Credit approval policy and practice of BANK ASIA LIMITED

Credit approval policy and practice of BANK ASIA LIMITED

1.2 Significance of the Study

Four years back Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four ‘Focus Groups’ were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinators to look into the practices of the best performing banks both at home and abroad. These focus groups identified and selected five core risk areas and produced a document that would be a basic risk management model for each of the five ‘core’ risk areas of banking. The five core risk areas are as follows-

a) Credit Risks;

b) Asset & Liability / Balance Sheet Risks;

c) Foreign Exchange Risks;

d) Internal Control & Compliance Risks; and

e) Money Laundering Risks.

Bangladesh Bank in one of it’s circular (BRPD Circular no.17) advised the commercial banks of Bangladesh to put in place an effective credit approval and monitoring system by December, 2003 based on the guidelines sent to them.

While doing internship in the Credit Department of Bank Asia Limited, Scotia Branch, and for preparing the report will try to make a comparative analysis of Credit Approval & Monitoring process of Bank Asia Limited existing credit policy following Bangladesh Bank’s suggested guidelines.

1.3 Objectives of the Study

The study has been undertaken with the following objectives

· To identify the factor affecting credit risk.

· To evaluate the techniques for credit risk management used by Bank asia ltd.

· To compare the existing credit approval and monitoring process of Bank Asia Limited with that of Bangladesh Bank guidelines.

· To identify and suggest scopes of improvement of existing methods of loan approval, maintenance and monitoring in the credit division of Bank Asia Ltd.

1.4 Methodology

The following sources have been used for the purpose of gathering and collecting data as required.

i) Primary sources & ii) Secondary sources.

A. Primary sources:

1) Observation & 2) Personal interview

B. Secondary sources:

1) Different Reports of Bank Asia Ltd. 2) Head Office Circulars

3) Brochures of Bank Asia Ltd. & 4) Previous Internship report.

Both primary and secondary data sources will be used to generate this report. Primary data sources are scheduled survey, informal discussion with professionals and observation while working in different desks. The secondary data sources are annual reports, manuals, and brochures of Bank Asia Limited and different publications of Bangladesh Bank.

To identify the implementation, supervision, monitoring and repayment practice- interview with the employee and extensive study of the existing file and practical case observation were done.

1.5 Limitation of the Report

This report will only consider credit risks of Bank Asia Limited. Due to time constrain, it will not cover-

· Asset and liability/ balance sheet risk.

· Foreign Exchange Risk

· Internal control and compliance risk

· Money laundering Risk.

Besides I was not able to visit the different branches of Bank Asia and had to rely mostly on the information gathered from the Scotia Branch.

1.6 Report Organization

This report is divided in five sections. The following section is the organization part i.e. this section will give an overview of Bank Asia Limited. In section iii, Credit approval policy and practice of BANK ASIA LIMITED is significantly analysed with respect to Bangladesh Bank’s guidelines for credit management in section iv. Section v deals with findings and recommendations.

Bank Asia Limited is one of the leading private sector banks in Bangladesh offering full range of Personal, Corporate, International Trade, Foreign Exchange and Capital Market Services. Bank Asia Limited is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments, assuring Excellence in Banking Services.

1.7 Background of Bank Asia Limited

Bank Asia started its journey on the 27^th of November 1999 with the inauguration of the bank’s Corporate Office at the Rang’s Bhaban. By a great number of public responses has enabled the Bank to keep up the plan of expanding its network. The opening of the Principal Office was the big leap forward and successively the opening of Gulshan and Chittagong Branch expanded the horizon of Bank Asia to bring its services to the valued clients more effectively.

Within a very short period, the Bank has opened 2 more branches in Dhaka and 2 branches in Sylhet and Kishorganj. In February 2001 Bank Asia took over the Bangladesh operation of The Bank of Nova Scotia of Canada, the first acquisition of a foreign bank by a local bank in the history of Bangladesh. Later, Bank Asia took over the Bangladesh operation of Muslim Commercial Bank

Limited (MCB) of Pakistan in January 2002. These courageous moves were possible for some visionary decision-makers and also dedicated team of professionals who are constantly putting all their best efforts to establish the bank as one of the leading concern in the industry

Bank Asia has so far been highly successful in keeping its clientele satisfied with its high quality services, while continuing its expansion to reach more people around the whole nation. Bank Asia conducts all types of commercial banking activities. The core business of the bank comprises of import, export, working capital finance and corporate finance. The bank is also rendering Consumer loan, and services related to local and foreign remittances.

The “Consumer loan” scheme of the bank, which is designed to help the fixed income group in raising standard of living is competitively priced and has been widely appreciated by the customers. The Bank also has ATM services and very lucrative deposit schemes i.e. DG+, DB+, MB+ which have earned the Bank a name in the market. However, these products are temporarily suspended at present.

1.8 Capital Base

Authorized Capital : BDT 4450,000,000.

Paid up Capital : BDT 1395,000,000(as on December 31, 2007)

2.1 SWOT Analysis of Bank Asia Ltd.

Every organization is composed of some strengths and weaknesses, which are its internal factors. The opportunities and threats it encounters are external elements. The following will briefly list some of Bank Asia’s internal strengths and weaknesses, and external opportunities and threats, as I perceive from my experience.

2.1.1 Strengths

Quality

Bank Asia strives to endow its customers with appreciable quality in every service it provides. Customer satisfaction claims the highest priority, as it should be in any service-oriented organization.

Adaptability

Bank Asia draws its strength from the adaptability and dynamism it possesses. It has quickly adapted to world class standard in terms banking services. Bank Asia has also adopted state of the art technology to connect with the world for better communication to integrate facilities.

Financial strength

Bank Asia is a financially sound company backed by the enormous resource base of the mother concern RANGS group. As a result customers feel comfortable and more secure while dealing with the bank.

Efficient management

All the levels of management are solely directed to maintain a culture for the betterment of the quality of the service and for developing a brand image in the market through the organization’s wide team approach and horizontal communication system.

State of the art technology

Bank Asia utilizes state-of-the-art technology to ensure consistent quality and operation. The evidence of that can be found in one of its branches, Banani that is equipped with Reuters and SWIFT. All these facilities will be introduced in every branch very shortly. Bank Asia Limited has also started using the Stelar Software since January 01, 2004

Human Resource Expertise

One of the key-contributing factors behind the success of Bank Asia is its HR who are highly trained and most competent in their own respective fields. Bank Asia provides its employees with training both in-house and out side job.

Logistics

Bank Asia is free from dependence from the ever-disruptive power supply. The company generates the required power through generator operating on diesel. Water generation at present is also done by deep tube wells on site and is abundant in quantity. Also support tools, like laser printers, photocopiers, microwave oven etc. that have become essential these days are available at arm’s length much to the convenience of the users.

First-Rate working environment

Bank Asia provides its workforce an excellent place to work in. The total complex has been centrally conditioned. The interior decoration has been done exquisitely with the blend of tasteful colors and artistic yet useful furniture that is comparable to any multinational bank.

2.1.2 Weaknesses

Limited workforce

Bank Asia has very limited human resources compared to its financial activities. There are not many people to perform most of the tasks. As a result many of the employees are burdened with extra workloads and works late hours without any overtime facilities. This might cause high employee dissatisfaction that will prove to be too costly to avoid.

2.1.3 Opportunities

Government support

Government of Bangladesh has rendered its full support to the banking sector for a sound financial status of the country, as it is becoming one of the vital sources of employment in the country now. Such government concern will facilitate and support the long-term vision for Bank Asia.

Evolution of e-banking

Emergence of e-banking will open more scope for Bank Asia to reach the clients not only in Bangladesh but also in the global area. It will also facilitate wide area network in between the buyer and the production unit of Bank Asia to smooth operation to meet the desired need with least deviation.

2.1.4 Threats

Mergers and acquisitions

The worldwide trend of mergers and acquisition in financial institutions is causing concentration in power in the industry and competitors are increasing in power in their respective areas.

Political instability

Unstable political situations cause great distraction in the otherwise smooth flow of business. Sudden hartals and other political programs sometimes present problems for the employees (esp. female employees) in commuting to and from the office. Political instability also promotes a weak law and order system leading to an increase in crime rate in the society. This might also be considered as a potential external threat for a financial institution.

Emergence of competitors

Due to existence of unfulfilled demand in financial sector, it is expected that more financial institutions will be introduced in the industry very shortly. And we have already seen such cases in our country that lots of new banks are coming in the scenario with new services, which signifies the faster rate of growth of competitors. Bank Asia should always be prepared to encounter more competition in the coming years.

2.2 Product and Services

The product and services that are currently available are given below:

Bank Asia Limited launched several financial products and services since its inception. Among them are Monthly Savings Scheme, Monthly Benefit Scheme, Special Savings Scheme, Consumer Credit Scheme, Small Loan Scheme, Rural Finance Scheme & E-cash ATM. All of these have received wide acceptance among the people.

Monthly Savings Scheme (DG+): The prime objective of this scheme is to encourage people to build up a habit of saving. In this scheme, one can save a fixed amount of money every month and receive substantial lump sum of money after three or five years.

Monthly Benefit Scheme (MB+): MB+ is a five (05) years scheme that lets depositors earn monthly benefit of TK. 1000 or its multiple by minimum initial deposit of TK. 100,000 or its multiple and after maturity depositors will get refund of his/her principle amount.

Special Savings Scheme (DB+): DB+ is a six (06) or ten (10) years scheme. The deposit doubles in 06 years and triples in 10 years.

Bonus Savings Scheme: A savings account with a minimum balance of TK. 50,000 will attract not only the usual savings interest but also a further 10% bonus on interest.

Personal Credit: Consumer loan is a relatively new field of collateral-free finance of the bank. People with fixed income can avail of these credit facilities to buy household goods, consumer items, buy car or to renovate/expand existing house, etc.

Credit Loan: If anyone is in possession of BSP (Bangladesh Sanchaya Patra), which will mature within the next 05 years, but he/she is in need of funds, the scheme can come to rescue.

Rural Development Scheme: Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through financing various income-generating activities. This scheme is operated through the rural branches of the Bank.

E-Cash Banking Facility: The E-cash card is an ATM card. It can be used as a combination of debit facility. The E-cash card network offers ball banking requirements without ever setting foot in a bank. It’s more than just an ATM service for quick cash withdrawals or account enquiries. E-cash card provides round the clock banking.

2.2.1 Depository Product

Bank Asia Limited is now offering different types product for mobilizing the savings of the general people.

2.2.2 Interest paid to different Deposits

The revised rate of Bank Asia Ltd. on all types of Deposits viz. Savings, Short Term & Fixed effective from May 01,2004 for new as well as existing deposits from its next maturity are as follows:

2.2.3 Loan Product

The Bank Asia 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:

2.2.4 Personal Banking Products

· ATM Card Service

· Internet Banking

· SMS Service/Mobile Banking

· Locker Service

3.1 PREMABLE

The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future. For a bank, it is the main source of profit and on the

other hand, the wrong use of credit would bring disaster not only for the bank but also for the economy as a whole.

3.2 Principles of Sound Lending

Bank performs different functions. Lending of money to different kinds of borrowers is one the most important functions of commercial bank. Not only this, it is the most profitable business of the commercial bank and the major source of income. But lending is a risky business. The borrower of a bank range from individuals to partnership, companies, institutions, societies, corporations etc. engaged in such activities as business, industry, transport, farming etc. But the fact is this while go on lending; a bank must follow certain principles. The principal of sound lending is which where risk involvement may be kept at minimum.

The principal of sound lending involves following things:

a) Safety: The survival of a banker and for the matter of that safety of bank depends on his/her loans and advances. The ideal position is when all the loans and advances positions are fully secured. The safety of the advances should be the first principle of lending. To ensure safety of lending following factors may be considered:

b) Purpose: The purpose of loans helps the banker to determine his course of action as regards lending. Banker should avoid making loans for unproductive purpose and speculative activities.

c) Liquidity: Liquidity means availability or readiness of banks funds on short notice. The liquidity of advance means its repayment on demand on due date or after a short notice.

d) Security: The security offered by a borrower for an advance is an insurance to the banker. It serves as the safety valve for an unforeseen emergency. There are different types of security, which call for particular attention and care on part of bank who has to see it that the title he/she gets on them is not unsafe. The security accepted by a bank to cover a bank advance must be adequate, readily marketable, easy to handle and free from any

encumbrances. Whatever be the security, a bank must realize that it is only a cushion to fall back upon in case of need, and its adequate alone should not form the sole consideration for judging the suitability of a loan.

e) Profitability: Banks obtain funds from shareholders and if dividend is to be paid on such shares it can be paid by earning profits. The working funds of a bank are collected mainly from by means of deposits from the public and interest has to be paid on these deposit as well as the bank has to cover establishment charges and other expanses. This is not possible unless funds are employed profitably.

3.3 Modern Concept of Good Lending

A. Modern concept of lending presupposes a well-developed loan proposal/loan case/ project. This covers as many as six pertinent aspects like Managerial, Organizational, Technical, Marketing, Financial and Economic/Socio-economic. These are technically known as feasibility or viability study of a proposal/ loan case/ projects. By studying all these six aspects if a banker is satisfied about the viability of a loan proposal/loan case/ project, then the bank can finance i.e. grant for lending or otherwise not.

B. Financial Spread Sheet (FSS) and Lending Risk Analysis (LRA) are the new technique of assessing soundness of a loan proposal/project. With the help of FSS bank analyses the financial statements regarding a loan proposal/project. Credit decision is made by the bankers on the basis of FSS and LRA and it is a new and modern technique. In LRA bankers analyze eight risks such as supplies risk and sales risk which are Industry Risk, performance risk, resilience risk, management competence risk, management integrity risk which are under Company Risk and security control risk and security cover risk which are under Security Risk.

Modern approach thus is an integrated approach of lending by bank, which covers safety, liquidity, purpose, security, profitability etc

3.4 Credit Policy of Bank Asia Limited

Credit policy is the guideline for the credit division which includes the terms and conditions of extending credit, which is followed by the credit division. It is prepared in accordance with the philosophy of the management. Sectors to be covered, steps to be followed, factors to be considered, limits to be maintained and all other relevant matters with expectations relating to the credit extension are clearly described here, which helps the credit division to perform their activities and also in taking the decisions.

· Bank Asia (BA) makes loan only to reputable clients who are involved in legitimate business activities and whose income and wealth are derived from legitimate sources.

· Bank Asia encourages lending to socially desirable, nationally important and financially viable sectors and will not lend to unproductive purpose or socially undesired projects.

· At all times a policy of “Know Your Customer (KYC)” must be foremost in the credit applications process.

· provide, and the credit approval package must contain, sufficient information on the borrower to approve the extension of credit. Satisfactory security and collateral is required as appropriate. BA’s main thrust is on case flow statement of the business rather than on collateral security.

· BA discourages the client with relatively low or no founds of their own and with a relatively high ratio of borrowed to own founds tend to face liquidity problems, with adverse repercussions on their ability to service their obligations.

3.5 Global Credit Portfolio of BAL

“Credit Portfolio” means total investments by a bank segregated under the folios of different industries. Bank Asia Limited is operating within its own internal environment under skirt of external macro environment, consisting of elements like economic, political/legal, demographic, technological, social etc. The size of loan portfolio is determined by various priorities for bank’s fund. Besides, the prudent management of Bank Asia Limited has designated its portfolio considering the following factors under two broad categories.

External factors:

Sector based Attractiveness.

Government Regulation

Credit need of the area or community.

Internal factors:

1. Capital Position

2. Types of Loan

3. Deposit pattern

4. Skills and Expertise of Bank’s personnel

5. Credit policy of the bank.

Strategies of the Bank Asia Limited are as follows:

Invest in those sectors where yield/sector is growing over years.

Hold investment in those sectors where yield/sector is high but not growing.

Divest in those sectors where yield/sector is diminishing over years.

This is a new generation bank. It is committed to provide high quality financial services/products to contribute to the growth of GDP of the country through stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the educated youth, poverty alleviation, raising standard of living of limited income group and overall sustainable socio-economic development of the country.

3.6 Types of Credit

Credit may be classified with reference to ?elements of time, nature of financing and provision base.

3.6.1 Classification on the basis of time

Continuous loans

These are the advances having no fixed repayment schedule but have a date at which it is renewable on satisfactory performance of the clients. Continuous loan mainly includes “Cash credit both Hypothecation and Pledge” and “Overdraft”.

Demand loan

In opening letter of credit (L/C), the clients have to provide the full L/C amount in foreign exchange to the bank. To purchase this foreign exchange, bank extends demand loan to the clients at stipulated margin. No specific repayment date is fixed. However, as soon as the L/C documents arrive, the bank requests the clients to adjust their loan and to retire the L/C documents. Demand loans mainly include “Payment Against Documents,” “Loan Against Imported Merchandise (LIM)” and “Letter of Trust Receipt”.

Term loans

These are the advances made by the bank with a fixed repayment schedule. Terms loans mainly include “Consumer credit scheme”, “Hire purchase”, and “Staff loan”. The term loans are defined as follows:

Short?term loan: Upto 12 months.

Medium term loan: More than 12 months & up to 36 months

Long?term loan: More than 36 months.

3.6.2 Classification on characteristics of financing

· Overdraft * Letter of Credit

· Consumer Credit * Bank Guarantee

· LTR

· PAD

· Term Loan

· Packing Credit

The varieties used by BAL are briefly described below with the common terms and condition. Banks generally offer different kinds of credit facilities to the customers.

Consumer Credit Scheme:

This loan is allowed for acquiring consumer durable to the fixed income group and other eligible borrowers. The subject facility is known as Consumer loan.

Export Finance:

An exporter requires financial accommodation at two stages, namely:

· Pre-shipment stage

· Post-shipment stage.

Overdraft:

It is an arrangement between the borrower and the Bank, whereby the borrower may overdraw his account up to an agreed amount, within a specified period of time. Overdrafts represent short-term funds and may be extended to business customers to meet a shortfall in their working capital requirements. Requests for financial capital expenditure should be considered under fixed loans.

· Different types of Overdrafts are Secured overdrafts, Overdraft against pledged of goods/stocks,

· Overdraft against Hypothecation of good, stocks, plant and Machinery.

Other Advances:

Advanced against import bills:

– Bills against L/C are originated from the lodgment of shipping documents received from foreign banks against L/C established by the bank.

– Advance against trust receipt

– Advance against Export bills purchased/discounted

– Advance against work order-advance made to client to perform work order

– The credit facilities against cash collateral are FDR/Sanchaya patra/ ICB unit certificates etc.

Fixed Loans:

They represent an arrangement entered into between the borrower and the bank, whereby the borrower is granted a loan for a specified amount with an agreed period. A separate fixed loan account is opened, to which is debited the amount of the loan; the proceeds of the loan being credited to the borrower’s current or saving account, from which source repayments are debited on an installment

basis under a standing instruction, either monthly, bi-monthly, quarterly, half-yearly, annually, or in one lump sum when the loan matures i.e., a bullet repayment.

Project Loans:

Fixed term loans are particularly appropriate for business customers who require finance on a long term basis for the development of their factories, for purchases of plant and machinery and other fixed assets as they are able to match the cost of the assets with the profits expected to be generated over the period. Such loans are invariably subject to the fundamental principle that the Bank’s funds go in last: this ensures the borrowers have sufficient resources to complete their project and there is no necessity for further resource to bank borrowings. In Hong Kong, construction loans are typical project financing activities.

Syndicated Loans:

There are circumstances when a bank’s regal lending limit to a particular borrowing group will be exceeded after taking on an additional project loan. In this instance, the bank will invite its correspondent banks to participate in the loan, with it acting as an arranger. Agent and/or Lender, whereby its relationship with customer could be fostered, and generous fee income (i.e., Arranger Fee, Agency Fee, Front-End Fee) could be earned to improve on its return on assets.

3.7 Credit Approving Authority

Credit decisions are heart of all credit works. Generally branch manager and the credit in-charge of a branch are held responsible for appraising of a loan proposal. The customer request for credit limit and the credit officer prepares a credit memo and send it to the head office, credit division. After taking all the relevant information from the branch the head office credit division sent the credit memo to the credit committee. Credit committee of BAL is comprised of Managing Director and other top-level executives, that is, SEVPs and EVPs. If credit committee is convinced about the merit of the proposal then it is sent the broad of directors. The board is final authority to approve or decline a proposal. The whole process takes a month or more.

3.8 Classification of Loan on the Basis of Security

For internal use, banks classify the loan and advance on the basis of how much the bank is secured in respective of the loan:

· Debts considered good in respect of which the bank is fully secured.

· Debts considered good for which bank holds no other security than the debtors personal security

· Debts considered good and secured by the personal security of one or more parties in addition to the personal security of the debtor.

3.9 Objective Basis of Classification

In classifying the loan and advance there are four classes in the loan review practiced in Bank Asia Limited. They are as follows:

3.9.1 Unclassified

The loan account is performing satisfactorily in the terms of its installments and no overdue is occurred.

3.9.2 Substandard

This classification contains where irregularities have been occurred but such irregularities are temporarily in nature. To fall in this class the loan and advance has to fulfill the following factor.

The main criteria for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the bank. These accounts will require close supervision by management to ensure that the situation does not deteriorate further.

3.9.3 Doubtful

This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but cannot be quantifiable at this stage. Moreover if the state of the loan accounts falls under the following criterion can be declared as doubtful loan and advance.

3.10 Qualitative Judgment Basis of Classification

Beside the above-mentioned objective criteria, Bank Asia Limited has other few qualitative judgment for classifying the loan and advance. This judgement totally depends on the Branch Manger and or the Head Office credit division. If there is any doubt or uncertainty regarding the recovery of any continuous credit, demand loan, fixed term loan and classified or not on the basis of the above mentioned objective criterion then the loan can be classified on the basis of the Qualitative Judgment. The qualitative factors that are considered in Bank Asia Limited are as follows:

· Borrower sustains a loss of capital.

· Significant decrease in the value of the security.

· Weakening of bank’s position as creditor due to any reason whatsoever.

· Diversification of the funds to uses other than the facility for which the credit was approved.

· Incorrect information supplied by the borrower or bankruptcy of the borrower.

· Credit is rescheduled frequently or the rules of rescheduling are violated or a suit is filed for the recovery of the credit.

Last year the classification of the loan and advance of Bank Asia Limited were like this:

Table: Classification position last two years. Tk in million

3.11 Provisioning

Specific Provision

Head office credit division prepares a list of credit accounts, which are considered to be totally or partially be unrecoverable & keeps a provision against the outstanding loans.

Rate of Provisioning

Bank Asia Limited in the time of loan provisioning to get the real picture of the income mainly follows the Bangladesh Bank guideline. The rate of provisioning used in BAL is summarized in the following table.

Table: Rate of provisioning

3.12 Steps Involved in Credit Processing

The credit appraisal process here at Bank Asia limited is a detailed and through one, complying to the central bank’s standards as well as analyzing all feasible sources of risk.

The credit division follows certain procedures to decide whether or not to allow the credit facilities demanded. The credit division maintains the tight control over credit reports and keeps the proper documentation and records in the files. In general following steps are followed for a standard credit procedure:

3.12.1 Application for Loan

For any type of credit facility relating to the working capital, trade finance, project finance and contract work, clients/borrower’s must fill an application form with following information: Name of firm/ company/ individual, Business address, Permanent address, Constitution/ Status (Proprietorship/ Partnership/ Public Limited Co./ Private Ltd. Co.), Date of establishment and place of incorporation, Background and business experience, Particulars of assets (Land/Building, Bank Deposit, Stock/Shares), Nature of the business, Statement of liabilities with Bank Asia and other banks, Financial statements for the last 3 years explaining the following terms, Capital Funds/ Net Worth (Paid up capital, Retained earnings, General reserve), Balance Sheet Statistics (Current assets, Fixed assets, Term liabilities, Capital/equity, Total liabilities).

For working capital finance clients/ borrowers must provide the following information (Annual production, Annual sales, Sources of raw materials, Cash flow statements).

Following factors are to be considered while submitting the loan application form to the bank:

Proposed debt/equity ratio

For processing and getting approval of the requested credit facility the client must provide the above information and should fully co- operate with the bank for further information as needed. The analyst should verify the information through both primary and secondary sources. While evaluating the project for approval the analyst should have adequate knowledge of the economic environment in which the project is to thrive. Such as information related to money, banking foreign exchange, reserves, production, price, national income, cost of living indices, govt. policies covering wages, taxation, tariff, import control, investment, marketability of product etc.

Projected financial statements

For all credit proposals, the borrowers should submit their financial statements including last 3(three) years profit and loss A/C and balance sheet-audited/ statement of affairs. When an individual borrower or guarantor applies for any credit facility, the submitted financial statements must be signed by competent authority and must contain legend to the signatory, the assets and liabilities and sources of income and items of expenses.

Here this discussion is like preliminary screening of the plant. So the credit officers need to be cautious about the facility the client is seeking and the available fund in the bank. More over most of the businesses in our country don’t have any standard form of accounting department and don’t have any audited statement. So the main task of the credit officers is to make a relationship with the client to find out the hidden income sources.

3.12.2 Scrutinizing the documents

In this step the bank collects and correlates the information about the client. After receiving the credit application form, the credit officer thoroughly checks the form and all the submitted documents. Here, the point of importance whether the documents are certified and or attested by the respective authority.

§ General check-whether the required documents are submitted authenticated.

§ Gross verification for identifying consistency.

3.12.3 Analyzing the information

Personal interview with the entrepreneur/management

When the client approaches for credit, the credit officer talks to him with a view to identifying whether the client has only need of seeking credit facility or not. The credit officer has to have deep analyzing power to find out the clue. The out come of a personal interview session is to have overall idea about the integrity, experience, and business sense of the borrower. Prompt and consistent information supply, willingness to supply information and other verbal and non-verbal clues can be of value to the credit officer in judging the client. If possible, a visit is made to the proposed/existing plant/factory.

Report from Bank Asia Limited

If the customer hold an account or is enjoying credit facility from the Bank Asia Limited, the statements of the accounts are collected for analyzing the performance of the existing facility, transaction summary of the accounts along with the integrity of the client.

Report from other banks

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 communicates with the respective authority of those banks with which the credit seeker has transaction to collect the information about few things:

· Whether the client has taken any loan in the name of the proposed project or any other sister concern.

· The amount outstanding and whether classified or not.

· The payment behavior of the client.

All the collected information is kept confidential.

Report from Society

Sometimes the credit officer collects in formation on a client from other businessmen having relationship with Bank Asia. Informally the credit officer discusses about the project, the sponsor(s) and the prospects of the project with persons he thinks can provide him with information. Moreover, information about the sponsor is also collected from the socially important person like community representative and chamber representative. Contacting the client’s supplier can also be another way to verify the payment character of the client.

CIB Report

There is possibility that client conceals information about his/her company’s current liability and transaction with other banks. So to get the accurate information about the credibility of the customer the branch office collects CIB report through the head office. The CIB authority provides the relevant information about the client.

Management Competence or Capability Appraisal

The ability of the management to run the business smoothly and business background of the promoter and the sponsor directors and the management are crucial factors in determining the success or failure of any business operation. Capability of the borrower in running the business in highly emphasized in

the time of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiency, effectively and profitability, proper investigation must be carried out in this regard. With this end in view Bank Asia collects the following information from the client:

• Brief description of the director’s educational background & business background.
• Brief profile of the management.
• Business performance for the last three years as performance of the business implies the capability of the manager’s running the business.
• Equity mobilization of the directors as it implies their risk-taking attitude.
• Entrepreneurship skills.
• Management’s experience in the business/businesses of similar nature.
• Resilience or shock absorption.

If it is revealed that the directors are in the business for a long time and have operated the business well are said to have the capability to run the business.

Financial strength Analysis

Analyzing the financial position of the borrower is one of the most crucial jobs to perform before financing any business. It includes financial base analysis of the borrower/business, liability position analysis in terms of risk and return measures, and lending risk analysis in the specified format of Bangladesh Bank.

Liability Position Analysis

Facility from Bank Asia & 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 Bank Asia Limited and other banks, Existing facilities for the sister concerns (if applicable), Debt to Asset ratio, the amount outstanding are classified or not, Monthly installment payment or fixed charge coverage performance of the client and also look for the nature, limit, outstanding, overdue, CL status, security value of the credit facilities.

Financial Viability Analysis

In this part, NPV and IRR of the project are calculated, and breakeven analysis is also performed in terms of sales volume and capacity utilization. Payback period and modified IRR are also calculated if deemed necessary for the completeness of the analysis.

3.12.4 Evaluation/ Approval

An accurate appraisal of risk in any credit exposure is highly subjective matter involving quantitative and qualitative judgments, where Quantitative factors refer to the analysis of financial statement ratio and Qualitative factors refer to the assessment of management, industry position, customer/ supplier relations, account performance and reputation.

In evaluating any credit proposal, the analyst uses the following distinct and logical steps:

· Evaluating the past performance of the borrowers.

· Assessing the risk of failure by identifying factors in the borrowers present condition and past performances, which indicates likelihood of success to repay the loan.

· Setting terms and conditions of credit facilities.

· Forecasting the probable future condition of the borrower and deciding whether to accept or reject a loan proposal.

3.12.5 Documentation & Disbursement

Once credit proposal is approved, a sanction letter is issued to client conveying offer to the client-mentioning terms of sanction-type of facility, facility amount, repayment, security, interest rate & fees, positive and negative covenants, etc.

Apparently there are three parts of documentation, namely-

a) Obtaining instruments/ documents-charge documents, standard documents & other specified documents as specified in terms and conditions in sanction letter.

b) Stamping

c) Execution

Once documentation is complete, facility is disbursed as per term and conditions in sanctioned advice.

Figure: Steps involved in Credit Processing

3.12.5 Relation between Advance with the Security

3.13 Lending Risk Analysis (LRA): Modern Technique of Credit Appraisal

The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess the credit risk in quantifiable manner and then find out ways & means to cover the risk. However, some commercial banks employ LRA technique as a credit appr