INTRODUCTION
The report is an internship report prepared as a requirement for the completion of the BBA program. The primary goal of the internship was to provide ‘on the job’ exposure to the student and an opportunity for translation of theoretical conceptions in real life situation. We the students were places in enterprises, organizations, research institutions as well as development projects. In this connection, after the completions of the BBA program.
Last year Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Fort ‘focus Groups’ were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinator to look into the practices of the best performing banks both at home and abroad.
BACKGROUND
After completion of all the required courses of the BBA Program from University of Development Alternative, it is an indispensable part of the study to get involved in a practical professional environment for 3 months. I joined AB bank Limited (Dhanmondi Branch.) as an intern. My assigned supervisor advised me to execute the report on “Retail Banking Operation of AB Bank Limited. The Dhanmondi Branch is the active Branch of AB Bank Ltd, full of ideal commercial activities. Since this branch performs the entire banking role, as a result, one can easily learn all simple and intricate banking operations. This report is the output my last three months’ endeavor during a practical experience. This report was prepared on the basis of this Bank’s current conditions and management systems in credit sectors.
OBJECTIVES
General objective of the study is to analysis the Consumer Credit of AB Bank Ltd.
The broad objective of preparing this study is to get an overall idea about the Consumer Credit Management System in banking sector by working in practical world.
The study has been undertaken with the following specific objectives:
· To analysis the pros and cons of the conventional ideas about consumer credit operation of a Bank.
· To have better orientation on consumer credit management activities specially consumer credit policy and practices, appraisal, processing steps, of AB Bank Ltd.
· To compare the existing credit policy of AB Bank limited with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh.
· To identify and suggest scopes of improvement in consumer credit management of AB bank Ltd.
· To get an overall idea about the performance of AB Bank Ltd.
SCOPE OF THE STUDY
The study encompasses organizational profile of ABBL. The study is also focused the credit flows of, overall credit management system and the strategies of it, micro and macro impact of credit disbursement in the private sector and the strategies to attract and retain credit seeking customers of AB Bank Ltd.
METHODOLOGY
Methodology will include direct observation, face-to-face discussion with employees of the different departments of the AB Bank Ltd., clients, study of files, circulars & overall practical experience of last three months.
Most of the necessary information was collected from the annual report of AB Bank Limited. Besides that, text books were also being analyzed for conceptual ideas. Information was also taken from several publications of the Bangladesh Bank. The sources are:
· Annual Report of AB Bank Ltd. Periodicals published by the Bangladesh Bank.
· Different publications regarding banking functions, foreign exchange operation, and credit policies.
· Various journals and books.
· Browsing of different web sites in the Internet.
SIGNIFICANCE OF THE STUDY
The significance of the study is to gain an inside knowledge about the strategies used to attract and retain clients using the AB Bank consumer credit line. The present study could be very important to the Stakeholders in AB Bank Ltd. The credit department is the most important department in generating revenue for a Bank. This study will also give valuable information and insight on the functioning of the Credit Department to the employees of AB Bank Ltd. The employees will be able to see if their efforts have been up to the mark according to the clients’ expectations. If it is not up to the mark, then they can increase their efforts to meet the clients’ expectations and excel in their profession.BACKGROUND
AB Bank Limited, the first private sector bank was incorporated in Bangladesh on 31st December 1981 as Arab Bangladesh Bank Limited and started its operation with effect from April 12, 1982. AB Bank is known as one of leading bank of the country since its commencement 27 years ago. It continues to remain updated with the latest products and services, considering consumer and client perspectives. AB Bank has thus been able to keep their consumer’s and client’s trust while upholding their reliability, across time. During the last 28 years, AB Bank Limited has opened 74 Branches in different Business Centers of the country, one foreign Branch in Mumbai, India and also established a wholly owned Subsidiary Finance Company in Hong Kong in the name of AB International Finance Limited. To facilitate cross border trade and payment related services, the Bank has correspondent relationship with over 220 international banks of repute across 58 countries of the World. In spite of adverse market conditions, AB Bank Limited which turned 27 this year, concluded the 2008 financial year with good results. The Bank’s consolidated profit after taxes amounted to Taka 230 crore which is 21% higher than that of 2007. The asset base of AB grew by 32% from 2007 to stand at over Tk 8,400 cr as at the end of 2008.The Bank showed strong growth in loans and deposits. Deposit of the Bank rose by Tk. 1518 crore i.e., 28-45% while the diversified Loan Portfolio grew by over 30% during the year and recorded a Tk 1579 core increase. Foreign Trade Business handled was Tk 9,898 crore indicating a growth of over 40% in 2008.
The Bank maintained its sound credit rating in 2008 to that of the previous year. The Credit Rating Agency of Bangladesh Limited (CRAB) awarded the Bank an Al rating in the long term and ST-2 rating in the short Term. From 14th November 2007 Bank changed its existing logo and presently known as AB Bank Ltd. instead of Arab Bangladesh Bank Limited.
MISSION & VISION
· Mission Statement to be the best performing bank in the country.
· Vision Statement to be the trendsetter for innovative banking with excellence & perfection.\
PROJECT OF THE BANK
· To mobilized resources form within the country for suitable and profitable investment.
· To create new entrepreneur in the field of trade, commerce and industry by creating their financial need and providing guidance and advice towards right direction of investment.
· To help formation of capital, broaden the investment base and develop the capital market.
· To contribute in the field of industrialization of the country and growth of National Economy.
· To establish, maintain, carry on, transact, undertake and conduct all types of banking, financial all investment and trust business in Bangladesh and abroad.
PRODUCT & SERVICES
Main product & services of AB Bank are as follows:
· Retail Banking
· Corporate Banking
· SME Banking
· Project Finance
· Loan Syndication
· Lending Rates
· Deposit Accounts
· Exchange Rates
· Money Transfer
· Cards
· Treasury & Foreign Exchange Products
· Service Products
· SME Loan
CONSUMER CREDIT
There are some consumer Credit products in AB Bank. These are as follows:
· Personal Loan (Unsecured)
· Personal Loan (Secured)
· Auto Loan
· Easy Loan for Executives
· Gold Grace — Jewelry Loan
· House/Office Furnishing/ Renovation Loan
· Staff Loan
· Education Loan
· Personal Overdraft
OPERATING PROFIT
Figure 1: Operating Profit as on 2005 to 2009
From the graph above we can see that the bank continues to increase its operating profit from the year 2006 to 2009.so it could be predicted that the bank will be able to increase its profit in future.
TOTAL ASSETS
Figure 2: Total Assets as on 2005 to 2009
From the above Graph we can see that the total assets of the Bank has increased gradually from 2005 to 2009, so it could be predicted that the bank will be able to continue its assets increasing in future.
LOANS AND ADVANCES
Figure 3: Loans and Advances as on 2005 to 2009
The graph shows that the bank continues to increase the amount of loans and advances from 2005 to 2009 and it could be predicted that the bank would remain increasing the amount of its loans and advances in future.
EARNINGS PER SHARE
Figure 4: Earning Per Share as on 2005 to 2009
The graph shows that EPS has decreased in 2006 but after that it started increasing gradually and could be predicted it will keep increasing in future
DEPOSITS AND OTHER ACCOUNTS
Figure 5: Deposits and Other Accounts as on2005 to 2009
The graph shows that the bank continues to increase the amount of its deposits from year 2005 to 2009 and could be predicted that it will remain increasing in future.
PROFIT AFTER TAX(PAT)
Figure 6: Profit after Tax as on 2005 to 2009
The Graph shows that the bank continues to have an increasing amount of profit after tax(PAT) in every year and could be predicted that it will remain increasing in future.
CREDIT
Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. It is any form of deferred payment.<href=”#cite_note-0″>[1] The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower.
Credit need not necessarily be based on formal monetary systems. The credit concept can be applied in barter economies based on the direct exchange of goods and services, and some would go so far as to suggest that the true nature of money is best described as a representation of the credit-debt relationships that exist in society (Ingham 2004 p.12-19).
TRADE CREDIT
The word credit is used in commercial trade in the term “trade credit” to refer to the approval for delayed payments for purchased goods. Credit is sometimes not granted to a person who has financial instability or difficulty. Companies frequently offer credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.
CONSUMER CREDIT
Consumer debt can be defined as ‘money, goods or services provided to an individual in lieu of payment.’ Common forms of consumer credit include credit cards, store cards, motor (auto) finance, personal loans (installment loans), retail loans (retail installment loans) and mortgages. This is a broad definition of consumer credit and corresponds with the Bank of England’s definition of “Lending to individuals”. Given the size and nature of the mortgage market, many observers classify mortgage lending as a separate category of personal borrowing, and consequently residential mortgages are excluded from some definitions of consumer credit – such as the one adopted by the Federal Reserve in the US.
The cost of credit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes interest, arrangement fees and any other charges. Some costs are mandatory, required by the lender as an integral part of the credit agreement. Other costs, such as those for credit insurance, may be optional. The borrower chooses whether or not they are included as part of the agreement.
Interest and other charges are presented in a variety of different ways, but under many legislative regimes lenders are required to quote all mandatory charges in the form of an annual percentage rate (APR). The goal of the APR calculation is to promote ‘truth in lending’, to give potential borrowers a clear measure of the true cost of borrowing and to allow a comparison to be made between competing products. The APR is derived from the pattern of advances and repayments made during the agreement. Optional charges are not included in the APR calculation. So if there is a tick box on an application form asking if the consumer would like to take out payment insurance, then insurance costs will not be included in the APR calculation.
TYPES OF CONSUMER CREDIT SCHEME
Visualizing the present scenario, AB Bank Limited has launched the consumer credit scheme into 9 product Brands as follows:
1) Personal Loan
2) Auto Loan
3) Easy Loan (For Executives)
4) Gold Grace-Jewelry Loan
5) House/Office Furnishing/Renovation Loan
6) Staff Loan
7) Education Loan
8) Personal Loan
| Product Name | PERSONAL LOAN |
| AGE | Minimum 25 years, Maximum 60 years |
| Minimum work experience | 2 years |
| Minimum Income | BDT 15,000/- per month |
| Loan amount | Minimum BDT 50,000/-, Maximum BDT 7,00,000/- |
| Rate | 14.5%- 17.5% |
| Tenor | 12 to 36 months |
| Security |
|
| Tin certificate | Mandatory |
| ID | National ID Card |
| Credit Report | Latest CIB Report |
| Validity of loan | Not more than 30 days from the date of approval. |
| Personal Loan (Easy Loan For Executives) Now covered under personal loan, subsequently a new product for executive will be designed. |
| Product Name | Auto Loan |
| AGE | Minimum 25 years, Maximum 60 years |
| Minimum work experience | 2 years |
| Minimum Income | BDT 30,000/- per month |
| Loan amount | Minimum BDT 3,00,000/-, Maximum BDT 20,00,000/- |
| Loan Limit | 80% of the value for brand new car.,80% of the value for reconditioned car . |
| Rate | 14.5%- 17.5% |
| Tenor | Brand new :12 – 72 months, Unregistered reconditioned car (as per import policy): 12-60 months. |
| Security | A . Spouse/ parent guarantee B .Joint registration of the vehicle & IGPA to sell the vehicle. |
| Tin certificate | Mandatory |
| ID | National ID Card |
| Credit Report | Latest CIB Report |
| Validity of loan | Not more than 30 days from the date of approval. |
| Product Name | Gold grace (JEWELLERY LOAN) |
| AGE | Minimum 25 years, Maximum 60 years |
| Minimum work experience | 2 years |
| Minimum Income | BDT 20,000/- per month |
| Loan amount | Minimum BDT 1,00,000/-, Maximum BDT 10,00,000/- |
| Rate | 14.5%- 17.5% |
| Tenor | 12 – 60 months |
| Security | Spouse/ parent guarantee |
| Tin certificate | Mandatory |
| ID | National ID Card |
| Credit Report | Latest CIB Report |
| Validity of loan | Not more than 30 days from the date of approval. |
| Product Name | EDUCATION[i] LOAN |
| AGE | Minimum 25 years, Maximum 60 years |
| Minimum work experience | 2 years |
| Minimum Income | BDT 15,000/- per month |
| Loan amount | Minimum BDT 50,000/-, Maximum BDT 50,00,000/- |
| Rate | 14.5%- 17.5% |
| Tenor | 12 to 48 months. |
| Security | A .student guarantee B . Spouse/ parent guarantee C.Admission offer from University/Institution. D. Admission fee to be paid directly to the University/ Institution. |
| Tin certificate | Mandatory |
| ID | National ID Card |
| Credit Report | Latest CIB Report |
| Validity of loan | Not more than 30 days from the date of approval. |
CONSUMER CREDIT RISK
Credit risk is an investor’s risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Another term for credit risk is default risk.
Investor losses include lost principal and interest, decreased cash flow, and increased collection costs, which arise in a number of circumstances:
- A consumer does not make a payment due on a mortgage loan, credit card, line of credit, or other loan
- A business does not make a payment due on a mortgage, credit card, line of credit, or other loan
- A business or consumer does not pay a trade invoice when due
- A business does not pay an employee’s earned wages when due
- A business or government bond issuer does not make pay a coupon or principal payment when due
- An insolvent insurance company does not pay a policy obligation
- An insolvent bank won’t return funds to a depositor.
SOVEREIGHN RISK
Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. The existence of sovereign risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm’s credit quality.
Five macroeconomic variables that affect the probability of sovereign debt rescheduling are: Debt service ratio, Import ratio, Investment ratio, Variance of export revenue, Domestic money supply growth
CONTERPARTY RISK
Counterparty risk, otherwise known as default risk, is the risk that an organization does not pay out on a credit derivative, credit default swap, credit insurance contract, or other trade or transaction when it is supposed to. Even organizations who think that they have hedged their bets by buying credit insurance of some sort still face the risk that the insurer will be unable to pay, either due to temporary liquidity issues or longer term systemic issues.
MITIGATING CREDIT RISK
Lenders mitigate credit risk using several methods:
- Risk-based pricing: Lenders generally charge a higher interest rate to borrowers who are more likely to default, a practice called risk-based pricing. Lenders consider factors relating to the loan such as loan purpose, credit rating, and loan-to-value ratio and estimates the effect on yield (credit spread).
- Covenants: Lenders may write stipulations on the borrower, called covenants, into loan agreements:
- Periodically report its financial condition
- Refrain from paying dividends, repurchasing shares, borrowing further, or other specific, voluntary actions that negatively affect the company’s financial position
- Repay the loan in full, at the lender’s request, in certain events such as changes in the borrower’s debt-to-equity ratio or interest coverage ratio
- Credit insurance and credit derivatives: Lenders and bond holders may <href=”#Hedging_credit_risk” title=”Hedge (finance)”>hedge their credit risk by purchasing credit insurance or credit derivatives. These contracts the transfer risk from the lender to the seller (insurer) in exchange for payment. The most common credit derivative is the credit default swap.
- Tightening: Lenders can reduce credit risk by reducing the amount of credit extended, either in total or to certain borrowers. For example, a distributor selling its products to a troubled retailer may attempt to lessen credit risk by reducing payment terms from net 30 to net 15.
- Diversification: Lenders to a small number of borrowers (or kinds of borrower) face a high degree of <href=”#Unsystematic_risk” title=”Systematic risk”>unsystematic credit risk, called concentration risk. Lenders reduce this risk by diversifying the borrower pool.
- Deposit insurance: Many governments establish deposit insurance to guarantee bank deposits of insolvent banks. Such protection discourages consumers from withdrawing money when a bank is becoming insolvent, to avoid a bank run), and encourages consumers to holding their savings in the banking system instead of in cash.
INTRODUCTION
Significant resources and sophisticated programs are used to analyze and manage risk. Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advice on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like Standard & Poor’s, Moody’s, Fitch Ratings, and Dun and Bradstreet provide such information for a fee. Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property.
BASIC PRINCIPLES OF LOANS AND ADVANCE
Basic principles of loans and advances are as follows?
1. Within the aggregate limit of loans and advances as mentioned, 50% of lending will be made to small industrial sector in accordance with prescribed norms of the Government and the Central Bank in terms of the Bank’s objectives with 50% to the commercial sector.
2. All lending will be adequately secured with acceptable security and margin requirements as laid down by the Head Office Credit Committee.
3. The Bank shall not incur any uncovered foreign exchange risk (currency exposure) in the lending of funds.
4. The Bank shall not incur any risk of exposure in respect of unmatched rate of interest on funding of loans and advances beyond 15% of outstanding loans and advances.
5. End-use of working capital facilities will be closely monitored to ensure lending user for the purpose for which they were advanced.
6. Loans and advances shall be normally funded from customer’s deposits of a permanent nature, and not out of short term temporary funds of borrowings from other banks or through short term money market operations.
7. Spreads over cost of funds on loans and advances and commissions and fees on other transactions should be commensurate with the rating of the borrower, quality of risk and the prevailing market conditions.
8. Loans and advances shall not exceed ten times the Bank’s net worth or 65% of customers deposit whichever is lower.
9. Credit evaluation will include:
a) Prevalent credit practices in the market place.
b) Credit worthiness, background and track record of the borrower.
c) Financial standing of the borrower supported by financial statements and other documents evidence.
d) Legal jurisdiction and implications of applicable laws.
e) Purpose and Tenure of the loan/facility
f) Viability of the business proposition.
g) Quality and adequacy of security, if available
SOME IMPORTANT FACTORS IN CONSIDERATION
Though, off balance sheet activities play a vital role in a banks earning, still income earned out of lending accounts for major portion of it. This lending, in other word advance, may raise the standard of success of a bank to the highest possible level and the same time premature death of a bank may occur depending on how the portfolio is handled. So, the following factors should be given great emphasis.
WHO SHALL GET CREDIT?
It is easier to find out a depositor than finding out a good borrower. Public money in the hands of bad borrower is never safe and secured. Then, whom to lend? The answer is to a proper entrepreneur. It is widely accepted that a good entrepreneur is a good borrower.
HOW MUCH TO LEND?
The Bank should lend matching to the asset of the borrower as well as his/her capability to properly handle the business. Bank credit must not be extended for speculative purpose. Moreover, contingent liability must be taken into consideration very wisely in sanctioning new loan and enhancing old limit as contingent liability turning into actual liability, may upset the liquidity position of a bank.
There must be a depth study on the following points:
· When the loan is to be given?
· How the loan is to be given?
· What may happen after disbursement of the loan?
· Generally what happens (from past experience) after disbursement of the loan?
· Is it hopeful that the loaner will repay the loan?
· In which sector, private or public, trading or industrial, the loan will be given?
· The loan will be short term or long term?
· A manager will do the possible efforts to minimize the risk of the Bank
CREDIT MANAGEMENT FUNDAMENTALS O AB BANK
a) As maximizing profit is the basic aim of the bank, every profit opportunity should be explored and negotiated skill fully.
b) Growth of the size of customer base through constant alertness towards profitable business opportunity.
c) To avoid unnecessary wastage of time and energy, clear, concise and summary type communications should be used.
d) To be thoroughly familiar with the banks policies and functions.
e) To put every effort in reducing and containing the size of classified advance portfolio.
f) To keep the exposure burden of credit operations to the barest minimum and endeavor to improve the cost efficiency of credit operations.
g) To apply strong commonsense in all credit matters by putting questions—”Does this make sense? Is there a better way? How to improve this?”
h) To place a high priority on the quality of credit exposure, new proposals must meet the bank’s credit criteria and existing portfolio should be under constant review for improving risk positions.
SOUND CREDIT PRINCIPALS OF AB BANK
a) Present and future business potentiality for optimum deployment of bank’s fund to increase return on assets.
b) Preference for self-liquidating QUALITY business.
c) Avoiding marginal performers.
d) Risk dispersion is basic to sound credit principles and policies. Recognize impact of fee income through Letter of Credit, Letter of Guarantee, Foreign Exchange business in enhancing return on assets.
e) Normally not to entertain or encourage long-term credit proposals.
LENDING POLICIES OF AB BANK
A loan policy gives loan officers, relationship managers, and the Bank’s management specific guidelines in making individual loan decisions and in shaping the Bank’s overall loan portfolio. One of the most important ways a bank can make sure that its loans meet regulatory standard and are profitable is to establish a written loan policy.
AB Bank Limited also has a good loan policy and the most important elements of the policy are stated below:
A goal statement for the Bank’s loan portfolio (in terms of types, maturities, sizes, and quality of loans).
Ø Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve.)
Ø Lines of responsibility in making assignments and reporting information within the loan department.
Ø Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications.
Ø The required documentation that is to accompany each loan application and what must be kept in the Bank’s credit files (required financial statements, security agreements etc.)
Ø Lines of authority within the bank regarding who is responsible for maintaining and reviewing the bank’s credit files.
Ø Guidelines for taking, evaluating and perfecting loan collateral.
Ø A presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loans.
Ø A statement of quality standards applicable to all loans.
Ø A statement of the preferred upper limit for total loans outstanding (i.e. the maximum ratio to total loans to total assets allowed.)
Ø A description of the principal trade area, from which most loans should come.
Ø A discussion of the preferred procedures for detecting, analyzing and working out problem loan situations.
TYPES OF LOAN POLICIES
The Bank’s lending operations will be in the form of:
· Working capital finance
· Trade finance (local and import)
· Project finance (on selective basis)
· SME finance
The following types of credit facilities shall be allowed:
Funded like as Overdraft, Time Loan, Term Loan, Trust Receipt, IBP,FBP
Non Funded like as Letter of Credit, Letter of Guarantee
SINGLE BORROWER/GROUP LIMITS/SYNDICATION
The Bank’s exposure on a single borrower shall be governed by Bangladesh Banks guidelines formulated through BRPD Circular(s). As per the latest guidelines Banks maximum permissible exposure for one obligor is 35% of the total capital of the bank, subject to funded facilities being up to 15% of the total capital. In case of export sector financing, the one obligor exposure limit is 50% but the funded exposure will remain the same, i.e. 15%.
DISCOURAGED BUSINESS TYPES
Unless reconsidered, considering various aspects the Bank shall discourage lending in the following sector:
· Tanneries and leather goods
· Commercial public Transport
· Gold trading
· Arms / weapons dealing
· Highly Leveraged Transactions
· Finance of Speculative Investments
· Lending to companies listed on CIB black list or known defaulters
· Counterparties in countries subject to UN sanctions
· Share Lending
· Taking an Equity Stake in Borrowers
· Lending to Holding Companies
· Bridge Loans relying on equity/debt issuance as a source of repayment
LOAN FACILITIES PARAMETERS
While sanctioning a credit facility different parameters like maximum size, maximum tenor, and covenant and security requirements to be clearly determined and spelt out. Such as
– Bank should not grant facilities where the bank’s security position is inferior to that of any other financial institution.
– Assets pledged as security should be properly insured.
– Valuations of property taken as security should be performed by a recognized professional valuation firm appointed to conduct valuations. (for credit facilities exceeding a certain amount as determined from time to time)
– 3rd party mortgage should be avoided unless direct relationship can be established acceptable to bank
CROSS BORDERS RISK
Risk associated with cross border transactions. International trade with parties of a particular country may be of comparatively higher risk. Political and sovereign risk, third world debt crisis, war risk, trade and economic sanctions risk, security risk etc to be considered while processing import and export finance proposals involving with particular countries. For example, export documents negotiated for and import from countries like Nigeria, Iraq, and Israel to be avoided.
CREDIT ASSESSMENT
A thorough credit and risk assessment shall be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment shall be presented in a Credit Memorandum that originates from the Branch and is approved by Head of Credit Risk Management, Credit Committee or the Board of Directors as the case may be. The Branch Manager will be the owner of the customer relationship, and will be held responsible to ensure the accuracy of the entire credit memorandum submitted for approval. The Branch Manager and Credit Officers must be familiar with the bank’s Lending Guidelines and shall conduct due diligence on new borrowers, principals, and guarantors.
It is essential that the Branch knows 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. Bank has established Know Your Customer (KYC) and Money Laundering guidelines which shall have to be adhered to at all times.
Credit Memorandum shall summarize the results of the 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 shall be addressed
BORROWER ANALYSIS
The majority shareholders, management team and group or affiliate companies shall be assessed. The academic qualifications, business experience and managerial ability of the directors / owners shall be taken into account. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall have to be addressed, and risks mitigated.
INDUSTRY ANALYSIS
The key risk factors of the borrower’s industry shall have to be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces shall have to be addressed and the strengths and weaknesses of the borrower relative to its competition to be identified.
SUPPLIER/BUYER ANALYSIS
Any customer or supplier concentration shall have to be addressed, as these could have a significant impact on the future viability of the borrower.
HISTORICAL FINANCIAL ANALYSIS
An analysis of a minimum of 3 years historical financial statements of the borrower shall be presented. This may, however, be relaxed in case of smaller enterprises. Where reliance is placed on a corporate guarantor, guarantor’s financial statements / net worth statements shall also have to be analyzed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed.
PROJECTED FINANCIAL PERFORMANCE
Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance shall have to be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans shall not be granted if projected cash flow is insufficient to repay debts.
ADHERENCE TO LENDING GUIDELINES
Credit Memoranda must clearly state whether or not the proposed recommendation is in compliance with the bank’s Lending Guidelines. The Bank’s Head of CRM or Credit Committee shall approve Credit Applications that do not adhere to the bank’s Lending Guidelines.
MITIGATING FACTORS
Mitigating factors for risks identified in the credit assessment shall have to be identified. Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues
SECURITY
A current valuation of collateral shall have to be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage shall be assessed.
ORGANIZATIONAL STRUCTURE RESPONSIBILITIES
An appropriate organizational structure is to be in place to support the adoption of the policies detailed in Section 1 of these guidelines. The key feature is the segregation of the Marketing/Relationship Management function from Approval/Risk Management. Credit approval should be centralized within the CRM function. Regional credit centers may be established having specific lending authority, and beyond that, all applications must be approved by the Head of Credit and Risk Management/Credit Committee or Managing Director/CEO/Board or delegated Head Office credit executive.
Organizational Structure
The following chart represents the management structure:
| Head of Risk Asset Management |
| Managing Director/ Chief Executive Officer |
| Head of Business Banking |
| Head of Credit Risk Management |
| MIS |
| EAA Committee |
| Credit Processing Unit & Approval Committee |
| Corporate A/C |
| SME |
| Syndication & Structured Finance |
| Research & Development |
| Credit Committee |
| Documentation & Disbursement |
| Loan Monitoring |
| CIB Cell |
| Compliance & Return |
| Special Asset Mgt. |
| Legal & Real Estate |
| Recovery |
| Collateral Management |
Diagram 8: Organizational Structure of Credit Management
LENDING PROCEDURE OF AB BANK
The lending procedure starts with building up relationship with customer through account opening. The stages of credit approval are done both at the branches and at the corporate office level. The various stages of credit approval are described sequentially:
· Step-I
A loan procedure starts with a loan application from a client who must have an account with the Bank. At first it starts from the branch level. Branch receives application from client for a loan facility. In the application client mention what type of credit facility he/she wants from the bank including his/her personal information and business information. Branch Relationship Manager or the Relationship Credit Officer of the credit department conducts the initial interview with the customer.
· Step-2
After receiving the loan application from the client, the bank sends a letter to Credit Information Bureau of Bangladesh Bank for obtaining a credit inquiry report of the customer from there. This report is called CIB (Credit Information Bureau) report. This report is usually collected if the loan amount exceeds fifty thousand taka. The purpose of this report is to be informed that whether or not the borrower has taken loans and advances from any other banks and if so, what is the status of those loans and advances i.e. whether those loans are classified or not.
.Step-3
If Bangladesh Bank sends positive CIB report on that particular borrower and if the Bank thinks that the prospective borrower will be a good one, then the bank will scrutinize the documents. Required documents are:
· In case of corporate client, financial documents of the company for the last three to five years. If the company is a new one, projected financial data for the same duration is required.
· Personal net worth of the borrower(s).
· In this stage, the bank will require whether the documents are properly filled up and duly signed. Credit in charge of the relevant branch is responsible enquire about the ins and outs of the customer’s business through discussing with him/them.
· Step-4
Bank officials of the credit department will inspect the project for which the loan is applied. Project existence, its distance from the bank originating the loan, monitoring cost and possibilities are examined.
· Step-5
Any loan proposal needs to be evaluated on the basis of financial information provided by the loan applicant. Financial spread sheet analysis which consists of a series of quantitative techniques is employed to analyze the risks associated with a particular loan and to judge the financial soundness and worthiness of the borrower. Besides lending risk analysis is also undertaken by the bank to measure the borrower’s ability to pay considering various risks associated with the loan. These quantitative techniques supported with qualitative judgment are the most important and integral part of the credit approval process used by AB Bank Limited. This is the credit analysis phase.
· Step-6
Obtain legal opinion on the collateral provided by the applicant, whether those are properly submitted- regular and up to date or else those documents will be asked to regularize by the applicant.
· Step-7
The branch starts processing the loan at this stage. Based on the analyses (credit analysis) done by the branch, the branch prepares a loan proposal. The proposal contains following important and relevant information:
Name of the borrower (s), Nature of credit, Purpose of the credit, Extent of the credit, Collateral, Margin, Rate of interest, Repayment Schedule Validity.
· Step-8
If the proposal meets AB Bank’s lending criteria and is within the manager’s discretionary power, the credit line is approved. The manager and the sponsoring officer sign the credit line proposal and issue a sanction letter to the client.
If the value of the credit line is above the branch manager’s limit then it is sent to head office or zonal office for final approval with detailed information regarding the client (s), credit analysis and security papers.
· Step-9
Head office processes the credit proposal and afterwards puts forward an office notice if the loan is within the discretionary power of the head office credit committee or board memorandum if the loan requires approval from the board of directors.
· Step-10
If the zonal office, credit committee of the head office or the board as the case may be approves the credit line, an approval letter is sent to the branch. The branch then issues a sanction letter to the borrower with a duplicate copy. The duplicate copy duly signed by the borrower is returned to the branch of the bank. This duplicate copy returned by the applicant proves that the borrower agrees with the terms and conditions of the credit line offered by the bank.
· Step-11
After issuing the sanction advice, the bank will collect necessary charge documents. Charge documents vary on the basis of types of facility, types of collateral.
· Step-12
Finally loan is disbursed by the branch through a loan account in the name of the borrower and monitoring of the loan starts formally.
LENDING REPORTS
| Products | Mid Rate | Interest Rate W.E.FMarch 13, 2011 |
| 1) Agriculture | 13.00% | 13.00% |
| 2) Large and medium scale industries | 13.00% | 13.00% |
| 3) Small Industries (Term Loan) | 13.00% | 13.00% |
| 4) Working Capital | ||
| a) Large and medium scale industries | 14.50% | 13.00%-16.00% |
| b) Small Industries | 14.50% | 13.00%-16.00% |
| 5) Export | 7.00% | 7.00% |
| 6) Commercial Lending | 14.50% | 13.00%-16.00% |
| 7) Housing Loans | 14.50% | 13.00%-16.00% |
| 8) Consumer Credit | 18.50% | 17.00%-20.00% |
| 9) Credit Card | 2.00% per month | 2.00% per month |
| 10) Finance to NBFI’s | 14.50% | 13.00%-16.00% |
| 11) Others | ||
| i) Cash Collateral – ABBL FDR | 14.50% | 13.00%-16.00% |
| ii) Cash Collateral – Other Banks FDR or WDB | 14.75% | 13.25%-16.25% |
| iii) Women Entrepreneur (Awparajita upto Tk 50.00 lac) | 10.00% | 10.00% |
| iv) Special Scheme Loans – SME | 15.50% | 14.00%-17.00% |
Notes:
- For lending against ABBL FDR, the rate is minimum 3.00% above the rate of the instrument subject to maximum 16.00%.
- Exposure under cash collateral of other banks requires clearance from FI & Treasury.
- For taking exposure on “Digun Loan” under Special Scheme, the rate will be 8% above the instruments’ rate; subject to maximum 17% p.a.
- For Women Entrepreneur (Awparajita above Tk. 50.00 lac) under Special Scheme, the rate will be minimum 13.00%-16.00%
GENERAL PROCEDURE OF LOANS AND