate governance and practices and sound risk management policies and strict credit evaluation procedure.

There is a growing realization that the micro finance can act as engine of sustainable growth. 2006 was a steeping stone for the Bank in micro financing and due to the strong commitment towards corporate social responsibilities, the Bank will look for more avenues for participating in micro financing during coming days.  We wish the future progress of Prime Bank.

 

 

CONCLUSION

Bangladesh economy is expected to grew by 6.8-7.00 percent during the fiscal year 2006-2007 due to good harvest, recovery of agricultural output, stable manufacturing growth supported by strong export demand of knit garments, robust service sector growth and steady flows of remittances. The high international prices of crude oil and continuing upward trend in prices of many commodities, interest rate are on rising trends in global economy with associated increase in the inflationary expectation. Bangladesh Bank is alert to contain the inflationary pressure and tightened monetary measures are expected to continue for facilitating smooth credit flow to the productive pursuits only for targeted output growth. The rate of interest of the country has already shown a rising trend due to the tightened measures.

Prime Bank limited is well positioned to meet the challenges of 2007 and will continue to strive to innovate and capture opportunity for growth and value creation. The Bank will focus on its large customer base to generate more business from existing customers. This strategy is supported by wide spectrum of product and services and level of customer service delivery. The Bank will continue to harness the potential of Retail, Credit Card, SME and Remittance market. However, continued pressure on interest margins, fees, exchange earnings and increased provision requirement for Retail, Credit Card and SME will pose a challenge to the financial institutions during 2007 also. In its pursuit for growth, the Bank will always adhere to good corporate governance and practices and sound risk management policies and strict credit evaluation procedure.

There is a growing realization that the micro finance can act as engine of sustainable growth. 2006 was a steeping stone for the Bank in micro financing and due to the strong commitment towards corporate social responsibilities, the Bank will look for more avenues for participating in micro financing during coming days.  We wish the future progress of Prime Bank.

 

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