Case Study On Prime Bank Limited

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Case Study On Prime Bank Limited

Chapter: 1

Introduction

1.1 Authorization of the study:

Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core of the money market in an advanced country. In recent times the banking sector over the world has been undergoing a lot of changes due to deregulation, technological innovation, globalization etc. Bangladesh banking sector is lagging for behind in adopting these changes.

(1) Understanding:

In this part the tried to be acquainted with every department of credit.

(2) Things are done here

In this part the tried to see the things which are being done in each department.

(3) Personal observations:

In this part the tried to present personal observations from credit department. had an opportunity to be acquainted with the practical banking prevail in the Head Office, PBL. have tried best to show the knowledge which has been acquired in practical orientation Period.

1.2 Objective of the study:

The main objective of the study is to gather practical knowledge regarding banking system and operation. This practical orientation gives us a chance to co-ordinate the theoretical knowledge with the practical experience. The following are of objectives for this practical orientation in bank:

(a) To apply theoretical knowledge in the practical field.

(b) To help the students in taking up professional courses in the M.B.A program.

(c) To have exposure to the functions of credit section.

(d) To observe the working environment in commercial banks.

(e) To study existing banker customer relationship.

1.3 Coverage of the study:

The report covers the following areas.

• Background of Prime Bank Ltd.
• Literature on Credit operation.
• Credit Operation of Prime Bank Ltd.

1.4 Methodology of the study:

For smooth and accurate study every one has to follow some rules & regulations. The study inputs were collected from two sources:

(a) Primary sources

(i) Practical desk work

(ii) Face to face conversation with the officer

(iii) Direct observations

(iv) Face to face conversation with the client

(b) Secondary sources

(i) Annual report of PBL

(ii) Files & Folders

(iii) Memos & Circulars

(iv) Various publications on Bank,

(v) Websites,

(vi) Different circulars sent by Head Office and Bangladesh Bank.

1.5 Limitations of the Report:

There were some problems while conducting the orientation program. A wholehearted effort was applied to conduct the orientation program and to bring a reliable and fruitful result. In spite of having the wholehearted effort, there exist some limitations, which acted as a barrier to conduct the program. The limitations are:

· Sometimes was assigned to do some jobs without explaining why this work is to be done. This situation has created a lot of problems to understand why a specific function is being performed.

· Another problem is concerned with data collection. PBL starts in 1995. So there are shortages of sufficient data for comparing. Moreover, the bank has supplied me the annual report only for two years.

· Learning all the banking functions within just two and half months was really tough.

· Another limitation of this report is Bank’s policy of not disclosing some data and information for obvious reason, which could be very much useful.

Chapter: 2

Overview of the Bank

2.1 Evolution of the Word ‘Bank’:

The word bank is originated from Italian word ‘Banca’. Banca means long tool. In ancient time Italian Jews merchant used to do business of lending money by sitting on the tools. To meet the expense of war of 1171 one type credit certificate was launched in Italy at an interest rate of 5% which was called as Monte in Italian language and Banke in German language. Then the German language was widely used in Italy. As a result the word ‘Banke’ gradually changed to the word ‘Banca’ from which the word ‘Bank’ originated.

2.2 Walkway of Banking:

The linguistics and etymology suggest an interesting story about banking origins. Both the old French word ‘Banque’ and the Italian word ‘Banca’ were used centuries ago to mean a bench or moneychangers table. The historians have identified the first bankers who lived more than 2000 years ago. They were money changers seated usually at tables or in a small shop in the commercial district, aiding travelers who came to the town by exchanging foreign coins for local money or discounting commercial notes for a fee in order to supply merchants with working capital.

The first bankers probably used their own capital to fund their activities but it was not long before the idea of attracting deposit and securing temporary loans from wealthy customers. Loans were then made to merchants’ shippers and landowners at rates of interests low as 6 percent per annum to as high as 48 percent a month for the riskiest ventures. Most of the early bank was Greek in origin.

The banking industry gradually spread outward from the classical civilizations of Greece and Rome into northern and western Europe. The early bank in Europe was placed for safe keeping of valuable items (such as gold and silver bullion) as people came to fear the loss of their asset due to war, theft, or expropriation by government. When colonies were established in North and South America, the old world banking practice was transferred to the new world.

2.3 Development of Bank in Bangladesh:

Bank system was practiced in Indian subcontinent by the Indian subcontinent merchants; Goldsmith Moneylenders were the primary bankers. During the mughal period banking and credit business was enchanted rapidly.

Indigenous banking in Bangladesh is as old as banking in other parts of the world. During mughal period, indigenous banking flourished. The Subarna Banik, the bullion trading community used to do banking in the then Bengal.

Banking in Bangladesh was gradually taken over by the upcountry bankers who were known as Seth, Shah etc. But Subarna Banik continued to operate in rural Bengal. The British gradually came to Bengal and operated banking in the form of agency house and exchanging houses started to flourish in Calcutta. Entry of the Bengalese into banking started in the part of this century especially in the period of the Swadeshi movement.

In 1700 AD “Hindustan bank” was established as the first joint stock bank. In 1784 “Bengal bank” and in 1786 “general bank of India “were launched. Then both the banks absolved respectively in 1793 and 1832.

During the early period of nineteenth century the three banks “Bank of Bombay”, “Bank of Madras” and “Bank of Bengal” merged to “Imperial bank of India”.

In 1947 after the separation of Bengal, bank business faced a severe disaster as non-Muslim bankers migrated to India. In order to rebuild the bank business State bank of Pakistan was established as a central bank of Pakistan in 1948.

In 1971 Bangladesh became independent. After liberation ‘Bangladesh bank’ was automated with the asset and liabilities of former “State bank of Pakistan”.

2.4 Background of Prime Bank Limited

The Prime Bank Limited (PBL) is a national banking group that is incorporated on February 12, 1995 as a consequence of persistent efforts of a group of entrepreneurs having excellence of experience exposure in the different fields of industry, trade and commerce of the country. It started operation as a commercial bank on April 17, 1995 with a branch at Motijheel. At present, the bank has 42 branches spread all over the country. It renders all types of commercial banking services to the customers of all strata in the society within the stipulations laid down the bank company act 1991 and rules and regulations formed by Bangladesh Government from time to time. Diversification of products and services and innovation of products suited to the needs of the customers in keeping with relevant rules and laws have made it different from other commercial banks of the country.

PBL’s national business in personal banking, corporate banking and its markets are its special strengths. It maintains correspondent relationship with all over the banks in countries. Prime Bank Limited is a forward looking and modern local bank with a record of sound performance. It is discarding its erstwhile conservative mould and in response to the current dynamic trends in locally financial activities, adopting an aggressive customer focused system. The effort that Prime Bank makes in order to portray the bank as a brand image is very strong and successful. The general image is that it is “trustworthy, efficient, helpful and committed”. The logo of the bank depicts the merger of confidence.

Prime Bank Ltd. has already made significant progress within a very short period of its existences. The bank has been graded as a top class bank in the country through internationally accepted CAMEL rating. The bank made satisfactory progress in all areas of business operation in 2005.

Prime Bank Limited was designed to provide commercial and investment banking services to all types of customer ranging from small entrepreneur to big business firms. Besides investment in trade and commerce, the bank participates in the socioeconomic development through the participation in priority sectors like agriculture, industry, housing, and self-employment. Prime Bank Limited wants to establish, maintain, and conduct all types of banking, investments and businesses in Bangladesh and abroad with superior service quality and performance.

2.4.1 General Statement of Prime Bank Ltd.

Prime Bank Ltd. has pursued pragmatic policies and strategies depending on the prevailing business scenario. It focuses on the emerging needs of the market and has positioned itself accordingly. High quality customer service through competent workforce remains uppermost in Prime Bank’s thinking and action plan. Integration of technology in business functions is an important strategy for PBL (Prime Bank Ltd.) to attain opportunities and to provide value-added services to the customers.

Prime Bank Ltd. has had consistent growth over the years. Management of PBL has put in place the necessary business initiatives, which are to ensure success as Prime Bank Ltd. moves towards the new millennium. Its guiding principles are rendering of service to customers more efficiently and effectively than other competitors, concentrating on core business and building self-strengths. Customer services of Prime Bank Ltd. are acknowledged to be one of the best in the industry and for this high quality Prime Bank Ltd. is rated as a top-performing bank.

Prime Bank Ltd. has planed to improve its customer services further through diversity in products and services. Offering customers a variety of options to fulfil their banking needs will remain an important component of PBL’s long-term business plans. Exercise will continue to reform the systems and to develop back-office support capabilities. Management has decided to focus more on small and medium sized enterprises by providing a broad range of financial options. PBL has further deepened its stack in retail banking by introducing new products. Efforts in Merchant banking are further intensified to generate more profits as Prime Bank Ltd. has acquired Merchant-banking license.

Prime Bank Ltd. is able to remain competitive and enjoyed continued growth, which in some extent depends on financial sector reforms of the government. Prime Bank Ltd. is in complete agreement with Bangladesh Bank’s plans to review and to asses thoroughly the financial sector and to set the future framework for the industry. Prime Bank Ltd. is willing to support all constructive reforms that are in the national interest and encourage more competition and choice for the people. This Bank always stays tuned to the realities of rapidly changing markets.

Management of PBL strongly believes that this bank will grow and prosper in the days to come. On going researches to innovate products and to fine-tune the existing products will lead to advantageous position. MasterCard credit cards business and newly introduced ONLINE banking have opened up new possibilities not only for improved customer service but several windows for profit generation. Installation of SWIFT and integration of treasury functions in both local money market and international foreign exchange market are expected to yield better growth in volume and earnings.

While banking is undergoing changes to accommodate increasing needs of customers, technology is considered as a key element for achieving competency based on reliability. PBL is working to further improve its computer system in order to provide clients with new IT products and services such as ATM, Online Banking and Point of Sales transactions. From PBL’s perspective, Technology will help Prime Bank Ltd. to operate more efficiently and improve its productivity. Therefore, investment in technology infrastructure receives highest priority. While technology takes care of much of the routine functions, employees will have more time to spend with their customers providing greater range of advice and services.

At present Prime Bank Ltd. has a small network of branches and therefore manages these branches in a manner, which maximizes profit and brings added values for shareholders.

2.4.2 Goals & Objectives of Prime Bank Ltd.

· To build up strong pillar of capital.

· To promote trade, commerce and industry.

· To discover strategies for achieving systematic growth.

· To improve and broaden the range of product and services.

· To develop human resource by increasing employment opportunities.

· To enhance asset of shareholders.

· To offer standard financial services to the people.

· To create congenial atmosphere so that the clients become interested to deal in with the prime bank limited.

· To keep business morality.

· To develop welfare oriented banking service.

· To offer highest possible benefit to customers.

· To let the viewers cast their very first look at it.

· To carry on the business of discounting and dealing in exchange of securities and all kinds of mercantile banking.

· To provide for safe-deposit vaults and the safe custody of valuables of all kinds.

· To carry on business as financiers, promoters, capitalists, financial and monitory agents, concessionaires and brokers.

· To act as agents for sale and purchase of any stock, shares or securities or for any other monetary or mercantile transaction.

· To establish and open offices and branches to carry on all or any of the business abroad and within the country.

2.4.3 Operation

Prime Bank Limited, since its inception, is a fully focused Bank depending on technology. The bank has now a network of 52 branches strategically located in different cities. All the branches are functioning in computerized environment and integrated through Wide Area Network (WAN) .The branches are full-fledged units and can provide all commercial and investment banking service raging from small and medium enterprises to big conglomerates and houses.

The Bank will try to reduce its dependence on interest earnings by giving more emphasis on the fee-based income through introduction of capital market operation and leasing. The Capital Market operation will include Portfolio Management, Investors Account, and Underwriting Mutual Fund Management etc.

The Bank will introduce modern system of Leasing Operation same as in practice with Banks in all other countries of the world. The lease finance portfolio of the bank will be the first of its kind in a Commercial Bank in Bangladesh.

A warehousing system will be developed in the country through private entrepreneurs. The conventional go down system of the Banks will gradually be done and a modern system of warehousing will be encouraged for pledge of goods of the clients. Investment Counsellors of PBL will give all sorts of advice to their Customers as they may require from time to time for protecting their assets and safeguard to their interest.

Entrepreneurship Development Training will be arranged to impart operational skill and modern technique of management to introduce new entrepreneurs in the field of industrialization on the basis of participating finance.

Prime Bank Limited is one of first few Bangladeshi Banks who have become members of SWIFT (Society for Worldwide Inter-Bank Financial Telecommunication) in 1999. SWIFT is a member owned co-operative which provides a fast and accurate communication network for financial transactions such as letters of credit, fund transfer etc. By becoming a member of SWIFT, the bank has opened up possibilities for uninterrupted connectivity with over 5,700 user institutions in 150 countries around the world.

Prime Bank Limited is operating branches on both conformist interest based Banking and Islamic Sariah Principle based Banking. The Islamic Sariah Principle Banking is completely different from the conventional banking.

The Bank is Maintaining separate set of accounts for Islamic Banking branches according to the standard adopted by financial Accounting and Auditing organization for Islamic Financial Institution.

Prime Bank Training Institute (PBTI) was set up in July 22, 1998 with an aim to create a strong and skilled work force.

The Institute had played a significant role in making skilled and efficient human resource. It is constantly working on improvement of training methods and materials. During 2006 it had conducted 4 Foundation Training Courses, 4 short, courses, 24 workshops for new recruits, junior level management, mid level management, and senior executives. The Training Institute also provided a Foundation course for 30 trainee officers of Jamuna Bank Limited at their cost.

Prime Bank Limited will try to achieve excellence in customer service. The customer is most important for them. Their policy is customer driven. The Bank will introduce Inland Travellers Cheque and launch Special Savings Schemes; Special Credit Scheme will also be devised for the benefit of the low-income group, specially for the self -employment of the educated youth.

2.4.4 Mission and vision of Prime Bank Limited

The efforts of Prime bank Limited are focused on delivery of quality service in all areas of banking activities with the aim to add increased value to shareholders investment and offer highest possible benefits to the customers. There must have the mission as well as vision what should back every efforts of the organization as it is said, “A mission without any vision is a daydream and a vision without any mission is a nightmare”.

· Mission:

q Continuous improvement in the business policies and procedures.

q Cost reduction through integration of technology at all level.

· Vision:

To be the most efficient bank in terms of customer service, profitability, and technology application.

2.4.5 Managerial Hierarchy of PBL

Chairman

Board of Directors

Executive Committee

Managing Director

Deputy Managing Director

Senior Executive Vice President

Executive Vice President

Senior Vice President

Vice President

Senior Assistant Vice President

Assistant Vice President

First Assistant Vice President

Senior Executive Officer

Executive Officer

Principal Officer

Senior Officer

Management Trainee Officer

Junior Officer

Assistant Officer

Figure: Organogram of PBL

2.4.7 Products & Services of Prime Bank Ltd.

Since commencement of banking operation, Prime bank Limited has not only gained enormous popularity but also been successful in mobilizing deposit and loan products. The bank has made significant progress within a very short time period due to its dynamic management and introduction of various consumer-friendly loan and deposit products. All the products and services offered by the bank can be classified under three major heads:

i) Multi Currency Account

ii) Deposit Products

· Contributory Savings Scheme

· Monthly Benefit Deposit Scheme

· Special Deposit Scheme

· Education Savings Scheme

· Fixed Deposit Scheme

· Prime Bank Money Scheme

· Prime Bank Insured Fixed Deposit Scheme

· Saving Deposit Account

· STD Account

· Foreign Currency Deposit Account

· Non Resident Taka Account

· NFCD Account

· NITA

iii) Loan Products

· Consumers’ Credit Scheme

· Lease Finance

· Hire Purchase

· Small and Medium Enterprise Credit Scheme

· Loan Against Shares and Securities

· House Building Financing Scheme

· Financing Scheme For Contractors

· Computer Software Financing Scheme

· Prime Bank Maser Card Credit Card

· Prime Bank VISA Credit Card

· Working Capital Financing

· Import Financing

· Export Financing

· Industrial Financing

Other Services

Consistent with the modern edge and competing in a perfectly competitive market, Prime Bank Limited has introduced some innovative banking services that are remarkable in a country like Bangladesh. The services offered by the bank are as follows

On-line Banking

The bank has set up Wide Area Network (WAN) across the country within its all branches to provide on-line branch banking facility to tits valued customers. The service named “PRIMELINE” has opened up several possibilities of improved customer services. Under this facility client of one branchs are able to do banking transaction at any other branch of the bank. The bank hosted its Web Site (www.prime-bank.com) to facilitate dissemination of information about the banking services and facilities of Prime Bank Limited all over the world.

Information Technology in Banking Operation

Prime Bank Limited has adopted automation in banking operation from the first day of its business. The main objective of this automation is to provide efficient and prompt services to its valued clients. At present all the branches of the bank are computerized under UNIX operating system to provide best security to the information. Prime Bank Limited is providing comprehensive range of banking services with utmost care and efficiency to its customers. ATM is used to count money properly to save client’s valuable time as well. The customer can draw money/cash from their account within a minute. Very recently the bank has launched the world famous banking software T24 which is very user friendly. It will no doubt help the bank to attain the objectives more efficiently.

SWIFT Service

Prime Bank Limited is one of the first few Bangladeshi Banks to obtain membership of SWIFT (Society for Worldwide Inter-bank Telecommunication). SWIFT is a members’ owned cooperative which provide a first and accurate communication network for financial transactions such as Letter of Credit, Fund Transfer etc. By being a member of SWIFT, the bank has opened up possibilities for uninterrupted connectivity with over 5700 user institutions in 150 countries all over the world.

Chapter-3

Literature Review

Loans or credits comprise the most important asset as well as the primary source of earning for the banking institutions. On the other hand, loan/credit is also the major source of risk for the bank management. A prudent bank management should always try to make an appropriate balance between its return and risk involved with the loan portfolio. Credit appraisal process is the tool which helps the bank to predict the risk and return on the proposed project for credit disbursement. Therefore, from the above definition it is clear that credit appraisal is a very important factor for banks. To get a clear idea about credit appraisal process, we need to know the key factors of credit appraisal procedures. In this chapter, we will have a brief idea on the key factors of standard credit appraisal procedures.

3.1 Credit:

The word credit is derived from the Latin word “credo” which means “I believe” and is usually defined as the ability to buy with a promise to pay. It consists of actual transfer and delivery of goods and services in exchange for a promise to pay in future. It is simply the opposite of debt. Diversification of banking service has accelerated the use of credit in the expansion of business operation. It is a fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to pay rather than the security held by the banker.

According to the Encyclopedia of Banking & Finance by Charles J. Woolfell, Bank credit is “ the earning asset of the commercial banks, including the variety of short and long term loans made to individuals, partnership, corporation, other business firms, banks, and governmental units and agencies; the banks’ holdings of investments.”

One of the two primary functions of a commercial bank is to extend credit to the deficit economic unit that comprises borrowers of all types. Bank credit is a catalyst of economic development. Without adequate finance, there can be no growth in the economy. Bank lending is important for the economy in the sense that it can simultaneously finance all of the sub-sectors of financial arena, which comprises agricultural, commercial and industrial activities of a nation. Therefore, a bank is supposed to distribute its loan able fund among economic agent-in-deficit in a manner that it will generate sufficient income for it and at the same time benefit the borrower to overcome his/her deficit.

3.2 Components of Bank Credit

Banks use to lend two ways- discounting bills and advances. Hence, Bank credit can be classified in two broad categories-

1. Advances

2. Bills discounted and purchased.

1. Advances

As the Encyclopedia of Banking & Finance by Charles J. Woolfell states, an advance is, “In general a loan although an advance may be an open account as well as being evidenced by a note, with or with out collateral.”

Again according to Radhaswami and Vasudevan (1985), “Advances are lending of money by banks against promissory notes executed by the customer with or without collateral security.”

Advances may be in the form of –

i) Loans

ii) Overdrafts

iii) Cash Credit

Whatever the form, advances are primary types of bank lending and major sources of income for banks. In Bangladesh, amount of advances (excluding the inter-bank) by the scheduled bank is about 97 percent of total credit.

Loans:

When an advance is made, with or without security, in a lump sump repayable either in fixed monthly installment or in lump sump and no subsequent debit is ordinarily allowed except by the way of interest, incidental charges etc, it is called a loan. A loan once repaid in full or in part, cannot be drawn again by the borrower. It is given for a fixed period at an agreed rate of interest. The whole amount of loan is debited to the customer’s name on a loan account to be opened in the ledger and, is paid to the borrower either in the form of cash or by the way of credit to his current or savings account.

Overdrafts:

The overdraft is a kind of advance always allowed on a current account operated upon by cheques. The customer may be sanctioned a certain limit upon which, he/she can overdraw his current account within a stipulated period. Here, withdrawals or deposit can be made any number of times at the convenience of the borrower, provided that the total amount of overdrawn does not, at any time, exceed the agreed limit. Interest is calculated and charged only on the actual debit balance on daily product basis.

Cash credit:

A cash credit is an arrangement by which a banker allows his customer to borrow money up to a certain limit. Cash credit arrangements are usually made against the security of commodities hypothecated or pledged with the bank.

Hypothecation: In case of hypothecation the possession of goods remain at the disposal and in the go down of the borrower. The borrower is given access to goods whenever it so desires. The borrower furnishes periodical return of stock with the bank.

Pledge: In case of pledge, the goods are placed in custody of the bank with its name on the go down where they are stored. The borrower has no right to deal with them.

2. Bills Discounted and Purchased

According to the Encyclopedia of Banking & Finance by Charles J. Woolfell, bill discounted is “The aggregate of notes, acceptances and bill of exchanges which a bank has discounted for its customers, as distinguished from loans.”

The banks also give advances to their customers by discounting or purchasing their bills of exchange. Such bills of exchange arise out of commercial transactions both in inland trade and foreign trade. Bills are classified as i) Clean bills and ii) Documentary bills.

When the drawer of a bill encloses with the bill the documents of title to the goods, such as, Bill of Lading, Railway Receipt, Steamer Receipt, to be delivered to the

Drawee of the bill on payment against acceptance of bill, as the case may be, the bill is called a documentary bill. In the absence of such document it is termed as a clean bill. By the nature of payment, bills can also be classified into two categories named i) Demand bills and ii) Usance bills

Where a bill is payable ‘at sight’ or ‘on demand’ or ‘on presentation’ it is called a demand bill. If a bill matures for payment after a certain period of time, like 30, 60, or 90 days after the date, it is called a usance bill.

In case of purchase or discounting of bills, the banker credits the customer’s account with the amount of the bill after deducting his charges or discount. Bankers purchase the demand bills but discount the usance bills. In purchasing the income is interest but in discounting the income is discount.

3.3 Principles of Credit:

A prudent Banker should always adhere to the following general principles of lending funds to his customers.

? Background, Character and ability of the borrowers

? Purpose of the facility,

??????? Term of facility,

? Safety,

? Security,

? Profitability,

? Source of repayment,

? Diversity.

Bank should never put “all its eggs in one basket”. It should be noted that selection of appropriate borrowers, proper follow-up and end-use supervision through constant close contact with the borrowers, are the corner stones for timely recovery of credit.

3.4 Factors of Credit Policy:

Credit policy of all banks cannot be developed on same lines because of differences in their operational needs and resource structures. In designing a credit policy, considerations should be given to following:

1) Total deposit resources of the bank and rate of fluctuation of resources.

2) Deposit structure.

3) Trend of growth in deposit and economic growth rate of the country.

4) Capital fund and other reserves. Large bank’s capital fund and secondary reserve in investment can permit its loan policy to be liberal in respect of its limit of lending in high risk-high returns loans while a relatively new small bank would stress more on liquid and highly secured loans at lower interest in its policy.

5) Capability of loan administration shall have to be given due weight in the credit policy. A large bank is able to hire numbers of highly skilled specialists/experts in different areas to advise the bank in loan making but smaller banks relying on usual credit managers cannot venture into sectors that require expert appraisal of loan applications and also that requires intensive post implementation monitoring of large and complex industrial loans.

6) Investment size of the bank and its nature.

3.5 Loan Documentation

The minimum requirements for loan or other facility documentation of a Bank are:

a) Copies of the relative sanction letter indicating that the transaction has been approved by properly authorized officers of the Bank.

b) A copy of the letter of sanction addressed to the customer and his acceptance thereof.

c) All necessary documentation required to meet the terms and conditions of the facility in the manner in which it was approved.

d) Before disbursement, it should be satisfied that all legal formalities have been completed.

e) Disbursement of all facilities shall be made on an Offering Sheet basis to ensure that all additional requests are duly approved by two authorized Officers one of which must be the Manager or Sub-Manager.

f) Securities offered should also be thoroughly verified / inspected once in a month and stock report prepared.

g) Where the loan agreement calls for restrictive covenants and ongoing conditions, the Manager must not only satisfy himself that these are adhered to at the outset of the transaction (i.e. date of initial takedown) but assure himself, at regular intervals, that these are not being violated.

h) Since the Manager together with the Credit Officer is fully responsible for documentation, they will formally sign a check list. Under no circumstances may anyone permit drawings under any facilities, until they have signed off the check list.

I) The Manager/Sub-Manager should ensure that appropriate steps are being taken to keep loan documentation current for all assets Of the Bank. The loan documentation check-list, should, therefore, be reviewed at regular intervals.

J) Lines of credit should, as a rule, be confirmed in writing to the borrower. A Specific expiration date for the line should be included. Moreover every letter of sanction must contain the Bank’s standard clauses.

K) The borrower must explicitly undertake that all information supplied by him to Bank in connection with the approved lines Of credit is correct.

L) Any material or adverse change in business conditions will cause the amount due to Bank from the client immediately repayable. The Bank reserves the right to call back the facilities extended at any time without assigning any reason whatsoever.

3.6 Standard Procedure of Credit:

The Standard Procedure of Credit of a Bank is completed through the following Steps:

A) Any request for credit facilities, must be made by the borrower in the Bank’s prescribed standard form properly filled in and completed in all respect and duly signed by the prospective borrower.

B) Submission of past 3 Years financial statement: For all credit proposals, the borrowers and guarantors (if any) should, wherever Possible submit past 3 years Profit & Loss A/C and Balance sheet duly audited by a recognized and competent Chartered Accountant containing unqualified opinions. Some borrowers may not have audited financial statements at all. In either case, the lending officer must interview the potential borrower or Guarantor and obtain satisfactory, accurate and complete financial information supporting any prior financial statements either audited or not audited. In the case of an individual borrower or guarantor, the financial statements must be signed by competent authority and must contain legend to the signatory, all assets and liabilities both direct and contingent and all sources of income and items of expenses. For all un-audited statements provided by a Company, financial Officer of the Company must execute such legend.

C) On all new credit arrangements an analysis of the credit worthiness of the borrower and guarantor (if any) should be prepared by the Credit Department at the Branch where credit monitoring responsibility lies and a copy thereof forwarded to the Head of Credit Division at ‘Head Office for pre-factor or post-factor review as the case may be. In case such credit originates in the Head Office, it will be forwarded to the Branch Manager for record and action.

3.7 Credit Analysis:

When a customer requests for a loan, bank officers analyse all available information to determine whether the loan meets the bank’s risk-return objectives. Credit analysis is essentially default risk analysis in which a loan officer attempts to evaluate a borrower’s ability and willingness to repay. The banker has to identify three distinct areas of commercial risk analysis related to the following questions:

1. What risks are inherent in the operations of the business?

2. What have managers done or failed to do in mitigating those risks?

3. How can a lender structure and control its own risks in supplying funds?

The first question forces the banker to generate a list of factors that indicate what could harm a borrower’s ability to repay. The second recognizes that repayment is largely a function of decision made by a borrower. Is management aware of the important risks and has it responded? The last question forces the banker to specify how risks can be controlled so that bank can structure an acceptable loan agreement.

Therefore, Bankers look into key risk factors or qualitative analysis which has been classified according to the five Cs of credit:

1. Character:

Character refers to the borrower’s honesty and trustworthiness. A banker must asses the borrower’s integrity and subsequent intent to repay. If there are any serious doubts, the loan should be rejected.

2. Capital:

Capital refers to the borrower’s wealth position measured by financial soundness and market standing. It helps cushion loses and reduces the likelihood of bankruptcy.

3. Capacity:

Capacity involves both borrower’s legal standing and management’s expertise in maintaining operations so the firm or individual can repay its debt obligations. Under capacity an individual must be able to generate income to repay the cash.

4. Condition:

A condition refers to the economic environment or industry specific supply, production and distribution factors influencing a firm’s operations. Repayment sources of cash often vary with the business cycle or consumer demand.

5. Collateral:

Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.

Under credit analysis Bank also does quantitative analysis which refers to the analysis of financial statement ratios to know the past performance of a company. Some of the key ratios which serve as a tool for financial analysis are classified as

1) Financial Ratio

2) Turnover Ratio

3) Profitability Ratio

1) Financial Ratios:

Financial ratios indicate about the financial position of the company. A company is deemed to be financially sound if it is in a position to carry on its business smoothly and meet its obligations-both long-term as well as short term-without strain. Some of the important ratios which are calculated in order to judge the financial position of the company are:

i) Fixed Asset Ratio =

ii) Current Ratio =

iii) Quick Ratio =

iv) Debt Equity Ratio =

2) Turnover Ratio:

The turnover ratios indicate the efficiency with which the capital employed is rotated. They are also known as Activity or efficiency ratio. The overall profitability of the business depends on the turnover i.e. the speed at which the capital employed in the business rotates. Higher the rate of rotation, greater the profitability. In order to find out which part of capital is efficiently employed and which part not, different ratios are calculated. These are:

i) Fixed Asset Turnover Ratio =

ii) Working Capital Turnover Ratio =

3) Profitability Ratio:

Profitability is an indication of the efficiency with which the operations of the business are carried on. Poor operational performance may indicate poor sales and hence poor profits. Bankers look at the profitability ratio as an indicator whether or not the firm/company earns substantially more than it pays interest for the use of borrowed funds and whether the ultimate repayment of their debt appears reasonably certain. The important profitability ratios are:

i) Overall Profitability Ratio =

ii) Gross Profit Ratio =

iii) Net Profit Ratio =

3.8 Lending Risk Analysis:

Lending Risk Analysis (LRA) is simply a loan processing manual and has done when the amount of loan is above 1 core. By going through this manual the lending bankers can asses the creditworthiness of their prospective borrowers.

Therefore, LRA is such an instrument which is definitely and directly related with lending information to analyze the borrower’s financial, marketing, managerial and organisational aspects subjectively and objectively. It also facilitates the analyst to know the security risk of the credit. Lending risk Analysis involves assessing the likelihood of repayment of loans to the bank as per agreement on the basis of analysis of certain risks. To analyze these risks bankers will need to fill-up a 16-page LRA form. The form leads to scoring various risk factors involved in lending. LRA has divided the various risks into two groups namely, Business Risk and Security Risk.

Business Risk:

Business Risk is concerned with whatever the borrowing company would fail to generate sufficient cash out of business to repay the loan Business Risk, the main component of lending risk, consists of the Industry Risk and the company Risk

A. Industry Risk:

Due to some external reasons a business may fail and the risk which arrives from external reasons of the business is called Industry Risk. It has two components:

i) Supplies Risk:

When the business fails due to disruption in the supply of inputs, the consequent risk which would arise is known as Supply Risk

ii) Sales Risk:

When the business fails for disruption in sales, this type of risk would generate.

B. Company Risk:

Company Risk is shown for some internal reasons of the business. It has also two main components and four sub-components

i) Company position Risk:

Each and every company holds a position within an industry. This position is very much competitive. Due to weakness in the company’s position in its industry, a company may fail and the risk of failure is called Company Position Risk. It depends on-

(a) Performance Risk:

If a company fails to perform well enough to repay the loan because of its weakness under given expected external conditions, the company is said to suffer from performance risk.

(b) Resilience Risk:

When a company fails due to lack of its resilience to unexpected external conditions, the resilience risk is generated.

ii) Management Risk:

If the management of a company fails to exploit the company’s position effectively, the company can fail and this risk of failure is called management Risk. It can be subdivided further-

(a) Management Competence Risk:

Management competence risk is the risk that the company fails because the management is incomplete

(b) Management Integrity Risk:

Management integrity risk is the risk that the company fails to repay its loan due to lack of management integrity.

Security Risk:

Security risk is the risk that the realised value of the security does not cover the exposure

of loan. Exposure means principal plus outstanding interest. Security risk can be divided

into two parts

(a) Security Control Risk:

Security control Risk is the Risk that the bank fails to realise the security because of lack of bank’s control over the security offered by the borrowers.

(b) Security Cover Risk:

Security cover risk is the risk that the realised security value may not cover the full exposure of loans.

3.9 Collateral:

Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.

Characteristics of Good Collateral:

The following five items determine the suitability of items for use as collateral. The suitability depends in varying on standardisation, durability, identification, marketability and stability of value.

Standardization:

The standardisation leaves no ambiguity between the borrower and the lender as to the nature of the asset that is being used as collateral.

Durability:

Durability refers to the ability of the assets to withstand wear. Or it can refer to its useful life. Durable goods make better collateral than non-durable. Stated otherwise crushed rocks make better collateral than fresh flowers.

Identification:

Certain types of assets are readily identified because they have definite characteristics or serial numbers that cannot be removed. Two examples are a large office building and an automobile that can be identified y make, model and serial number.

Marketability:

In order for collateral to be of value to the bank, the collateral must be marketable. That is the borrower must be able to sell it. Specialised equipment is not as good as collateral as are dump trucks, which have multiple uses.

Stability of value:

Bankers prefer collateral whose market values are not likely to decline dramaticallyduring the period of the loan such as common stock.

Different Types of Collateral:

Secure loans have a pledge of some of the borrower’s property behind them (such as home or an automobile) as collateral that may have to be sold if the borrowers have no other way to repay the bank. Some of the most popular collaterals are:

1. Account Receivable: The banks take a security in the form of a stated percentage of the borrower’s balance sheet. When the borrowers credit customers send in cash to retire their debts this cash payments are applied to the balance of borrowers loans. The bank may agree to lend more money as new receivable arise from the borrowers sells to its customers thus allowing the loan to continue as long as the borrower has need for credit and continuous to generate and adequate volume of sales.

2. Factoring: bank can purchase a borrowers account receivable based upon some percentage of the book value because the bank takes over the ownership of the receivable, it will inform the borrowers customers that hey should send their payments to the purchasing bank.

3. Inventory: A bank will lend only a percentage of the estimated market value of a borrower’s inventory in order to leave a substantial cushion in case the inventories value begins to decline. The inventory pledged may be controlled completely by the borrower using a so-called floating line approach.

4. Real Property: A bank may take a security interest in land and / or improvements on land own by the borrower and records its clime-a mortgage-with a government agency in order to define against successful claim by others.

5. Personal Property: Bank takes a security in jewellery, securities and other forms of personal property owned by a borrower.

6. Personal Guarantees: A pledge of the stock deposits or other personal assets held by the major stock holders or owners of a company may be required as collateral to secure a business loan.

3.10 Loan Review:

In a bank the purpose of loan review is to minimize loan losses by reviewing outstanding loans in order to

1. Identify potential problems with specific loans.

2. Identify weaknesses in procedures or personnel in general

3. Quantify the repayment risk in the loan portfolio by estimating how much cash borrowers can generate under current market conditions from operations and collateral.

3.11 Loan Classification as per Bangladesh Bank

The classification of loan provided by different commercial banks can be shown through the following table.

Source: BRPD circular no:09 dated 14^th May, 2001

Qualitative Judgment Criteria:

a. Unclassified: Repayment is regular.

b. Substandard: Repayment is irregular but has reasonable prospect of improvement.

c. Doubtful Debt: Unlikely to be repaid but special collection efforts may result in partial recovery.

d. Bad/Loss: Very little chance of recovery.

Percentage of Provision:

Provision is also made under the same circular which is as follows-

Source: BRPD circular no.16 dated 06.12.1998

3.12 Other Loan Provisions from Bangladesh Bank

1. Necessary CL forms on Loan Classification, Provisioning and Interest Suspense Account were forwarded through the