Corporate Credit Management System in a Private Commercial Bank: A Study on Prime Bank Limit
CHAPTER – 1
AN OVERVIEW ON
PRIME BANK LIMITED
1.1 Corporate Credit Division of Bank in Bangladesh
Modern banking system plays a vital role for a nation’s economic development. Over the last few years the banking world has been undergoing a lot of changes due to deregulation, technological innovations, globalization etc. These changes in the banking system also brought revolutionary changes in a country’s economy. Present world is changing rapidly to face the challenge of competitive free market economy. It is well recognized that there is an urgent need for better, qualified management and better-trained staff in the dynamic global financial market. Bangladesh is no exceptions of this trend. Banking Sector in Bangladesh is facing challenges from different angles though its prospect is bright in the future.
The Bangladesh banking sector is made up of Bangladesh Bank (The Central Bank), Scheduled Banks, Non-Bank financial institutions, Microfinance institutions (MFIs), Insurance companies, Co-operative banks, Credit rating agencies and Stock exchange. Among scheduled banks there are 4 nationalized commercial banks (NCBs), 5 state-owned specialized banks (SBs), 30 domestic private commercial banks (PCBs), 9 foreign commercial banks (FCBs) and 29 non-bank financial institutions (NBFIs) as of December 2009. Over and the institutions cited above, three development financial institutions namely House Building Finance Corporation (HBFC), Ansar-VDP Unnayan Bank and Karma Shangsthan Bank are operating in Bangladesh, all of which are state owned. The percentage of non-performing loans in the banking system is extremely high. The U.S. Government and donor institutions are assisting with financial sector reforms. Part of the reform effort is to upgrade regulations and accounting standards to international standards as far as possible. Bangladesh Bank regulates all banking institutions and, as in many countries, the Ministry of Finance rather than being independent controls the central bank. Bangladesh Bank supervises the activities of all banks.
Every bank has different divisions and every division has units or departments and every department has their own functions to serve the customers according to customer’s requirement.
The departments are:
· General Banking
· Export & Import
· Loans & Advances
The Bangladesh Bank is now carrying out a reform program to ensure quality services by the banks. Bangladesh Bank (BB) has been working as the central bank since the country’s independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. Bangladesh Bank is also responsible for planning the government’s monetary policy and implementing it thereby.
1.2 Overview of Prime Bank Limited
Prime Bank started its Journey in the Year 1995 with the firm commitment of providing superior customer service with a difference. Its vision remained to be the best private Commercial bank in Bangladesh in terms of efficiency, Capital adequacy, asset quality, sound management and profitability. Having recorded progress in all areas PBL has now established itself as the leading and strongest among private Commercial banks in Bangladesh. PBL was formally launched in April 1995 with one branch at Motijheel Commercial Area, Dhaka. It started its Islamic Banking operation in December of the same year. It was listed with both the bourses of Bangladesh VIZ. Chittagong Stock Exchange and Dhaka Stock Exchange in 1999 and 2000 respectively through initial public offering. It was registered as Merchant Banker with the Securities and Exchange Commission, Bangladesh in 2000 for starting its investment Banking and Advisory services. In 2003 PBL become primary dealer for buying and selling securities under the license issued by Bangladesh Bank.
The Bank has also expanded its services cross border with a view to providing banking service globally. It has opened its first fully owned subsidiary- Prime Exchange Co. Pte Ltd. In Singapore, this started its operation from 8th July 2006 to offer remittance service to Bangladeshi nationals living in Singapore. This is the first Bank of Bangladesh established in Singapore with the approval of Bangladesh Bank and the Monetary Authority of Singapore. Opening of a fully owned subsidiary in Singapore has added a new dimension to the Bank’s remittance operation widening its global reach for remittance activities.
With the aim to offer innovative banking service to the Non-resident Customers, PBL opened its first Offshore Banking Unit in 2007 at DEPZ, Saver, a new dimension in its customer friendly business activities. The bank has already received license from Bangladesh bank for opening of three more OBUs at CEPZ, Chittagong and Adamjee EPZ, Narayangonj and Comilla EPZ, which will be opened very soon.
At present, the Bank has 86 branches spread over the Country. It renders all types of commercial banking services to the Customer of all strata in the Society within the stipulations laid down in the Banking Companies ACT 1991 and rules regulations framed by Bangladesh bank from time to time. Diversifications of Product 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 local commercial banks of the Country.
1.2.1 Vision, Mission and Strategic Priority of PBL
FIG 1: Vision, Mission & Strategic Priority
1.2.2 Core Values
- For Our Customers
To become most caring Bank-by the most courteous and efficient service in every area of our business.
- For Our Employees
By promoting well-being of the members of the staff
- For Our Shareholders
By ensuring fair return on their investment through generating stable profit.
- For Our Community
By assuming our role as socially responsible corporate entity in a tangible manner through close adherence to national policies and objectives.
1.2.3 Objectives of the Prime Bank Limited
The objectives and goals of PBL are very specific and in accordance with its vision. The objectives are as follows:
· To mobilize the savings and deposits and channeling it out as loans or advances with management approval;
· To establish, maintain, carry on, transact and undertake all kinds of investment and financial businesses including underwriting, managing and distributing the issue of stocks, debentures, and other securities;
· To finance international trade both in Import and Export;
· To carry on foreign exchange business, including buying and selling of foreign currency, the issuance of traveler’s cheque and international credit card etc.
· To develop the standard of living of the limited income group by providing Consumer Credit;
· To finance the industry, trade and commerce in conventional way and also by offering customer friendly credit service; and
· To participate in the industrial development of the country through encouraging the new and educated young entrepreneurs to under take productive ventures.
1.2.4 Prime Bank’s Organizational Structure
Prime Bank is listed with promoter shareholders’ collectively holding a 46% stake in the bank. One of the main reasons for the bank’s good financial condition is that the bank’s promoters, who have other business interests as well, have refrained from using the bank for insider lending. This is a huge issue for Bangladeshi private banks and together with somewhat lax supervision, is the single biggest factor for the poor financial condition of most private banks.
While Prime Bank has so far benefited from its promoter shareholders’ approach of maintaining an arms-length relationship between the bank and their other businesses, whether this would continue to be the case in future, particularly when the second-generation promoters become directors of the Bank remains to be seen. The bank had a rather large board (20 members in all) with representatives from all the major shareholders. Previously central bank norms prevented any one shareholder individually holding an equity stake of greater than 5% in the bank; this was the reason for the 20 directors sitting in the board. The central bank rules in this regard have undergone a slight change. Now the rules are that the individual holding has been enhanced to 10% and the size of the Board will now be restricted to 13 members, which should include at least two independent directors.
The bank’s board has a policy of rotating the Chairman’s position amongst various members; consequently the bank has a new Chairman every year. The executive management also appears a bit top-heavy (relative to the size of the bank) with one additional managing director besides the managing director, a Senior Executive Vice President, four Executive Vice Presidents and many Senior Vice Presidents. Prima-facie the rotating Chairman and the presence of effectively two managing directors may lead to some overlapping responsibilities and possible conflict; however this does not seem to have happened so far in the bank’s history and the bank continues to perform satisfactorily.
|2.||Deputy Managing Director|
|3.||Senior Executive Vice President|
|4.||Executive Vice President|
|5.||Senior Vice President|
|7.||Senior Assistant Vice President|
|8.||Assistant Vice President|
|9.||First Assistant Vice President|
|10.||Senior Executive Officer|
FIG 2: Organizational Structure
1.2.5 Managerial Hierarchy of Prime Bank Ltd
Board of Directors
Additional Managing Director
Deputy Managing Director
Senior Executive Vice President
Executive Vice President
Senior Vice President
Senior Assistant Vice President
Assistant Vice President
First Assistant Vice President
Senior Executive Officer
Management Trainee Officer
FIG 3: Managerial Hierarchy
1.3 Role of Prime Bank in Bangladesh Economy
Present world is changing rapidly to face the challenge of competitive free market economy. Bangladesh is no exception of this trend. Banking sector in Bangladesh is facing challenges from different angles though its prospect is bright in the future. Bangladesh economy is expected to grow by 6.8-7.00 percent during the fiscal year 2008-2009 due to good harvest, recovery of agricultural output, stable manufacturing growth supported by strong export demand of knit garments, robust service sector growth and steady flows of remittances.
Modern Banking system plays a vital role for a nation s economic development. Over the last few years the Banking world has been undergoing a lot of change due to deregulation, technological innovations, globalization etc. These changes also made revolutionary changes of a country’s economy.
Import Business of Prime Bank has spread its invisible wings throughout every sector of the economic development of our country. Some of the major development areas are as follows-
- Through facilitating the import of various accessories, raw materials, fabrics, and yarn, Prime Bank is playing a key role in the backward integration of our garments industry, which is holding the base of our economic developments.
- Import of different garment machinery, textile machinery as well as printing, medical and pharmaceuticals equipments is working as a fuel to ensure our economic mobility.
- Import of electronics like TV, Freeze, mobile and other equipments has enormously improved the meaning of our life and our living standards.
- Import of various food and food grains like Oil, Rice, Wheat, Sugar, Master Seeds, and Soybean Seeds is one of the key factors to satisfy the need of our high level of population growth.
- The bank is also spreading its invisible hand of development toward the improvement of our agricultural industry through the import of fertilizer and insecticides.
- To consider the role of Prime Bank in Import business there is no way those we undue the importance of other imported items like paper, coal, motorcar, energy saving lights and others.
CHAPTER – 2
TO THE STUDY
2.1Introduction to the Report:
The financial organizations of a country (like–banks) play an important role in accelerating the process of economic growth. Modern banks play an important role in promoting economic development of a country. Banks provide necessary funds for executing various programs underway in the process of economic development. They collect savings from large masses of people scattered through out the country, which in the absence of banks would have remained idle and unproductive. Banks collected these scattered amounts, pooled together and made available to commerce and industry for meeting the capital requirements. But there are different kinds of risk associated with these types of transaction.
So for a bank it is significant issue that the credit approval process and risk assessment criteria for different types of loan should be in proper way. Because the performance and the success of the bank are depend on it. As a result, it is a matter of great importance to the bank’s management for sound lending and selection of the borrowers in credit operations, after calculating the risks associated with it.
2.2 Rationale of the Study:
For better understanding of the corporate world basically the financial institutions like banks, doing their credit operations in Bangladesh; this study is very essential. It is significance for me as a student of business administration because this study will help in the future career. If I am aware of credit endorsement process and risk criterion for different types of loans in banks, particularly in prime bank. I can find out some new and safe, less risky way to approve the loans to the borrowers and that will help to do sound banking operations.
May be that can help my future career life. May be in future I can work in the credit department of a bank. Then this study can help me to understand the credit approval process and risk assessment criteria for different types of loans. This study also helps the
faculty of Business Administration or to the university as a whole or to the business sector. Because this study will be cover the credit approval process and risk assessment criteria, for different types of loans in bank.
2.3 Statement of the Problems:
For this research program, goal is to identify the different factors which are associated credit approval process and risk assessment criteria for different types of loans. And to find out that these factors helping level to avoid selecting the risky borrowers.
Nobody is perfect in this world. As human being & making mistakes is quite usual. Despite making this report with extreme care, there may be some mistakes. I tried our best to make this repot a successful one but because of shortage of time and also inadequate resources there may be some lacking. I hope that readers will understand it and will be very pleased with the work to make this research report a successful one.
2.4 Scope and Delimitation of the Study:
Nobody is perfect in this world. As human being & making mistakes is quite usual. Despite making this report with extreme care, there may be some mistakes. I tried our best to make this repot a successful one but because of shortage of time and also inadequate resources there may be some lacking. I hope that readers will understand it and will be very pleased with the work to make this research report a successful one.
2.5Objectives of the Study:
To be meaningful, every work must have some objectives. For this reason, every researcher has to formulate the objectives of the study. So, in the light of the research topic, this study has been designed on the basis of the following objectives:
i. Broad Objective
To understand the scope for credit approval process and risk assessment criteria for different types of loans in prime bank.
ii. Specific Objectives
To understand to whole strategies follow by the Prime bank, in their credit operations, basically the credit approval process and risk assessment criteria for different types of loans and the ways to perform better then previously by overcoming the existing problems with these.
CHAPTER – 3
METHODOLOGY OF THE STUDY
3.1 Methodology of the research work
In conducting this report basically, there have been two types of data and information used. The name of those two types and their sources to reveal the information for preparing this report is given below:
3.2 Data Sources
To complete the study in the light of research objectives, information both from the primary and secondary sources will be considered. However, as the primary sources this study will use two methods. These are:
3.2.1 Primary Source
· Personal investigation with bankers,
· Personal experience gained by visiting different desks,
· Different circular sent by Head Office of PBL and Bangladesh Bank.
3.2.2 Secondary Source
· Different ‘Procedure Manual ‘published by PBL,
· Study of old files,
· Previous Internship report,
· Publications of Bangladesh Bank.
· Web site searching data on banking
· Reference books on banking
· Annual Report
CHAPTER – 4
ANALYSIS AND INTERPRETATION OF THE DATA
4.0 Description of Corporate division of Prime Bank
4.1 Organization Structure of Credit Department of PBL
Adequate segregation of duties is a prerequisite of an effective system of internal control. To be adequate, segregation must that the following functions are performed by persons independent of each other:
- Sales and Marketing-Sales and Branch
- Credit Assessment and Approval-By Credit Unit
- Credit Documentation and Administration-Loans Processing and disbursement unit
- Credit recovery-by recovery & Collection unit
The credit approval team will be independent from the sales and branch team who will evaluate and approve the loan. The credit administration under retail operations team will check and ensure the documentation and disburse the loan. This will ensure the better control of the asset and mitigate the risk of compromise of the duties.
The following chart represents the Management Structure Credit Department of PBL:
FIG 4: Management Structure of Credit Department of PBL
The following chart represents the retail banking management structure:
FIG 5: Organization Structure of Retail Credit Department
4.2 Different Types of Loan/advance offered by PBL
The Prime Bank is offering the following loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and have good return to the investment as well as satisfy the client. The loan and advance products are as the following:
Loan and Advance have primarily been divided in to two major groups:
- Fixed Term Loan:
These are the loans made by the Bank with fixed repayment schedules. Fixed term loans are categorized into three based upon its tenure which is defined as follows:
Short Term: Upto 12 Months
Medium Term: More than 12 and upto 36 months
Long Term: More than 36 Months
- Demand Loan: SOD, Export
- Continuous Loan:
These are the loans having no fixed repayment schedule, but have an expiry date at which it is renewable on satisfactory performance of the customer.
These categories of loans are accommodated under the 7 prime sectors which are as under:
- Term loan to Large & Medium Scale Industry
- Term loan to Small & Cottage Industries
- Working Capital: CC(H), CC(Pledge), OD
- Export Credit: “Export Cash Credit (ECC)”, Packing Credit(PC).Foreign Documentary Bill Purchased( FDBP), Inland Documentary bill purchased etc.
- Commercial Lending: Loan against Imported Merchandise (LIM), Loan against Trust Receipt (LTR), Payment against Documents (PAD), Secured overdraft (SOD), cash credit etc for commercial purpose.
- Other: transport, personal loan, work order finance.
4.2.1 Types of Credit Facilities
Depending on the various nature of financing, all the credit facilities have been brought under two major groups;
A. Funded credit
B. Non-funded credit
Under Non-funded credit, there is basically two major products namely-
1. Letter of Credit
2. Letter of Guarantee
Under Funded credit, there are the following products-
1. Loan (General)
2. Housing Loan (Commercial
3. Home Loan (Swapna Neer)
4. House Building Loan (Staff)
5. Other loan to Staff (CCS)
6. Cash Credit (Hypo)
7. Cash Credit (Pledge)
8. Hire Purchase
9. Lease Financing
10. Consumer Credit Scheme (CCS)
11. SOD (Financial Obligation e.g. FDR, MBDR)
12. SOD (General)
13. SOD (Work Order)
14. SOD (Export)
15. PAD, LIM, LTR, IBP
16. Export Cash Credit (ECC)
17. Packing Credit (PC)
18. FDBP, IDBP, FBP.
4.3 Credit Assessment System
4.3.1 Introduction of Credit Assessment System
Commercial banks and financial institutions intermediate between lenders and borrowers. These financial intermediaries collect deposit and disburse it as loan and advance to the individual people, business, commercial, industrial entity. The loan and advance should be given to them who has the certain and predicted cash flow to repay the credit. If the credit officer fail to analyze the clients viability of repaying the loan and the projects cash flow possibility of default may arise due to the information. In sanctioning the loan, is the key to identify the borrowers’ ability, expertise, efficiency, and industry analysis, business performance to ensure the recovery of the credit along with the good supervision, monitoring and the relationship. The purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate security.
4.3.2 Allocation of Authority
To assure proper and orderly conduct of the banking operation, the board of directors empowered the Managing Directors and executives of the bank to lend up-to certain under certain terms and conditions at their discretion. Important point is that an officer will not be delegated certain power on the basis of his position. In other words, an officer does not automatically get lending authority by virtue of his corporate /functional title. Specified lending authority will be delegated by the Managing Director to various Executives after taking into consideration his proven credit judgment, Knowledge, and experience.
4.3.3 Approving Authority
In PBL the credit proposal go through certain steps that are ordered in terms of hierarchy.
Branch Credit Department
FIG 6: Approving Authority Sequence
The board of directors is the ultimate authority and it delegates different power to the different committees. In PBL there are following hierarchies in approving credit facilities.
4.3.4 Branch Credit Committee
The branch credit department is maintained by the branch manager and the other members are second man or manager operation, credit in-charge, and other members are nominated by the branch manager and the credit officer who prepares the proposal calls them relation officer. As the ultimate performance of the branch depends on the loan all of the members are give importance. If the credit amount wanted is not under the sanctioning authority of the branch committee, it is sent to the Head Office Credit Committee for approval.
4.3.5 Head Office Credit Department
After receiving the loan proposal from different branches, credit committee (HO) seats after certain interval for analyzing the proposal. The credit officers review the proposal and look for what other information is needed to provide with it to present before the executive committee. Here they also appraise the loan proposal in the same way the branch does. The HO credit committee is headed by the Managing Directors of the bank and he selects other members. Mainly the HO credit department is responsible for the following activities:
- The committee evaluates the quality of the lending staff posted in the branch and take appropriate steps to made them efficient and effective.
- Ensuring that all the required information and documents are collected and are in order.
4.3.6 Executive Department
If the limit of the loan proposal exceeds the authority delegated to the HO credit committee, the loan proposal is forwarded to the executive committee for sanction. Approving the credit facility as delegated by the Board of Directors.
· Supervising implementing the directives of the Board of Directors.
· Reviewing of each extension of the credit approval by the HO credit committee or Managing Director.
· Communicate the result of all the above function to the Board of Directors.
4.3.7 Board of Directors
If the credit demand of the client crosses the delegated power of the executive committee, the proposal is sent to the board of directors for approval. The Board of Directors has, in the PBL, retain the following credit related responsibilities in their hand:
· Delegating authority to approve and review credit
· The board of directors will approve the credit for which authority is not delegated to anybody.
· The board of directors will establish the credit-related, policy and procedures.
4.4 Steps in Loan Processing
There are some stages the proposal has to come across. The steps are:
4.4.1 Credit Request
In general the client having an account approached the bank official for financial help in the form of credit. The client may directly go to the credit department or talk with the manger of the branch. While talking with the client the officer try to find out the following cues: 4 Borrower’s identity, Family background, Character, Capacity and honesty.
· Reputation in business circles, friends, and competitors and employees.
· Educational qualifications, Business Experiences.
· Physical Fitness and Eagerness.
· Purpose of the Loan, Popularity and marketability of the product.
· Availability of the raw materials, transport and communication.
· Expected terms of repayment.
· Other sources of income.
· Lifestyle of the Borrower.
· Declaration of the assets and liabilities.
· Whether reason for credit facility seeking is justifiable.
· Tendency to disclose the information.
Here this discussion is like preliminary screening of the client. So the credit officers need to be cautious about the facility the client is seeking and the available fund in the bank. Moreover most of the businesses in our country don’t have any standard form of accounting department and don’t have any audited statements. So the main task of the credit officers is to make a relationship with the client to find out the hidden income sources.
4.4.2 Credit Application form
The client is given a credit application form if and only if the credit officer is satisfied discussing with the client when he approached. This can be said the preliminary screening of the client. The PBL credit application request form is said to be a standard one. A sample Credit Application Form is given in the appendix. The client has to provide the following information in the credit application form
· Mode of financing and amount of credit wanted.
· Primary information of the Business
· Directors name along with their shareholding percentage of net worth and filled up net worth statement
· Sister concern’s information and working capital related basic information.
4.4.3 Scrutinizing and Collection of Information
In case of clients who have previous record of taking credit facilities, their in-file records are examined to see whether the client has a good record of payments in time.
· Information gathered through direct inquiry.
· Information gathered through in-file ledger fact.
PBL request the client to provide the following documents when the complete credit application form is submitted. These documents are used to collect information for processing the loan proposal. These also help the credit analyst to appraise the client and to prepare proposal. The information or documents that must be given by the clients are as follows.
|§ Broad Resolution for availing credit facility from Prime Bank||§ Property Document|
|§ Certified copy or photo copy of the Memorandum of Articles of Association/certificate of incorporation||§ Copy of the original title deed of the landed property offered for mortgages|
|§ Photocopy of the directors duly attested.||§ Bia Deed of the previous owner of the same property|
|§ Personal Networth of the directors||§ CERTIFIED copy of the Mutation Khatian|
|§ Copy of the TIN and Trade License duly attested||§ Duplicate Carbon Copy (DCR)|
|§ Last three years audited balance sheet||§ Up-to-date rent receipt and Municipal Tax Receipt|
|§ Group brochure/Machinery list/stock report/list of buyers||§ Certified copy of CS, S.A, and RS Khatian.|
|§ Short description of the products of the company||§ Up-to-date
|§ Project Profile (if new project)||§ Valuation certificate by an engineer.|
|§ Name and address of the present bankers||§ RAJUK approved plan of the building with the approved letter.|
|§ Name address of the sister concern||§ Photograph of the land from the three different sides.|
|§ Quotation||§ Photograph of the owner of the land|
|§ Marketing Distribution System/Export Target||§ Board resolution of mortgaging the property if the same belongs to any limited company|
|§ Short Profile of the Directors mentioning their business experiences|
|§ Brief Description of the management of the company mentioning their educational and professional experiences.|
|§ A latest liability position of all the business concerns of the group with other bank or financial Institutions.|
4.4.4 Credit Appraising & Presentation of Credit Proposal for Approval
1. Appraising the client or Credibility Appraisal
The credit officer has to check the integrity and the honesty of the client that is the management and the other allied company as well. The integrity is checked through different ways. They are as follows:
When the client approached for credit, the credit officer talked with him to identify whether the client has any need of seeking credit facility. The credit officer has to have deep analyzing power to find out the clue.
Report form PBL
If the customer hold an account or is enjoying credit facility from the PBL, the statements of the accounts are collected for analyzing the performance of the existing facility, transaction summery of the accounts along with the integrity of the client.
Report from other Bank:
The client has to mention whether he has other liability in other bank in the name of the project and or in the name of the sister concern in the time applying for credit. From the given information the credit officer contact, communicate with the respective authority of those banks with which the credit seeker has the transaction to collect the information about few things:
q Whether the client has taken any loan in the name of the proposed project or any other sister concern.
q The amount outstanding and whether classified or not.
q The payment habit of the client
All the collected information is kept confidential.
Report from society:
Some times the credit officer collects information from other businessman having relationship with PBL. Informally the credit officers discuss about the project and the initiator and the potentiality with the businessman.
The branch office collects CIB report through the head office. It is known that all the banks have to send liability position of the client. The CIB authority provides the related information for which he is asked for.
2. Financial strength analysis
Analyzing the financial position is one of the main factors to be identified before financing any business. In the application form the client has to furnish the total investment made by him in the said project he is seeking loan facility. The credit officer must find out the Net-worth of the client.
- Look for the net-worth of all the directors
- Paid–up capital
- Investment in business
- Leverage (Equity Multiplier)
- Cash flow
- Allied deposit in PBL.
- Tangible net-worth of the business for the lasts three years and projected two years.
- Total Asset-Total Debt Overall group strength (if applicable)
- The strength also appraised by the business performance.
3. Liability position analysis
Facility from PBL & other banks taken by the client must be provided while applying for credit facility. The credit officer looks for:
- Existing facility enjoying by the Client Company from the PBL and other banks.
- Existing facilities for the sister concerns if applicable.
- Debt to Asset ratio.
- Here the credit officers need to look for the Nature, limit, outstanding, overdue, CL status, security value of the credit facilities
- Whether the amount outstanding are classified or not
- Monthly installment payment or fixed charge coverage performance of the client.
4. Management Competence’s or Capability Appraisal
The ability of the management to run the business smoothly and business background of the promoter and the sponsor director and the management are important. As most of the established businessman are traditional and has not business education it is very difficult to find out. To identify and judge PBL collect the following information from the client:
- Brief description of the directors educational background & business back ground
- Brief profile of the management
- Business performance for the last three years as performance of the business implies the capability of the management’s running the business.
- Equity mobilization of the directors as it implies their risk-taking attitude.
If it is revealed that the directors are in the business for a long time and have operated the business well is said to have the capability to run the business.
4.4.5 Approval of Credit by Higher Authority
Branch Credit Committee: Branch credit committee to be headed by the Branch Manager, other members to be selected by the manager in consultation with Head Office.
Head Office Credit committee: Head office credit in accordance with authority established and delegated by the Board of Directors.
· Reviewing, analyzing and approving extension of credit in accordance with authority established and delegated by the Board of Directors.
· Evaluate the quality of tending staff in the bank & take appropriate steps to improve upon.
· Recommending credit proposal to the Executive Committee/Board of Directors which are beyond the delegated authority.
· Ensuring, that all elements of Credit application i.e. Forms, Analysis of statements and other papers have been obtained and are in order.
· Confirming that the transaction is consistent with existing loan policy and Bangladesh Bank guidelines & if not the Committee may prepare a recommendation form an exception to or change in policy for consideration by the Executive Committee/Board of Directors.
Executive Committee: Approving credit facilities as delegated by the Board of Directors. Supervising the implementation of the directives of the Board of Directors. Reviewing of each extension of credit approval by the Head Office Credit Committee/Managing Director. Keeping Board of Directors informed covering all these aspect.
Board of Directors: Establishing overall policies and procedures for approving and reviewing credits. Delegating authority to approve and review credits. Approving credit for which authority is not delegated. Approving all extensions of credit which are contrary to bank’s written credit policies.
4.4.6 Sanction of Credit
Most important step of providing credit facility is the sanctioning of credit, because sanctioning authority will be held responsible for any discrepancy. In this step all the documentation is completed and the customer is sent an advising letter for the credit facility along with all the terms and conditions.
Norms maintained in sanctioning of credits are described below:
- Credit will be sanctioned and disbursed strictly in terms of the approved Credit Operational Manual of the Bank and Head Office Circulars issued from time to time.
- All norms informed through the Circulars of Credit Division in particular and all other relevant circulars in general, which are to be followed meticulously while exercising power.
- Credits will be subject of Bangladesh Bank restriction.
- The party to whom credit will be allowed should be as far as possible within the command area i.e. Area of operation of the Branch. Deviations, if any are to be explicitly explained in the proposal.
- No Sanctioning Officer can sanction any credit to any of his near relations and to any firm/company where his relations have financial interest. Such cases should be sent to the Head Office.
- All Sanctioning Officers maintain a Sanctioned Register for recording serially all the credits sanctioned by him. Sanctioning officer will accountable for non-recovery due to his injudicious decision.
- All approval of credit facilities must be conveyed under dual signature. Ideally both the signatories must have the required lending authority. If however, two lending officers of the required lending are not available, one of the signatories must have the required authority.
4.4.7 Disbursement of Credit
Disbursement of credits presupposes observance of all norms and procedures, which are conveyed through different Circulars of Head Office, issued from time to time.
4.4.8 Credit Administration and File Maintenance
Credit File Maintenance:
The credit file for each facility shall contain all information necessary to facilitate ready monitoring of that facility. It should contain a through history of the customer relationship to help credit officer’: track any problems, assist a newly assigned credit officer in understanding the customer and make the lending process transparent. Primary items in Credit File include:
- Credit application and Credit approval notes/analysis. Evidence of credit approval and data upon which approval was granted together with any comments, if appropriate.
- Copy of sanction and loan agreement. A checklist along with copies of all legal & banking documents obtained/to is obtained. Details and 6 monthly updated information of all related facilities to the name customer group,
- All supporting data such as financial statements and analysis, references, credit investigation results, CIB & other Bank reports and notes of all discussions with the borrower and other relevant parties with paper clipping.
- Correspondences call reports, site visit reports, stock report etc. each credit file shall be maintained in a secured location and where access restricted to authorized personnel’s only. Copies of the information may be kept where regular access is required.
Facility Evidence Maintenance:
All charge documents should be maintained in a place of utmost security. All charge documents as prescribed by the bank & local laws, for the relevant credit facility, Signed credit agreement, Signed guarantees or other evidence of credit security or collateral agreement shall be kept in fire proof safe under the custody of Branch manager or his designate alternative and another officer. A register of charge and security documents should be maintained under the supervision of the Branch Manager.
4.4.9 Credit Monitoring and Reviewing
It is the responsibility of the Manager to monitor the over all profile and risk aspect of the credit portfolio in accordance with the criteria set down in the Bank Credit Policy. Such monitoring shall be evidenced from the comments of the Manager in monthly Call/Visit Report and be kept in the Credit File with a copy to the Head Office.
This Review shall be formally performed at intervals prescribed by Head Office but it is the responsibility of the Manger to ensure at all times that the credit portfolio meets the standard set forth by the Bank.
Periodic Review and Follow-up should aim at ensuring:
- Terms of approval have been maintained.
- Conduct (turnover, regularity of repayment etc.) of the borrowing accounts during the period under the review has been satisfactory or as expected.
- Continuing value of the collateral is adequate.
- There are no adverse trends in market, economic and political conditions which may endanger the reliability of the facility.
- Business reciprocity offered and received is commensurate with the facilities allowed.
- Earning from the account is cost effective (i.e. adequate to meet business cost of funds and leave sufficient margin for adequate risk reward, overheads and profits).
- Borrowers business is being satisfactorily conducted as reflected through a review and analysis of the financial and operating statements.
4.4.10 Taking Precaution/Legal Action against Delinquent Clients
The responsibility for review and classification of credit facilities starts at Branch level. The frequency of the supervision and monitoring depends on the classification of credits.
4.5 Credit Risk Management
In perspective of Prime Bank Limited risk is Defined as the possibility of Losses, Financial or else. Now a days management plays a vital role to reduce uncertainty of assets and or else. The major area of risk the bank think is that credit risk, liquidity risk, Matket risk, Operation risk an reputation risk due to money laundering risk. Market risks include Foreing Exchange risk, Interest rate risk and Equity risk.
Fig 8: Types of Risk management Of Prime Bank Limited
4.5.1 Risk Management Process
To manage the risk, prime bank Limited takes some Steps. They actively involve analysis, evaluation, acceptance and management is not only for regular process but also improve financial performance of the Bank.
The risk management policy of the Bank operates under 5 broad principles:
Oversight by the Executive Committee. Board approves Policies and Processes of risk management recommended by the management and executive Committee approves through credit proposals Submitted by the Management.
Audit committee of the Board reviews the internal audit reports of the Bank and risk management Covering credit Risk, Operational Risk and Including money Laundering risk, market Risk, and Liquidity risk.
Dedicated independent risk management units via Credit Risk Management Units, Credit Administration Unit, Credit Monitoring and Recovery Unit, Internal Control and Compliance Unit are responsible for implementation of the risk policies and monitoring of compliance with risk Policies. They are also responsible for identification and measuring risks.
Dedicated committee at Management Level has been set up to monitor risk viz. Credit Risk through credit Review Committee and risk Management Division, Operational risk through Management Committee and Internal Control Division. Market Risk and Liquidity risk through Asset Liability Committee (ALCO); Information risk through MRS Committee and Reputation risk arising out of Money laundering through chief Compliance officer of the Bank and Compliance Officers of the Branches.
In order to Streamline risk control features in a more effective manner, PBL has put in places all manuals as suggested in the core risk management guide lines of Bangladesh Bank. Its Standard Operating Procedure (SOP) Contains all the guide lines and also includes some of the internationally accepted best Practices. Departments including corporate banking, SME banking, retail banking, Credit Card, foreign exchange, treasury, human resources and financial administration. The SOPs include all processes related to the initiation, maintenance, settlement/Closure and recording for the entire range of products offered by the Bank. SOPs will help the Bank maintain control over its operations, clarify the links with the IT system, act as an effective communication tool that reduce training time, improve risk management and work consistency.
4.5.2 Credit Risk
Credit risk is one of the major risks faced by the Bank. This can be described as potential loss arising from the failure of a counter party to perform according to contractual arrangement with the bank. The failure may arise due to unwillingness of the counter Party or decline in economic condition etc. Therefore the Bank’s risk management has been designed to address all these issues.
4.6 Credit Principles
Credit Principles are used to reduce the risk of credit. These are as follows:
Loan – Deposit Ratio
Loans and Advance are financed from customer deposits some time from capital fund of the Bank. Prime Bank Limited financed the Loan less then their deposits. May be one branch can exits the loan-deposits ratio but from short term money market or out of temporary fund.
Credit facilities shall be allowed in a manner so that credit expansion goes on ensuring optimum asset quality i.e. Bank standard of excellence shall not be compromised. Credit facilities will be extended to customers who will complement such standard.
All credit extension must comply with the requirements of Bank’s Memorandum and Articles of Association, Banking Companies Act, 1991 as amended from time to time, Bangladesh Bank’s instruction circulars, guidelines and other applicable Laws, rules and regulations, Bank’s Credit risk management Policy, Credit operational manual and al relevant circulars in force. The officer originating a credit a credit proposal shall specifically declare that it complies with all above mentioned rules, regulations, policy etc. Credit officer have to check that all of the information is properly verified. And mentioned document is in the given to the bank is Correct.
Any deviation from the internal policy of the bank must be justified and well documented. Specially, all credit assessment form shall invariably include the deviations from the policy, if any. However, no external regulations shall be compromised.
Credit operation of the Bank should be contributed at optimum level within the defined risk limitation. In other words, credit facilities should be extended in such a manner that each deal becomes a profitable one so that Bank can achieve growth target and superior return on capital. Besides, credit extension shall focus on the development and enhancement of customer’s relationship and shall be measured on the basis of the total yield for each relationship with a customer.
Credit facilities will be extended to those customers who can make best use4 of them thus helping maximize bank’s profit as well as economic growth of the country. To ensure achievement of this objective the Bank bases its lending decision mainly on the borrower’s ability to repay.
The portfolio shall always be well diversified with respect to sector, industry, geographical region, maturity, size, economic purpose etc. Concentration of credit shall be carefully avoided to minimize risk.
Proper credit assessment is complex and requires high level of numerical as well as analytical ability of the concerned officer. To ensure effective understanding of the concept and thus to make the overall credit portfolio of the bank healthy, proper staffing shall be made through placement of qualified officials having appropriate background, right aptitude, formal training in credit risk management, fami