Term Paper on Problems and Prospects of Retail Credit in Context of NCC Bank Limited
Subject: Business, Finance | Topics:

Executive Summary
In the new competitive business era, private banking sector is getting more competitive in bangladesh. For this ,they are becoming more aware about the utilization of their money. But the credit exposure of NCCBL has been focused on commercial lending that is domestic trade finance ,export loan, transport loan etc. which has been increased tolal classified loan. So, NCCBL should emphasized more on “Retail Credit” or “Consumer Credit”. Therefore, to find the problems and prospects of NCC Bank retail credit the credit portfolio, credit assessment , approval and disbursement procedure and Interest income from retail credit product are discusses which will be perform collecting both primary and secondary data through questionnaire over the hundred respondents using convenience sampling techniques. To complite the report data are analyze through table, time series analysis using MS Word , MS Excel.

NCCBL total loan amount are increases in the the five consecutive years. But retail credit loan are not significantly increase compare to the total loan amount. Besides this, last three years this growth are decreased. it can be commented that though retail credit growth of NCCBL decreased after year 2003 but interest income from retail credit product of NCCBL increased significantly.

Lower tenor of credit lessens the burden from clients and inspires them to take more credit which is currently offered by the bank. NCCBL has relatively lower interest rate in terms of all retail credit products which is an opportunity for it to attract new clients. Diversified product portfolio, lower rate of charges etc is the favorable features of NCCB for clients. If NCC Bank follows the above recommendations to utilize this prospect and to cope up its problem, NCC Bank will be able to continue the growth in retail credit sector.

1.0 Introduction:

Retail lending has been a spectacular innovation in the private commercial banking sector in recent years. The growth of retail lending, especially, in a developing country’s economy, is attributable to the rapid advances in information technology, the evolving macroeconomic environment, financial market reform, and several micro-level demand and supply side factors.
In today’s Bangladeshi banks, especially, the private commercial banks consistently point to the stability of revenue and profit as the most important feature of retail lending and a key motivation for the recent interest. In particular, retail stability is seen as valuable for commercial banks seeking to offset the volatility of riskier business lines, such as trading and other capital-market activities. While retail lending offers phenomenal opportunities for growth, the challenges are equally daunting. How far the NCCBL retail banking will be able to exist in retail banking industry in future will depend upon the capacity building of the banks to meet the challenges and make use of the opportunities profitably.

1.1 Problem and Purpose of the research:

This study aims to investigate the feasibility of expanding the retail credit operation in NCCBL. More specifically, this study wants to explore the problems and prospects of retail credit in context of NCCBL. Moreover, this study wants to analyze

• The credit portfolio of NCCBL .
• Credit assessment , approval and disbursement procedure.
• Interest income from retail credit product

1.2 Scope of the problem:

Credit risk can be well diversified through retail credit as loan amounts are relatively small so a comparison has meed between total credit to retail credit and interest growth of the retail credit of this bank. classified loan position of this bank has also shown in this report.
1.3 Limitations:

Although it has been tried on the level best to make this report based on facts and complete information available, there are some limitations that are inevitable. They are following:

1. There was a time limitation as one and a half month is not enough to study on retail credit in details.
2. Because of being private limited companies NCCBL keep some information restricted like the amount of classified loan in retail credit. For this reason, classified loan status of retail credit has not been able to compare with total classified loan of these banks.
3. Interview should be conducted with the help of experience moderator but it was very cost sensitive. So, the interview was taken by myself and fellow which might crept few errors on the research.
4. Sample size was too small to represent the proposed scenario.
5. The knowledge constraint of the researcher was another limitation for the study.

1.4 Background of the study:
Nowadays almost all over the world, retail-banking is a very popular concept which has added a new arena of the banking sector. The primary activities of any bank is to collect deposit and invest in different areas to earn profit. Beside this, the asset value maximization of the shareholders and maintaining strong customer relationship are another two important duties for any bank. To maintain these, National Credit & Commerce Bank Limited (NCCBL) has invested a vast amount of their deposit in different sector such as Agriculture, industry, construction, transport & communication, Storage and others. From the very beginning, the credit exposure of NCCBL has been focused on commercial lending that is domestic trade finance, export loan, transport loan etc. which has been increased total classified loan of NCCBL in previous years.One of the prudent conditions of ensuring profit is to minimize risk. So,the defaults culture from the corporate clients have made the bank management to rethink about its existing credit portfolio which could emphasize bank on retail credit.
1.5 Sources and Methods of collecting information:

Data have been collected from two sources. These are as under:
• Primary Source
• Secondary Source
For primary data sources, self-developed questionnaire has been used which is given to the appendix. For secondary data sources, annual reports of NCCBL for 2003, 2004, 2005, 2006 and 2007 are used. The web site of these banks and retail credit brochures are also used.
Number of hundred respondents are considered as sample which are taken by using nonprobability convenience sampling techniques. To collect primary data structured questionnaire are prepared and distributed operating by three interviewers. But to prepare questionnaire basic concept about the retail credit of NCCBL are gether by telephone, mail etc. Five point likert scales is applied to evaluated the degree of agreement or disagreement with each of a series of statements of the questionnaire.
1.6 Acronyms:
Cr. = Crore
RHO=Retail Credit Head Office
NCCBL=National Credit and Commerce Bank Limited
DSA=Direct Sales Agent

1.7 Report preview:

In the following report, First research approach & research design are maintion to give the knowledge about the report prepared procedure. Second identify the banks clients and type of the retail credit product offered. Then different product features are presented to gether knowledge about retail credit of NCCBL. Third Credit assessment, approval and disbursement process & promotional activities of the bank are discribed. Four tolal loan to retail credit amount and its growth, interest income growth of retail credit and total classified loan are compared. Finally to find the problems and prospects from of the above data are analysed and give some recommendations to achieve the prospects.

2.0 Body of the Report:
Today’s banking industry is experiencing renewed interest in retail credit as one of the strategic key tools of risk diversification. Retail credit lending is one kind of services that banks provide to individuals with a cluster of products through branches, internet and other channels.

2.1 Research Process:

To explore the problems and prospects of retail credit of NCCBL first an was developed then research design was formulated including sample size & techniques, questionnaire design, selecting measurement and scaling procedures and finally to reach the solution collected data are analyzed.

2.1.a Research Approach

Approach development process followed analytical model like (varbal & graphical ), using Questionnaire , analysis of secondary data of NCCBL to identify the problem and prospects of retail credit disbursement of the bank. Question asked from the employee of NCCBL.

2.1.b Research Design

To explore the prospect and problems of retail credit of NCCBL all data are collected both primary and secondary sources. Annual report of NCCBL and brochures are collected from the employee of NCCBL and Based on the basis concept of retail credit of NCCBL that are collected through telephone, mail, personal conversation, questionnaire are prepared.As this is not a establish concept in this bank so that an exploratory research will be more appropriate for that.

2.1.c Sample Design

To save time and cost, number of hundred respondents are considered as sample which are taken by using nonprobability convenience sampling techniques to prepared the report.The interview for this study will be limited to Dhaka city only ,the employee in Gulshan, Uttara, Motijheel and Mirpur branch of NCCBL. From each of the branch, about 25 employee has been conveniently selected and thus the sample size is 100.

2.1.d Questionnaire Design
To collect primary data, structured questionnaire are prepared and distributed through three interviewers. 10 Multipal choice question each has five alternative answar are asked from the different brunches of 100 employees of NCCBL. 10 questions are made focus on the report objectives. So, to achieve the objectives, this study proposes to examine the following research questions:

Research question

R.Q.1 Is loan disbursement policy of your bank well diversified
R.Q.2 Are retail loan disbursement policy of your bank known to the customer
R.Q.3 Has income from retail loan been create some hope for the bank
R.Q.4 Does your bank provide significant amount of retail loan

2.1.e Measurement and scaling procedures

Five point likert scales is applied to evaluated the degree of agreement or disagreement with each of a series of statements.

(All are Five Point scales ranging from 1 (Strongly Disagree) to 5 (Strongly Agree).

12345
     
StronglyDisagreeNeither AgreeAgreeStrongly Agree
Disagree nor Disagree  
     

Most of the respondent score are above 90 so its shows favourable option to the given point of view.

2.1.f Data Analysis:

Based on secondary data, various analyses have been conducted in this paper. The data has been presented in different tables and the explanation of those tables has been provided. Again based on the secondary data, trend
analysis of different graphs has been provided to project the future. In addition, the whole analysis has been done to show the prospect of retail credit of NCCBL.

2.2.0 Retail Credit Practices in National Credit and Commerce Bank Limited (NCCBL):

National Credit and Commerce Bank (NCCBL) is another second generation private bank established in the year 1993.It started financing retail credit formally from the year 2003 with a very limited product portfolio. Financing individuals of mainly middle-class salaried employees to enhance their lifestyle is the dictum of retail credit of NCCBL.

2.2.1 Target Clients:
Employees of govt. and Semi- Govt. organizations, autonomous bodies, private companies and other financial institutions, school, college, university teachers, owners of house/flat, self-employed professionals are the target clients of NCCBL.

Types of Retail Credit Products Offered by NCCBL
Table 1: Retail Credit Products of NCCBL

SL Types of Retail Products
1House Renovation Loan
2Personal Loan Scheme
3Festival Loan
4Consumer Finance Scheme
5Travel Loan

Sources of Data: Annual Reports of NCCBL

According to the table 1, it is observe that NCCBL retail credit sector are not much segmented only five retail product are available for the client.

Personal Loan or Any Purpose Loan

For the purpose of marriage, maternity, treatment and sometimes for educational purposes, this loan can be given by NCCBL.

Table 2: Features of Any Purpose Retail Loan of NCCBL
Features Description
Loan amount(min) Tk. 20,000
Loan amount(max) Tk. 1,00,000
Rate of Interest 17.00%
Tenor 6 months -1 year

Features Description
Loan amount(min)Tk. 20,000
Loan amount(max)Tk. 1,00,000
Rate of Interest17.00%
Tenor6 months -1 year
Criteria(Age limit)20-50 at the time of maturity
Repayment MethodMonthly equal installment
Days needed for disbursement10-12 days
Disbursement MoodClients’ savings account, sometimes cash for salaried person
Disbursement SystemDecentralized
Other Charges(Processing Fee)1% on loan amount
Risk Fund1% on loan amount
Penalty Charge(Amount on installment overdue)1% or Tk 100 whichever is lower
Stamp ChargeTk. 400
Early Settlement with cost on total outstanding amountAt any time at free of cost
No. of GuarantorsOne person
Mostly preferred client Salaried individuals

House Renovation Loan

For the purpose of house renovation, NCCBL offers this type of loan.

Table 3: Features of House Renovation Loan

FeaturesDescription
Loan Amount(Min)Tk. 10,000
Loan amount(Max)Tk 5,00,000
Rate of Interest17%
Tenor1-5years (max) depends on loan amount
Repayment methodMonthly equal installment
Disbursement modeCredit amount is disbursed to client’s saving account or some times cash disbursement happens
Other charges1% on the loan amount
Risk Fund1% of the loan amount
Penalty Charge1% of installment overdue or Tk. 100 whichever is lower.
Down PaymentN/A
Stamp ChargeTk.400
Early SettlementPossible but no fee is required
Criteria for application(Age limit)30-50 years (at the time of application).
Minimum Monthly IncomeTk 15,000
GuarantorsOne person

2.2.2 Credit assessment, approval and disbursement process:

Similar to other private commercial banks offering retail credit, NCCBL also follows the “Prudential Regulation of Consumer Financing by Bangladesh Bank, 2004”. The retail credit disbursement process of NCCBL is decentralized that mean credit is disbursed from branch level. The total days required from receiving client’s application to loan disbursement is 10- 12 working days.
For any loan application, Tk. 500 is required as application fee.
To apply for any of the above retail loan of NCCBL, a client needs his/her photographs, copy of passport/ National ID card, last one year’s bank statement, copy of TIN, trade license(for businessmen), personal net worth statement etc.
Besides these, following legal documents are needed to get any retail loan from NCCBL.

• Duly filled in loan application form with terms and condition signed
• Demand Promissory Note
• Letter of Guarantee
• Letter of Set-Off etc.

Promotional activities of NCCBL

Table 4: Promotional activities of NCCBL

Promotional activities of NCCBL 
Direct Sales Agent 
Display media advertisement 
Print media advertisement

Billboard 
Fair arrangement 

Sources of Data: Annual Reports of NCCBL

According to the above table 4, NCCBL conducts its promotional activities for retail credit through print media (paper advertisement). So, NCCBL has only one wings in promotional activities.

Comparison between total credit and retail credit

Table 5: Percentage of retail credit growth to total growth

Year

Total Loan Amount (cr)

Retail Loan Amount (cr)

% of Total Loan

2003

1187.17

9.22

0.78

2004

1424.66

22.44

1.58

2005

1912.41

27.24

1.42

2006

2303.88

29.43

1.28

2007

3061.66

31.72

1.04

Sources of Data: Annual Reports of NCCBL

According to the above table 5, NCCBL total loan amount are increases in the the five consecutive years. But retail credit loan are not the significant compare to the total loan amount. Besides this, last three years this growth are decreased.

Growth of retail credit disbursement over the previous years

Table 6: Percentage of growth of retail credit

Year

Amount (cr)

% of growth base on previous year

2003

9.22

2004

22.44

143%

2005

27.24

21%

2006

29.43

8%

2007

31.72

8%

Sources of Data: Annual Reports of NCCBL

According to the above table 6, though in 2003 retail credit growth of NCCBL increased significantly but after that it was decreases.

Percentage of growth of retail credit

Interest income generated by retail credit

In the year2003, 2004, 2005, 2006and 2007 the amounts of interest income generated by different products of retail credit of NCCB are given in the following table 7.

Table 7: Comparison of retail credit interest income growth among the five years

YearAmount (cr)

% of growth base on  previous year

20030.83 
20041.5688%
20052.0934%
20062.76232%
20072.6198%

Sources of Data: Annual Reports of NCCBL

According to table 7, it can be commented that interest income from retail credit product of NCCBL increased significantly through in year 2007 interest income from retail credit growth decreased.

Interest income generated by retail credit

Total classified loan amount over the years

Table 8: Tolal classified loan in the five consecutive years

Year

Classified Loan Amount (cr)

2003

1253.35

2004

1118.4

2005

981.54

2006

1212.26

2007

1353.31

Sources of Data: Annual Reports of NCCBL

According to table 8, total classified loan of NCCBL increases day to day. Most of the classified loan are occured through corporate clients.

Total classified loan amount over the years

3.0 Ending Summery:
Identifying some problems and prospects the report can be summerized in the following ways.

3.1 Problems of NCC Bank Limited in Retail Credit Operation:

From the above description and comparative analysis with its previous years operation following problems are found in NCC Bank Retail Credit operation.

• Less diversified target client segments
NCCBL is allowing retail credit disbursement to a few individuals. Salaried individuals are getting preference in terms of retail credit.

• Lengthy Assessment Procedure

For the compliance of prudential guidelines of Bangladesh Bank 2004, NCCBL asks for CIB report for an amount of TK. 50,000 and more. As it takes six to seven days for CIB to be returned back to the branches, almost 20 working days or more are needed by NCCBL to disburse retail credit.

• Decentralized Disbursement System

The retail credit disbursement process of NCC Bank is decentralized. As the credits sanctioned are disbursed from branch level most of the employees of credit department in branches are engaged with disbursement related activities in most of the times.

• Inadequate Promotional Activities

NCCBL has depends only paper advertisement for promotional activities in retail credit.

• Retail credit loan are not increased
Retail credit loan are not increased significantly compare to the total loan amount.

3.2 Prospects for NCC Bank in Retail Credit Operation:

From the above study and competitive analysis on NCCB, the prospects that are found as under:
.
• Lower interest rate and related cost

NCCBL has relatively lowest interest rate in terms of all retail credit products. Again, in terms of processing fee, stamp charge and early settlement NCCBL charges the lower amount.

• Lower tenor of credit

Lower tenor of credit lessens the burden from clients and inspires them to take more credit which is currently offered by the bank.

• Interest income from retail credit increased

Interest income from retail credit product of NCCBL increased significantly from the previous year.

4.0 Conclusions:
Though the numbers of fixed income earning people are increasing day by day, there is an existing large segment of business people of different types in Bangladesh who needs retail loan frequently rather than salaried individuals This narrow focus on target clients is reducing the market share of NCCBL in retail lending. NCCB Lshould has targeted greater segments and trying to come upfront with other attractive features. For longer assessment process, clients do not get loan within a short time when they need which resulted less number of clients and has also affected the interest income.
.The retail credit disbursement process of NCC Bank is decentralized which is also a barrier for it to take steps for more expansion in retail credit. As the credits sanctioned are disbursed from branch level most of the employees of credit department in branches are engaged with disbursement related activities in most of the times which hampers to attend more clients. So, bank should think about it. In the present time perspective, multimedia activities have expanded in such a way that a larger number of people watch television and listen in radios rather than reading newspaper. People are also attracted by colorful billboards in the road. NCCBL has taken no steps for promotional activities up to now in display media. Promotional activities should increased. NCCBL has relatively lower interest rate in terms of all retail credit products which is an opportunity for it to attract new clients.

NCCBL total loan amount are increases in the five consecutive years. But retail credit loan are not significant compare to the total loan amount. Besides this, last three years this growth are decreased. it can be commented that retail credit growth of NCCBL decreased significantly after year 2003 but interest income from retail credit product of NCCBL increased significantly.

5.0 Recommendation:

With the consideration of the above whole study especially the problems and prospects, I suggest that NCCBL management to think about the following points:

• NCCBL has depends only paper advertisement for promotional activities in retail credit. But it should emphasize on multimedia activities like television, radio, recruiting sales agents and colorful billboards in the road sothat a larger number of people know their retail product. Sometime Bank can arrange fair to promote their product.

• All classes of people are not the current target clients of NCCBL, only the upper class, upper middle class of people who are able to provide relatively high interest are the current target clients of NCCBL. If all classes of people were in target segments of NCCBL could add more wings in market share and interest income. NCCBL should rethink about its target client segment and if possible, should include middle class and lower middle class that can easily fit with that products. NCCBL should consider especially of businesspersons.

• NCCBL has decentralized retail credit disbursement system which is requiring more time for even any small amount of loan. In this case, NCCBL should develop a central database system which will enable the RHO of NCCBL to disburse any amount of retail credit directly from Head Office. It will not only reduce the loan disbursement time interval but also helps branches of NCCBL to be more retail client oriented. This central database system will also enable RHO to identify any retail client of any branch at any time, which will ensure highest level of monitoring and quality control.

From the above analysis and comparison, it has been proved that, NCC Bank though has some problems, yet it has lots of opportunities to carry on its retail lending business. Diversified product portfolio, lower rate of charges etc is the favorable features of NCCB for clients. If, NCC Bank follows the above recommendations, to cope up its problem, NCC Bank will be able to continue the growth in this traded path.

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