The report is originated in result of my internship program which I have done as a requirement of BBA program. This report is completed based on my three months internship in Dhaka Bank Limited. This is an orientation report that contains the real life day to day working experience of different tasks in Credit Management of BASIC Bank Limited, Gulshan Branch.
The objective of this study is to analyze the credit management policy, financial performance regarding credit, credit risk management of BASIC Bank limited etc. To prepare this report both primary and secondary sources of data have been used.
The first section of this report consists of an introductory part which has been developed for the proper execution of the entire report. Here I have discussed methodology and objective of this report. I also have mentioned some limitations that I have faced in preparing the report.
Second part is the overview of the organization. This report will help to have an idea about the organization. Thus user of this report can understand all the facts related with the report.
Third part has explained the working experience of my internship period at different division of BASIC Bank Limited. here I have shared the credit policies, different types of loan and advances, interest rates, provisions etc.
The remaining part consisted of analysis, findings, recommendations and conclusion. Here I included what I have found after working in this bank as SWOT analysis, and comparative analysis.
As the banks provide finance or lending to its counter parts, there arises a risk of credit risk which is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. It was a massive problem for the last two decades when the nationalized banks would give out loan to any client they wanted without thinking of the consequences of getting the loan back or the risk associated with it. Even at present, this problem is haunting many banks and poses a major threat towards their sound performance. So it’s very important to have an effective and sound credit risk management system in place which will help the bank mitigate its risk factors and carry out successful financing service or lending. With that issue in mind, the topic “Credit Risk Management” has been undertaken as my topic for internship report.
The report, proposed to be prepared as a part of my graduation study will be based on my 3 months internship in BASIC Bank. The selected topic for report is “Credit management of BASIC Bank Limited”. This is a report that contains the real life day to day working experience of different tasks in Credit Department of BASIC Bank Limited, Gulshan branch.
The major focus of BASIC bank is financing in business area. The Bank was established as the policy makers of the country felt the urgency for a bank in the private sector for financing small scale Industries (SSIs). But now this bank is financing in many industrial area. A small industry, as per Industrial policy 1999 approved by the Cabinet, has been defined as an industrial undertaking whose total fixed investment is less than Tk.100 million.
The credit portfolio of BASIC Bank consists of industrial credit, commercial credit, micro credit, foreign trade. Credit is the most fundamental issue in our banking sector. Default culture is the most common phenomenon in the banking sector of Bangladesh. Like other Govt. banks, private banks also suffer from this problem. So it’s very important to have an effective and sound credit risk management system in place which will help the bank mitigate its risk factors and carry out successful financing service or lending. With that issue in mind, the topic “Credit Management” has been undertaken as my topic for internship report.
This report will provide an insight of credit risk management issues of BASIC Bank. This report consists of an introductory part which has been developed for the proper execution of the entire report. And other part will describe the credit management scenario, factors related to credit, different types of risks associated with credit risk management, credit risk management practice in lending decision of bank, process, documentation etc provide a picture of credit management of the bank.
Since this internship program was a part of my study my first objective is to fulfill the requirement of my graduation level. As I started working in BASIC Bank Limited I felt an interest in credit management area of this bank.
The prime objective of this report is to analyze the “Credit Management of BASIC Bank Ltd.’’
The specific objectives of the study are:
- To evaluate credit risk management of basic bank
- To find out the feasibility and practical market issues about new credit risk evaluation model and credit pricing model.
- To find the problems related with credit risk management of Basic Bank Ltd.
- To make suggestion for effective credit risk management.
For this report preparation I used both primary and secondary sources. At first I went through some previous similar studies that were done in this field to understand the scope, limitation and appropriate method. It gave me an initial idea about the field.
- Primary Sources:
- Interviewing the bank officials of Credit Risk Management division and
- Observing practical work.
- Secondary Sources:
- Annual reports of BASIC Bank Limited
- Website of the Bank, Bangladesh Bank,
- Official record and MIS of the bank
Though I have given utmost effort to prepare this paper but there are some limitations of the study. They are as follows-
1. This paper has focused on the most sensitive part of the organization i.e. loan and advance. So the bank authority hesitated to disclose important information to maintain business secrecy.
2. Only 3 months time is not enough to complete such a study in a lucid manner.3. The whole report was prepared on the Gulshan Branch of BASIC Bank and so it doesn’t focus the true picture of the Credit Risk Management scenario of the whole banking sector in the country.
4. Credit Risk Management is a new concept that is still not implemented in the bank properly and that’s why to get a full in depth knowledge about the issue was restricted to some extent.
BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited) registered under the Companies Act 1913 on the 2nd of August, 1988, started its operations from the 21st of January ,1989. It is governed by the Banking Companies Act 1991. The Bank was established as the policy makers of the country felt the urgency for a bank in the private sector for financing small scale Industries (SSIs). At the outset, the Bank started as a joint venture enterprise of the BCC Foundation with 70 percent shares and the Government of Bangladesh (GOB) with the remaining 30 percent shares. The BCC Foundation being nonfunctional following the closure of the BCCI, the Government of Bangladesh took over 100 percent ownership of the bank on 4th June 1992. Thus the Bank is state-owned. However, the Bank is not nationalized; it operates like a private bank as before.
BASIC Bank Limited is unique in its objectives. It is a blend of development and commercial banks. The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loanable funds shall be invested in small and cottage industries sector.
|Authorized capital||Tk. 5000.00 million|
|Paid up capital||Tk. 2357.59 million|
|Total Reserve and Surplus up to 31.12.2011||Tk. 3124.17 million|
The Bank is required to transfer 20 percent of its net profit before Tax to Capital Fund as per the Banking Companies Act 1991.
Business Philosophy of BASIC Bank:
The philosophy of BASIC Bank is to develop into an ideal, excellent and unique financial institution in the banking regime. The sponsors perception were since inception and till now that BASIC Bank should be distinguished from other private owned and managed commercial Banks operating in Bangladesh is to provide best customer service so, that BASIC Bank cab grows as a leader in the banking industry rather than a follower, BASIC Bank is tirelessly striving. However, BASIC Bank is a commercial Bank in the private sector. It is therefore evident that BASIC Bank would seek fair return on owner’s equity as of its one prime goal. The profit-earning goal is sought to be achieved by rendering maximum possible satisfaction to clients through quick and efficient services. Therefore, quality service to the clients is another important goal of BASIC Bank.
Objectives of the BASIC Bank:
- As mentioned earlier, BASIC’s priority is in promoting and financing development of small and cottage industries.
- Besides, the Bank is to provide full range of commercial banking services including collection of deposits, such as current, savings, STD, and FDR; short term trade finance, handling of import and export business.
- BASIC offers Micro credit to the urban poor through linkage with NGO’s with a view to facilitating their access to the formal financial market.
Financing establishment of small units of industries and business and facilitate their growth
Small Balance Sheet size composed of quality assets.
- Steady and sustainable growth.
- Investment in a cautious way.
- Adoption of new banking technology.
- To search for newer avenues for investment and develop new products to suit such needs.
- To establish linkage with other institutions which are engaged in financing micro enterprise.
BASIC Bank is always ready to maintain the highest quality of services by upgrading banking technology prudence in management and by applying high standard of business ethics through its established commitment and heritage. Among many goals of BASIC Bank, one of them is to maximize profit through optimum utilization of resources by providing best customers service. The rest are as follows:
- To employ funds for profitable purpose in various fields with special emphasis on small scale Industries.
- To undertake project promotion to identify profitable areas of investment.
- To search for newer avenues for investment and develop new product to suit such needs.
- To establish linkage with other institutions which are engaged in financing micro enterprises.
- To co- operate and collaborate with institutions entrusted with the responsibility of promoting and aiding SSI sector.
- To establish a charitable organization in the name of “BASIC Bank Foundation” to augment CSR activities through expanding both nature and magnitude towards implementation of social obligations in an organized manner for a better Bangladesh.
To achieve its organizational goals, the bank conducts its operations in accordance with the major policy guidelines laid down by the Board of Directors, the highest policy making body. The management looks after the day-to-day operation of the Bank.
Board of Directors:
As stated earlier the Government holds 100 percent ownership of the Bank. The Government of Bangladesh appoints all the Directors of the Board. The Secretary of the Ministry of industries is the Chairman of the Bank. Other Directors of the Bank are high Government and central Bank executives.
The Managing Director is an ex-officio member of the Board of Directors. There are at present 7 Directors including the Managing. The Board of Directors is a bridge between shareholders and the executive body. Its activities concerned with policy formulating, strategic planning, board control over executive functions etc.
The Managing Director heads the management. The two General Managers and Departmental Heads in the Head Office assist him. BASIC Bank is different in respect of hierarchical structure from other banks in that it is much more vertically integrated as far as reporting to the chief Executive is connected. The Branch Managers of the Bank report direct to the Managing Director and, for functional purposes, to the Heads of Departments. Consequently, quick decision making in disposal of cases is ensured.
The performance of BASIC Bank Limited has been satisfactory since its inception in respect of all the measurement parameters.
At the end of the year 2011, total assets of the bank stood at Taka 78,031.73 million against Taka 61,569.39 million in previous year registering an increase by 26.74 percent. Total deposit of the Bank at the end of 2011 stood at Taka 62,650.73 million (80.29% of Total liabilities) compared to Taka 49,259.60 million (86.28% of Total liabilities) in 2010. Total amount of deposit was increased by 27.18 percent. Loans and advances increased by 22.75 percent to Taka 56,884.76 million in 2011 compared to Taka 46,341.51 million in 2010. All out efforts were made to improve the recovery rate and control non-performing loans and advances. Relative figure of classified (non-performing) loans and advances remain stable at 4.38 percent at the end of the year.
A total recovery of Taka 1297.61 million in the year under review. Additional provision made in 2011 was Taka 348.53 million against classified and unclassified loans and advances and off-balance sheet exposure. Year 2011 was a period of high growth in loans and advances with 22.75 percent increase. Total outstanding industrial loans including term loan and working capital stood at Taka 33,323.05 million at the end of 2011 compared to Taka 27,777.89 million of 2010. Total outstanding commercial loans stood at Taka 22,727.40 million compared to Taka 16,915.32 million in 2010 reflecting a growth of 34.36 percent.
Monetary and Financial Resources
BASIC Bank Limited is unique in its objectives. It is a blend of development and commercial banks. The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loanable funds shall be invested in small and cottage industries sector.
Like any other financial intermediaries, BASIC Bank Limited is no exception in performing its core functions viz. Mobilization of fund and utilizing such mobilized fund for profitable purposes.
Mobilization of Fund:
The main sources of fund for the Bank are:
It is the main stay of the Bank’s sources of funds. Following usual practices, it collects deposit through:
- Current Deposit
- Savings Deposit
- Term Deposit
- Scheme Deposit
Apart from deposit, BASIC Bank Limited received funds from :
- Bangladesh Bank
- Asian Development Bank (ADB)
- KfW (kreditanstalt fur Wieder-aufbau Credit Institution for Reconstruction), a German development bank. All of these funding sources are for relatively longer period. Receiving the credit lines from ADB and KfW has been a recongniting of the Bank’s highly satisfactory performance.
BASIC Bank Limited
Credit Rating Report (Entity Rating)
Credit Rating Agency of Bangladesh Ltd. (CRAB) has retained the long term rating AA2 (Double A two) and short term rating ST-2 of BASIC Bank Limited for the year 2011.
Commercial Banks rated ‘AA’ in the long term have very strong capacity to meet their financial commitments. They differ from the highest-rated Commercial Banks only to a small degree. AA is judged to be of very high quality and is subject to very low credit risk.
Commercial Banks rated ST-2 in the short term category are considered to have strong capacity for timely repayment. Commercial Banks rated in this category are characterized with commendable position in terms of liquidity, internal fund generation, and access to alternative sources of funds is outstanding.
Credit management scenario
The word “Credit” is derived from the Latin word “credo” meaning, “I believe”. Speaking broadly, credit is finance made available by one party (lender, seller, or shareholder/owner) to another (borrower, buyer, corporate or non-corporate firm). More generally the term credit is used narrowly for debt finance. In banking area credit is considered as one of the major functions. Bank lending is important for the economy in the sense that it can simultaneously finance all of the sub-sectors of financial arena, which comprises agricultural, commercial and industrial activities of a nation.
In our country defaulting loan is an alarming situation for banking sector. Despite the application of a number of remedial measures, loan default problem continued to haunt them. Since 1989, Bangladesh follows both “overdue criteria” and “qualitative criteria” to deem a loan classified or unclassified. According to overdue criteria, as suggested by Bangladesh Bank, bank managers usually divide all loans into five categories (continuous loan, demand loan, term loan payable within five years, term loan payable in more than five years and short-term agricultural credit / micro credit), and then observe periods elapsed for repayments. All troubled loans are then further reclassified as special mention account (SMA), substandard, doubtful and bad/losses to comply with international norms of loan classification. To fight with this situation, Bangladesh Bank has provided a guideline as policy guideline. In this guideline these things are included-
- Industry and Business Segment Focus
- Types of Loan Facilities
- Single Borrower/Group Limits/Syndication
- Lending Caps
- Discouraged Business Types
- Loan Facility Parameters
- Cross Border Risk
Some risk factors also included in guideline those need to be assessed for a loan. They are
- Amount and type of loan(s) proposed.
- Purpose of loans.
- Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
- Security Arrangements
In addition to this risks some other risk areas should be considered such as borrower analysis ,industry analysis ,supplier/buyer analysis, historical financial analysis, projected financial performance, account conduct, adherence to lending guidelines, mitigating factors, loan structure, security, name lending etc.
Types of loans and advances offered by BASIC Bank
The making of loan and advance is always profitable to a bank. As the bank mobilizes savings from the general people in the form of deposit, the most important task of it is to disburse the said deposit as loan or advance to the mass people for the development of commercial, industrial who are in need of fund for investment. Like other business firm, the main purpose of the commercial bank is to make profit. The profitability of the banks depends on the efficient manner and avenues in which the resources are employed. The BASIC Bank Limited has made so far efficient use of the deposit and has the classified rates under control. The Bank disburses loan in different form. It varies in purpose wise, mode wise and sector wise.
Classification of Advance: Commercial & Industrial Credit
1. Industrial Credit Scheme.
2. Micro Credit Scheme for the poor.
3. Commercial credit.
1. Industrial Credit Scheme
BASIC Bank Ltd (Bangladesh Small industries and Commerce Bank Ltd) is a scheduled bank undertaking all types of banking operations. Through 100% share owned by the Government, the Bank operates like a private bank. The very name, Bangladesh Small Industries and Commerce Bank Ltd, is indicative of the nature of the bank. It is blend of development and commercial banking functions.
As a one of the soundest banks in Bangladesh, BASIC Bank is unique in its objectives. The bank is entrusted with the responsibility of providing short, medium and long term loans and other financial assistance for promotion of industrial sectors. The Memorandum and Articles of Association of the bank stipulate that 50 percent of loan able funds shall be invested in small and cottage industries sector. Thus the bank’s priority remains with promoting and financing small scale industries in the country.
- “Small Industry” means enterprises employing fewer than 50 workers and / or with a fixed capital investment of less than Tk. 100 million.
- “Cottage Industry” covers household based units operated mainly with family labor. Generally, fixed assets and operating costs together do not exceed Tk. 0.50 million per unit of cottage
Leading Criteria of industrial credit scheme
Leading criteria is an important part of credit risk management which is doing before lending.
Entrepreneur/ promoter have to be creditworthy and capable enough to run the proposed project efficiently.
b) Viability of the project:
The project should be viable in line with organizational, technical, commercial, financial and economic points of view.
c) Technical viability:
- The project should be technically sound and environment- friendly.
- Technology transfer in case of borrowed know-how ought to be ensured.
- Building should be well planned and well constructed at a suitable location.
- Technical process proposed should preferably be a proven one.
d) Commercial viability:
- Market prospect and potential for the product has to be fully assured at competitive prices.
- Marketing channel existing for the product should be accessible to the entrepreneur.
e) Financial viability:
- There should be reasonable debt-equity ratio as determined by the Bank on individual case basis.
- Debt service coverage ratio should be at least 2.5 times at the optimum level of production.
- IRR should preferably be not less than 20 percent.
- The project should be found viable in financial analysis done by the Bank.
f) Economic viability:
- The project should ensure benefit to the national economy and create sufficient employment opportunity and increasing income.
- Savings/ Earnings of foreign currency may give an additional dimension.
2. Micro Credit Scheme for the poor
The board of Directors of BASIC Bank in pursuance of the objectives of the Bank and recognizing the need for helping the low income people formulated Micro Credit Scheme for the poor. They provide lone through NGO also.
Credit Delivery System:
Three alternate delivery systems are being used to reach credit to the urban poor borrowers.
- BASIC Bank provides loan to NGOs which on-lend to the poor borrowers. NGOs then become responsible to make repayment to the Bank. The sub borrowers repay loan to the NGOs.
- The Bank provides loan to the urban poor borrowers through NGOs or the Bank directly extends loan to the borrowers. The NGOs assist the Bank in motivation, formation of self-help groups and monitoring and supervision of loan utilization. For this the NGO is paid a fee by the Bank.
- BASIC provides loan to the urban poor borrowers direct without the assistance of any NGO. BASIC’s staffs perform all required functions of motivation, group formation and monitoring and supervision of loan utilization Borrowers make repayment to the Bank.
Loan may be sanctioned to individual members organized in a group as well as to NGOs. The maximum limit of loan per person is Tk. 15,000. it may be relaxed for deserving cases. The minimum loan size is Tk. 2,000 per borrower. There is no size limit for loan to NGOs.
For lending to NGO members the Bank charges 10% interest rate. When BASIC Bank handles Micro Credit operation on its own, the interest is charged at the rate of 15% per annum.
In all cases stocks/ equipment procured with the loan proceeds remain hypothecated with the Bank. The member borrowers sign D.P mote. However, the loans are collateral free. D.P note and their relevant charge forms are signed by authorized executives of NGOs.
3. Commercial Credit:
The types of commercial credits are given below.
i. Overdraft (OD): It is a continuous advance facility. By this agreement, the banker allows his customer to overdraft his current account up to his credit limits sanctioned by the bank. The interest is charged on the outstanding amount not on the sanctioned amount. OD is of two types practiced in BASIC Bank Limited.
- Secured Overdraft (SOD): BASIC sanctions SOD against different securities like FDR, Work Orders etc
- Temporary Overdraft (TOD): It is given to the valued customers only. It is not that much secured. Usually it forwards without any security or sometimes exercise lien against the instrument, deposited in the bank. It is given by the branch manager discretionary power.
ii. Cash Credit (CC): By this agreement, a banker allows his customer to borrow money up to a certain limit. CC is a favorite mode of borrowing by traders, industrialists, etc for meeting their working capital requirements. It is operated like overdraft account. Depending on the needs of the business, the borrower can draw on his cash credit account at different time and when he gets money can adjust the liability. BASIC Bank charges interest on the daily outstanding balance of the account.Based on charging securities, there are two forms of cash credit.
- Cash Credit (Hypothecation): Hypothecation is a legal transaction whereby goods are made available to the lending banker as security for a debt without transferring either the property in the goods or possession. The banker has only equitable charge on stocks, which practically means nothing. It is given against registered mortgage of land and building, hypothecation of goods and personal guarantee of directors.
- Cash Credit (Pledge): Pledge is the bailment of goods as security for payment of a debt or performance of a promise. Transfer of possession in the judicial sense. In case of pledge goods the bank acquires the possession of the goods or a right to hold goods until the repayment for credit with a special right to sell after due notice to the borrower in the event of non-repayment.
- iii. Loan (General): It is given against personal guarantee, hypothecation of goods and land and building.
iv. Bills Portfolio: Branch purchases demand bills of exchange that are called “Draft” accompanied by documents of title to goods such as bill of lading, railway receipt, and truck receipt. The purchase of bill of exchange is drawn at an issuance, i.e. for a certain period maturing on a future date and not payable on demand or sight.
v. Term Loan: BASIC Bank is advancing both short and medium term credit to the industrial sector on the basis of their capital structure, constitution and liquidity consideration. It is given against land and building along with machinery, personal guarantee of directors and hypothecation of raw materials.
vi. Letter of Credit: An undertaking by the bank to make payment to the seller subject to submission of documents drawn in strict compliance with the stipulated terms giving title to goods to the buyer/ bank.
vii. Back to Back Letter of Credit: Letter of credit for importing raw materials/ accessories opened against lien of an export items. Payment is usually settled from export proceeds. A letter of credit is an instrument by which a banker for account of a buyer gives formal evidence to a seller of its willingness to permit him to draw on certain terms and stipulates in legal form that all such bills will be honored.
viii. Export Cash Credit: Advance allowed as ash credit for processing goods for exports. The advance is usually adjusted from export proceeds. The term PC (Packing Credit) is also used for such advance.
ix. Loan Against Imported Merchandise (LIM): Loan allowed against imported merchandise and storing the same in bank’s custody. The bank through its approved clearing agent clears the merchandise. The advance is adjusted by delivering the goods against payment by the importer.
x. Local Bill Purchase (LBP): Advance allowed against bills drawn under an inland L/C opened and accepted by a local bank. Such local L/C is usually opened as back to back L/C against export L/C.
xi. Payment Against Documents (PAD): The bank that establishes the letter of credit is bound to honor its commitment to pay for import bills when these are presented for payment, if drawn strictly in terms of the letter of credit. In fact, the amount stands as advance to the importer, which is adjusted by delivery of documents against payment or by allowing post import finance such as LIM or LTR.
xii. Foreign Bill Purchase (FBP): Post export credit allowed against export bills. If the bills are drawn as per terms of the L/C, the bank purchases the same and pay equivalent amount of the bill to the credit of the client’s account. The advance is adjusted on realization of export proceeds through foreign agent.
Interest rates on the various types of credits offered by BASIC Bank Limited
|a. Primary Products||11.00%|
|2. Industrial Term Lending|
|a. Agro based Industries||13.00%|
|b. Micro Industries with project cost up to taka 50 lakh||15.50%|
|c. Other Small scale Industries||15.00%|
|d. Medium Scale Industries||15.00%|
|3. Working Capital (Industrial)|
|a. Agro based Industries||14.00%|
|b. Micro Industries with project cost up to taka 50 lakh||16.00%|
|c. Other Small scale Industries||16.50%|
|d. Medium Scale Industries||16.00%|
|i. Readymade garments, frozen food, agro-based industries||7.00%|
|b. Advance against inland documentary bills accepted by banks|
|i. Payment in foreign currency||15.00%|
|ii. Payment in local currency||17.00%|
|5. Commercial lending|
|a. Internal trade/ import financing/ other short term and demand loan.||18.00%|
|6. OD against|
|a. Bank’s Own Fixed Deposit||3% above +FDR rate|
|b. Other Bank’s Fixed Deposit Receipt||19.00%|
|c. PSP/SP/Other Govt. Bonds||17.00%|
|d. Unit Certificate||19.00%|
|7. Micro Credit through NGOs and other special programs||18.00%|
Procedure for getting approval of a loan
The following procedure is applicable for giving loans to the customer
How to apply for Credit
The investor may contact head office or any of the branch offices of the bank for preliminary discussion on his proposal and the facilities provided by the bank. The proposal will then be examined at the branch or head office of the bank and if the proposal appears to be a viable one and the promoter is found creditworthy and proposed project is acceptable then intending investor will be supplied with a prescribed loan application form. The application form should be submitted in triplicate with the requisite project examination fees, which are not refundable. The borrower will be required to deposit equity in advance (partial) with BASIC @ 20% of the total estimated paid-up capital of the proposed company. The deposit will carry interest at the rate applicable to SAVING BANK ACCOUNT. There are three different sets of loan application form- one for investment cost up to taka 2.5 million, one for investment cost above taka 2.5 million and the rest for borrowers of informal sector.
Guidelines for submission of Loan Application Form
The borrower is provided with instruction papers which help him or her to prepare the loan proposal properly.
- Information on loan proposal should be furnished in prescribed FIRST INFORMATION SHEET (FIS) in triplicate properly typed and each page/ set should be duly sealed and signed by the applicants(s)/ sponsor(s).
- Complete information should be furnished in respect of each item supported by documentary evidences, wherever necessary, to avoid further reference/ delay/ rejection of application
- Information may be provided in additional sheets of papers, if required. However ensure that all the pages and annexure are signed under official seal. Also ensures that all the facts/ evidences have been enclosed properly including three feasibility reports/ detailed study reports on loan proposal.
- The clients are required to deposit with the application the project examination fee and also a portion of the equity at the following rate either by cheque or pay order or demand draft drawn in favor of BASIC Bank and payable in any of the scheduled banks within the country. Project examination fee:
- Taka 10,000 only in respect of projects having fixed costs above taka 50 lacs
- Taka 5,000 only in respect of projects having fixed cost up to taka 50 lac.
- Memorandum and Articles of Association together with the certificates of registration/ incorporation and commencement of business of the company duly certified by the managing director of the company should be submitted. Incase of partnership, the deed duly certified by the managing partners of the firm should be submitted.
- Title deed of land, together with non-encumbrance certificate from the district registrar or sub-registrar should be submitted.
- Certificates from the surveyor for determining the price of land of the proposed project/ price of adjacent land sold during last 3 years should be submitted. Also to be submitted are site map.
- Machinery layout plan, price quotation of 3 suppliers together with illustrated brochures and literatures should be submitted for both imported and local machinery.
- Consent letter from Power Development Board/ Rural Development Board/ Gas Authority/ Pollution Control Board should be submitted wherever required
- Soil test/ water test report (if required)
- Nationality certificate along with attested photographs of the directors/ partners/ proprietor should be submitted
- Declaration of assets and liabilities of the proposed directors/ partners/ proprietor. Declaration about payment of income tax should be submitted.
- Letter addressed by the prime banker of the company/ firm/ person should be issued with a copy to the BASIC as per given annexure.
- Give reasons for seeking additional loan for expansion/ balancing/ replacement/ of the existing unit. Also provide information relating to the existing line of products, rated/ actual annual production capacity for the past operating years, sales performance and financial position of the company/ firm.
Procedure for Processing Loan Application
In setting up procedures for the evaluation/ approval of small projects, the length of processing time becomes a significant factor. Compared to other financial institutions’ usual two months average processing time for its medium and large loan program, the processing/ approval time for small industry loans remains well below the above processing time because of its lesser detailed studies as well as the bank considers that small entrepreneurs look for their sources of credit at their time of need.
- The processing/ approval time for small industry loan is not more than two months from the date of receiving complete application form
- Application in prescribed form is received in triplicate, duly filled in, and sealed and signed by the sponsoring directors along with their attested photographs duly affixed in the space provided for.
- Draft layout plan of the proposed building and the estimate for construction cost is obtained
- In case of the project to be located in any BSCIC industrial Estate, BSCIC’s letter of consent, particulars of the land, copy of lease deed is obtained.
- For location of industry in other areas, permission/ no-objection for setting up the small industry is obtained from the appropriate authorities.
- Utility agency’s letter of consent for providing necessary utility services to the unit to be obtained.
- Detailed credit report on the sponsors/ project is prepared i.e. the bank shall carry out detailed credit investigation on the promoters.
- Tentative list of machinery/ work with detailed specification should be obtained supported by 3 price quotation
- The individual project appraisal report for Small Scale and Cottage industry may not be very elaborate and exhausted. However, it covers the basic areas of project viability.
- Joint report between the bank and the borrower is prepared for informal sector.
- The bank sometimes seeks advice from a panel of experts whose services may be hired by the bank as and when required in specific cases.
Commercial banks and financial institutions intermediate between lenders and borrowers. The loan and advance should be given to them who has certain and predicted cash flow re-pay the credit. If the credit officer fails to analyze the clients’ viability of repaying the loan and project’s cash flow, possibility of default may arise. In other words, it can be said that the purpose of appraisal is to be sure that the proposed advance will be safe, liquid, profitable and covered by adequate security. At the time of credit proposal, the bank has to come to an acceptable compromise between over caution and under caution.
BASIC bank was established to provide term loan and other financial assistance including all kinds of banking facilities to accelerate the pace of development to small industry. The financial assistance included short term working capital loan, medium term and long term capital finance to viable new small scale industry (SSI) projects and BMRE of SSI projects which will fulfill the banks criteria of viability and acceptability. Project appraisal in the banking sector is needed for the following reasons:
- To justify the soundness of an investment
- To ensure repayment of bank finance
- To achieve organizational goals
The entrepreneurs of small industry concern/ project requiring financial assistance from BASIC Bank need to fulfill the following criteria:
A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a credit application that originates from the Relationship Manager, and is recommended by Branch Credit Committee (BCC). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals and guarantors.
It is essential that RMs know their customers and conduct due diligence on new borrowers, principals and guarantors to ensure such parties are in fact who they represent themselves to be. All banks should have established KNOW YOUR CUSOMTER (KYC) and Money Laundering guidelines which should be adhered to at all times.
Credit Applications should summarize the results of the RMs risk assessment and include as a minimum, the following details:
- Amount and type of loan(s) proposed
- Purpose of loans
- Loan structure ( Tenor, Covenants, Repayment Schedule, Interest)
- Security arrangements
In addition, the following risk areas are analyzed:
- Borrower analysis
- Industry analysis
- Supplier/ Buyer analysis
- Historical financial analysis
- Projected financial performance
- Account conduct
- Adherence to lending guidelines
- Mitigating factors
- Loan structure
Head Office Approval
The respective credit officer at ICD appraises the project by preparing a summary named “TOP Sheet”, “Executive Summary” and “Office Note” which contains a brief description of the loan proposal. Then he submits it to the Head Office Credit Committee (HOCC) for the approval of the loan. The Head Office Credit Committee considers the proposal and takes decision whether to approve the project or not.
After getting the approval from the head office, the branch issues the sanction letter to the borrower. A sanction letter contains the following particulars amongst other details: name of the borrower, managing partner, nature of facility, amount, expiry, rate of interest, purpose, security and the following terms and conditions:
- Before availing the loan all documentation formalities must be completed. Registered power of attorney in favor of BASIC Bank to sell the mortgaged property without the consent of the court or owner of the lender.
- DP note and other usual charge documents/ undertakings etc duly stamped must be signed and submitted to the authority before disbursement of loan
- The loan shall be governed by all other firms and conditions as per policy and practices of the bank that will be acceptable for the sanction to safe guard the interest of the bank.
- The bank reserves the right to amend, modify or withdraw any or all the terms of the loan at any time without assigning any reason whatsoever or to terminate/ call back the loan facility at any time for which bank or its official cannot be held responsible for any loss for such cancellation of the loan.
The borrower receives the letter and returns a copy of this letter duly signed by him/ her as a token of having understood and acceptance of the terms and conditions above.
Documentation of Loans and Advances
In spite of the fact that banker extends credit to a borrower after inquiring about the character, capacity and capital of the borrower, he obtains proper documents executed from the borrower to protect him against willful defaults. Documents contain the precise terms of granting loans and they serve as important evidence in the law courts if the circumstances so desire. The documents for loans and advances can be classified into two categories. Charge documents and Security documents.
Mode of charging securities: BASIC Bank practices following 2 types of securities.
- Primary securities- Cash or cash equivalent that is easily liquidated or convertible into cash. Example- FDR, Sanchaypatra, DP Notes etc
- Secondary Securities- These securities are tangible securities that can be realized from sale proceeds or transfer of property. Example- Immovable properties.
The modes of charging securities are as follows:
Lien: Lien is the right to retain possession and not right of ownership. Bank’s lien is general lien over its own financial obligation to clients. Property under lien cannot be sold without notice to the owner and sometimes without court’s order
Hypothecation: This is mortgage of movables by an agreement and here neither possession nor ownership is transferred. Hypothecated goods cannot be sold out/ disposed off without notice and court’s order. However, if a special power of attorney is taken, in that case, it can be disposed off without going to the court.
Pledge: Pledge is the bailment of goods as security for payment of a debt or performance or promise. Here, title and ownership are not transferred. Pledge goods may be sold out and proceeds thereof may be appropriated towards adjustment of liability in case of failure of the borrower to repay or fulfill the terms and conditions.
Mortgage: Mortgage is the transfer of interest in immovable property to secure the repayment of money advanced. Ownership remains with the mortgager. In case of equitable mortgage, court order is necessary and in case of registered mortgage court’s order is not necessary for sale / disposal of the mortgaged property for adjustment of advance.
A proper disbursement procedure is essential for implementing a project small or big, within the estimated time and cost.
However, constant monitoring of the projects on the one hand and timely mobilizing the equity on the other hand cannot be under estimated for efficient implementation of a project. The following factors are taken into account.
- After machinery contract is finalized the Bank will open irrevocable letter of credit on behalf of the borrower in the joint names of the Bank and the borrower.
- Disbursement of foreign currency loan is made automatically as soon as irrevocable letter of credit for import of machinery is established and the foreign suppliers make shipment of machinery.
- The local currency loans are to be made available to the project after satisfactory and full utilization of equity by the borrowers by creating required physical facilities (tangible assets) for the project
- The sponsors have to request for release of local currency loan to the Bank supported by papers like progress report, statement of account, documents.
- The local current loan of the Bank to be disbursed in one or more installment according to nature of project
- The borrower must use the loan for the purpose for which the advance is extended
- The borrower shall apply the proceeds of the loan exclusively to finance the cost of the goods and services required to carry out the project. Foreign currency shall be disbursed only for goods and services that have neither been paid for in Bangladeshi currency not were produced in here
- If the completion of the project or its successful operation is hindered or delayed because the funds available are inadequate to ensure its completion, it shall be the responsibility of the borrower to make prompt arrangements in accordance with financial plan approved by the bank to provide the necessary funds.
Credit risk management
Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank’s dealings with or lending to corporate, individuals, and other banks or financial institutions.
Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. Central to this is a comprehensive IT system, which should have the ability to capture all key customer data, risk management and transaction information including trade & Forex. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and dis-intermediation, it is essential that banks have robust credit risk management policies and procedures that are sensitive and responsive to these changes.
CREDIT RISK MANAGEMENT OF BASIC BANK
Credit Risk Management is basic to risk management and controlling, as it is the major risk factor in most bank business. Therefore, a bank should assess the degree of risk associated with each loan and its profitability. In this connection prior assessment of and follow up on a loan transaction constitute essential ingredients of the credit risk control process. An in-depth analysis of the borrower financial conditions, expected usage of funds, ability to repay, willingness to repay and sources of repayment all together constitute step one in the risk control processes.
In this chapter all the possible risks that are exposed while sanctioning loans are briefly discussed keeping front the Credit Risk Management.
Different types of risks associated with CRM
Broad divisions of CRM are as follows:
A. Business Risk
Business Risk is concerned with whether the borrowing company would fail to generate sufficient cash out of business to repay the loan. Business Risk, the main component of lending risk, consists of the Industry Risk and the Company Risk.
a) Industry Risk: Due to some external reasons a business may fail and the risk, which arrives from external reasons of the business, is called industry risk. It has two components:
- i. Supply risk: It indicates the risk of failure of the business due to disruption in the supply of inputs resulting from their price, quantity or quality. The inputs of supply risk are labor, raw materials, machinery and equipment, power, premises etc. The price, quality or quantity of supplies may be disrupted because of the following measures. The price of supplies may be disrupted due to removal of price control by Government, imposition of import tariffs, adverse fluctuation of foreign exchange rates etc. Scarcity of supplies causes production loss. Supply scarcity causes due to- labor unrest, erratic power supply, imposition of power controls makes supplies scarce, supply of raw materials disrupted by transport difficulties, critical raw materials only available from one supplier, who goes out of business etc. It is difficult to obtain right quality of supplies, when it is difficult to obtain required quality of raw materials and when there is a shortage of necessary skilled labor.
- ii. Sales risk: It is another component of industry risk. When the business fails for disruption in sales, this type of risk would generate. Sales may be disrupted due to changes in market size, increased competition, changes in regulations, losing of a single large customer etc. To assess sales risk at first we have to analyzes industry turnover and compare the same with other two major competitors. Next we have to assess how easy it is for new competitors to enter the industry, then we have to assess the risk that changes to regulations will damage sales and then we have to assess the risk that a single large customer switches to a competitor and finally we will assess the risk involve in sales.
b) Company Risk: Company risk is shown for some internal reasons of the business. It has also two main components and four sub components.
1) Company position risk: Each and every company holds a position within an industry. This position is very much competitive. Due to weakness in the company’s position in its industry, a company may fail and the risk of failure is called company position risk. It depends on-
i. Performance risk: If a company fails to perform well enough to repay the loan because of its weakness under given expected external conditions, the company is said to suffer from performance risk. It is a part of company position risk. Assessment of performance risk involves validating the company performance. It depends on competitive position, realistic business strategy, cash generating ability etc.
ii. Resilience risk: When a company fails due to lack of its flexibility to unexpected external conditions, the resilience risk is generated. The resilience risk of a company depends on company’s leverage, its liquidity and the strengths of the owner/key personnel’s connections.
2) Management risk: If the management of a company fails to use the company’s position effectively, the company can fail to and this risk of failure is called management risk. It can be subdivided further-
i. Management competence risk: Management competence risk is the risk that the company fails because the management is incompetent. It is a part of management risk under company risk. The competence of the managers depends on their ability and level of teamwork. To assess the ability of the managers we have to analyze their education, experience, relevant skill etc.
ii. Management integrity risk: Management integrity risk is the risk that the company fails to repay its loan due to lack of management integrity. Management integrity is a combination of honesty and dependability.
B. Security Risk:
Security Risk is the risk that the realized value of the security does not cover the exposure of loan. Exposure means principal plus outstanding interest. Security risk can be divided into two parts. This are-
i. Security control risk: security control risk is the risk that the bank fails to realize the security because of lack of bank’s control over the security offered by the borrowers. The risk of failing to realize the security depends on the difficulty with which the bank can both obtain a favorable judgment and take possession of security.
ii. Security cover risk: security cover risk is the risk that the realized security value may not cover the full exposure of loans. Security cover risk depends on speed of realization and liquidation value.
Classification of Loans and Provisions
|Types of Loan||Length of Overdue||Status of Classification||Rate of Provision|
|Continuous Loan(OD/CC, PC, LIM, LTR etc) Overdue period will be accounted from the day following the date of expiry of such loan||UnclassifiedSub-StandardDoubtfulBad/Loss||1%20%50%100%|
|Demand Loan(Forced LIM, BLC/ PAD, EBP etc) Overdue period will be accounted the day following the date of expiry of such loan||UnclassifiedSub- StandardDoubtfulBad/ Loss||1%20%50%100%|
|Term loan payable within 5 yearsOverdue period will be accounted from the day following the expiry of the due date of payment of installment of such loan||Sub- StandardDoubtfulBad/ Loss||20%50%100%|
|Term loan payable more than 5 yearsOverdue period will be accounted from 6 months following the expiry of the due date of payment of installment of such loan||Sub- StandardDoubtfulBad/ Loss||20%50%100%|
|Stag/ Micro CreditOverdue period will be accounted from 6 months following the expiry of the due date of payment on installment of such loan||UnclassifiedSub- StandardDoubtfulBad/ Loss||5%5%5%100%|
Special Mention Account:
Bangladesh Bank recently introduced this account under BRPD Circular No. 02 dated 15th February 2005 in order to strengthen credit discipline and bring classification gradually in line with international standards. This circular makes the following adjustments:
A continuous credit, demand loan or a term loan which will remain overdue for a period of 90 days or more will be put in to special mention account and interest accrued on such loan will be credited to interest suspense account, instead of crediting the same to income account. This will help banks to look at accounts with potential problems in a focused manner and it will capture early warning signals for accounts showing first signs of weakness. Loans in the “SPECIAL MENTION ACCOUNT” will not be treated as defaulted loan.
Management of Delinquent Client:
When a problem loan is detected the responsible loan officer takes the corrective action and tries to minimize the loan losses by allowing different facilities to the client. The steps followed by BASIC Bank to manage the delinquent clients are:
This is the first step practiced at BASIC Bank to manage the problem loan. This step involves the following activities:
- Open discussion with the borrower about the problem he is facing
- Discussion with third party to find out the underlying reasons
- Issuing “1st Reminder” letter to inform the due date and due installments
- If the party doesn’t respond, then “2nd Reminder” and “3rd Reminder” IS issued
If the persuasion failed, the loan officer negotiates a plan of action with the borrower to save both the bank and the borrower from possible loss. This calls for certain sacrifices on the part of the bank and borrower in their mutual interest. The plan of action in BASIC Bank consists of the following:
- Revise loan agreement
- Concession of interest (if the client is difficult to manage)
- Rescheduling of the loan and giving installment facility to repay the overdue amount beside the regular installment.
If the client fails to repay the loan even after rescheduling the loan, BASIC Bank goes for taking legal action against the delinquent client to recover the loan. The branch manager sends a letter to the head office department informing the borrower’s reluctance to repay the loan. Following measures are taken:
- Filing case against the client
- Assigning the loan officer for assisting the lawyer
Monitoring and Follow-up
Monitoring is tackling the risk aspect of the loan and advance portfolio to be sure that the portfolio is complying with the criteria set down in the credit policy. For analyzing and monitoring the loan portfolio branch manager is the main responsible person.
Factors analyzed in loan monitoring
Credit policy of the BASIC Bank Limited has set forth the guidelines that must be followed in the time of loan review. After getting the review of the loan portfolio from the branch level the assigned officer of the head office credit department starts analyzing and preparing the report. The following factors are taken into consideration at the time of monitoring the loan and advance.
- The account is not having excess over limit
- The terms and condition of the sanctioned letter are strictly followed
- The value of the collateral security is adequate
- There is not any unfavorable situation in market, economy and political conditions which may endanger the reliability of the borrower account
- The analysis of the borrower’s business performance and comparison of the projected and actual to find any deviations
The supervision of projects includes adequate control procedures in the disbursement of loan and the continuous monitoring of project operations during its period of construction and implementation through report requirement as well as plant visits. A project under implementation is visited every month and progress report is submitted to the management. Bank official on project supervision keeps watch over the estimation made and notes the deviation for taking quick remedial measures. An entrepreneur is encouraged to come to the Bank and talk about his project and problems. It is emphasized for taking up comprehensive insurance policy covering the properties of the project. All sorts of papers, reports, received from the borrowers is promptly reviewed/ scanned for some signals that may need special close attention of Bank Management. Branches of the bank are effectively utilized for project supervision including disbursement of local currency loan in their respective areas.
Recovery is the recurring worry for the bank officials. Moreover, recycling of advances is important without which the bank’s liquidity is in jeopardy. Besides that the community doesn’t get benefited unless new advances and new borrowers are encouraged. Strategic supervision of the loan and advance can ensure the timely recovery of the loan and advances along with the interpersonal relationship with the client. In the time of my attachment in the BASIC Bank Limited, it was observed that the credit officers are timely preparing the report and taking the following supervision techniques:
1. Loan account statement check to find out:
- Whether the limit is within that has been sanctioned
- Satisfactory transaction has been made
- Whether the borrower has sustained a loss of capital
- Significant decrease in the value of security
- Weakening of bank’s position due to any reason
- Used of credit other than the purpose for which it was approved
- Incorrect information supplied by the borrower or bankruptcy of the borrower
- Credit is rescheduled frequently or the rules of rescheduling are violated.
2. Collection of the financial statements of the client and analyzing them and comparing the actual performance with that of projected. If actual is less than projected then the credit officers take the following measures:
- Meet the owner and discuss to identify the reason
- Analyze the business strategy regarding the price, quality and competitors
- Whether the amount disbursed was used properly
- Whether the management has given its full effort in managing the business
No banker wants the loan to be turned into bad; at least they are not bad at the time they are made. However, bank find that invariably a small portion of the loan become delinquent and eventually must be written off. The loan review process is a crucial tool in reducing losses and in monitoring loan quality. It consists of a periodic audit of the ongoing performance of some or all of the active loans in a bank’s loan portfolio. Other than its basic objective of reducing loan losses, some intermediate objectives of the loan review of BASIC Bank are as follows:
- To detect actual or potential bad loans as early as possible
- To ensure that the loan policy is followed
- To inform management and the board of directors about the overall condition of the loan and advance portfolio
At the time of loan review, BASIC Bank follows the Bangladesh Bank guidelines and its credit policy set by the board of directors. The frequency of the review of individual loans is determined by the size and quality of the loan; large and poor loan is reviewed frequently than others.
BASIC Bank is required to submit the loan review report and the state of the loan portfolio to the Bangladesh Bank credit cell. For maintaining this schedule BASIC has set forth a due date for its all branches to send the loan review report to Industrial Credit Division. The concerned officer sends the report to the Bangladesh Bank Credit Department.
The schedule is given below:
|Loan Amount||Review Period||Reporting time|
|Tk 0.1 to 1 million||Quarterly||By next month 30th day|
|Tk 1 to 10 million||Quarterly||By next month 30th day|
|More than tk 10 million||Monthly||By next month 30th day|
Limitations and Drawbacks in Implementing CRM Techniques:
Traditionally, it has been observed that banks in Bangladesh used to operate funds business i.e. lending activities under security-oriented principle. Before 1989, banks used to give more emphasis to the security without considering the business risk of the borrowers at the time of sanctioning loan. But CRM does not give more emphasis on the security rather it gives more emphasis on the business risk of the borrowers. CRM’s unique system of scoring and various analyses give the bankers an opportunity to scrutinize the capable borrowers with due consideration regarding their competence, integrity, repayment capacity and cash flow projection of the project. The criteria specified in the LRA manual are very much appropriate and pragmatic to minimize the risks of lending. But in some cases it becomes very difficult to the bankers because of the following reasons:
- Inadequate Data: To apply financial data relating to performance of a firm, it is very important to assess its existing or projected strength. In many cases up-to-date and reliable data like production, trade, business raw-materials, total demand and supply of different product of different industries, industry growth, sales turnover, performance data for major competitors are inadequate, which are necessary for assessing risk.
- Inaccurate data: CRM calls for submission of financial statements by the borrowers. Most of the prospective borrowers are observed not to prepare financial statements. But the lending officer has to depend largely on the Balance Sheet and Income Statement figures. As the business concern of Bangladesh, in most cases they do not maintain proper records of their transactions, so they fail to provide accurate data. Experience shows that even the financial statements submitted by the applicants cannot be relied upon. Inconsistencies are observed in the information provided by applicants. Collection and compilation of these data are very laborious and in many cases problematic. So analysis of performance risk and resilience risk are becoming cumbersome.
- Lack of auditor’s performance: To minimize chance of unfair presentation of financial statement, lending officers have to rely much on audited financial statements. But in practical situation, the auditing firms too sometimes help the business concerns in providing false and fictitious statements. With few exceptions, audited balance sheets and profit & loss statements follow client instructions.
- Unwillingness to disclose information: Generally, competitors do not have the habit of disclosing their business information. They always tend to maintain secrecy for their business interest. But LRA calls for submission of competitor’s performance.
- Non-cooperation between different banks: LRA techniques require information regarding exposure to other banks. Though credit bureau report has an important role in this regard, the non-cooperation between different banks is a real difficulty.
- Lack of experienced assessor: In most cases, the value of security actually realized is less than what a bank estimates. Sometimes, security also loses value before it is realized. Due to lack of experienced, qualified and reliable surveyor institutions to assess value of security along with its quality and market demand are very scarce in Bangladesh.
- Lack of skill and knowledge of the personnel: Human resources are the most valuable resources of an organization. The trained and skilled manpower is an important factor for effective and efficient handling of CRM. Preparing CRM requires special skill and knowledge in risk management and knowledge in national and international economy is also required for successful analysis of CRM. But most of the banks are facing the acute problem regarding the skilled and knowledgeable personnel who know the modern tools and techniques of analyzing the financial statements, trend and dynamism of market.
- Insufficient independence: Banks and financial institutions are not apart from any type of political influence or pressure group in respect of loans and advances. Besides, independence of credit analysis/ risk management section at branch level is not fully ensured.
- Economic factors: The various components at the macro and micro level of our national economy are not yet stable enough. As a result, the analysis of demand, supply, sales forecast etc. do not contribute enough to the Lending Risk Analysis (LRA).
- Legal environment: Analysis of security risk often does not become accurate because of lengthy and complicated legal proceedings. However, the law of the country does not make auditing compulsory for all the enterprises except the joint stock company. In such a situation analysis of lending risk on the basis of un-audited financial statements may become useless.
- Biasness and Irregularities: In the LRA manual the degree of risks of the borrowers are measured subjectively and as such the question of biasness and irregularities of the concerned personnel cannot be avoided. If they do not apply their judgment ethically, the result of LRA may be misleading.
- Absence of discounting technique: Term loan is sanctioned for longer period of time for meeting the cost of assets of a capital nature for the establishment, renovation, expansion and modernization of industrial units and also for financing permanent current assets. In this method, each year’s cash inflow is discounted at the required rate of return and these present values are cumulated until they equal or exceed the amount invested. In its simplest terms, this is value today of the money received in future, is not present in this technique, but is very much required for medium and long term loan.
- Political Pressure: Also at times it is seen that there are many loans which are not sanctioned at the branch level because they are considered too risky or not worthy enough but because of political pressure, they are sanctioned at the Head Office which creates an unnecessary and extra pressure on the Overall financial position of the Bank
The SWOT analysis comprises of the organizations internal strength and weakness and external opportunities and threats. SWOT analysis gives an insight of what an organization can do in future and how they can compete with their existing competitors through existing capabilities and constraints. This tool is very important to identify the current position of the organization relative to others, who are playing in the same field and also used in the strategic analysis of the organization.
- 100% Government owned bank
- A reputation of good customer service
- Diversified products and particularly a wide range of lending products
- Specialized banking facilities
- Basic has fewer branches than its domestic competitors. Such as they have only 50 branches whereas Uttara Bank Limited has 198 branches and 12 regional offices.
- Failing to lunch sophisticated technology
- Low attaining new customer
- Albescence of marketing activity
- Expanding branch of the bank
- Expanding the product of the bank
- Huge population
- Increasing rate of entrepreneur
- Using e-banking technology
- Entry of new banks.
- Increasing competition among banking industry.
- Slowdown in market growth
- Costly new regulatory requirement
Yearly profit of basic bank
Profit (million BDT)
The growth of profit was steady from 2000 to 2005. The profit rang revolved around 200 million BD taka. But in 2006 it got onto the peak because of wise loan portfolio making. After the profit rate had fallen due to global recession. But BASIC Bank has managed to recover the loss and their profit has started rising.
Sector wise Distribution of loan and advance in 2011
The bigger portion of BASIC Bank’s portfolio consists with export and import finance. L/C opening is one of their major tasks. They also have a great amount of investment in industrial area. But we can see in this chart, micro credit area has a very small investment although it was their focused area in initial stage.
Profi t after Tax (million BDT)
Criteria 2: Distribution of total loan investment in 2011
BASIC Bank Limited
|Investment area||Million BDT|
|Engineering (Iron and Steel/Electrical)||8,357.69|
|Food, Beverage, Edible Oil, etc||7,503.61|
|Hospital and Medical Services||1,768.18|
|Textile (Linkage Industry)||2,255.94|
|In Bangladesh||Million BDT|
|Bills purchased and discounted||27,794.684|
|Bills purchased and discounted||17,928.79|
|Fixed asset including premises||7,110.24|
|Loan, cash credit, over drafts||56,981.15|
|Bills purchased and discounted||4,285.33|
Criteria 3: Credit rating
|Bank||Long term||Short term||Credit rating firm|
|BASIC Bank Ltd||AA2||AA2||ST-2||ST-2||CRAB|
Criteria 4: provision against unclassified loan and investments
|Bank||Total loan and advance||classified loan||provision|
Major findings at a glance:
- BASIC bank use LRA technique for credit risk management as per Bangladesh Bank manual
- Many officers are not so much efficient in this term.
- It follow risk mitigation system instead of risk avoidance
- In case of large lending, site visit and other collateral keep strictly
- If any suspicious loan application arise then interest rate grow high and loan amount are sanction in several part.
- Bangladesh Bank introduced On-line CIB database system that all concerned can get available information regarding loan status of the borrower for taking immediate decision.
- Credit recovery is better position, approximately 70%.
After going through a thorough and in-depth analysis and view on the Credit Risk Management scenario of BASIC Bank, it must be said that compared to other Banks in their sector, they are ahead of others in terms of discipline and good management skills too. Their overall credit recovery rate is 70%.It is good than other government banks. But even then, there are certain areas or criteria that can be improved for better and efficient functioning of the BASIC Bank. They are listed out as below:
- BASIC Bank should more concern about credit risk management and use of LRA technique because it is specialized bank for industry development.
- More training should be conducted for the bankers to improve their analytical ability and professional standard regarding the use of CRM techniques to make the recovery rate in optimal level.
- Top management of the Bank should assign importance to CRM as a principal tool for credit screening of the loan cases where the application of LRA is mandatory.
- Bangladesh bank should careful about all step and procedure of credit risk management and remove the limitation by enforcing low.
- Keep recovery rate stable and also try to improve it by creating different departments for approval process, credit administration, credit monitoring and credit recovery. By doing so, the degree of biasness should be reduced and more accurate assessing will be done.
- For the purpose of realistic assessment of security risk the legal system in terms of realization of security should be reviewed with keep collateral security so that the period of realization could be properly estimated.
- Documents and paper works in LRA should be minimized and market study for lending should gradually be introduced.
- Government should take steps to grow awareness to the normal public that people who doesn’t repay loan should be treated as enemy of the countries and they should be separated from the society.
- BASIC bank should decrease personal lending
- BASIC bank should spread their service in rural area to finance proficient investor to develop our industry.
If the above mentioned recommendations are followed carefully, the given objectives of the report can be accomplished. The percentage of nonperforming loan should be reduced and then can slowly divert towards cash flow based lending and also further improve the overall position of the banks.
Credit Risk Management (CRM) reflects the degree of risk of repayment involved with the borrower. Obviously, CRM is not the ready prescription on all ills but it would be helpful to the BASIC Bank to go one step forward of their mission to minimize lending risk. This practice of CRM should be made compulsory for all commercial banks and specialized banks like Bangladesh Shilpa Bank (BSB), Bangladesh Krishi Bank (BKB) and Nationalized Banks also and the special form should be developed for the agricultural lending. Since banks and financial institutions play an important role in the progress of national economy, it is the duty of our bankers to manage their loan portfolio very carefully. Our national economy has been suffering enough for the misuse of banks’ money in loans and advance and wastage of public assets. This is the high time to manage the public assets effectively and contribute to the nation’s progress.
(2011). annual report of BASIC BANK.
(2011). anual report of HSBC Bank.
(2011). anual report of Islami Bank.
(2011). anual report of Janata BAnk.
(2011). anual report of Mercantile BAnk.
Bangladesh Bank. (n.d.). Retrieved march 3, 2013, from www.bangladesh-bank.org: http://www.bangladesh-bank.org/
MD.MASUKUJJAMAN, A. M. (2011). Risk Management Practices: A Critical Diagnosis of Some Selected Commercial Banks in Bangladesh. Volume–VI, Number–01.
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