Analyze Credit Appraisal Procedures of EXIM Bank
Overview of EXIM Bank Limited –
Export Import Bank Of Bangladesh (EXIM BANK), a scheduled commercial bank in the private sector, stared its banking operation on the 3rd of Augest, 1999.from lsl July 2004 the bank converted its banking operation into Islamic banking based on Islamic shariah from Traditional banking operation. During the same year, the bank issued 3,138,750 ordinary shares through IPO placement. Within a very short period o f the time the bank has earned good reputation among the people in this country. This is a clearly evidence by the tremendous growth of its business and operating results. Of its very beginning EXIM bank LTD was known as BEXIM bank limited. But some legal constraints the bank renamed as EXIM bank, which means Export Import Bank Of Bangladesh Limited.
EXIM Bank Limited was established in 1999 under the leadership of Late Mr. Shahjahan Kabir, founder chairman who had a long dream of floating a commercial bank which would contribute to the socio-economic development of our country. He had a long experience as a good banker. A group of highly qualified and successful entrepreneurs joined their hands with the founder chairman to materialize his dream. Indeed, all of them proved themselves in their respective business as most successful star with their endeavor, intelligence, hard working and talent entrepreneurship. Among them, Mr. Nazrul Islam Mazumder became the honorable chairman after the demise of the honorable founder Chairman.
This bank starts functioning from 3rd August, 1999 with Mr. Alamgir Kabir, FCA as the advisor and Mr. Mohammad Lakiotullah as the Managing Director. Both of them have long experience in the financial sector of our country. By their pragmatic decision and management directives in the operational activities, this bank has earned a secured and distinctive position in the banking industry in terms o f performance, growth, and excellent management. The authorized capital and paid up capital of the bank are Tk. 1000.00 million & Tk. 313.87 million respectively. The bank has migrated all of its conventional banking operation into Shariah based Islami banking since July 2004.
From 1st July o f 2004 the bank become shariah based Islamic bank and from then it is rendering banking services according to Islamic banking principles. For smooth operation the board of directors established a shariah Board, which decides on the banking principles according to which the bank will operate its business.
Corporate Vision & Mission
Their vision and mission are stated in the following bullets:
- To be the finest bank in the banking arena of Bangladesh under the Shariah guidelines.
- To maintain Corporate and business ethics.
- To become a trusted repository of customers’ money and their financial advisor.
- To make our stock superior and rewarding to the customers/share holders.
- To display team spirit and professionalism.
- To have a Sound Capital Base.
- To provide high quality financial services in export and import trade.
- To provide excellent quality Customer service.
- To receive, borrow or raise money through deposits, loan or otherwise and to give guarantees and indemnities in respect of al debts and contracts.
- To establish welfare oriented banking systems.
- To play a vital role in human development and employment generation to invest money in such manner as may vary from time to time.
- To carry on business of buying and selling currency, gold and other valuable assets.
- To extend counseling and advisory services to the borrowers/ entrepreneurs etc. in utilizing credit facilities of the bank.
- To earn a normal profit for meeting the operational expenses, building of reserve and expansion of activities to cover wider geographical area.
Management of EXIM Bank
Management is the process of planning, organizing, leading and controlling the work of organization members and of using all available organizational resources to reach stated organizational goals. The strength of a bank depends of the strength of its management team. EXIM Bank is proud to have a team of highly motivated, well-educated and experienced executives who have been contributing substantially to the continued progress of the bank.
Managerial effectiveness has been measured in EXIM Bank in terms of come selected criteria such deposit mobilization, loans and advances made, loan recovery, profitability and productivity. It has been found that EXIM bank is effective in respect of branch expansion, loan disbursement, loan recovery etc.
With a short spam of time, EXIM Bank has become one o f the leading and most successful bank not only among the third generation banks but also it superseded many other banks and financial institutions belonging to second and even first generation banks for the point of view of its excellent business performance, extraordinary corporate culture and strong team work under the dynamic leadership of its management.
Management is trying to support and assist well-motivated and experienced affairs to run the day to day affairs of the bank smoothly. For maintains quality management, it is required to train-up more official at head office and branch level in respect of sanctioning, disbursement and recovery of credit, project appraisals, customer services etc.
The Board of directors has formed a Sharia Supervisory Board for the Bank. Their duty is to monitor all the Bank’s transactional procedures, & assuring it’s Sharia compliancy.
This Board consists of the following members headed by its chairmen.The tasks of the Sharia supervisor in summary is replying to queries of the Bank’s administration, staff members, shareholders, depositors, & customers, follow up with the Sharia auditors and provide them with guidance, submitting reports & remarks to the Fatwa & Sharia Supervision Board and the administration, participating in the Bank’s training programs, participating in the supervision over the Allqtisad Allslami magazine, & handling the duty of being the General Secretary of the Board.
Banking with shariah principles
Export Import Bank o f Bangladesh Limited is the 1st bank in Bangladesh who has converted all of its operations of conventional banking into shariah-based banking since July/2004. We offer banking services for Muslims and non-Muslims alike allowing our customers choice and flexibility in their savings and investments. Our products are approved by our Shariah Board comprising of veteran Muslim scholars of our country who are expert in all matters o f Islamic finance. The process by which Noriba’s investments are designed and executed allows the Bank to offer a combination of Sharia compliance and capital markets expertise that is unique throughout the world. Noriba is committed to the strict adherence to the requirements of the Sharia as a result of the Bank’s sole focus on Sharia-compliant investments and the full supervision of its financial products & transactions by the Noriba Sharia Board.Noriba experts specifically design each of the Bank’s investment vehicles with the approval of the Noriba Sharia Board. Once the given product or transaction has been arranged, the Noriba Sharia Board carefully screens it for compliance before giving final approval for its implementation.
This control mechanism guarantees that all aspects of Noriba’s final products and banking transactions are in adherence with the guidelines of the Sharia.
Shariah Based Islami Banking
By the grace of Almighty Allah, the Bank has started its operation as full-fledged Islami Bank based on Shariah through conversion from conventional interest based banking system with effect from 1st July 2004 with the approval of Bangladesh Bank. It is our great pleasure that everybody gladly accepted the conversion with appreciation. It is a breakthrough in the history of Islami Banking, because all other Islamic Banks of Bangladesh are found Shariah based since inception i.e. at the time of their incorporation.
We have also experienced some traditional Banks having a few branches based on Shariah. But total conversion of a conventional Bank into a full fledged Islami Bank is, perhaps, first time introduced by us in the World.
It is noted here that a learned Shariah Council, consisting of 12 members who are prominent ulema, reputed bankers and eminent economists of the country, has been formed to guide, monitor and supervise the banking activities complying Shariah principle since inception of its islami banking branches and thereafter transformation of its operation from traditional to fully Shariah based Islamic banking system. Professor Moulana Mohammad Salah Uddin is the Chairman of the council. Total 08(Eight) meetings of the council were held during the period.
Human resource management of EXIM Bank
Hunan resource is the fundamental asset of the organization. Human resource approach is concerned with the growth and development of people toward higher level of competency, creativity and fulfillment. Therefore, human resources development has been given its due importance in an environment that values performance, teamwork, fairness and integrity, it has both qualitative and quantitative dimension. EXIM Bank recognizes that intellectual capital is the most important asset for a financial institution.
Without proper and efficient human resources, no organization can run its operations. The bank believes that the professional competence bank personnel and its commitment for accomplishing assigned responsibilities are a first line of defense to prevent irregularities.
The objectives of Human Resource management of EXIM Bank are as follows:
- Conducting job analysis
- Planning employee needs and recruiting job candidates
- Selecting of candidates
- Orienting and training new employees
- Managing wages and salaries (Compensating Employees) and benefits
- Appraising performance
- Communicating (interview, counseling, disciplining)
- Training and developing managers
- Building employee commitment
Corporate Social Responsibility
The purpose of our banking business is, obviously, to earn profit, but the promoters and the equity holders are aware of their commitment to the society to which they belong. A chunk of the profit is kept aside and/or spent for socio-economic development through trustee and in patronization of art, culture and sports of the country. We want to make a substantive contribution to the society where we operate, to the extent of our separable resources.
It is a great pleasure that by the grace of Almighty Allah, we have migrated at a time all the branches from its conventional banking operation into Shariah based Islami banking operation without any trouble. Lot of uncertainties and adversities were there into this migration process. The officers and executives of our bank motivated the valued customers by counseling and persuasion in light with the spirit of Islam especially for the non-Muslim customers. Our IT division has done the excellent job of converting and fitting the conventional business processes into the processes based on Shariah. It has been made possible by following a systematic procedure of migration under the leadership of honorable Managing Director.
Financial overview of the Bank
The performance of the bank, during the period under review, is more significant simultaneously in development and achievements of continuous growth rate in all the areas of banking operations. The Bank has successfully been marching ahead with its prime business objective by earning a after tax profit of Tk.930,843,607 registering an annual growth of 43.14% than that of the previous year which was Tk.650,292,342. It has successfully mobilized Tk.41,565,68,592 deposits from depositors and has arranged disbursement of Tk.40,195,239,222 as investment up to 31st December 2007 through its 35 Branches. The total Income on investment (Share & Bonds) of the Bank were Tk.205,594,883. The return on assets (ROA) after tax was 2.00% well above the industry average. The earnings per share were Tk.43.45 as on 31st December 2007 & the net income per share was Tk.43.45 which was 14.49% more then the previous year. The achievements were possible because of the service excellence of management team with support from a very resourceful and skilled workforce rendering efficient and specialized services.
The Bank started its voyage with an authorized Capital of Tk. 1, 000 million while it’s initial Paid up Capital was Tk.225.00 million subscribed by the sponsors in the year 1999. The Capital and Reserve of the Bank as on 31st December 2007 including paid up capital of Tk.4,569,562,645. The Bank also made provision on classified investment which is amounted to Tk.635,106,791.
Deposit is one of the principal sources of fund for investment of commercial banks and investment of deposit is the main stream of revenue in banking business. The total deposit of the Bank stood at Tk.4154.66 crore as on December 2007 against Tk.3503.20 crore of the previous year which is an increase of 18.60%. This growth rate may be termed as a remarkable achievement for the Bank. The present strategy is to increase the deposit base through maintaining competitive rates of Profit and having low cost of funds.
Asset and Liability Management
A Banks Assets are mainly developed with and backed by its liabilities. Thus successful banking requires efficient and effective management of its assets and liabilities. Export Import Bank of Bangladesh Limited has a well organized Asset Liability Management Desk under direct supervision of a well formed and well groomed Asset Liability Committee (ALCO). The ALCO of the Bank monitors Balance Sheet risk and liquidity risks of the Bank.
The term Balance Sheet risk refers to potential change in earnings due to change in rate of profit, foreign exchange rates which are not of trading nature. On the other hand, liquidity risk can be defined as the risk or chance of failure to meet up any withdrawal/disbursement request by a counter party/customer. The ALCO of EXIM Bank reviews liquidity requirement of the Bank, the maturity of assets and liabilities, deposit and lending pricing strategy and the liquidity contingency plan. The primary objective of the ALCO is to monitor and avert significant volatility in Net Profit Income (NPI), investment value and exchange earnings. Besides this, the ALCO of EXIM Bank deals with various issues that may put an impact on the profitability or management procedure of the Bank. To manage the contingent points of time and operation, the ALCO of the Bank calls for special meetings, analyzes the situation and decides what should be done to serve the Banks interest most.
Internal Control & Compliance
Internal Control and Compliance is the key of a good management and a strong core of an organization. It ensures safe and smooth operations within the organization. All the rules and regulation practiced in the banking industry are meant to safety and efficiency in banking operations of all kind. Internal Control and Compliance ensures that all the working units of the Bank abide by those rules and regulations without any fail.
Sometimes Operational loss arises from errors and fraud due to lack of Internal Control and Compliance. Internal Control and Compliance Division undertakes periodical and special audit of the branches and departments at Head Office for review of the operation and compliance of the statutory requirement. The Audit Committee of the Board of Directors plays an effective role in providing a bridge between the Board and Management. The Committee reviews the Financial Reporting process, the System of Internal Control, the Audit process and the Bank’s process for compliance with laws, regulations and code of conduct.
Export Import Bank of Bangladesh Limited has a very strong and well organized Internal Control and Compliance Division to look after the control and compliance level of rules and regulations within the Bank. Bangladesh Bank guidelines are strictly followed in case of Internal Control and Compliance of the Bank. There is a well-organized guideline prepared by the Internal Control and Compliance Division (ICCD) of the Bank in line with the guidelines of Bangladesh Bank. The audit and inspection department under ICCD is conducting audit and inspection on regular basis and submits reports to the Management and the Board Audit Committee with the follow-up of review on compliance and monitoring thereof satisfactorily. Besides, a number of circulars regarding Internal Control and Compliance are issued each year so that the employees of the Bank may learn about the rules and regulation of the Bank as well as the Regulatory Authorities and the amendments and changes therein.
Money laundering means Illegal transactions made in order to project the proceeds of crime as legally obtained. Persons, who earn illegal money, try to hide their source of earning by conducting a number of transactions. Such transactions separate the source of earning from its proceeds. It becomes difficult for the law enforcing agencies to trace the source of earning.
Not only EXIM Bank, all of the company which has banking business must follow the rule. After the act the bank imposed some rule of their banking sector. Such as:
- For money transfer form one bank to another bank a customer must need to be a bank account on the particular bank.
- In case of foreign currency, the customer must need a bank account to receive the currency.
- In case of sent money to outside of the country, without an account the customer cannot be able to sent money.
All of the banks strictly followed the money laundering act. If any of them failed to follow the rules there is a punishment for the bank by the government.
Bank’s plays the most important role in the economy. For growing and developing countries, private bank already prove them and play a vital role in the national development. The commercial banks not only contribute with the economy growth of a country but also provide some services according to their customers demand. Now Bank’s offer the widest range of financial services and perform a lot of financial functions. Credit appraisal is the major part of a bank. It is the main investment segment of any Bank and its required different type of policy, phase and activities for providing the credit facility to the customers.
Objective of the report
- To explain the credit appraisal system o f EXIM bank.
- To propose some ways to improve the credit appraisal system.
Methodology of The report
This report requires a systematic process from selection of the topic and to final report preparation. To perform the study data sources are to be identified and collected, and that are to be classified, analyzed, interpreted and presented in a systematic manner and also the key point are to be find out. This overall process of methodology is given in the below.
Selection of the topic
Before selecting the topic it was discussed with my supervisor, bank officers. For that a well organized internship report can be prepared.
Identifying data sources
Primary and secondary both essential data sources are identified which will be needed to complete the report. To complete this report interviewing the officers, staffs, and the client will be also necessary.
- Primary data collected from face to face conversation with the officers.
- Practical desk work.
- Relevant file study which provided by the bank officer.
- Exposure on different desk of the bank.
- Annual Reports o f EXIM bank.
- Web site of the bank.
Classification, analysis, interpretation and presentation of data some arithmetic and graphical tools are used in this report for analyzing the collected data and to classifying those to interpret them,
Findings of the study
The collected data were analyzed very well and were pointed out and shown as findings. Few recommendations are also made for improvement of the current situation.
Credit Appraisal Process of EXIM Bank
In a financial system of any economy, we know that financial surplus mobilize from surplus economic unit to the deficit economic unit. In the banking word the bank play an intermediary role between deficit economic and surplus economic unit. Bank mobilizes the fund from surplus economic unit as deposit and makes the fund available to the deficit unit. And after that process credit is create.
The word credit is derived from the Latin word “credo” which means, “I believe” and is usually defined as the ability to buy with a promise to pay. It consists o f actual transfer and delivery of goods and services in exchange for a promise to pay in future. It is simply the opposite of debt. Diversification of banking service increasing the use of credit in the expanded business operation. It is a fundamental instruction of banking that advances are made for the customers and the customer are promises to pay rather than the security held by the banker.
According to Islamic Shariah Principle any interest or extra money against the money which was lent, is called “Riba” and for that it is prohibited. Therefore credit should not allow any interest. For that the financial institute, Shariah Council has made some rules for validity o f business transactions, which is safe and easy to maintain the Islamic rules and regulation.
According to the Islamic Shariah one can not lend money to other expecting some more in return. But one can invest money to other business under various modes and that will be discovered clearly before starting a business. In that point “Credit” is named as “Investment” and “Interest” is accounted as “Profit”. In conventional system interest may be defined as the amount of money generated by a particular amount of money at a particular rate after a particular period. But according to the Islamic Shariah principle lending is related with buying and selling of items which is associated with risk. The extra amount of money that comes from the trade is profit and it is acceptable for investment.
Principle of Investment
According to the Qureshi (1997) a prudent banker should always more concern to the following general principle.
- Background, Character and ability of the borrowers
- Purpose o f the facility,
- Term o f facility,
- Source o f repayment,
According to islami shariah we already know what is called investment and what the investment principles are. My main intern report is on Credit appraisal process o f EXIM bank. Before describe that system first I would like to explain in what sectors EXIM bank invest and what their products are.
Loan Facilities and Products of EXIM Bank
Lone facilities provided for business types
The bank shall provide suitable investment services and products for the following sectors. Sectors:
- Steel & Engineering
- Food & Allied.
- Textile & Garments
- Pharmaceuticals & Chemicals.
- Paper & Paper product.
- Service Industry.
- Housing & Real Estate.
- Bricks Fields.
- Edible Oil.
- Assembling Industry.
- Cottage Industry.
- Electronics & Electrical Commodities.
- Construction Company.
- Trading (Retail/W hole sale).
Lone facilities not provided for business types
The bank does not provided loan facilities to the following business
- Military equipment/weapon finance.
- Highly leverage transaction.
- Finance of speculative loan.
- Logging, Mineral extraction/mining or other activities that is ethically of environmental sensitive.
- Lending to companies listed on CIB black list or known defaulter.
- Share lending.
- Taking an equity stake in borrowers.
- Lending to holding companies.
- Bridge loans relying on equity/dept issuance as a source of repayment,
- Tannery finance.
- Who has no business with the bank
The Lending Procedure
The credit appraisal process starts with lending process which consists of various sequential activities. The stages of lending process are done both at the branches and at the Head Office level. The procedure starts when borrowers come to any branch and seeking for loan and continues until the clients adjust the total loan. Before sanctioning of the loan, the borrower’s application is appraised in various stages. To assess the credit appraisal system of EXIM Bank Ltd, the stages of lending procedures as shown in the above flow chart are described in sequential order:
Applications from the credit applicant
The procedure of credit appraisal starts when a client comes at any branch o f EXIM Bank for taking loan. EXIM Bank gives more attention on borrowers’ selection and starts at the very beginning of the procedure by primary interview of the client and the interview taken by the investment officers. If the investment officer satisfied with the client then the borrower can apply in the banks approved format asking for that loan facility. The invest officers interview the client very carefully to get as much information as possible and puts emphasis on the following aspects:
Past track record: It is considered by the following criteria:
- Bank Record: Transaction records of own bank and other bank provided by the client. It is very useful for quantitative judgment o f the borrower.
- Credit Report of the client: This is provided by Bangladesh Bank and has a good validity in measuring client.
- Market Information: The borrower’s reputation in the market is a better probe for the banker.
- Financial Statement: These statements not always considered primarily for selecting a customer. But if the clients bring with these statements those helps a lot to decide the business status of the client.
Obtaining CIB Report
EXIM bank considers CIB (Credit Information Bureau) report provided by the central bank as the top priority information about the borrower. Therefore the bank strictly follows the CIB report as per rules and regulation of BRPD (Banking Regulatory and Policy Directory) instruction. After receiving the loan application from the client, the bank sends a letter to the Head Office to collect the credit inquiry report of that particular client from Credit Information Bureau o f Bangladesh bank. This report is called CIB report.
The purpose of this report is to be informed whether or not the borrower has taken loans and advances from any other bank and also the status of those loans and advances.
Collection of Documents and business related information
If Bangladesh Bank sends positive CIB report on that particular borrower then the bank assumes that, this borrower to be a good one and then the bank starts analyze the documents such as:
- For the corporate client, financial document of the company for the last three to five years is needed. If the company is a new one projected financial data for the same duration is required.
- Personal net worth of the borrowers.
- In this stage the bank will ensure that the documents are properly filled in and properly signed. Investment in charge of the relevant branch is responsible for enquiring about the ins and outs of the customers business through discussing with him/them.
Bank asks over different types of documents from their client, sometimes it depends on the relationship with client to the bank. If the client have strong relationship with the bank for a long time and both parties trusted each other then bank go easy with them; don’t ask too much documents. If a new client come and wants, the bank invests to his/her business. Then bank ask him, different types of documents to understand his/her trust worthiness in the market and towards the business. And also to make sure that he won’t be a defaulter in future.
Five c’ s analysis
When a customer requests a loan, bank officers analyze all available information to determine whether the loan meets the bank’s risk-return objectives. Credit analysis is essentially default risk analysis in which a loan officer attempts to evaluate a borrower’s ability and willingness to repay.
Therefore, Bankers look into key risk factor which has been classified according to the five Cs o f credit:
Character refers to the borrower’s honesty and trustworthiness. A banker must asses the borrower’s reliability and intent to repay. If there are any serious doubts, the loan should be rejected.
Capital refers to the borrower’s wealth position measured by financial soundness and market standing. It helps reduce loses and possibility of bankruptcy.
Capacity involves both borrower’s legal standing and management’s expertise in maintaining operations so the firm or individual can repay its debt obligations. Under capacity an individual must be able to generate income to repay the cash.
A condition refers to the economic environment or industry specific supply, production and distribution factors influencing a firm’s operations. Repayment sources of cash often vary with the business cycle or consumer demand.
Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.
Bank officer of the investment department inspect the project for which the loan is applied. Here project survival, its distance from the bank originates the loan, monitoring the cost and possibilities etc. If the proposed amount exceeds Tk. 10.00 lac, a senior officer from Head Office performs an on site inspection of the project.
In other cases the officers from the branch go for inspection of the side. Sometimes the security documents are also evaluated and officers go for valuation of security like land, shops or market to know the real market value of the security.
Analysis of Collected Information
Any loan proposal needs to be evaluated on the basis of financial information provided by the loan applicant. Financial analysis, analyze the risks associated with a particular loan and to judge the financial soundness and worthiness of the borrower. Besides, Lending Risk Analysis is also undertaken by the bank to measure the borrower’s ability to pay considering various risks associated with the loan.
EXIM Bank Ltd uses a multiple methods or techniques to assess prospective borrower as well as the project. These techniques include analysis of CIB report, appraisal of the project possibility and credit risk grading.
These methods are
- Evaluation o f CIB report
- Analysis o f project feasibility
- Credit risk grading
Here bank follows above three techniques to asses the client. The first one is CIB report evaluation, which is provided from Bangladesh bank. If its have positive result then investment offices go for the next technique, that is analyze the project feasibility. Client submits a project proposal to the branch investment officer. The experienced officers weigh up the project very carefully and try to find out how much practical and profitable the project is. After their assessment if they satisfy with the project, then they go for next method and that is called credit risk rating.
Credit Risk Grading
Definition of credit risk grading (CRG)
- The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.
- A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure.
- Credit Risk Grading is the basic module for developing a Credit Risk Management system.
Functions of credit risk grading
Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.
Use of credit risk grading
- The credit risk grading matrix allows application o f uniform standard to credit to ensure a common standard approaches to assess the quality o f individual obligor. Credit portfolio of a unit, line of business, the branch or the bank as whole.
- As evident, the CRG output would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated; the other decision would be rated to pricing and specific feature of the credit facility. These would largely constitution obligor level analysis
- Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a bank. It is also relevant for portfolio level analysis.
EXIM Bank Ltd has Lawyer; they provide legal opinion on the collateral provided by the applicant, whether those are properly submitted and up-to-date.
Collateral is the lender’s secondary source of repayment or security in the case o f default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made. Characteristics of Good Collateral are Standardization, Durability, Identification Marketability and Stability of value. So it is bank’s lawyer duty to find out the collateral’s legality.
Sending Investment Proposal
The branch starts processing the loan at this stage. Based on the analysis done by the branch and the branch prepare a loan proposal. Then Gulshan branch investment department send it to Head office.
They highlight on the information o f the proposal such as: Name o f the borrowers, Nature o f investment, purpose of Investment, Extent of Investment, Collateral, Margin, Rate of profit, Repayment of schedule, Validity etc.
Analysis the Information by Investment Department of Head Office
The branch sends all the documents and available information to the Head office investment department. Now in this stage, Head office investment department officers are analysis all the information that provided by the branch investment department.
Preparing Memo for the EC Meeting
Investment division prepares a memo which is called EC memo by analyzing the proposal send by the branch. The memo summarizes the proposal and sends by the branch and some important information regarding the client for example if the client has any previous loan, the status o f the previous loan and current performance etc. This memo along with proposal is sent to the EC (Executive Committee) meeting.
EC meeting is held twice in a week and is generally control by the honorable Chairman of the bank. The EC takes decision whether to sanction the loan or not.
After the loan proposal is completely prepared by the branch officers, it is sent to the head office for approval to the approval authority. To ensure proper and orderly conduct of the business of the bank, the Board of director empowers the managing director and other executives of the bank to lend up to certain amount under certain terms and conditions at their discretion.
The lending authority is broadly categorized as follow:
- Board/Executive Committee
- Managing Directors
- Head of Loan Division
If Head Office Executive Committee or the Investment Committee approves the investment line, an approval letter will sent to the branch. The branch then issues a sanction letter to the borrower with a duplicate copy. The duplicate copy properly signed by the borrower and returned to the branch of the bank. This duplicate copy returned by the applicant proves that the borrower agrees with the terms and conditions of the investment line offered by the bank.
Collection of Charge documents
After issuing the sanction advice, the bank collects necessary charge documents. Charge documents are generally printed documents provided by the bank for implementation by the clients. Charge documents vary on the basis of types of facility, types of collateral etc.
The loan is disbursed only when the customer submits all the required charge documents and so the clients usually submit the documents early as possible. The requirements of charge documents in different modes of investment is slight different.
Disbursement of Loan
Finally loan is disbursed by the branch through a loan account in the name of the borrower and the monitoring stage o f the loan starts formally.
Investment (Credit) Monitoring and Reviewing
In EXIM Bank Ltd, the branch manager monitors the overall profile and risk aspect of the Investment portfolio. This Review is formally performed and arranged by the Head Office but it is the responsibility of the branch Manager to ensure that the Investment portfolio meets the standard set that forward by the Bank.
- To minimize investment losses, monitoring procedures and system s are in place that provides an early indication of the failing financial health of a borrower. The respective officials monitor the following exceptions:
- Past due principal or profit payments, past due trade bills, account excesses and branch of investment covenants.
- Investment term s and conditions are monitored, financial statements are received on a regular basis and any covenant breaches or exceptions are referred to the branch manager for timely follow up.
- Timely corrective action is taken to address findings of any internal, external or regulator inspection/ audit.
EXIM Bank Ltd uses the “PC Bank Software” developed by Leads International which is able to produce the above information for central/ Head Office as well as local review.
Some key point of appraisal process
There is no exact time required for the total investment appraisal process. It varies for different types of investments. In general, the critical time in the total procedure is the time required for getting the CIB report from Bangladesh Bank which is essential for any credit proposal. EXIM Bank depends a lot on CIB report o f the borrower and for previous track records. Therefore if the CIB report is clean and provided by the central bank promptly, then it is up to Banks efficient service that how quickly the bank can serve its customers by appraising the credit proposal.
The Law and Recovery unit of Head office directly manage the continued declining accounts. The recovery unit functions as following way:
- Determine account action plan/recovery strategy.
- Pursue all options to maximize recovery.
- Ensure sufficient and timely investment loss provisions are made based on actual and expected losses.
- Regular review of the weak accounts.
Evaluation of Credit Practice
Credit appraisal system of EXIM Bank Ltd follows both the rules and regulations of Bangladesh Bank and also the Shariah Principle board’s instruction and sometimes consulting with the Shariah Board. The procedures o f lending process o f EXIM Bank Limited are very simple and consist of a number o f steps. The process starts with a customer who has an account with the bank or is intended to open an account with the bank. The lending generally starts at the branch level. The branch manager plays an important role at the beginning of the lending process.
For selecting borrower EXIM Bank give more attention on that, but sometimes the inefficient officers may handle it other way which may cause good customers run away or the bad ones cheats. But the growth of the investment o f the bank and there is very little amount of default case, shows that the good clients are screened out from the very beginning in EXIM Bank.
After conversion to Shariah based banking the credit facilities are termed as investment facilities and loan products are named in different terms in Islamic modes. But the service and facility are same and the previous customers are also satisfied with the new service.
But as an Islami bank, EXIM cannot provide some credit facilities like personal loans to its customers.
Loan Monitoring Techniques
EXIM Bank employs several techniques for loan monitoring. So far EXIM Bank’s Loan monitoring has been done very effectively which is evident from its very low default rate in the previous years. Sometimes monitoring should be done through physical verification of the borrower’s work place, mortgaged property or hypothecated stocks.
Centralization of Disbursement Authority
At EXIM Bank, each and every investment sanctioned through Executive committee meeting. Branch cannot sanction any investment except M TDR (Fixed deposit amount).
In these case if the secured M TDR kept in the same branch and if the amount is not more than Tk. 10 lac, only then the loan is provided.
Investment is the major income generating source of the bank. Though the bank is making tremendous growth in the investment, there are some problems in the credit appraisal system. By evaluation the credit appraisal practices of the bank some recommendations have been suggested for the improvement of the credit appraisal system which is as following:
- An integrated planning should be made to reduce time taken by the credit appraisal procedures of EXIM Bank Ltd. The officer’s of the branch level should make a plan for the sequence of activities.
- There is no shortage of skilled officers in investment department but if the HR department arranges training for the investment officers that will make them up-to date.
- One proper standard procedure should be developed for all types of clients and no interpersonal relationship should be involved in approve a loan
- EXIM Bank practice centralized disbursement system. Branch cannot sanction any investment except MTDR. If head office give branch a certain level of power to sanction investment then the invest process can be more time consuming and efficient.
- There is lack of coordination between Branch and Head office. For this, sometimes Branch investment offices can’t able to give loans to their valuable clients. Head office has to give certain level of power to the branch authority, so that they can keep the client for long time.
Banking sectors no more depends on only on traditional method of banking. In this competitive world now a day’s banking sector is wide enough to cover any kind of financial services, not only from the local banks but also from the foreign banks. The major task of bank is to survive the services in this competitive environment by managing its assets and liabilities in an efficient way. To make the assets specially loan and advances banks must have too more careful and otherwise this asset will became a burden for the bank.
EXIM Bank has made a continuous growth in all the areas of operations from the starting of its operation in 1999. Within a short span of life time the bank has became one of the leading most successful bank of the country.
Investment is the major revenue generating source of income of the bank, which has a tremendous increasing growth rate. The ratio of classified loan and total investment proves the high recovery rate of the investment division of the bank. Therefore the credit management and credit appraisal system of the bank are excellent.
Here in this study an assessment of the credit appraisal procedure system of the bank was made and critically evaluated. Some problems were found such as time consuming procedures, lack of skilled officers etc and finally some suggestion are made for improvement.
Success in the banking business largely depends on effective lending. Less the amount of loan losses, the more the income will be from investment operation the more will be the profit and here lies the success of EXIM Bank Limited.