“Assessment of Credit Risk & its Management”
Chapter 1
1.1 Background of the study:
Assessment of Credit Risk is an important tool for credit risk management as it helps a Bank to understand various dimensions of risk involved in different credit transactions. Credit Risk Grading Manual of Bangladesh Bank was circulated by Bangladesh Bank vide BRPD Circular No. 18 dated December 11, 2005 on Implementation of Credit Risk Grading Manual which is primarily in use for assessing the credit risk grading before a bank lend to its borrowing clients.
Since the nature of business as well as leverage level of Banks is different from that of other borrowing clients, the need for a separate Credit Risk Grading Manual has been felt. Keeping this in mind and with a view to properly risk rate a Bank in order to set up counter party limits for providing credit products extended by one bank to another Bank this Credit Risk Grading Manual for the Bank has been produced.
The Credit Risk Grading Manual developed for a Bank shall be an effective tool to help a Bank to take a sound decision in analyzing credit risk on another bank and to set up a credit limit for money market and other business operations.
According to Bangladesh Bank “Credit Risk Grading Manual” I have decided to prepare a report on “Assessment of Credit Risk& its management of Dutch
Bangla Bank Ltd”.
1.2 Rationale of the Study:
Bangladesh is one of the underdeveloped countries in the world. The economy of the country has a lot left to be desired and there are lots of scopes for massive improvement. In an economy like this, banking sector can play a vital role to improve the overall social-economic condition of the country. The banks by playing the role of an intermediary can mobilize the excess fund of surplus sectors to provide necessary finance, to those sectors, which are needed to promote for the sound development of the economy. As the banks provide finance or lending to its counter parts, there arises a risk of credit risk, which is the possibility that a borrower or counter party will fail to meet its obligations in accordance
with agreed terms. Even at present, this problem is haunting many banks and poses a major threat towards their sound performing. So it’s very important to have an effective and sound credit risk management system in place which will help the bank mitigate its risk factors and carry out successful financing service or lending. With that issue in mind, the topic “Assessment of Credit Risk & its Management” has been undertaken as my topic for internship report.
1.3 Statement of the Problems:
To make the consequence more specific we have focused different sectors. Those are:
• What are the most important assessment criteria
• How grading are done based on assessment
• To analyze the Credit flow of DBBL
• To evaluate the overall credit management system of DBBL
• Functions and use of Credit Risk Grading in DBBL
1.4 Scope and Delimitation of the Study:
Through this survey following people will be benefited
• Banks
• Financial institutions
1.5 Objectives of the Study:
The report is prepared on the “Assessment of Credit Risk & its management” of Dutch Bangla Bank with the thought of getting in depth of the credit Assessment criteria and understands its importance.
Broad Objective:
The broad objective is to know about the credit assessment and risk grading process.
Specific Objective:
• To have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management of Dutch Bangla Bank Limited (DBBL).
• to familiarize with the credit management in the Banking arena and to grasp an idea about bank involvement in credit management system
• Evaluation of credit risk.
• Lending Procedure of Dutch Bangla Bank Ltd
1.6 Methodology of the Study:
• The following methodology will be followed for the study based on observation and interpretation. Data sources are scheduled survey, informal discussion with professionals and observation while working in different desks.
• The secondary data sources are annual reports, manuals, and brochures of Dutch
Bangla Bank limited and different publications of Bangladesh Bank. To identify the implementation, supervision, monitoring and repayment practice-interview with the employee and extensive study of the existing file was and practical case observations were done.
1.7 Limitation of the Report
Though I have given utmost effort to prepare this paper but there are some limitations of the study. They are as follows-
1. This paper has focused on the most sensitive part of the organization i.e. loan and advance. So the bank authority hesitated to disclose important information to maintain business secrecy.
2. Only 3 months time is not enough to complete such a study in a lucid manner.
3. The whole report was prepared on the Ring Road Branch of Dutch Bangla Bank and so it doesn’t focus the true picture of the Credit Risk Assessment scenario of the whole banking sector in the country.
Chapter 2
ORGANIZATIONAL PART
Dutch-Bangla Bank Limited (DBBL) is a scheduled commercial bank. The Bank was established under the Bank Companies Act 1991 and incorporated as a public limited company under the Companies Act 1994 in Bangladesh with the primary objective to carry on all kinds of banking business in Bangladesh. The Bank is listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited.
DBBL- a Bangladesh European private joint venture scheduled commercial bank commenced formal operation from June 3, 1996. The head office of the Bank is located at Senakalyan Bhaban (4th floor), 195, Motijheel C/A, Dhaka, Bangladesh. The Bank commenced its banking business with one branch on 4 July 1996.
Banks are the pillars of the financial system. Specially, in Bangladesh the health of the banking system is very vital because the capital market is little developed here. As the banks are still the major sources of credit and exercise great influence on the financial system, it is extremely important that the country’s banking systems should be in good health in the interest of investment activities meeting the needs of all kinds of finance and related matters.
Over the years, Dutch-Bangla Bank Limited has built itself as one of the pillars of Bangladesh’s financial sector and is playing a pivotal role in the extending the role of private sector of the economy. The bank has strong branch network national wide with 126 branches.
2.1 Company Profile at a glance:
Name: | Dutch-Bangla Bank Limited |
Year of Establishment: | 1996 |
Authorized Capital | 400 Crore |
Paid up Capital: | 202.14 Crore |
Number of Branches: | 126 |
Number of Employees: | ….? |
Total Number of Shareholders: | 7900 |
Total Profit Figure in 2012: | …… Core |
Total Deposit of the Bank in 2012: | 42,110.15 million |
Total Number of Executive & Officers: | 847 |
Earning per Share : | 237.37 taka |
Business Link: | Different Organization both Government |
and Non Government | |
2.2 Corporate Information:
Registered Office Sena Kallyan Bhaban (3rdFloor), 195, Motijheel CommercialArea, Dhaka 1000, Bangladesh
2.3 Mission
Dutch-Bangla Bank Limited engineers enterprise and creativity in business and industry with a commitment to social responsibility. “Profits alone” do not hold a central focus in the Bank’s operation; because “man does not live by bread and butter alone”.
2.4 Vision
Dutch-Bangla Bank dreams of better Bangladesh, where arts and letters, sports and athletics, music and entertainment, science and education, health and hygiene, clean and pollution free environment and above all a society based on morality and ethics make all our lives worth living. DBBL’s essence and ethos rest on a cosmos of creativity and the marvel-magic of a charmed life that abounds with spirit of life and adventures that contributes towards human development.
2.5 Core Objectives of Dutch-Bangla Bank Limited.
Dutch-Bangla Bank believes in its uncompromising commitment to fulfill its customer’s needs and satisfaction and to become their first choice in banking. Taking cue from its pool of esteemed clientele, Dutch-Bangla Bank intends to pave the way for a new era in banking that upholds and epitomizes its vaunted marques “Your Trusted Partner”
2.6 The Goal of the Bank: To share a significant portion of the banking sector’s byutilizing available manpower and also state of the art technology for maximizing the shareholders wealth.
o Long-term goal: To maximize the wealth of the shareholders.
o Short term goal: The earn satisfactory rate of return on investment providing wide range of banking services.
2.7 Features of Dutch-Bangla Bank Limited
There are so many reasons behind the better performance of Dutch-Bangla Bank Limited than any other newly established banks:
¾ Highly qualified and efficient professionals management the bank
¾ Dutch-Bangla Bank Limited has established a core Research & Planning Division with efficient persons.
¾ The Bank has established correspondent relationship more that 100 of foreign banks.
¾ The computerized operation system in all branches of DBBL has provided the frequent and prompt customer service.
¾ The inner environment and teamwork of all branches in DBBL motivated
¾ All experienced employees to achieve the ultimate objective of DBBL.
¾ Dutch-Bangla Bank Limited has become a member of the SWIFT system to expedite foreign trade transaction.
¾ Dutch-Bangla Bank Limited has become introduced some scheme for the purpose of saving of low income people which are not available in other like “Ajibon Pension Scheme”
¾ The Bank offers attractive saving rate than other financial institutes.
¾ Dutch-Bangla Bank Limited provides loan to the customers at lower interest with easy and flexible condition that the others do.
¾ Dutch-Bangla Bank Limited charges lower commission from their customer in comparison with other banks.
¾ Along with the profit generation Dutch-Bangla Bank Limited also maintains social responsibilities.
¾ The Bank always guided their potential customer by giving valuable advises.
2.8 Overall Banking of DBBL:
1. Electronic Banking: Service because it is advanced, secure and affordable. DBBL creates a custom banking service to suit any business of any size. The services have a wide range that includes cash flow services, distribution banking and salary accounts. If a company knows what type of custom and tailored banking service they need, DBBL can provide it instantly and at minimal cost (usually free of charge).
2. SME Banking: The purpose of the loan may be Seasonal Financing of inventory or Trade Receivable or both to the business entity Nature of Business Wholesalers, Manufacturers / Assemblers and Retailers of machinery, accessories, agriculture items, etc Loan Amount Maximum TK. 500,000/- Interest Rate @ 17% p.a.
3. Letter Of Credit (LC) :Areas of Operation
• Import Finance
DBBL extends finance to the importers in the form of:
1. Opening of Import L/C
2. Credit against Trust Receipt for retirement of import bills.
3. Short term & medium term loans for installation of imported machineries & production thereof.
4. Payment against document
• Export Finance
1. Pre-Shipment Finance
Pre-Shipment finance in the form of:
I) Opening of Back-to-Back L/C
II) Export Cash Credit
2. Post-Shipment Finance Post-Shipment finance in the form of:
I) Foreign/Local Documentary Bills Purchase
• II) Export Credit Guarantee
III) Finance against cash incentive
4. Foreign Remittance
DBBL provides premium quality service for repatriation and collection of remittance with the help of its first class correspondents and trained personnel. By introducing on -line banking service and becoming a SWIFT Alliance Access Member, which enable its branches to send and receive payment instruction directly that helps provide premium services. Remittance services provided by DBBL are:
Inward Remittance: Draft, TT
Outward Remittance: FDD, TT, TC and Cash (FC)
5. Treasury
DBBL is well equipped for treasury operation through subscribing Reuters’s terminal and operating in SWIFT network. It is also well equipped with competent human resources for efficient dealing.
6. Accounts Services:
DBBL provides all the accounts services as prescribed by the guidelines of Central Bank (Bangladesh Bank). Account services are:
1. Foreign Currency Account.
2. Non-Resident Foreign Currency Deposit Account (NFCD)
3. Resident Foreign Currency Deposit Account (RFCD)
4. Convertible and Non-Convertible Taka Account
5. Convertible and Non-Convertible Taka Account
6. Non-Resident Blocked Taka Account.
7. Corporate Banking: Dutch-Bangla Bank offers a wide range of corporate bankingservices. They include:
• Project finance.
• Working Capital finance
• Syndications & Structured finance
• Trade finance
• Equity finance
• Social and Environmental Infrastructure finance
• Custom electronic-banking projects
8. Debit / Credit Cards
Dutch-Bangla Bank provides the debit and credit card facility to their customer.
9. Internet Banking:
DBBL allows customer to do seamless internet banking. This allows you to review account, statements, paying bills as well as making some transactions. Because of local banking regulations, DBBL is not allowed to provide some types of transactions even though it is fully capable.
2.9 Competitors: BRAC Bank, Standard Chartered Bank Ltd, Bank Asia
2.10 Corporate Culture
Dutch-Bangla Bank Limited (DBBL) is one of the most disciplined Bank with a distinctive corporate culture. In this bank, it believes in shared meaning, shared understanding and shared sense this bank, it believes in shared meaning, shared understanding and shared sense making. The People of bank can see and understand events, activities, objects and situation in a distinctive way. They mould their manners and etiquette, character individually to suit the purpose of the Bank and the needs of the customers who are of paramount importance to them. The people in the Bank see themselves as a tight knit team/family that believes in working together for growth. The corporate culture they belong has not been imposed: it has rather been achieved through their corporate culture.
2.11 Product Services Information
DBBL-NEXUS Classic Card (debit) | |
Card Products: | DBBL-NEXUS Maestro card (debit) |
DBBL-NEXUS Maestro card (credit) | |
DBBL-NEXUS Silver OD card (credit) | |
DBBL-NEXUS Gold OD card (credit) | |
Truly Online Banking | |
IT Products: | Wide range of ATM & POS |
Internet Banking | |
SMS & Alert Banking | |
Clean Credit Lines: | |
Retail Banking Products: | (No cash security, No personal guarantee.) |
DBBL Life Line: | |
From the basket of Life Line, DBBL is | |
offering a complete series of credit facilities | |
for individual service holders, professionals | |
and self-employed person. | |
Health Line: | |
Hospitalization or other emergency medical | |
Needs; To purchase body fitness equipments. | |
Education Line: | |
For Higher education purposes: | |
Tuition fees | |
Secured / Clean OD Lines: | ||
(flexible OD lines in Debit Card) | ||
OD facility against security | ||
DBBL Future Line | OD facility against salary | |
<href=”#DPS> DBBL Deposit Plus Scheme (DPS) | ||
<href=”#PBS> DBBL Periodic Benefit Scheme (PBS) | ||
<href=”#BDS> DBBL Bochore Dergun Scheme (BDS) | ||
<href=”#CHESS> DBBL Children Education Savings Scheme | ||
<href=”#CHESS> (CHESS) | ||
<href=”#PP> DBBL Pension Plus (PP) | ||
2.12 Banking Products
Deposit Term Deposit
Savings Deposit Account MONTHLY TERM DEPOSIT
Current Deposit Account TERM DEPOSIT 3 MONTHS
Short Term Deposit Account TERM DEPOSIT 6 MONTHS
Resident Foreign Currency Deposit TERM DEPOSIT 12 MONTHS
Foreign Currency Deposit TERM DEPOSIT 12 MONTHS
Convertible Taka Account TERM DEPOSIT 24 MONTHS
Non-Convertible Taka Account TERM DEPOSIT 24 MONTHS 1 Year
Exporter’s FC Deposit (FBPAR) PAYOUT
Current Deposit Account-Bank TERM DEPOSIT 36 MONTHS
Short Term Deposit Account-Bank TERM DEPOSIT 36 MONTHS 6 Months
PAYOUT
TERM DEPOSIT 36 MONTHS 1 Year
PAYOUT
TERM DEPOSIT ABOVE 36 MONTHS
MONTHLY TERM DEPOSIT BANKS
TERM DEPOSIT 3 MONTHS BANKS
TERM DEPOSIT 6 MONTHS BANKS
TERM DEPOSIT 12 MONTHS BANKS
2.13 Loan & Advances
• Life Line (a complete series of personnel credit facility)
• Loan angst. Trust Receipt
• Transport Loan
• Real Estate Loan (Res. & Comm.)
• Loan Angst. Accepted Bill
• Industrial Term Loan
• Agricultural Term Loan
• Lease Finance
• Other Term Loan
• FMO Local currency Loan for SME
• FMO Foreign currency Loan
• Cash Credit (Hypothecation)
• Small Shop Financing Scheme
• Overdraft
2.14Management Hierarchy:
Chairman
Director
Managing Director
Additional Managing Director
Deputy Managing Director
Senior Executive Vice President
Executive Vice President
Senior Vice President
First Vice President
Vice President
Senior Assistant Vice President
First Assistant Vice President
Assistant Vice President
Senior Executive Officer
Executive Officer
Senior Officer
Officer
Assistant Officer
Trainee Officer
Assistant Relationship Officer
2.15 Major units of the Bank:
• Board Secretariat
• Office of the Managing Director
• Office of the Additional Managing Director
• Office of the Deputy Managing Director (Operation)
• Office of the Deputy Managing Director (Administration)
• Accounts Division
• Credit Division
• Card Division
• Credit Administration Division
• Credit Monitoring & Recovery Division
• Corporate Banking Division
• General Services Division
• Human Resource Division
• Information Technology Division
• International Division (Treasury Back Office)
• Internal Control And Compliance Division
• International Division (Front Office)
• Medical Consultant
• Retail & SME Division
• Training Wing
Chapter 3
Credit Management of Dutch Bangla Bank Ltd:
A Theoretical Analysis & Interpretation:
3.1 Definition of Credit:
The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future. For a Bank, it is the main source of profit and on the other hand, the wrong use of credit would bring disaster not only for the bank but also for the economy as a whole.
The objective of the credit management is to maximize the performing asset and the minimization of the non-performing asset as well as ensuring the optimal point of loan and advance and their efficient management. Credit management is a dynamic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund.
Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio is not only constituted the banks asset structure but also a vital factor of the bank’s success. The overall success in credit management depends on the banks credit policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance.
3.2 Factors Related with Credit:
• Risk
• Time
• Interest rate
• Security or Collateral
• Operating Expense
• Legal Considerations
• Inflation
• Finance Charge
3.3 Credit flow of DBBL:
Credit Risk Management is basic to risk management and controlling, as it is the major risk factor in most bank business. Therefore, a bank should assess the degree of risk associated with each loan and its profitability. In this connection prior assessment of and follow up on a loan transaction constitute essential ingredients of the credit risk control process. An in-depth analysis of the borrower financial conditions, expected usage of funds, ability to repay, willingness to repay and sources of repayment all together constitute step one in the risk control processes.
Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio is not only constituted the bank’s asset structure but also a vital factor of the bank’s success. The overall success in credit management depends on the banks credit policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance.
3.4 Types of loans and advances offered by DBBL:
The making of loan and advance is always profitable to a bank. As the bank mobilizes savings from the general people in the form of deposit, the most important task of it is to disburse the said deposit as loan or advance to the mass people for the development of commercial, industrial who are in need of fund for investment. Like other business firm, the main purpose of the commercial bank is to make profit. The profitability of the banks depends on the efficient manner and avenues in which the resources are employed. DBBL has made so far efficient use of the deposit and has the classified rates under control. The Bank disburses loan in different form. It varies in purpose wise, mode wise and sector wide. The varieties used by DBBL are briefly described below with the common terms and condition and performance in each mode.
Classification of Advance: Commercial & Industrial Credit:
3.41 Corporate Credit Scheme.
3.42 Retail Credit Scheme
3.4.1 Corporate Credit Scheme:
The bank is entrusted with the responsibility of providing short, medium and long term loans and other financial assistance for promotion of industrial sectors. There are 3 types of corporate credit scheme:
• Cash Credit
• Over Draft
• Secured Over draft
3.4.2 Retail Credit Scheme:
The bank also provides retail loan to individual customer. There are different types of retail loan which helps customer to fulfill their dream. Like car loan, educational loan, travel loan etc
3.6 Lending Policies of Dutch Bangla Bank Ltd:
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 most important ways a Bank can make sure its loans meet regulatory standard and are profitable is to establish a written loan policy.
Dutch Bangla Bank Ltd. also has a good loan policy and the most important elements of the policy arc stated below:
¾ A goal statement for the Bank’s loan portfolio (in terms of types, maturities, sizes, and quality of loans).
¾ 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.)
¾ Lines of responsibility in making assignments and reporting information within the loan department.
¾ Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications.
¾ 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.)
¾ Lines of authority within the bank regarding who is responsible for maintaining and reviewing the Bank’s credit files.
¾ Guidelines for taking, evaluating and perfecting loan collateral.
¾ A presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loans.
¾ A statement of quality standards applicable to all loans.
¾ A statement of the preferred upper limit for total loans outstanding (i.e. the maximum ratio to total loans to total assets allowed.)
¾ A description of the Bank’s principal trade area, from which most loans should come.
¾ A discussion of the preferred procedures for detecting, analyzing and working out problem loan situations.
A written loan policy statement carries a number of advantages for the bank adopting it. It communicates to employees working in the loan department what procedures they must follow and what their responsibilities are. It helps the Bank moves forward a loan portfolio that can successfully blend multiple objectives such as promoting the bank’s profitability, controlling its exposure and satisfying regulatory requirements.
3.7 Lending Procedure of Dutch Bangla Bank Ltd:
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-1
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 Manager or the Officer-in-charge of the credit department conducts the initial interview with the customer.
he/she wants from the bank including his/her personal information and business information. Branch Manager or the Officer-in-charge 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 C1B (Credit Information Bureau) report. This report is usually collected the credit information of customer. 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:
• Incase 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 the loan. These quantitative techniques supported with qualitative judgment are the most important and integral part of the credit approval process used by DBBL. 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:
¾ Name of the borrower (s).
¾ Nature of credit.
¾ Purpose of the credit.
¾ Extent of the credit.
¾ Collateral.
¾ Margin.
¾ Rate of interest.
¾ Repayment schedule
¾ Validity
??Step-8
If the proposal meets DBBL’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 send 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-l0
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.
?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.
¾ Step-12
¾ Finally loan is disbursed by the branch through a loan account in the name of the borrower and monitoring of the loan starts formally.
There must be a depth study on the following points:
Ö When the loan is to be given;
Ö How the loan is to be given;
Ö What may happen after disbursement of the loan;
Ö 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
? ? The loan will be short term or long term.
A manager will do the possible efforts to minimize the risk of the Bank.
??The loan will be short term or long term.
Ö A manager will do the possible efforts to minimize the risk of the Bank gi
3.8 General Procedure for Loans and Advances:
Loan Processing | Approved | ||||
Customer | Branch | Head | |||
Application | Office | Office | |||
Credit Proposal
Report Collection | ||||||
Loan Disburse | CIB | |||||
To Customer | ||||||
From BB | ||||||
Branch | ||||||
Customer | Credit | |||||
Document | Approval To | |||||
Customer
Formalities
Loan prayer
3.8.1 First information sheet (FIS)
First information sheet (FIS) is the prescribed from provided by the respective branch that contains basic information of the borrower. It contains following particulars.
1. Name of the concern with its factory location, office address and Tel no.
2. Name of the main sponsors with their educational qualification.
3. Business experience of the sponsors, details of past and present business, its achievement and failures, name of ill the concerns wherein the sponsors have involvement.
4. Income tax registration no. With the amount of tax paid for the last three years.
5. Details of unencumbered assets (movable & immovable) personally owned by the sponsors.
6. Details of liabilities with other banks and financial institutions including securities held there against.
7. Purpose of loan sought from DBBL.
8. Estimated cost of the project & means of finance.
3.8.2 Application for credit line
After receiving the first information sheet from the borrower Bank official verifies all the information carefully. He also checks the account maintains by the borrower with the Bank. If the official become satisfied then he gives application to the bank prescribe format supplied by the bank called Credit for request limit (CRFL).
3.8.3 Credit Sanction & Appraisal Process
Borrowers Credit Worthiness Analysis by DBBL following 6 “C”s:
The question that must be dealt with before any other whether or not the customer can service the loan that is pay out the loan when due with a comfortable margin of error. This usually involves a detailed study of six aspects of the loan application: character, capacity, cash, collateral, conditions and control.
All must be satisfied for the loan to be a good one from the lender’s (DBBL) point of view.
Character: The loan officer must be convinced that the customer has a welldefined purpose for requesting credit and a serious intention to pay. Responsibility, truthfulness, clean past record, true purpose and honest intention to repay the loan make up what a loan officer calls character.
Capacity: The customer requesting credit must have the authority to request suchand the legal standing to sign a binding loan agreement.
Ö Cash: The borrower should have the ability to generate enough cash flow to repaythe loan. This cash flow can be generated from sales or income from the sales or income, from the sale of liquidation of assets or funds raised through debt or equity securities.
Ö Collateral: The borrower must possess adequate net worth or enough qualityassets to provide adequate support for the loan. The value of the collateral security must cover the loan exposure.
Ö Conditions: The recent trend of borrower’s line of work or industry must be takeninto considerations by the lender.
Control: The lender should be careful about whether changes in law andregulations could adversely affect the borrower and whether loan request meets the Bank’s and regulatory authorities’ standards for loan quality.
3.8.4 Collecting CIB Report from Bangladesh Bank
After receiving the application for credit line, Bank sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. Basically branch seeks this report from the head office for all kinds of loans. The purpose of this report is to being informed that whether the borrower the borrower has taken loan from any other bank; if ‘yes’, then whether the party has any overdue amount or not.
3.8.5 Making Credit proposal (CP)
Branch then has to find the right borrower by considering the following 6 C’s. These are character, capital, capacity, cash, collateral, condition (economic). If the branch thinks that the project is feasible then he will prepare a Proposal. Bank prepares the proposal in a specific from called credit proposal. Significance the proposal branch sends it to head office for approval.
3.8.6 Credit assessment
A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a credit application that originates from the Relationship Manager, and is recommended by Branch Credit Committee (BCC). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals and guarantors.
Credit Applications should summarize the results of the RMs risk assessment and include as a minimum, the following details:
• Amount and type of loan(s) proposed
• Purpose of loans
• Loan structure (Tenor, Covenants, Repayment Schedule, Interest)
• Security arrangements
In addition, the following risk areas are analyzed:
• Borrower analysis
• Industry analysis
• Supplier/ Buyer analysis
• Historical financial analysis
• Projected financial performance
• Account conduct
• Adherence to lending guidelines
• Mitigating factors
• Loan structure
• Security
3.8.7 Risk Grading
All Banks should adopt a credit risk grading system. The system should define the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications.
3.8.8 Project Appraisal
It is the pre-investment analysis done by the officer before approval of the project. Project appraisal in the banking sector is needed for the following reasons:
1. To justify the soundness of an investment
2. To ensure repayment of bank finance
3. To achieve organizational goals
4. To recommend if the project is not designed properly
3.8.9 Head Office Approval
The respective officer of Head Office appraises the project by preparing a summary named “Top Sheet” or “Executive Summary”. Then he sends it to the Head Office Credit Committee (HOCC) for the approval of the loan. The Head Office Credit Committee (HOCC) considers the proposal and takes decision whether to approve the loan or not. If the loan is approved by the HOC C, the HO sends the approval to the concerned branch with some conditions. These are like.
? Drawing will not exceed the amount of bill receivables.
? The tern over in the account during the tenure of the limit should not be less than four times of the credit limit.
? All other terms and conditions, as per policy and practice of the bank for such advance to safegua