Credit Management of Premier Bank (Part-4)

6.POLICY RECOMMENDATIONS

The following measures may be considered to eliminate the problems from Premier Bank’s credit portfolio:

1.Officers signing a memorandum recommending approval of a credit must reasonably expect the credit to be a low risk one. This expectation is to be founded on:

a.   A through knowledge of the borrower’s business by the officer recommending the credit.

b.   A thorough analysis of the credit by all officers signing the credit memorandum. This must include a good understanding of the credit taker’s environment, including the economy, the industry, the credit taker’s business or personal strategy, and the credit taker’s capacity to successfully implement that strategy.

2.Owners, managers, and individual credit takers must be people of integrity with substantial relevant business experience. The character of the people to whom a bank is lending money is the single most important determinant of its credit quality. It is also most difficult to analyze. Experience in business and competence can often be judged by track record. Experience in the successful operation of a business under adverse conditions as well as normal ones are important. Attitude toward risk and reward, change and tradition, and short- term and long-term profitability is significant.

3.The bank’s position as creditor should as good as or better than that of any other significant creditor with respect to collateral security, guarantees, default clauses, and similar matters. If a borrower should experience difficulty, negotiations will encompass not only the borrower and the bank but also other creditors. It is important for the bank’s bargaining position that it not be in a weaker position than other creditors.

4.The bank must have sufficient qualified staff, facilities, and procedures in place to ensure professional administration of the documentation, continuing credit evaluation, and operational support of the credit throughout its life. No matter how good the initial decisions, if the credit is not professionally followed, the bank is asking for trouble.

5.Proper Documentation of Credit Policy: The bank should prepare a formal credit policy in a documentary or manual form. This should cover the legal and operational aspects of lending as well as the strategic intent of the bank. For instance, it may identify the economic sectors towards which credit can be directed more profitably. The credit policy should be of an evolving nature, reflecting the changes and trends taking place in the economic sphere.

6.Quick Loan Processing: Instead of relying heavily on manual paper work, skillful use of computers and sophisticated & advanced financial software can shorten the loan processing time quite considerably.

7.Less Centralization of Loan Disbursement Authority: The Head Office should allow its branches to sanction project loans up to certain limits. It should deal with projects requiring large amounts of loan.

8.To combat the problem of mobilizing deposit in the form of credit, Premier Bank should focus on intensive marketing effort.

9.The Bank should recalculate its lending rate on a periodic basis to cope with changing lending scenario.

10.At the branch level credit department must be adequately capable of collecting the correct and relevant information and analyzing the financial statements quickly and precisely.

12.Credit officer must be skilled enough to understand the manipulated and distorted financial statements.

13.Credit committees at all levels must work in co-ordination with each other for quick approval of loans and to reduce the loan processing cost.

14.To faster the lending process, Premier Bank should facilitate online loan application submission and personal credit processing.

Credit Proposal Format

The Premier Bank Limited

Head Office, Banani, Dhaka

Memo No#            / 2008                                                                    Dated:

From: The Managing Director, The Premier Bank Limited.

To: The Executive Committee/ Board, The Premier Bank Limited.

Subject: Proposal for approval of:

Company Name:                                                                                Industry Types(As Per CIB Guideline)Address : Factory:Business:

Phone:           Mob: Fax:          E-mail:                              Customer ID No:

Lending

Category:

Sector Code:

Purpose Code
Group NameOrganizing Office:
Major Ownership

Name

Share %Personal Net Worth (Lac Take)Position/ Designation
Total
Date of Establishment                        Account opened on:                           Account No:Customer Code (CIB):                       TIN:                                                       Paid –up Capital:Total New worth:                                 Investment in Business:Banking with the Premier Bank Limited since                               in the name of

Original Limit:                                                                      Sanctioned by Head Office/ Branch on.

Comments in last HO/ BB inspection report, if any:

 

Deposits                                 (Fig. In Lac Tk.)Originating Reason

Type

Encumbered

Unencumbered

Total

Marketed by the Bank                             □Customer approached the Bank               □Part of Special Scheme Bank/Govt. □

 

Referred by individual                             □

 

Name of Person who Marketed

Total
Volume of Import L/Cs (Foreign and local)
Volume of Export Bills
Volume of L/Gs
Volume of Remittances

* Lending Category:

i.        Agricultural (AG)ii.       Large and Medium Scale Industry (Term Loan)-LMiii.      Small & Cottage Industry (Term Loan)- SCIiv.      Working Capital-WCL

v.       Working Capital (Small Industry)- WCS

vi.      Export-Ex

 

  1. Commercial Lending (Com)
  2. Ready Made Garments (RMG)
  3. Housing-Commercial (HC)
  4. Housing –Residential (HR)
  5. Other (OT)

(Fig. in Lac Taka)

Facilities Summary     New □   Renewal  □      Increase □   Delinquent □

Existing facility

Proposed Facility

Security Value

NatureLimitOutstandingOverdueExpiryAdj. timesRecycle TimesLimitExpiryFDR/SDRPropertyOthers (Specify)Total
L/C Limit (at Sight)
LTR Limit
Overdraft
CashCont.
Total
Classification Information:Existing past due at our Bank.Existing past due at other Banks:

Current Classification

Unclassified □   Sub Std □  Doubtful □ Bad loss □
CIB Report: Report from other Banks:
Findings of Trades Checking:

Other Group Liabilities With the Premier Bank Limited:

(Figure-in Lac Taka)

Company/ Trade Name

Existing Facilities

Security Value

NatureLimitOutstandingExpiryOverdoesCL statusFDRPropertyOthersTotal
Total
Total (Group)
Income during last 12 months (In case of new customer Projected income for the next 12 months to be furnished)

Financial

Audited               Un-audited

(a) Commission/ Exchange/ Fees:

 

(b) Interest Income net of Cost of Fund:

Total:

(c) Yield on Advance/ Credit Faculty:

2008

(Audited)

2007

(Audited)

2006

(Audited)

Sales/Revenue   Net profit   Total Debt   Total Assets   Tangible Net worth

 

Allocation of Credit for this Sector:(To be filled in by Head Office
Total Allocation for the year
Sanctioned Limit
Outstanding

Fig. in Tk. Lac

Liabilities with other Banks:

Bank Name

Name of Account

Nature of facility

Limit

Outstanding

Overdue

Cl. Status

Remarks

Grand Total

Fig. in Tk. Lac

Group Liabilities with other Banks:

Bank Name

Name of Account

Nature of facility

Limit

Outstanding

Overdue

Cl. Status

Remarks

Grand Total
Risk

Overall Borrowing Quality

Good

Acceptable

Marginal

poor

Good

Acceptable

Marginal

Poor

Business Risk

 

 

 

Security Risk

Date of Customer’s request:Proposal Received at Head Office on:Analysis completed on:Level of Approval Required:

Details of the proposed facilities:

a) Nature of Credit Facility

:

b) Limit

:

c) Margin

:

d) Commission

:

e) Validity / Expiry

:

f) Repayment

:

g) Purpose

:

h) Interest on PAD

:

i) Security

:

j) Condition

:

Securities against all the facilities

Credit Analysis

  1. History of Relationship with the premier Bank Limited:
  2. Management/ Sponsors
  3. Details of business of venues steel mills Limited.
  4. Description of the project
  5. Distribution
  6. The production process flowchart
  7. Infrastructural Facilities
  8. 3 years financial information with ratio analysis: (Audited and/or Management signed Balance sheet & Income Statement to be attached. In case of new project forecasted financials of at least 3 years should be submitted)

(a)        Income statement:                         Audited                           Un-audited

Fig. in BDT Lac

Particulars
1.0Sales Revenues (Less return, Vat etc.)
1.1Cost of Good Sold:
1.2Gross profit (1.0-1.1)
1.3General and Admin. Expenses
1.4Maintenance/ Selling Expenses
1.5Total Admin. & Selling Exp. (1.3+1.4)
1.6Operating profit (Loss) (1.2-1.5)
1.7Other Income
1.8Other Expenses
1.9Financial Expenses (Interest)
2.0Net profit (Loss) (1.6+1.7-1.8-1.9)

(b)        Balance Sheet:                         Audited                           Un-audited

Fig. in BDT Lac

Assets    Liabilities & Owner’s Equity
Current Assets:    Current Liability:
2.1Cash in hand

3.5

Accounts payable/ Sundry Creditors
2.2Cash at Bank

3.6

Bank Loan (under 1 year)
2.3Accounts Receivable

3.7

Long term Loan Installment due for  1 year.
2.4Inventory/ Stock

3.8

Other Current Liabilities
2.5Advance Deposit

3.9

Total Current Liabilities (3.5 to 3.8)
2.6prepaid ExpensesNon-current Liabilities:
2.7Other Current Assets

4.0

Long term Loan

4.1

Other non-current liability
2.8Total Current Assets(2.1 to 2.7)   

4.2

Total Non-current Liability (4.0+4.1)
 Fixed Assets / Non Current Assets:   

4.3

Total Liabilities (3.9+4.2)
2.9Land & Building (net of dep.)Equity /Net Worth:
3.0Plant and Machinery (net of dep.)

4.4

Capital/Paid-up Capital
3.1Furniture and Fixtures (net of dep.)

4.5

Retained Earnings
3.2Other Fixed Assets/ Non current Assets (net of dep.)

4.6

Reserves
3.3Total Fixed Assets/ non Current Assets (2.8 to 3.2)

4.7

Less Intangible Assets (i.e. Goodwill, Trade Mark, patent etc.)

4.8

Tangible Net worth/ equity (4.4+4.5+4.6-4.7)
3.4Total Assets (2.8 + 3.3)   

4.9

Total Liabilities and equities (4.3+4.8)

(c)        Ratio Analysis:

FormulaMajor Ratios   
Profitability Ratios:

(1.2/1.0) ´100

Gross Profit Margin (%)

(2.0/1.0) ´100

Net Profit Margin (%)

(2.0/3.4) ´100

Return on Assets (%)

(2.0/4.8) ´100

Return on Equity (%)
Liquidity Ratios:

(2.8/3.9)

Current Ratio
(2.1+2.2+2.3)/3.9Quick Ratio
FormulaMajor Ratios   
Asset Utilization Ratios:

(1.0/3.3)

Sales to Fixed Assets (times)

(1.0/3.4)

Sales to Total Assets (times)

(1.0/2.8-3.9)

Sales to Working Capital (times)

(2.3/1.0) ´365

Receivable Turnover in days

(2.4/1.1) ´365

Inventory Turnover in days

(3.5/1.1) ´365

Payable Turnover in days
Debt Utilization Ratios:

(4.3/4.8) ´100

Debt to Equity (%)

(4.3/3.4) ´100

Debt to Total Assets (%)

(2.0+1.9)/(1.9+3.6+3.7)

Debt Service Coverage (times)

(d)       Financial Analysis and comments on above financials

6.         Working capital assessment

Item

Daily requirements

Tied up period In days

Amount Tk (Lac)

Unit

Rate

Amount

(a)

(b)

(c)=(a´b)

(d)

E=(c´d)

Imported raw-material
Local raw materials (Chemical)
Stores & Spares
Work in Process
Stock of Finished
Goods
Accounts Receivables
Other Exp.
Total

7.         Marketing prospect/ Demand-Supply:

Justification for the proposed Facility

Strength and weaknesses:

Strengths:

Weaknesses:

Declaration:

  1. The proposal does not contradict to any objective clause of the Bank.
  2. The matter is in compliance with rules and regulations of the Bank (Any exception from Banks Rules be clearly mentioned here)
  3. The proposal does not contradict with rules and regulations of Bangladesh Bank and Banking companies Act.
  4. Due diligence have been done in processing the proposal and all facts relating to the proposal which had come to out knowledge have been revealed in the Credit proposal.

Recommendation:

CIB INQUIRY FORMS

To be Filled in Capital Letter/ Type

Inquiry From -1

(Debtor/Borrower only)

Segment-1 (CIB-01 Form) related information.

New
Renew
Enhancement
Others.

Amount of Loan applied for

1.

Name of the Bank

:

2.

Name of the Branch

:

3.

Under District of

:

Branch Code:

4.

Reference Nos. of Branch

:

5.

Reference Nos. of Head Office

:

6.

Borrower Code: (if available)

:

7.

Name of the Borrower in full

:

8.

Abbreviated Name(In case of individual)

:

9.

Father’s Name(In case of Individual)

:

10.

Mater’s Name(In case of Individual

:

11.

Husband’s Name(In case of married woman)

:

12.

Address:

:

a) Permanent Address

:

b) Business Address

:

c) Factory Address

:

13.

Telephone Nos.

:

14. Voter ID Card No.

14.

Tin No.

:

To the best of our knowledge the above borrower obtained the credit facilities from different Banks/ financial/ institutions as mentioned below:- NIL

Name of the Banks/ Financial Institution

Name of Branch with District

N/A

N/A

Signature,

Name:

Designation:

Telephone:

Mobile:

Note:   Suppressing or Distortion of any information (related to borrower/ owner) by the Bank is Punishable Under Bangladesh Bank Order 1972, Chapter IV Art. 48

To be Filled In Capital Letter/ Type

Inquiry Form-2

(Owner’s only)

Segment-2 (CIB-01 Form) related information

1.

Name of the Bank

:

2.

Name of the Branch

:

3.

Under District of

:

Branch Code:

4.

Reference Nos. of Branch

:

Date:

5.

Reference Nos. of Head Office

:

Date:

6.

Borrower Code: (if available)

:

7.

Full Name of the Borrower

:

8.

Full Name of Owner

:

9.

Abbreviated Name of owner

10.

Father’s Name

:

11.

Mater’s Name

:

12.

Husband’s Name(In case of married woman)

:

13.

Address:

:

a) Permanent Address

:

b) Business Address

:

c) Factory Address

:

Statue of the Owner (Tick appropriate Box)

Proprietorڤ Partnerڤ Chairmanڤ Sponsor Directorڤ
Elected Directorڤ Nominated Directorڤ Otherڤ Managing Director
1.5Voter ID Card No.:

Name of the Bank/ Financial Institution\ Insurance Company of which the above owner is chairman/ Director.

To the best of our knowledge the above owner:

a)                  obtained credit facilities in individual name:

b)                  Has got other business which obtained credit facilities from the banks/ financial institutions as mentioned below:

Name of the owner’s related business/ firm with addressName of the Banks/ Financial InstitutionName of the Branch with District
i.
ii.
iii.
iv.
V
Vi
vii.
viii.

To the best of our knowledge the above information is Correct.

Signature,

Name:

Designation:

Telephone:

Mobile:

Note:   Suppressing or Distortion of any information (related to borrower/ owner) by the Bank is Punishable Under Bangladesh Bank Order 1972, Chapter IV Art. 48

To be filled in Capital Letter/ Type

Inquiry Form-3

(Group/ Related Business)

1.

Name of the Bank

:

2.

Name of the Branch

:

3.

Under District of

:

Branch Code:

4.

Reference Nos. of Branch

:

Date:

5.

Reference Nos. of Head Office

:

Date:

6.

Full Name of  Borrower

7.

Full Name of Group

:

8.

Address:

:

9.

a) Permanent

10.

b) Business

:

9.Subsidiaries/ Sister Concern:

Name

Business Address

i.
ii.
iii.
iv.
v.

Please write NA or Not Applicable if the concerned Borrower is neither a group nor a subsidiary/ sister Concern under declared a group. To the best of our knowledge the above information is Correct.

Signature,

Name:

Designation:

Telephone:

Mobile:

Note:   Suppressing or Distortion of any information (related to borrower/ owner) by the Bank is Punishable Under Bangladesh Bank Order 1972, Chapter IV Art. 48

Company name: Venus Steel Mills LimitedAddress: House# 329, Road# 8/A, Dhanmondi,    DhakaIndustry Name: Corrugated iron or Galvanizing plain sheet manufacturer.Code:
Group name (in company is part of group): VenusOriginating Office: Corporate Marketing Division, Head Office, Banani, Dhaka-1213.
Current exposure to this customer: Venus Steel Mills LimitedCurrent exposure to group: N/A
Why was this analysis conducted?Application for new facility

 


Increases to existing facility

 

Renewal of existing facility

 

Delinquent customer

 

Risk Category:        Good    Acceptable      Marginal    Poor

 

 

 

 

 


Business

 

 

 


Security:

 

 


Overall

 

Type of facility sought:i) Term Loan: Revolving L/C (at sight) limit of BDT 3,500.00 Lac.ii) Subsequent LTR Limit of BDT 1,600.00 Lac
Purpose: To Import raw materials, to retire import documents under L/C facility and payment of duty and at through pay orders in favor of customs authorities.Amount sought: 3,500.00 Lac
Loan category:

 

Voluntary givenby Bank

 

 

 

Part of governmentScheme

—————————-

 

(name of scheme)Directed by

Individual

———————————

(name of person directing this loan)

 

Level of approval required:EC of The Board: 15.30.2008
Date of Customer made request:25.01.2008
Originating:Credit OfficerRecommendationAccept         Decline

 

 

 


Date analysis completed: 07.03.2008
Recommending Officer( S):(Branch Management Committee)

 

 

Date of recommendation made:
Board Advisory CommitteeSub-Manager

 

 

Date decision made
ApprovingAuthority: EC/ BoardDecisionAccept         Decline

 

 

 


Date loan disbursed
Officer authorizing disbursementDate disbursement Authorized

Supplies risk

Cost item% of total costsWhat is the risk of disruption?Average                             AverageComments
Labor

 

 

 

Skilled and relatively cheep
Raw materials:CR Coil and Zinc 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mainly imported which is supported by locally produced raw material.
EquipmentsPower 

 

 

 

 

 

 

 

 

 

 

 

Dependent on PublicUtility as well as own utilities
Premises 

 

 

 

 

 

 

 

Own premises
Others 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

N umber of Day’s production lost in past 12 months due to strikes? N/A

 

Power Supply                           Independent power supply                            dependent on public utilities

 

 

 

 

 


Explain any significant risks of disruption to production.

 

The company has its own power supply facility with 1,100 KVA Waukesha Gas Generator. No significant risks of disruption to production regarding power supply.

 

What is the risk of failure due to disruption       Low            Average       High          Excessive

 

 

 

 

in the supply of inputs?

(Tick one box)

Sales Risk

Industry growth:Give industry size figures for the latest 3 years that are available
Year

2008

2007

2006

Estimated total industry turnover

271,400

371,400

563,400

                                                               Strong            Weak         No        Small      largeGrowth            growth     change   decline    decline

 

 

 

 

 

 

 


Over the next few years, what is the most likely trend in industry turnover?

 

Raw material (CR Coil) of this industry now produced in the country which will ultimately reduce the cost of procurement raw material. The consequence will result a high industry turnover over the next few year.

 

Competitive pressure: Obtain performance data from two major competitors for three (3) years.Major competitor 1: PHP Cold Rolled Mills Ltd. …………………………………. Market share ……….. 11% 

(Name)

Year

2008

2009

2010

TurnoverData not AvailableData not AvailableData not Available
CapitalData not AvailableData not AvailableData not Available
ProfitData not AvailableData not AvailableData not Available

 

 

 

                                                        Les                               about the                        faster

 

 

Fast                               same                              than our customer

 


This competitor is growing

 

What prevents customers from switching to this competitor?

Venus Group is fully a Bangladesh owned enterprise, superior quality, good management, competitive pricing & goodwill prevents their satisfied customers from switching to other competitors.

Major competitor 2: KIY Steel Mill Ltd. ………………………….. Market share ………9 ……….%(Name)

Year

2008

2009

2010

TurnoverData not AvailableData not AvailableData not Available
CapitalData not AvailableData not AvailableData not Available
ProfitData not AvailableData not AvailableData not Available

 

Les                               about the                        faster

 

 

Fast                               same                              than our customer

 


This competitor is growing

 

What prevents customers from switching to this competitor?

Venus Group is fully a Bangladesh owned enterprise, superior quality, good management, competitive pricing & goodwill prevents their satisfied customers from switching to other competitors.

Sales Risk (Continued)

Barriers to Entry:

 

 

 

Difficult             Average              Easy

 

How easy is it for new competitors to enter this industry?

What barriers prevent new competitors from entering this industry?

 

To set up a steel and engineering industry require huge amount of fund, skilled workforce and high category technological support.

 

 

 

Regulatory Changes:

Low                 Average              High

What are the risk changes in regulations will damage sales?

Explain your answer.

In General Govt. policy of our country is to encourage steel Industries to reduce pressure on importing steel goods.

Customer Concentration: List 5 largest customers of the Borrower.

Customer Names

% of total sales

Bangla & Co.

15%

Brother’s Co.

10%

Chittagong Steel

8%

Azimuddin & Sons

5%

Sayed Co.

5%

Regulatory Changes:

Low                 Average              High

 

 


What is risk that a single customer representing significant

Proportion of sales, switches to a competitor?

 

 

Explain your answer:

Company has established a long term relationship among customers with its low price, good quality and schedule time delivery.

What is the risk of failure due to disruption of sales?Low                 Average              High              Excessive 

(Tick one box)

Performance risk:

Performance Risk (Continued)

Resilience Risk:

Resilience risk (Continued)

Liquidity (Continued)What proportion of costs is fixed? 48.90%                Very               average                  witheasily                                            difficulty 

 

 

 

How easily will this company be able to reducecosts if sales fall?

 

Explain your answer:

 

Fixed cost is fixed for certain constrain of time. Because of the nature of Business, Major costs are related to the sales. If sales fall then obviously, major costs will fail.

How resilient is the company to liquidity                  Highly               average         not at allwhich may cause repayment failure?                         resilient                                    resilient

 

 

 

 


Connections:Do the owners or managers have any connections/ affiliations which may benefit or damage the company?Companies Share holders are very much influential in the society, which may benefit the company all the way.
How resilient is the company to the  liquidity            Highly               average         not at allwhich may cause repayment failure?                         resilient                                    resilient

 

 

 

 

Resilience risk:liquidity                                                                       Highly               average         not at allCopy your assessments of resilience to                        resilient                                    resilientbankruptcy, illiquidity and adverse effects of          (low risk)                                 (high risk)

 

 

 

 

political changes, from above

 

 

 

 

How resilience is the company to bankruptcy?How resilience is the company to illiquidity?

 

How resilience is the company to the adverseeffects of political change?

 

Now, use your assessment of resilience to resilience tobankruptcy, illiquidity and the adverse effects ofpolitical changes, to answer the following  questionLow               Average           High            Excessive

What is the risk of failure due to lack of resilience to unexpected external conditions?

(tick one box)

Management ability

 

QUESTIONNAIRE

The following questions were asked to the Officers of the Bank:

1.         What types of credit Premier Bank is offering?

2.         What is the credit policy of Premier Bank?

3.         What credit guidelines does Premier Bank fallow?

4.         What is the lending process followed by Premier Bank?

5.         How a credit application is processed in Premier Bank?

6.         How a credit proposal is evaluated?

7.         What are the standards to evaluate a credit proposal?

8.         Which documents are required for the purpose of issuing a credit?

9.         Describe the analysis of a credit.

10.       What are the safeguards for issuing a credit?

11.       What are the positive parts of the process?

12.       What are the weak parts of the process?

13.       What are your suggestions to improve the service of the bank?

The following questions were asked to the Credit Customers of the Bank:

1.         What credit products do you expect to receive from Premier Bank?

2.         How do you expect to receive your desired credit?

3.         What advantages have you enjoyed to receive credit from Premier Bank?

4.         What problems have you faced to receive credit from Premier Bank?

5.         How do you expect the credit appraisal method should be?

6.         What are your suggestions to receive the best service from Premier Bank?

 

 

More parts of this post-

Credit Management Of Premier Bank (Part-1)

Credit Management Of Premier Bank (Part-2)

Credit Management Of Premier Bank (Part-3)

Credit Management Of Premier Bank (Part-4)