Main principle of this report is to analysis Credit Appraisal and Non-performing Loan of Dhaka Bank. This study focus on to develop an insight of tools available to identify efficient methods and used to mitigate overall credit risks and to reduce loan default rate. Other objectives are to identify the obstacles encountered when a loan is being default by Dhaka Bank Limited and the ways to overcome the problems. Finally explain the recent strategy and initiatives taken by Dhaka Bank Limited for further development or reducing loan classification.
OBJECTIVES OF THE STUDY
Every day banks are trying to innovate new process to attract clients. Now, since clients have more options to switch banks and to go for what they need, bank may loose clients due to this situation. Non-performing loans and advances create problems for both bank and borrower particularly when bank’s profitability is reduced due to classified loans. Customer retention is very important for any company or bank.
The main objective of the study is to develop an insight of tools available to identify efficient methods and used to mitigate overall credit risks and to reduce loan default rate. Recent study shows that banks are unable to maximize their profit without lowering the classified loans. To explore the practical strengths and weaknesses of some credit risk analysis those are used by bank to manage risk. In both decision-making and evaluation process credit control analysis plays both a major part and also some great risks.
- To identify the main factors of the credit risk and computation of credit risk grading of Dhaka Bank Limited.
- To identify the trend of total & sector wise disbursement of Loans & Advances of Dhaka Bank Limited.
- To identify and compare the trend of classified, unclassified and recovery of loans and advances of Dhaka Bank Limited.
- To identify the obstacles encountered when a loan is being default by Dhaka Bank Limited and the ways to overcome the problems.
- To examine the recent strategy and initiatives taken by Dhaka Bank Limited for further development or reducing loan classification.
- To identify how and why a loan defaults.
The report is based on primary and secondary data.
For data collection following methods are followed:
- Information collected from face to face communication. Therefore, error depends on the response of the respondents only.
- Prior research reports.
- Bangladesh Bank Reports and several web sites are used.
- Website of Dhaka Bank Limited (www.dhakabankltd.com).
- The Annual Reports and different publications of Dhaka Bank Limited.
- Personal interviews with the employees and customers.
The conclusion drawn in this study is not definite and it depends on the responses collected that is very much theoretical and varies from person to person situation and as well country to country. This study is mainly focused on Dhaka Bank Limited to perceive what tools Dhaka Bank Limited uses to evaluate its borrower.
SOURCES OF DATA
Both primary and the secondary data were used to prepare the report. The details of these sources are as below:
Primary data for this report had been collected through the conversation & discussion of different officers. On the job observation of the officers has helped a lot to know information of banking.
The secondary sources of data are:
- Annual Report of Dhaka Bank Limited
- Internal Publications of Dhaka Bank Limited
- The website of Dhaka Bank Limited (www.dhakabankltd.com)
- The website of Bangladesh Bank (www.bangladesh-bank.org)
HISTORY OF DHAKA BANK LIMITED:
Dhaka Bank Limited was incorporated as a public limited company under the Companies Act 1994. The Bank started its commercial operation on July 05, 1995 with an Authorized Capital of Tk.1,000.00 million and Paid Up Capital of Tk.100.00 million. The present Paid Up Capital of the Bank is Tk.1,934,252,875.00 as on June 30, 2008. The total equity (capital and reserves) of the Bank as on June 30, 2008 stood at Tk.3,424,609,016.00. The Bank has 44 branches and 2 Offshore Banking Units across the country and a wide network of correspondents all over the world. The Bank has a plan to open more branches in the current fiscal year to expand the network. Dhaka Bank Limited offers the full range of banking and investment services for personal and corporate customers, backed by the latest technology and a team of highly motivated officers and staffs. In the effort to provide excellence in banking services, the Bank has launched online banking service, joined a countrywide-shared ATM network and has introduced a co-branded credit card. A process is also underway to provide e-business facility to the bank’s clientele through online and home banking solutions. Dhaka Bank Limited is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments.
“EXCELLENCE IN BANKING”
To be the premier financial institution in the country providing high quality products and services backed by latest technology and a team of highly motivated personnel to deliver Excellence in Banking.
At Dhaka Bank, we draw our inspiration from the distant stars. Our team is committed to assure a standard that makes every banking transaction a pleasurable experience. Our endeavour is to offer you razor sharp sparkle through accuracy, reliability, timely delivery, cutting edge technology, and tailored solution for business needs, global reach in trade and commerce and high yield on your investments.
Our people, products and processes are aligned to meet the demand of our discerning customers. Our goal is to achieve a distinct foresight. Our prime objective is to deliver a true reflection of our vision- Excellence in Banking.
- Customer Focus
- Respect to the Individual
- Responsible Citizenship
Dhaka Bank Limited was rated by Credit Rating Agency of Bangladesh (CRAB) Limited on the basis of audited Financial Statements as on December 31, 2007. The summary of the rating is as follows:
CRAB has awarded A1 (Pronounced as Single A One) rating in the long term and ST-2 rating in the short term to Dhaka Bank Limited. In 2006, CRAB awarded the same rating to Dhaka Bank Limited in the long term and short term.
Commercial Banks rated in this long-term category are adjudged to be strong banks, characterized by good financials, healthy and sustainable franchises, and a first rate operating environment. This level of rating indicates strong capacity for timely payment of financial commitments, with low likeliness to be adversely affected by foreseeable events.
Commercial Banks rated in this short-term category are characterized with commendable position in terms of internal fund generation, access to alternative sources of funds and moderate level of liquidity. The rating is valid for one year.
OBJECTIVES OF DHAKA BANK LIMITED
The main objectives of the Dhaka Bank Limited are as follows:
- To establish, maintain, carry on, transact, undertake and conduct all types of banking, financial, investment and trust business of in Bangladesh and abroad.
- To form, establish and organize any bank, company, institutions or organization either singly and/or in joint collaboration of partnership with any individual company, financial institution, bank, organization or any government and or government agency for the purpose of carrying on banking, financial investment and trust business and/or any other business as provided hereafter.
- To carry on any business relating to Wage Earner Scheme as may be allowed by Bangladesh Bank from time to time including maintaining of foreign currency accounts and any other matter related there to.
- To contract or negotiate all kinds of loan and/or assistance, private or public from any source, local or foreign, and to take all such steps as may be required to be complete such deals.
- To form, organize assets, participate or aid in forming, promoting or organizing any company, bank, syndicate, consortium institute or any holding and subsidiary company in Bangladesh or abroad for the purpose of undertaking any banking financial investment and trust business.
- To take part in the formation, management, supervision or control of business or operations of any company or undertaking and for that purpose to render technical managerial and administrative services and act as administrator, manager and secretary.
- To purpose, or otherwise acquire, undertake, the whole or any part of or any interest in the business, goodwill, property, contract, agreement, right, private assets and liabilities of any other company bank corporation, partnership, body person or persons carrying on, or having ceased to carry on, any business which the company is authorized to carry on such terms and may be deemed expedient.
- To encourage sponsor and facilitate participation of private capital in financial industrial or commercial investment, share and securities and in particular by providing finance in the form of long, medium or short term loans or share participation by way of subscription to the promoter shares, or underwriting supports or bridge finance loans and/or by any manner.
- To amalgamate or reconstruct or recognize with any commercial bank, or body corporate or association in cooperation with any person, commercial bank or association.
- To establish and open offices and branches to carry on all or any of the above business abroad and within the country provided prior permission is obtained from the Bangladesh Bank.
- To establish provident fund, gratuity, pension, and other fund for the welfare and benefit of the employees and staffs, former or present and any matter related thereon.
- To act as official liquidator and receiver.
- To receive, borrow or raise money on deposit, loan or otherwise upon such terms as the Dhaka Bank may approve and to give guarantee and indemnity in respect of any debt or contract.
- To appoint officials, staff, experts, advisers, consultants, auditors, Legal advisers and provide for their suitable remunerations.
- To advance, deposit or lend money to or with such persons or bodies, corporate, unincorporated, statutory, govt. and/or its agencies on such terms as the Dhaka Bank may approve.
Capital and Reserves
Dhaka Bank Limited has been consistently maintaining the ‘Capital Adequacy Ratio’, as prescribed by Bangladesh Bank. This has been made possible by a policy of building up both capital and reserves. It started with an Authorized and Paid-up Capital of Tk.1,000.00 million and Tk.276.00 million respectively in 1995. Authorized and Paid up Capital increased to Tk.6,000.00 million and Tk.1,934.25 million respectively in 2008. In addition to Paid up Capital, the Bank has built up a strong reserve base over the years.
Strength and Performance
With the active support and guidance from Bangladesh Bank, clients and patrons, the Bank has been maintaining sound financial strength and showing a steady and impressive business performance. Dhaka Bank Limited is one of the few mentionable banks, which maintains Capital Adequacy ratio and has more than required provision as per Bangladesh Bank criteria.
Starting with a modest deposit of only Tk.10,749.00 million in 1996, the Bank had closed its business with a deposit of Tk.48,731 million as of December 31, 2007. The total deposits stood at Tk.56,986 million as of December 31, 2008. Total credit stood at Tk.49,698 million as on December 31, 2008 against Tk.39,972 million last year. Bank has posted a profit before tax and provision of Tk.2,533 million during the year ended December 31, 2008 against 2,010 million last year with a growth of 26%. Earning per share (EPS) is Tk.43.00 as on December 31, 2008 against Tk.36.00 as on December 31, 2007. Dhaka Bank has received ICAB National Award 2007 in the financial sector for their published Accounts and Reports.
Credit Policy and Portfolio
Credit policy of the Bank works within the framework of three main objectives, namely, maintenance and improvement of quality of assets, recovery on time and building-up of an efficient customer oriented credit delivery system.
The portfolio includes working capital financing, project financing, import-export financing and domestic trade financing etc. The Bank continued to extend working capital facilities to customers to ensure smooth and uninterrupted operation of their business. At the same time, it expanded project-financing portfolio to meet the growing demands of the economy for long-term finance in a depressed capital market.
Due emphasis was given to financing export oriented and export linked industries without loosing sight of the need for long term loans by other domestic market based industries and ventures. So far the Bank has financed 843 projects in 2007. Among them 129 projects were financed during 2007 amounting to Tk.34,049 million. In long term portfolio, the bank has been diversifying from Textile and RMG industries to Agricultural Industries, Pharmaceutical Industries, Chemical Industries, Food & Allied Industries, Transport & Communication, Electronics & Automobile Industries, Housing & Construction Industries, Engineering & Construction Industries including Ship Breaking, Energy & Power Industries and Service Industries etc. Moreover, the Bank has also extended credit facilities to CNG filling stations, Shipping, Power Sector, Micro Credit and health services etc. For improved customer services, the Bank now extends One Stop services to corporate clients who require term loan, working capital and import-export financing etc. The Bank also participates in Syndicate Financing and so far has sanctioned Tk.1.50 billion in 03 syndications. At Dhaka Bank Limited, the Syndications and Structured Finance unit was setup on October 30, 2004. This unit successfully closed nine syndicated deals till 2008. In 2008 (up to March) Dhaka Bank Limited has arranged 3 syndication deals for a total amount of Tk.1.50 billion. The Syndications and Structured Finance team as a business unit soon followed up by closing another deal totaling Tk.1.40 billion for a large local corporate. In the year 2008 the unit has given priority to the Power, Telecommunication, Textile and any other lucrative industry.
Extensive Schemes of Dhaka Bank Limited
CAR LOAN: As part of establishing a personal banking franchise of Dhaka Bank Limited, the bank has successfully launched Car Loan Scheme. The product is term financing facilities to individuals to aid them in their pursuit of have a car of their dream. The facility becomes affordable to the clients as the repayment is done through fixed installment s commonly known as EMI (Equated Monthly Installment) across the facility period. Depending on the size and purpose of the loan, the number of installments varies from 12 to 60 months. In case of brand new cars the loan tenure will be maximum 72 months. One can bought his car with the money provided by Dhaka Bank Limited through its Car Loan Scheme.
PERSONAL LOAN: As part of establishing a personal banking franchise of Dhaka Bank Limited, the bank has successfully launched Personal Loan. The product is a term financing facility to individuals to aid them in their purchases of consumer durables or services. The facility becomes affordable to the clients as the repayment is done through fixed installments commonly known as EMI (Equated Monthly Installment) across the facility period. Depending on the size and purpose of the loan, the number of installments varies from 12 to 60 months. The highest amount of loans disbursed through the scheme is Tk.5,00,000.00. Personal Loan scheme of Dhaka Bank Limited is a very popular scheme for individuals especially for the service-oriented people of limited income.
Vacation Loan: Dhaka Bank Limited has successfully launched Vacation Loan. The product is a term financing facility to individuals to aid them in their pursuit of spending a vacation in the country or abroad. The facility becomes affordable to the clients as the repayment is done through fixed installments commonly known as EMI (Equated Monthly Installment) across the facility period. Depending on the size and purpose of the loan, the number of installments varies from 12 to 48 months.
Deposit Pension Scheme (DPS): Dhaka Bank Limited is well poised to be the leading Personal Banking business amongst the local private commercial banks. Bank’s conscious efforts in brand building, introducing and supporting new packaged products, developing Personal Banking organization along with non-traditional delivery channels have resulted in good brand awareness amongst its chosen target markets.
Installment based savings schemes are a major category of saving instruments amongst mid to upper middle-income urban population. DPS is an installment based savings scheme (Deposit Pension Scheme) of Dhaka Bank Limited for individual clients.
ATM: Through extensive ATM network supported by state of the art technology Dhaka Bank Limited provides ATM service 24 hours a day 7 days a week. In the word of the Bank, “We never sleep to serve you.”
Lockers: One can use the locker facility of Dhaka Bank Limited and thus have the option of covering his/her valuables against any unfortunate incident. The Bank offers security to its locker service as afforded to the Bank’s own property at a very competitive price. The Bank would be at peoples service from Saturday through Thursday from 9:00 am to 4:00 pm. Lockers are available at Gulshan, Banani, Dhanmondi, Uttara, CDA Avenue & Cox’s Bazar Branch. The Bank provides locker facilities at the branch to keep valuables safe and secure. With high standard lockers installed for security, the Bank becomes to avail this facility in a secure and homely atmosphere.
Special Deposit Scheme: The Bank has launched Special Deposit Scheme for it customers through Personal Banking wing. Through this scheme one can earn monthly interest depositing Tk.1,00,000.00 or its multiples for 3 years.
Moving the Wheels of Progress: Many wheels revive together to run a total system and so does the banking activities of Dhaka Bank Limited. The Bank has been consistently moving the service wheels like corporate banking, syndication of funds, capital market services and personal banking to support national economy.
Different Business Different Needs: Business needs differ, so do the solution of Dhaka Bank Limited. The Bank provides Project Finance, Import and Export Finance, Corporate Finance and Loan Syndication, Working Capital Finance, Lease Finance, SME Finance, Treasury Services, Remittance, Retail Banking, Opening of LCs, Issuance of Guarantees.
Online Islamic Banking on all Branches: Dhaka Bank Limited is offering Islamic Shariah banking service through online now. Al-Wadia Current Account, Mudaraba Savings and Fixed Deposit Account and also investment within shariah are included in this service. One can easily get the Islamic banking services through any branches of Dhaka Bank Limited.
Financial Institution Division (FID)
This division deals with international trade that is import, export and foreign remittance. To deal with foreign currency Bank has to take prior permission from Bangladesh Bank.
International trade is an important constituent of the business portfolio of the Bank. Dhaka Bank Limited offers a full array trade finance services, namely, issuing, advising and confirmation of documentary credit, arranging forward exchange cover, pre-shipment and post-shipment finance, negotiation and purchase of export bills, discounting of bills of exchange, collection of bills etc.
Finance and Accounts Division
Finance & Accounts Division is concerned with finding and using funds to carry out the marketing plan. They are responsible for all sorts of payments. They prepare the all sorts of report for management including cost of fund, Profit and Loss account, Balance Sheet, Cash Flow statement, Budget and other relevant reports.
Operations Division is responsible for all kinds of procurement and logistics support. They purchase all sorts of product that are needed by various divisions and branches. Firstly the divisions requisitioned the necessary products in a prescribed format in every month. When the Divisional Head of the Operations approves it, they purchased the product as per requirement. The division is also responsible for choosing the suitable site for opening new branches.
Human Resources Division
This Division deals with human resources management that is recruitment of new employees, placement of them, promotion, transfer and all other benefits that are entitled by the employees.
Dhaka Bank Limited is expanding its operation day by day, so it is in need of efficient human resources to smoothly run its operation. This efficient force is recruited by Human Resources Division through different types of tests and interviews.
Grading is another task that is accomplished by this Division, with the help of Branch Managers and Divisional Heads. All the Branch Managers and the Divisional Heads along with the concerned employee prepare the Appraisal Forms as prescribed by the Human Resources Division and send it back to the Human Resources Division with a recommended grading. This grading system motivates employees to be more efficient and sincere in their respective job.
Corporate Finance and Syndication
This unit was set up in June 2003 with a mandate to arrange financing for medium to large scale projects through syndications, consortium financing and ‘club deals’. The unit not only was able to break ground in this segment but it also successfully completed the first ever aircraft financing deal that was arranged through local financial institutions. The demand for this service is expected to rise further due to growing and large demand for industrial financing in line with the overall economic development. The Corporate Finance and Syndication Unit is now well equipped to meet the challenges of highly competitive industry by creating a market niche through acquisition of in-depth financial management techniques and development of human resources.
Capital Market Services
Lease Finance, Hire Purchase & Capital market operation besides investment in treasury bills & Prize Bonds constitute the investment basket of Dhaka Bank Limited. Dhaka Bank Limited is a member of the Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd. The investment portfolio made up of Government Securities & Shares and Debentures of different listed companies stood at TK.2046.1 million this year indexing a 4.91% increase over TK.1950.28 million in the previous year. Now the Capital Market Services Division has opened another four wings at Uttara, Dhanmondi, Motijheel and Chittagong for giving trading facilities to its clients.
Personal Banking Division
Personal Banking Division (PB) with the aim to address modern banking needs of the bank launched Dhaka Bank credit card, personal loan, car loan & vacation loan etc. In the meantime, the bank takes the honor to have client base of approximately 6,000. Moreover restructuring the existing products & services & introducing new products, particularly electronic banking products like Dhaka Bank ATM Card & the automated Tele Banking service from selected branches was highly appreciated by the bank customers.
Year 2007 was particularly a year of growth & challenge for retail business of the bank. The Bank diversified its portfolio & concentrate on offering tailor made products e.g. personal credit, Vacation Loan & Car Loan. The bank customer reach had been extended through establishing a large field sales & service channel for expanded customer reach. With all these efforts, Dhaka Bank Limited was able to create a strong brand in just a year in the market, which is portrayed in the amount of loan disbursement & quality of asset. Yet, as another-addition to the bank commitment Excellence in Banking, the division went on building strategic tie ups with different organizations & conducted different promotional programs. These programs were highly appreciated in the market.
The division focusing to develop & introduce new products & services through extensive market research to meet every facet of modern banking needs.
The highlights of the financial performance of Dhaka Bank Limited are given below:
(Fig in million Tk.)
|2||Paid up Capital||531||664||1,228||1,289||1,547||1,934||25|
|3||Deposits (Base & Bank)||16,851||22,270||28,439||41,554||48,731||56,986||17|
|4||Loans & Advances||12,887||16,539||23,372||34,049||39,972||49,698||24|
|8||Inward Foreign Remittance||878||1,110||3,377||16,764||10,609||1,834||12|
|10||Volume of NPL||420||271||351||554||1,258||1,908||52|
|11||NPL % of total Advances||3%||2%||2%||2%||3%||3.84%||22|
|12||No. of Branches||20||23||29||37||41||45||10|
|13||No. of Employees||568||613||688||786||842||898||7|
|14||No. of Foreign Corr. /Banks||406||406||406||350||350||350||–|
|15||Earning per Share (Tk.)||53||61||44||45||36||43||19|
|16||No. of share outs.||5.31||6.64||12.28||12.89||15.47||19.34||25|
|17||Cost of Deposit (%)||7.24||6.75||8.13||9.15||8.97||9.40||5|
|18||Credit/Deposit ratio (%)||76.47||74.26||82.19||91.84||82.03||87.21||6|
Source: Annual Report, Dhaka Bank Ltd. and website www.dhakabankltd.com
Advance and Deposits Comparison (Fig in crore Tk.)
The advance and deposit ratio has been increased over the years. At the beginning of the bank the ratio was as low as 20%, which has reached at 80% in 2007. So the bank is getting more aggressive as it is getting old.
Return on Equity (ROE):
Return on Assets (ROA):
Guidelines on Credit Risk Management
Credit risk is the primary financial risk in the banking system. Identifying and assessing credit risk is essentially a first step in managing it effectively. In 1993, Bangladesh Bank as suggested by Financial Sector Reform Project (FSRP) first introduced and directed to use Credit Risk Grading system in the Banking Sector of Bangladesh under the caption “Lending Risk Analysis (LRA)”. The Banking sector since then has changed a lot as credit culture has been shifting towards a more professional and standardized Credit Risk Management approach.
Credit Risk Grading system is a dynamic process and various models are followed in different countries & different organizations for measuring credit risk. The risk grading system changes in line with business complexities. A more effective credit risk grading process needs to be introduced in the Banking Sector of Bangladesh to make the credit risk grading mechanism easier to implement.
Keeping the above objective in mind, the Lending Risk Analysis Manual (under FSRP) of Bangladesh Bank has been amended, developed and re-produced in the name of “Credit Risk Grading Manual”.
The Credit Risk Grading Manual has taken into consideration the necessary changes required in order to correctly assess the credit risk environment in the Banking industry. This manual has also been able to address the limitations prevailed in the Lending Risk Analysis Manual.
CREDIT RISK GRADING (CRG):
Credit risk grading is an important tool for credit risk management as it helps the Banks & financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch. The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as post-sanction stage.
At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level.
At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken.
Having considered the significance of credit risk grading, it becomes imperative for the banking system to carefully develop a credit risk-grading model that meets the objective outlined above
Definition of Credit Risk Grading:
- 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 they pose. 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 of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole.
- As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute 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.
Credit Risk Grading Definitions:
For loans to individuals or businesses credit quality is typically assessed through a process of credit scoring. The criteria for Credit Risk Grading (CRG) are:
- Financial risk
- Business/industry risk
- Management risk
- Security risk
- Relationship risk.
The following CRG is being set by the Bangladesh Bank, which helps to evaluate the borrower. Risk manager will input data available from their income statement, balance sheet and cash flow to the FSS known as Financial Spread Sheet, which will calculate the risk ratio and provide the score (Appendix A). Based on the total score of profitability, risk ratio etc. manager will grade the client. A borrower will be categorized ‘Superior’ when he will provide full-cash security, or guaranteed by the government or international bank. This type of guarantee is superior because there is zero possibility of loan being classified or zero exposure. Next, a borrower is classified as ‘Good’ when the score is 85 or more. ‘Acceptable’ when his credit risk grading score is between 75 and 84. Banker need not to be worry till the score is 75 because they are considered to be ‘Good-performing loan’. When the client is ranked ‘Marginal’ banker needs to be careful about sanctioning loan because this client has 50% probability that he might classify. Then as the score become less by 10 points the client will be categorized ‘Special Mention’, ‘Substandard’, ‘Doubtful’ and ‘Bad/Loss’ when score is below 35. These four are called Non-performing loan. This scoring system is a decision making tool.
Fully cash secured, secured by government guarantee/international bank guarantee
Strong repayment capacity of the borrower, excellent liquidity, low leverage, consistent strong earnings and cash flow.
Not strong as GOOD grade borrower but has consistent earnings, cash flow and a good record of accomplishment.
Borrower having an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and /or inconsistent earnings.
Potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower.
Weak financial condition, capacity to repay is in doubt.
Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. Due to specifically identifiable pending factors such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.
|8||Bad / Loss||BL||<35|
Long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation. Prospects of recovery are poor and legal options have been pursued.
Table : Credit Rate Grading (CRG)
Source: Bangladesh Institute of Bank Management, Mirpur, Dhaka, May 2006
Ultimately, if client wants to ensure a good credit score they should keep financially fit and deal responsibly with their financial commitments. It is confidence that a loan will be paid back on schedule that determines whether credit is granted.
Re-assessing clients regularly is always a good practice for ensuring proper risk management and financial growth in banks. DBL updates the records with the latest financial statement of the client every year and sometimes every six months for clients. It is a good practice from a credit-risk control standpoint.
The principal function of a bank is to lend. Lending is a dynamic activity. It is through the medium of lending the banking industry promotes economic activity instill and encourages, at the individual level, the principle of self-reliance, and yields earnings for the bank. It is lending alone that brings banking into a more meaningful and purposeful contract with public and therefore, has the greatest impact upon them.
It is a fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to repay, rather than the security held by the banker. Security is required by the banker as a protection against unexpected default in repayment by the customer. Thus, the object of both external and internal controls is to ensure the employment of bank funds in a profitable manner without undue risk of loss to the capital.
Although all lending involves some degree of risk, it is necessary for any bank to develop sound and safe lending policies and new lending techniques in order to keep the risk to a minimum. The principles of sound lending may, therefore, be summarized on below:
1) Safety: Safety is the first guiding principle of a prudent banker. A bank is in business to make money. It mainly uses depositor’s fund as a means of its earnings. The money of the depositor’s being repayable on demand or, after a short notice, determines the capacity of a bank as to the period for which he can safely lend it out without an uncalculated risk. Safety should never be sacrificed for profitability. Once the confidence of the depositor’s is shaken, the banker cannot carry on the banking business. On principle he, therefore, cannot indulge in unsecured or long term advances. Advances should be expected to come back to resort to legal action or to sell the securities to liquidate the advance. The repayment of the loan depends upon the borrower’s- i) capacity to pay, and ii) willingness to pay.
2) Liquidity: Liquidity is the availability of bank funds on short notice. It is not enough that the money will come back, it is also necessary that it must come back on demand or in accordance with agreed terms of repayment. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made; otherwise, the liquidity position of the bank is endangered.
3) Profitability: Commercial bank has to distribute its resources in a manner that they meet the twin requirements of liquidity and profitability. A banker has; therefore, to see that major portion of the assets owned by it are not only liquid but also aim at earning a good profit.
The working funds of a bank are collected mainly by means of deposits from the public and interest has to be paid on these deposits. They have also to meet their establishment charge and other expenses. They have to make provision for depreciation of their fixed assets and also for any possible bad or doubtful debts. Interest earned by a bank on its advances is the main source of its income. The difference between the interest received on advances and the interest paid on deposits constitutes a major portion of the banker’s income. The bank will not, however, enter into a transaction unless a fair return is assured. So, there is little point in a banker granting facilities which do not bring directly or indirectly some returns.
4) Purpose: A banker would not throw away money for any purpose for which the borrower wants. The purpose should be productive so that the money not only remains safe but also provides a definite source of repayment. The banker should study the purpose for which loan is required and the resources from which the borrower is expected to repay. If the funds borrowed are employed for unproductive purposes like marriage ceremony, pleasure trip, repayment of old debts etc. or speculative activities, the repayment in the normal course will become uncertain. Banks also discourage advances for hoarding of stocks.
5) Security: It is the practice of banks not to lend money without any security. The security offered for an advance is insurance or a cushion to fall back upon in case of need. A banker would normally like to recover the advance from the sale of the security. They would prefer an advance to come back from the normal source. The importance of an adequate and acceptable security can, however, be hardly over emphasized. Security serves as a safety value for an unexpected emergency. An element of risk is always present in every advances however securities are not insisted upon, there are chances that the borrower may raise funds elsewhere by charging them to others and thereby the banker’s position is jeopardized.
Security taken by banks can be classified into two broad categories such as:
a) Primary Security may be either personal security or impersonal security or both. Personal security is given by a borrower by way of duly executed promissory note, acceptance/endorsement on a bill of exchange and personal covenants in mortgage deeds or loan agreements. Impersonal security is given when a charge is created by way of pledge/ hypothecation/mortgage over the borrower’s tangible assets, such as, goods and commodity, fixed assets, bills receivables, book debts.
b) Collateral Security may be direct or indirect. Collateral security obtained from the borrower himself to secure his own account is known as direct collateral security. For example, advance against hypothecation of stock-in-trade is strengthened by equitable mortgage of the title deeds of house property of the borrower. Indirect collateral security means any form of security given by a third person to secure a customer’s account. A guarantee given by a third party is an indirect collateral security.
6) Disposal: The advances should be as much broad-based as possible and must be in keeping with the deposit structure. The advances must not be in one particular direction or to one particular industry; because any adversity faced by that particular industry will have serious repercussions on the bank. Again, advances must not be granted in one area alone. There should be spread of advances against different securities, industries as well as areas. Thus, by a diversification of the advance a banker will be able to spread his risks and considerably improve the safety of advances.
7) National Interest: Banking industry has significant role to play in the economic development of a country. The banker would lend if the purpose of the advance is for overall national development plans necessitating flow of credit to priority sector in the larger national interest. Sometimes the need of the borrower may be considered so essential for the benefit of the national economy that despite heavy risks involved the advance may be granted. In the changing concept of banking, national interest for financing in some areas, especially in advances to agriculture, small industries, small borrowers, and export-oriented industries, are assuming great importance.
ROLE OF CIB IN CREDIT MANAGEMENT
Due to irregular and insufficient flow of credit information in the banking system the proportion of classified loan in relation to the total credit is very high. This proportion of classified loan operated a bad culture in the banking sector. In order to eliminate the bad culture & to equip the banks with proper credit information for loan application processing, proposal for creation of (CIB) was put forward by different committees and organizations and it was established in 1992.
The main objectives of the CIB are to collect all sorts of information in respect of the borrowers from the scheduled banks and other non-bank financial institutions & creation of computer database in order to feedback the same information to the banks & other non-bank financial institutions for quick processing of new loan application, rescheduling, etc. and preparation of various reports for MIS purposes to be used in Bangladesh Bank & ministry concerned.
The Following Are The Main Functions Of CIB:
1) To standardize information flow on loans/ credits within the Bangladesh banking system.
2) To increase the speed & accuracy with which the credit information is made available to banker assessing credit role.
3) To combine the information gathered on classified loans with the information on newly sanctioned loans to the borrowers thereby making available on integrated information package.
4) To integrate the default loan information in the CIB and its timely submission to the banks for loan application processing.
5) To collect credit information on quarterly basis from Banks.
6) To make policy for keeping utmost security & confidentiality of CIB data & reports thereon.
7) To convey the CIB information to Banks as quickly as possible for quick disposal of loan application.
8) To prepare various reports on credit information of the borrowers.
9) To help the commercial Banks to generate their own (automatic) database system for time reduction in submitting the credit report to CIB for assimilation.
10) To conduct itself supervisory job (survey) in case of need to review the correctness of the information submitted by Banks.
11) To prepare summary reports on available information at CIB for management purposes.
From the above discussion, we can conclude CIB database is one of the most important information canters for the financial institutions. This information, if used properly, will definitely improve the relationship between the Bank & its customers and ultimately be helpful to eliminate the present bad culture in banking sector.
LOANS & ADVANCES
Banking business is like all other profit-oriented business. It depends mainly on how much profit they can make. Profit is the yardstick for the bank to move on. Banking is a business that deals only with money and credit. They work as reserves of “savings” of the community and also as lenders or investors for trade business and industry. Banks are profit oriented. They invest their funds in many to earn income. Huge amount of income derives from loans and advances. Credit is continuous process. Recovery of one credit gives rise to another credit. In this process of revolving of funds, bank earns income in the form of interest. A bank can invest its fund in many ways. Banks bake loans and advances to traders, businessmen, and industrialists against the security. Moreover nature of credit may differ in terms of security requirement, disbursement provision, terms and conditions etc. The Dhaka Bank should take proper caution in lending otherwise the risk of default in repayment may arise.
Target Customers of the Dhaka Bank Limited
The customers for the loan services are categories as follows:
- Individual person.
- Sole proprietorship firms.
- Partnership firms.
- Private limited company.
- Public limited company.
- Government and semi government organization.
- Bank employees.
Reasons For Providing Loans And Advances
Loans and advances are the survival unit of the bank because until and unless the success of this section, the survival is a question to every bank. If this section is not properly working, the bank itself may become bankrupt. This is important because this is the earning unit of the bank. Banks are accepting deposits from the depositors in condition of providing interest to them as well as safe keeping their interest. Now the question may gradually arise how the bank will provide interest to the clients and the simple answer is advance.
Why the bank provides advances to the borrowers
- To earn interest from the borrowers and give the depositors interest back.
- To accelerate economic development by providing different industrial as well as agricultural advances.
- To create employment by providing industrial loans.
- To pay the employees as well as meeting the interest groups.
We often use loans and advances as an alternative to one another. But academically this concept is incorrect. Academically advance is the combination of such items where loan is a part only. For this credit section of this bank is known as advance section.
Consumer Credit Scheme
The objective of this loan is to provide credit to the customer (Service Holder) for purchasing of essential Household durable like- computer, Television, Sound System, Sewing machine, Furniture etc. The borrower executed the following documents in the Bank’s favor to secure the loan:
- Demand Promissory Note (Single).
- Letter of Arrangement.
- Letter of Installment.
- Letter of Disbursement.
- Letter of Hypothecation.
- Personal guarantee signed by the 3rd party with particulars of guarantee form-C.
- Assets and Liability position of the borrower.
- Monthly income of the borrower.
By considering those documents Bank provides loan to borrower under the following terms and conditions:
Margin: 20% on the value of the household items to be purchased.
Repayment: Repayment procedure is 24/36/48 equal monthly installments.
Security: Hypothecation of the purchased assets.
Rate of interest: 16% (Revised from time to time).
Extent of limit: The loan amount sought can not exceed 80% of the purchased price.
Diversification of Credit
As per Bangladesh Bank rule on credit, Dhaka Bank can extended 80% of its deposits. Dhaka Bank extends credit in four sectors which are organized under a broad sector:
About 85% people of rural area are engaged in agricultural activities. But most of them do not have enough money to cultivate their land. Under this category Dhaka Bank provides credit in various agricultural activities such as crops, fisheries, and live stocks, jute & jute goods export etc.
Bangladesh is a developing country. We have to develop industry for the economic growth of the country. But most of the people of our country do not have sufficient capital to develop industry. Under this category Dhaka Bank provides credit in various industrial activities such as small & cottage industry, big and medium industry.
Dhaka Bank gives credit to purchase commercial goods. As a result the producers of goods can sale their outputs and the traders can do their business efficiently. Under this sector Dhaka Bank provides credit for various activities such as trade, export, import, working capital etc.
Many of our country want to organize some productive activities. But they do not achieve their goal for lack of capital to meet up their needs for capital; Dhaka Bank helps to improve the socio-economic condition of the country. Under this sector Bank provides credit for various activities such as Housing, Consumption, Construction, Transportation, and Equipment (Medical) etc.
General Procedure For Loans And Advances
The following procedure is applicable for giving loans to the customer. These are:
Application for loan
The borrower applies for the loan in the prescribed form of the bank describing the types and purpose of loan.
Getting Credit Information
The bank collects credit information about the applicant to determine the credit worthiness of the borrower. Bank collects the information about the borrower from the following sources:
- Personal investigation.
- Confidential report from other bank Head Office/Branch/ Chamber of the Commerce.
- CIB Report from Central Bank.
The loans and advance department gets a form filled by the party seeking a lot of information. The information’s are listed below:
- Name and address of the borrower (present and permanent).
- Constitution or status of the business.
- Date of establishment and place of incorporation.
- Particulars of properties, Partners, and Directors.
- Background and business experience of the borrowers.
- Particulars of personal assets, Names of subsidiaries, Percentage of share holding and Nature of business.
- Details of liabilities in name of borrowers, in the name of any directors.
- Financial statement for the last three years.
- Nature and details of business/products.
- Details of requested credit facilities.
- Details of securities offered.
- Proposed debt equity ratio.
- Other relevant information.
Analyzing these information
Bank then starts examination that whether the loan applied for, is complying with its lending policy. If comply, then it examines the documents submitted and the credit worthiness. Credit worthiness analysis, i.e. analysis financial conditions of the loan applicant is very important. If loan amount is more than 50 lac then bank goes for Lending Risk Analysis (LRA) and Spreadsheet Analysis (SA) which are recently introduced by Bangladesh Bank. According to Bangladesh Bank rule, LRA and SA are must for the loan exceed one crore.
If these two analyses reflect favorable condition and documents submitted for the loan appear to be satisfactory, then banks goes for further action.
Lending Risk Analysis-LRA:
LRA is a traditional technique used by experienced people of credit department of banks to calculate the risk of loan. CRG is an upgraded tool of LRA. LRA is a ranking whose total score is 140. Among this score, 120 is for total Business Risk and 20 for Total Security Risk.
|Score||Business Risk||Score||Security Risk|
|13 – 19||Poor risk||0 – 10||Poor risk|
|20 – 26||Acceptable risk||10 – 14||Acceptable risk|
|27 – 34||Marginal risk||14 – 20||Marginal risk|
|Above 34||Good risk||Above 20||Good risk|
LRA is a very important and vital analysis for deciding whether the loan proposal is potential or not. Many types of scientific, mathematical, statistical and managerial tools and devices are required to perform this analysis.
The project proposal is analyzed and decision about the project is taken. The loans and advance department is responsible for the analysis. After preliminary appraisal of the loan project the final approval is obtained from the manager. If the loan amount crosses a certain amount (not found) manager sends the loan project to the principal office for final approval. The experts in principal office find out different projected ratios and develop an understanding about the potentiality of the project. Bank evaluates a loan proposal by considering few predetermined variables. These are:
- Purpose of the loans.
- Sources of repayment.
- Diversification of risks etc.
The most important measure of appraising a loan proposal is safety of the project. Safety is measured by the security offered by the borrower and repaying capacity of the borrower. The attitude of the borrower is also important consideration. Liquidity means the inflow of cash into the project in course of its operation. The profit is the blood of any commercial institution. Before approval of any loan project the bank authority has to sure that the proposed project will be profitable venture. Profitability is assessed from the projected profit and loss statement. The security is the only tangible remains with the banker. Securing of collateral is the only weapon to recover the loan amount. So bank has to see that the collateral, it is accepting is easy to sale and sufficient to recover the loan amount. Bank cannot sanction loan by only depending on collateral. The sources of the payment of the project should be a feasible one. During sanctioning any loan bank has to be attentive about diversification of risk. All money must not be disbursed amongst a small number of people. In addition any project must be established for the national interest growth.
The Dhaka Bank, Credit Operations & Change Management Dept., Head Office is very cautious about valuation of the collateral. The bank officials and simultaneously evaluate the collateral the party offers by private firm. This two way valuation of the collateral increases the accuracy of its value estimated. Three types of value of the collateral are assumed:
- Current market price • Distress price • Price after five years
The legal officers of the bank check the documents ascertain their impurity.
Final Decision About the Project
If the loan decision remains with the branch level, branch sanctions the loan and if the approving authority is head office then the decision comes to the branch by telex or fax.
Proper Supervision of the Project
If such provision is kept in the sanction contracts, the bank officials go to the project area and observe how the loan is utilized. If no such clause to supervise the loan is added, even then the bank can see the performance of the project.
Documentation of the Loan
These are the most frequently used and common documents for creation of above mentioned charged and for other formalities for sanctioning the loan:
- Demand promissory note: Here the borrower promises to pay the loan as and when demanded by the bank to repay the loan.
- Letter of Arrangement: Here the written amount of the loan sanctioned to the borrower is specified.
- Letter of Continuity: It is used to take continuous facilities as providing continuous securities.
- Letter of Hypothecation: It is the written document of the goods hypothecated thus to put in case of need.
- Stock Report: This report is used for SOD and CC. in this report, information about the quality and quantity of goods hypothecated furnished.
- Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of board of directors of the company owning the landed property.
- Personal guarantee: It is the additional confirmation of the borrower to repay.
- Guarantee of all the directors of the company.
- Resolution of the board of directors: It is used to borrow the fund to execute documents and complete other documents.
- Letter of disclaimer: By this letter, the borrower withdraws his all claim on the property/goods liened/mortgaged.
- Form no. 18/19 for filling charges with the register of joint stock companies under relevant section.
- Letter of Acceptance: Letter indicating the acceptance of the sanction proposal by the borrower.
- Letter of Pledge: It is the written document of the goods pledge thus the legality of holding the goods.
- Letter of Disbursement: This is the document through which the payment of sanctioned loan indicates.
- Letter of Partnership: In case of partnership firm, the partnership deeds are to be provided.
- Letter of Installment: The amount of installment that is to be paid at certain intervals.
- Insurance Policy: It shows the up-to-date insurance profile of the customer.
- Tax Paying Certificate.
- Any document if described, as essential in the sanctioned advice sanctioned by the head office.
RECOVERY OF LOANS AND ADVANCES
To lend money is an easy matter. To be sure of recovery of the loan is not that easy. No banker whatsoever careful and diligent he is in granting advances succeeds on getting all the money that has been advanced. With the outcome of social responsibilities of the commercial banks to make advances to the priority sectors the situation has been becoming more and more complex. The most serious problem that affects the entire banking industry today is the problem of recovery of bank advances.
In whatever from bank advances is granted, they are repayable on demand or at the expiry of some fixed period. Overdraft and Cash Credit are legally repayable on demand. Loans are repayable on the expiry of the periods for which they are granted. In case loan is repayable in installments and default occurs in the payment of any installment, entire loan usually becomes immediately recoverable at the option of the bank. Bills of Exchange discounted are payable on maturity. Banker has to keep a close watch on the borrower and to take adequate follow-up measures for ensuring that recovery of advance is smooth and timely. A sound practice to follow in handling advance, the systematic plan of repayment. From the bank’s point of view, this is important for at least two reasons:
i) If the borrower has no or has indefinite plans for repayment of the advance, it may indicate that the loan is too risky or is too speculative for the bank to handle.
ii) If the borrower has a plan for the repayment of the loan, the banker is placed in a position to consider the source from which the funds will come for repayment and to analyze the risk involved more intelligently.
Reasons for non-recovery of loans/advances
a) Not careful about the weak points while preparing credit proposal.
- Negligence in carefully implementing terms of sanction letter, as a result, loans remain faulty.
- Borrowers take advantage of the situation.
- Failure of the controlling office in monitoring the recovery.
b) Selection of borrower’s essential pre-requests of good loan not properly done.
- His 3 C’s 3 R’s or 5 C’s or 6 C’s not properly assessed, hence recovery becomes difficult.
c) Feasibility study not properly done, project not properly implemented leading to loan becoming undue.
d) All important required papers not obtained before disbursement, law officer not consulted legal actions become difficult.
e) Wrong valuation of pledged goods mortgaged properly over valuation. Branch managers in some cases not aware that goods actually pledged.
f) Loans/advances do not become overdue overnight -corrective measures are not taken when symptoms detected.
g) Lack of control and proper supervision, diversion,
h) Inspection of go-downs/factories not done.
- Stereotype inspection.
- Borrowers take advantages.
- Goods are either damaged or destroyed or removed for want of timely action.
Procedure for Recovery
If a borrower fails to make repayment of the dues the bank has to consider what steps need to be taken to recover the debt. Banker will eventually have to take the following steps to recover the stuck up advances.
a) Existing loans (all categories):
- Diarizing due dates of repayment.
- Regular follow-up.
- Periodical inspection.
- Surprise visits.
b) Overdue loans/advances:
- Preparation of quarterly lists: Branch copy, controlling office copy and head office copy.
- Attempts made for adjustment of loans before application of quarterly interest.
- Must be adjusted before being classified.
c) Classified loans/advances (Substandard, doubtful and bad.):
- Targets for recovery.
- Steps for classification.
d) Interest exemption:
- Quick decision.
- Communication of decision quickly.
Remedial Measures of Loan Recovery
- Ascertain reasons for non-payment.
- Training and motivating of staff.
- Classification of Borrowers to A, B, C & D.
- Manager handles “D” type customer.
Strategies for Recovering of Loan
Following are some strategies that yielded appreciable results:
- Tailor-made strategies for different problems must be prescribed.
- Timely wisdom alone works as timely strategy.
- Recovery often proves effective when follow-up done with co-obligates.
- Old loans cleared to secure new loans to be taken advantage.
- Clean loans not recovered are regularized by taking some sort of security to have some hold on borrowers.
- Friendship and exchange of courtesies with dites of the place like DC, SP, elected representatives credit moral impact on borrowers.
- Material change.
- Management composition.
- Economic trends- local and international.
- Client performance versus budget.
- Bank versus client relationship.
- Evidence of weakness in borrowers.
- Understand client’s business.
- Analyze Client’s financials.
- Frequent visits to clients.
- Perfected legal documentation.
- Security covers for Bank’s risk.
- Investigate market rumors.
- Use credit bureau checking.
- Legal review of documents & situation.
- Workout strategy & action.
- Loss evaluation versus security cover.
- Stay or leave decision & reclassification.
- Continuous visits to the client (Defaulter).
- Negotiation versus court action.
- Legal expenses multiplying.
- Obtain support- senior management, legal counsel and specialist; legal, business, and government.
Different Types of Legal Actions:
When the banks fail to recover the loans through pursuance, they file suit against the defaulting borrowers in competent courts of law through banks approved lawyers to ensure recovery through legal course of action:
- Filling certificate cases under public demand recovery act. 1913.
- Recovery of loans through sale of mortgaged property or taking over management of the defaulting concern.
- Filing criminal cases for breach of trust under 406/420 BPC.
- Filing money suit cases under Artha Rin Adalat Act 1990.
- Filing Bankruptcy cases under Bankruptcy Act 1997.
Prior to setting of Artha Rin Adalat in 1990, Bank’s had to file cases in sub-judge courts, commercial courts, assistant judge courts and certificate cases to the authorized certificate officers in districts & thanas through out the country under Public Demand Recovery Act, 1913 and thousands of cases have been pending for years together in various courts. This legal framework was found quickly inadequate to cope up with the challenges of rapidly changing financial environment.
Meaning of Credit Policy
Policy entails projected course of action. Each bank should have its own policy of granting credit although credit is always a matter of judgment applying common sense in the light of one’s own experience.
A sound credit policy includes among other things safety of funds invested vis-à-vis profitability of the bank. Encouraging maximum number of small loans is better than concentration in a particular type of advances which ensures sufficient liquidity with least incidence of bad debts.
It has to be borne in mind that a good loan allowed to a properly selected borrower is half collected. In order to make a good loan there should have a good loan policy.
Objective of Credit Policy
There are some objectives behind a written credit policy that are as follows:
- To provide a guideline for giving loan.
- Prompt response to the customer need.
- Shorten the procedure of giving loan.
- Reduce the volume of work from top level management.
- Delegation of authority to the middle level management.
- To check and balance the operational activities.
Importance of Credit Policy:
The necessity of a written credit policy is to provide a framework of standards and points of reference within which individual lending personnel can operate with confidence, relative uniformity, and flexibility. Lending officers will then be able to make their own decisions within delegated authority, without the necessity for constant referral to higher management.
Without such a written policy, there is a tendency to concentrate all decision making in one or two people at or near the top, with the obvious disadvantages of slower decisions and the inability of loan officers to develop their full potential. The other tendency is to foster a dangerous diversity of lending practices and philosophies within the organization, probably leading ultimately to an in-ordinate number of problem loans. In addition to establishing uniform guidelines for loan officers and satisfying the regulator agencies, a written credit policy can aid bank management in defining the objectives of the bank. Like any other business, the commercial banks establish particular objectives to be met.
Formulation of Credit Policy:
One of the questions that should arise in a discussion of credit policy is who should formulate the policy. Although the ultimate responsibility lays at the highest level in the organization i.e. the board of directors, yet the actual drafting shall have to be done by the senior lending officer in consultation with the chief executive officer and with contributions from senior officers, associates and subordinates. Obviously, the level of origin will vary with the size and structure of the organization. The matter than be referred to the board for approval after careful examination, consideration and discussion.
Essential Components of A Sound Credit Policy:
There can be some variations based on the needs of a particular organization, but at least the following areas should be covered in any comprehensive statement of credit policy:
- Legal consideration: The bank’s legal lending limit and other legal constraints should be set forth to avoid inadvertent violation of banking regulations.
- Delegation of authority: Each individual authorized to extend credit should know precisely how much and under what conditions he or she may commit the bank’s funds. These authorities should be approved, at least annually, by written resolution of the board of directors and kept current at all times.
- Types of credit extension: One of the most substances parts of a loan policy is a delineation of which types of loans are acceptable and which type are not.
- Pricing: In any profit motivated endeavor, the price to be charged for the goods or services rendered is of paramount. Without it, individuals have few guidelines for quoting rates or fees, and the variations resulting from human nature will be a source of customer dissatisfaction.
- Market area: Each bank should establish its proper market area, based upon, among other things, the size and sophistication of its organization, its capital standpoint, defining one’s market area is probably more important in the lending function than in any other aspect of banking.
- Loan standards: This is a definition of the types of credit to be extended, wherein the qualitative standards for acceptable loans are set forth.
- Credit granting procedures: This subject may be covered in a separate manual, and usual is in larger banks. At any rate, it should not be overlooked because proper procedures are essential in loan establishing policy and standards. Without proper procedures for granting credit and constant policing to ensure that these procedures are meticulous carried out, the best conceived loan policy will not function and, inevitably, problems will develop.
As the Bank have a high rate of non performing loans. Banks risk taking applied should be contained and our focus should be to maintain a credit portfolio keeping in mind of Banks capital adequacy and recovery strength. Thus Banks strategy will be invigorating loan processing steps including identifying, measuring, containing risks as well as maintaining a balance portfolio through minimizing loan concentration, encouraging loan diversification, expanding product range, streamlining security, insurance etc. as buffer against unexpected cash flow.
Sanction of Credit
Most important step of providing credit facility is the sanctioning of credit. Because sanctioning authority will be held responsible for any discrepancy. In this step all the documentation is completed and the customer is sent an advising letter for the credit facility along with all the terms and conditions.
Norms maintained in sanctioning of credits are described below:
- Credit will be sanctioned and disbursed strictly in terms of the approved Credit Operational Manual of the Bank and Head Office Circulars issued from time to time.
- All norms informed through the Circulars of Credit Division in particular and all other relevant circulars in general, which are to be followed meticulously while exercising power.
- Credits will be subject of Bangladesh Bank restriction.
- The party to whom credit will be allowed should be as far as possible within the command area i.e. Area of operation of the Branch. Deviations, if any are to be explicitly explained in the proposal.
- No Sanctioning Officer can sanction any credit to any of his near relations and to any firm/company where his relations have financial interest. Such cases should be sent to the Head Office.
- All Sanctioning Officers maintain a Sanctioned Register for recording serially all the credits sanctioned by him. Sanctioning officer will accountable for non-recovery due to his injudicious decision.
- All approval of credit facilities must be conveyed under dual signature. Ideally both the signatories must have the required lending authority. If however, two lending officers of the required lending are not available, one of the signatories must have the required authority.
Disbursement of Credit
Disbursement of credits presupposes observance of all norms and procedures, which are conveyed through different Circulars of Head Office, issued from time to time.
Credit Administration and File Maintenance
Credit File Maintenance: The credit file for each facility shall contain all information necessary to facilitate ready monitoring of that facility. It should contain a through history of the customer relationship to help credit officer’: track any problems, assist a newly assigned credit officer in understanding the customer and make the lending process transparent. Primary items in Credit File include:
- Credit application and Credit approval notes/analysis. Evidence of credit approval and data upon which approval was granted together with any comments, if appropriate.
- Copy of sanction and loan agreement. A checklist along with copies of all legal & banking documents obtained / to be obtained. Details and 6 monthly updated information of all related facilities to the name customer group,
- All supporting data such as financial statements and analysis, references, credit investigation results, CIB & other Bank reports and notes of all discussions with the borrower and other relevant parties with paper clipping.
- Correspondences call reports, site visit reports, stock report etc. each credit file shall be maintained in a secured location and where access restricted to authorized personnel’s only. Copies of the information may be kept where regular access is required.
Facility Evidence Maintenance: All charge documents should be maintained in a place of utmost security. All charge documents as prescribed by the bank & local laws, for the relevant credit facility, Signed credit agreement, Signed guarantees or other evidence of credit security or collateral agreement shall be kept in fire proof safe under the custody of Branch manager or his designate alternative and another officer. A register of charge and security documents should be maintained under the supervision of the Branch Manager.
Credit Monitoring and Reviewing
It is the responsibility of the Manager to monitor the over all profile and risk aspect of the credit portfolio in accordance with the criteria set down in the Bank Credit Policy. Such monitoring shall be evidenced from the comments of the Manager in monthly Call/Visit Report and be kept in the Credit File with a copy to the Head Office.
This Review shall be formally performed at intervals prescribed by Head Office but it is the responsibility of the Manger to ensure at all times that the credit portfolio meets the standard set forth by the Bank.
Periodic Review and Follow-up should aim at ensuring:
- Terms of approval has been maintained.
- Conduct (turnover, regularity of repayment etc.) of the borrowing accounts during the period under the review has been satisfactory or as expected.
- Continuing value of the collateral is adequate.
- There are no adverse trends in market, economic and political conditions which may endanger the reliability of the facility.
- Business reciprocity offered and received is commensurate with the facilities allowed.
- Earning from the account is cost effective (i.e. adequate to meet business cost of funds and leave sufficient margin for adequate risk reward, overheads and profits).
- Borrowers business is being satisfactorily conducted as reflected through a review and analysis of the financial and operating statements.
Assessment of Group Exposure: If facilities of any one customer group are booked in a number of locations, an officer designated by Head Office shall be responsible for the management of the Bank’s global exposure to that customer group. Any development in the customer’s which may effect the management of the facility and in particular the credit rating assigned to the customer, shall be documented and advised by the designated officer to the concerned Branch & to the Head Office, Credit Division.
General Norms for Monitoring Credit Facilities: The Branches will submit a monthly statement of the credits allowed under the discretionary powers of the Manager to the Head Office irrespective whether the same are outstanding or not on the date of return.
Taking Precaution/Legal Action against Delinquent Clients
The responsibility for review and classification of credit facilities starts at Branch level. The frequency of the supervision and monitoring depends on the classification of credits.
Sub-standard Advances: This classification contains accounts where irregularities have occurred but where such irregularities are considered to be either “technical” or “temporary” in nature. The main criteria for a sub-standard advance are that despite these “technical” or temporary irregularities no loss is expected to arise.
These accounts will require close supervision by the management to ensure that the situation does not deteriorate further.
Provision @ 15% of the base is required for debt in this classification where the base is the outstanding balance less interest kept in Interest Suspense Account less the value of eligible securities.
Doubtful Debt: This classification contains debts where doubt exists the full recoverability of the principal and/or interest. Although a loss is anticipated it is not possible at this state to quantify the exact extent of that loss. Management is required to handle such debts with the utmost caution to either avoid or minimize the Bank’s losses. Provision @ 50% of the base is required for debts in this classification.
Bad-Debts: These facilities are considered to be uncorrectable shall be made a provision @ 100% of the base.
Special Mention: In addition to the above classification rating, there should be another category which is not classified but where special attention is necessary to keep the account out of classification. This category will be known as Special Mention. Facilities required special monitoring are to be flagged or put on a watch list. No provision is necessary for this category.
In order to develop marketing strategy SWOT analysis is very vital. In the process of making a SWOT marketer identifies the strength and weakness of the company and also the opportunities and threat to the company. The SWOT analysis of Dhaka Bank Limited has given below:
- Dhaka Bank Limited has nation wide image of providing quality service. It provides excellent and prompt services with higher degree of secrecy to corporate and mass level of customers.
- It has an excellent management team and disciplined workforce.
NCC abides by a set of core values that reflects high commitment to customer:
- Responsive to customers needs.
- Flexible in approach
- Professional in manner
- Strive for service excellence.
A group of qualified, experienced, dedicated and well-trained personnel employing the best effort to accomplish the organizational objective.
String network through out the country and correspondent relationship with almost all international and local banks operating in Bangladesh created a good accessibility and relationship with people.
- Most to the employees are not properly trained.
- The appropriate employees are not in the appropriate position.
- DBL currently don’t have any marketing division and any strong marketing activities through mass media e.g. Television. TV ads playa vital role in awareness building. DBL has no such TV ad campaign.
- In order to be more competitive in the market DBL should come up with more new attractive products. This one of the weakness that DBL is currently passing through.
- Bonus is given four times in a year this is another reason of the employee satisfaction.
- Promotion system of Dhaka Bank is perfectly structure for the employee inspiration. Generally promotion has been every three years after.
- Incentives are given to the employee from profit.
- Rewards are offered to the employees who are able to arrange handsome amount of deposit.
- Some foreign banks and private banks are coming threat to Dhaka Bank. At present in retail banking Standard Chartered Bank and in business banking Standard Chartered Bank, Hong Kong Shanghai Banking Corporation, CITY Bank N.A. are rival of Dhaka Bank. Also some private banks like IFIC Bank, Dutch-Bangla Bank, Eastern Bank, Prime Bank, Bank Asia etc. are becoming the new competitions for the bank and will be creating a competitive pressure on Dhaka Bank.
- Now a day’s different foreign and private bank are also offering similar type of retail lending products like Dhaka Bank. So, if all competitions fight with the same weapons, the natural result is declining profit.
- Bangladesh bank provides some rules and regulations for all banking institutions. Whether the rules and regulations suit the organization or not, it must obey these that sometimes impose barriers on daily normal operation.
During the two months internship program at Credit Operations & Change Management Dept., Head Office, almost all the desks have been observed more or less. This internship program, in first, has been arranged for gaining knowledge of practical banking and to compare this practical knowledge with theoretical knowledge. Comparing practical knowledge with theoretical involves identification of weakness in the activities and making recommendations for solving the weakness identified. Though all departments and sections are covered in the internship program, it is not possible to go to the depth of each activities of branch because of time limitation. So, the objectives of this internship program have not been fulfilled with complete satisfaction. However, highest effort has been given to achieve the objectives the internship program.
During the internship, it is found that the branch provides all the conventional banking services as well as some specialized financing activities to the economy. The Credit department provides all the services related to international and disburse credit if the proposal is sound. As specialized financing, it provides term finance to medium and small-scale industries. Thus, by providing this various services, Credit Operations & Change Management Dept., Head Office, is playing an important role in the banking system and expansion of business & industry for economic development of Bangladesh.
Though I am not in any position to provide any assistance for the betterment of this bank, but I am expressing my task from three months observation. Some of my observations are not mentioned here rather it has given as recommendation directly.
a) General Observation of Credit Operations Dept.-
Despite the fact that 2008 was a year of many challenges, the Bank was managed quite successfully. The year was concluded with a steady growth and the market share was retained in all areas of operations. Bank management is confident about its ability to sustain its earning capacity and maintenance of asset quality in the coming years. Some observations are given in the following:
- The head of this department is a very dynamic person holding a personality and well capable of handling a department like this in the most efficiently and effective manner.
- Cordial relation among the employees exists.
- Most of the employees are experienced banker.
- The employees are highly committed to their job.
b) Banking Observation of Credit Operations Dept.-
In credit management, it is conventional that proposals of credit facilities must be supported by a complete analysis of the proposed credit. More importance should be given on refund of loans out of funds generated by the borrower from their business activities (cash flow) instead of realization of money by disposing of the securities held against the advance, which is very much uncertain in present context of Bangladesh, where a number of creditors are willful defaulters. Credit officer measures the risk associated with the credit facility. He should not be liberal in this respect; he should strictly follow the credit evaluation principle setup by the bank. The analysis should contain information about the borrower, credit purpose, credit repayment sources, details of collateral security with valuation and guarantee. It should also contain an assessment of the competence and quality of the borrower’s management ability, the general economic and competitive environment of the borrowers industry and other pertinent factors, which may affect the borrower’s ability to repay the facility, should be given much importance. It should improve in file management system to faster the dealings with the client’s proposal. Return on Equity (ROE) model is a good model for measuring returns and risks associated with a bank regarding its credit facilities provided by the bank.
Although Credit Operations department is the key department of the banking operations, a number of problems have been detected while working this bank. These problems along with the recommendations for solving them are stated here:
- Credit dept. should increase more its quality of customer services.
- Speed up processing of loan application.
- L/C should be opened promptly.
- Bank should be innovative and diversified in its services.
- Bank should introduce more modern technology.
- Information system should be developed.
- Development of Human Resources.
- Chain of doing job in the branch should be made clear.
- Marketing for selling the services should be encouraged.
- Detail Manual should be prepared for accurate credit operation.
- Some discretionary power should be given to the branch management.
- Reduce classified loan on an emergency basis.