Credit Management of Janata Bank Limited
CREDIT MANAGEMENT
Loans or credits comprise the most important assets as well as the primary sources of earning- ‘bread and butter’ 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.. To get a clear idea about credit appraisal process we need to know the key factors of credit appraisal procedures.
Credit:
The word credit is derived from the Latin word “credito” 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.
Principles of Credit:
A prudent Banker should always adhere to the following general principles of lending funds to his customers.
?Creditworthiness- Character, Capacity and Capital of the borrowers
? Purpose of the facility,
? Term of facility,
? Safety,
? Security,
? Profitability,
· Liquidity,
? Source of repayment,
? Diversity.
PROCESS OF CREDIT MANAGEMENT
Credit management must be organized in such a process that the bank can minimize its losses for payment of expected dividend to the shareholders. The purpose of this process is to provide directional guidelines that will improve the risk management culture, establish minimum standards for segregation of duties and responsibilities, and assist in the ongoing improvement of concerned bank.
The guidelines for credit management may be organized into the following sections:
Policy guidelines:
a. Lending guidelines
b. Credit assessment and risk grading
c. Approval authority
d. Segregation of duties
e. Internal control and compliance
Management structure and responsibilities
Program guidelines:
a. Approval process
b. Credit administration
c. Credit monitoring
d. Credit recovery
Now the guidelines are discussed in the following:
Policy guidelines
a. Lending guidelines: The lending guidelines include the following:
Ø Industry and Business Segment Focus
Ø Types of loan facilities
Ø Single borrowers/ group limits/ syndication
Ø Lending caps
Ø Discouraged business types
As a minimum, the followings are discouraged:
o Military equipment/ weapons finance
o Highly leveraged transactions
o Finance of speculative investments
o Logging, mineral extraction/ mining, or other activity that is ethically or environmentally sensitive
o Lending to companies listed on CIB black list or known
o Counter parties in countries subject to UN sanctions
o Lending to holding companies.
b. Credit Assessment and Risk Grading:
A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities.
Credit Applications should summarise the results of the risk assessment and include, as a minimum, the following details:
Ø Environment or social risk inputs
Ø Amount and type of loan (s) proposed
Ø Purpose of loans
Ø Loan structure ( tenor, covenants, repayment schedule, interest)
Ø Security arrangement
Ø Any other risk or issue
Ø Risk triggers and action plan-condition prudent, etc.
Risk is graded as per Lending Risk Analysis (LRA), Bangladesh Bank’s Guidelines of classification of loans and advances.
c. Approval Authority:
Approval authority may be as the following:
Ø Credit approval authority has been delegated to Branch Manager, Credit Committee by the MD/ Board
Ø Delegated approval authorities shall be reviewed annually by MD/ Board.
MD/ Board:
§ Approvals must be evidenced in writing. Approval records must be kept on file with credit application
§ The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required.
§ Any credit proposal that does not comply with Lending Guidelines, regardless of amount, should be referred to Head Office for approval.
d. Segregation of Duties:
Banks should aim at segregating the following lending functions:
Ø Credit approval/ risk management
Ø Relationship management/ marketing
Ø Credit administration.
e. Internal Control and Compliance:
Banks must have a segregated internal audit/ control department charged with conducting audits of all branches.
Management structure and responsibilities
The following chart presents an example of credit management structure:
2.2.3. Program guidelines
a. Approval process: The following diagram illustrates an example of the approval process:
b. Credit administration: The credit administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities.
c. Credit monitoring: To minimized credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of borrowers.
d. Credit recovery: The recovery unit of branch should directly manage accounts with sustained deterioration (a risk rating of sub-standard or worse). The primary functions of recovery unit are:
? Determine account action plan/ recovery strategy
? Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate.
? Ensure adequate and timely loan loss provisions are made based on actual and expected losses.
TOOLS OF CREDIT MANAGEMENT
For credit management, a firm may use tools available to them. Such tools include Credit Risk Grading (CRG) and Financial Spread Sheet (FSS). Credit risk grading is an important tool for credit risk management as it helps the banks and financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or branch.
The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank has been in practice for mandatory use by the banks and financial institutions for loan size of BDT 1.00 crore and above. However, the LRA manual suffers from a lot of subjectivity, sometimes creating confusion to the lending bankers in terms of selection of credit proposals on the basis of risk exposure. Meanwhile in 2003 end, Bangladesh Bank provided guidelines for credit risk management of banks wherein it recommended, interalia, the introduction of Risk Grade Score Card for risk assessment of credit proposals.
Bangladesh Bank expects all commercial banks to have a well defined credit risk management system which delivers accurate and timely grading. In practice, a bank’s credit risk grading system should reflect the complexity of its lending activities and the overall level of risk involved.
Definition of Credit Risk Grading (CRG)
? the Credit Risk Grading (CRG) is a collective definition based on the pre- specified scale and reflects the underlying credit-risk for a given exposure.
? A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure.
? Credit Risk Grading is the basic module for developing a Credit Risk Management system.
Functions of Credit Risk Grading
Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.
Use of Credit Risk Grading
? The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a nit, line of business, the branch or the bank as a whole.
? As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/ facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of credit facility. These would largely constitute obligor level analysis.
? Risk grading also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk portfolio level analysis.
Number and short name of grades used in the CRG
The proposed CRG scale consists of 8 categories with short names and numbers are provided as follows:
| Grading | Short Name | Number |
| Superior | SUP | 1 |
| Good | GD | 2 |
| Acceptable | ACCPT | 3 |
| Marginal/ Watch list | MG/ WL | 4 |
| Special Mention | SM | 5 |
| Sub Standard | SS | 6 |
| Doubtful | DF | 7 |
| Bad and Loss | BL | 8 |
Financial Spread Sheet in Credit Management
1. Financial Spread Sheet provides a quick method of assessing business trends and efficiency
? Assess the borrowers ability to repay
? realistically show business trends
? Allow comparisons to be made within industry
2. Borrowers that provide Financial Spread Sheets are more likely to be good borrowers
· At two of the client banks the FSRP consultants could not find 10 bad loans with 3 consecutive years of financial statements available.
· Out of 25 good loans reviewed by the FSRP consultants, at two of the client banks, 3 consecutive years of financial statements were available on all of them.
· The willingness of the customers to provide detailed financial information and to answer question regarding that information, is indication of the co-operation the bank will receive in the future.
3. A Financial Spread Sheet is an important tool in a discipline of organized approach to credit analysis.
4. The historic financial reports of a company are a primary indicator of its future financial position. Spread sheets allow proper analysis of financial statements.
HISTORY OF JANATA BANK LTD
Janata means people. This is a progressive Bank. Immediately after the emergence of Bangladesh in 1971, the erstwhile United Bank Limited and Union Bank Limited were nationalized and renamed as Janata Bank. It has been operating since it’s inception in 1972 both in Bangladesh and overseas. Janata Bank Ltd. has been playing a significant role in the economic development of the country by mobilizing savings and channelizing funds into different productive sectors. It is also a major player in the fields of micro-credit and software development.
Janata Bank Ltd, the second largest commercial Bank in Bangladesh, has an authorized capital of BDT 8000 million, paid up capital of BDT 2594 million. The Bank has a total asset of Tk.267157 million as on 31st December 2008.
Credit Rating Agency of Bangladesh (CRAB) assigned Janata Bank Ltd. BBB-1 in the long term and ST3 in the short term. CRAB also assigned AAA in the long term and ST-1 in the short term as a govt. owned entity.
JBL is going public next January when it will raise Tk 100 crore through IPO. It will seek Tk 900 premium for each share valued at Tk 100.
Janata BankLtd. operates through 8489branches including 4 overseas branches at United Arab Emirates. It is linked with 1202 foreign correspondents all over the world and a subsidiary in Italy. The Bank employs around 13500 persons. The corporate head office is located at Dhaka with 35 (thirty five) Divisions. As a part the conscious development of existing Human Resources, Janata Bank through its three training institutes imparts training to officers and staffs. It computerized 139 important branches; non-stop services introduced in 88 branches; ONLINE Banking in 60 important branches under important branches under implementation; ATM, EFT facilities.
The Board of Directors is composed of 7 (seven) members headed by a Chairman. The Directors are representatives from both public and private sectors. The Bank is headed by the Managing Director (Chief Executive), who is a reputed banker.
The bank was registered as a public limited company on may 21, 2007.
International Awards
Recently The Bank has been recognized Internationally and Domestically for it’s good performance.
International Award -“World’s Best Bank Award-2006,2007 and 2008 in Bangladesh by New York based Financial Magazine “Global Finance.
Janata Bank Limited receives “Asian Banking Awards 2005” on Credit Scheme for Handicapped People
International Award -The Bank of the Year-2004 in Bangladesh
‘ by the London based Financial Magazine The Banker of the Financial Times Group.
Janata Bank Limited receives “Asian Banking Awards 2004” on Financing Program for Women Entrepreneurship:
Janata Bank Limited gets “The Banker Award-2003”
The Banker, an International Banking Magazine of the Financial Times group in London has selected Janata Bank Limited as “The Bank of the Year, 2003” among all The Banker, a magazine of the London based Financial Times Group of Companies, has voted Janata Bank Limited as the bank of the year for Bangladesh for 2001, 2002and 2004. Limited in recent times for Improving IT based performances.
Vision of Janata Bank Ltd.
Janata Bank’s vision is to become the effective largest commercial bank in Bangladesh to support socio-economic development of the country and to be a leading bank in South Asia.
MISSION OF JANATA BANK LTD.
The mission of the bank is to be an effective commercial bank by maintaining a stable growth strategy, delivering high quality financial products, providing excellent customer service through an experienced management team and ensuring good corporate governance in every step of banking network.
SERVICES PROVIDED BY JANATA BANK LTD.
Janata Bank Ltd. offers all the major banking facilities and services to its customers. The Bank with its network spreading throughout the country has a unique feature of ploughing back savings from those places and then investing them into different loan portfolios.
Janata Bank Ltd. with its wide ranging branch network and skilled personnel provides prompt and personalized services like issuing:
a. Demand Draft
b. Telegraphic Transfer
c. Mail Transfer
d. Pay Order
e. Security Deposit Receipt
f. Transfer of fund by special arrangement,
i) Normal transfer
ii) Electronic transfer through Ready Cash Card.
The Bank provides the following Internet facilities:
Ø Current/Savings/STD account status
Ø FDR account status
Ø Advance account status
Ø Loan account status
Remittance services are available at all branches and foreign remittances may be sent to any branch by the remitters favoring their beneficiaries. Janata Bank Ltd. has correspondent banking relationship with all major banks located in almost all the countries/cities.
Janata Bank Ltd. has already established a world wide network and relationship in international Banking through its 4 (four) overseas branches and 1202 foreign correspondents. The Bank has earned an excellent business reputation in handling and funding international trade particularly in boosting export & import of the country.
SPECIAL SERVICES PROVIDED BY JANATA BANK LTD., TSC BRANCH.
Janata Bank TSC branch provides the following special services:-
a. Sale of Admission Forms of Dhaka University.
b. Receipts of admission related money.
c. Doing various academic transactions, etc.
3.4 CREDIT PROGRAM
General and Industrial Credit:
Janata Bank Ltd. has formulated its policy to give priority to small and medium businesses while financing large scale enterprise through consortium of banks total loans and advances of the bank stood at BDT 144678.20 million as of December 31, 2008as compared to BDT 121204.40 million in 2007. Increase rate is around 12% compared to 2007. Following the guideline of Bangladesh Bank, credit facilities have been extended to productive and priority sectors. In extending credit facilities, the Bank has given due importance to sectoral needs and requirements of both public and private sectors. Major sectors include Jute, Textile Ind. & trade, Steel & Engineering, Food & Allied, and Export & Import etc.
| Year | Loans& Advances(million Tk) |
| 2004 | 107786 |
| 2005 | 99748.7 |
| 2006 | 101461.9 |
| 2007 | 121204.4549 |
| 2008 | 144678.20 |
Rural Credit, Micro Ent. & SP. Program Financing:
Loan is provided to the rural people for agricultural production and other off-farm activities.
v Loan pricing system is customer friendly.
v Prime customers enjoy prime rate in lending and other services.
v Quick appreciation, appraisal, decision and disbursement are ensured.
Credit facilities are extended as per guide-lines of Bangladesh Bank (Central Bank of Bangladesh) and operational procedures of the Bank.The rates may, however, change from time to time depending on the level of competition in the financial sector.
As a nationalized commercial bank it has a social responsibility to improve the financial condition of the poor/unemployed people. With a view to perform that social responsibility, Bank has initiated rural credit program since 1974. Now under this rural portfolio there are 33 products.
A vast majority of the Bangladeshis live in the rural areas and their main source of income is agriculture and agro-business. Janata Bank Ltd. has opened branches in rural areas to cater to the banking needs of rural people. Apart from accepting deposits from the rich and moderately well-off villagers, Janata Bank Ltd. encourages the poor people to make small savings through different mechanisms.
So far lending in rural area is concerned; Janata Bank Ltd. has been financing agricultural production and poverty alleviation programs since 1977. It also lends to the poor landless so that they can make a living. The average loan size is about Taka 10,000.00 and the number of borrowers under rural credit scheme is more than 500,000.The major types of sectors for offering loans are:-
1. Short Term Crop Production Loan
2. Irrigation and Agricultural equipment
3. Fish/Shrimp Production
4. Horticulture Development
5. Agro-based Industry
6. Rural Transport
7. Weavers Credit
8. Agri-business Loan
9. Tea Production & Processing Loan
10. Different Micro Credit Programs
SME Financing Scheme:
Small and Medium Enterprise (SME) Financing Scheme has been introduced to assist new or experienced entrepreneurs to invest in small and medium scale industries. Small business development loan, Gharoa project, credit for forestry/Horticulture/Nursery, crop loan project all are designed for this purpose.Tk4036 million has been granted as loan up to 31-12-2008.
Doctors’ Credit Scheme:
Doctors’ credit scheme is designed to facilitate financing to fresh medical graduates and established physicians to acquire medical equipments and set up clinics and hospitals.
Women Entrepreneurs Development Scheme:
Women Entrepreneurs Development Scheme has been introduced to encourage women in doing business. Under this scheme, the bank finances the small and cottage industry projects sponsored by women. Total loan outstanding in 2008 was Tk 39.9 million.
3.5 PERFORMANCE OF JANATA BANK LTD.
Janata Bank Ltd. is the second largest commercial bank in Bangladesh. The aim of the Bank is to actively participate in the socio-economic development of the nation by operating a commercially sound Banking system. It provides credit to deserving borrowers and at the same time, protects depositor’s interest.
Deposits: Janata Bank Ltd. mobilized total deposit of BDT 221336 million in 2008 as compare of BDT 198635.89 million in 2007 . Comparative interest rates deposit mobilization efforts of the bank and confidence reposed by the customer in the bank contributed to the notable growth in deposit. The bank evolved a number of attractive deposit schemes to care to the requirement of small and medium services. This improved not only the quantum of deposits, it also brought about qualitative change in the depositors structure.
Deposit and Deposit Mix:
Break-up of Deposit and Deposit Mix
Taka in million
| Type | As on 31-12-06 | As on 31-12-07 |
| Current and others account deposits | 28388.2688 | 35510.83478 |
| Bills payable | 1558.985159 | 1880.79648 |
| Savings Bank Deposit | 59817.08979 | 62723.70393 |
| Term Deposit | 93182.1912 | 98520.55685 |
| Total | 182946.5359 | 198635.892 |
Investment:
To earn profit, the Bank Prudently invests its fund to different sectors. The investment portfolio of the Bank is comprised of Treasury bill, other bonds, Debenture, Shares etc. The Bank earns a handsome profit from this investment portfolio. Year wise investment of the Bank is shown in the following table:
| Year | Investments (Tk. in million) |
| 2004 | 20455.8 |
| 2005 | 28375 |
| 2006 | 24785.38603 |
| 2007 | 55862.93039 |
| 2008 | 57824 |
Portfolio wise investment is described below for 2008 and 2007:
| 2008 | 2007 | ||||||
| 1 | Govt. Securities | 17889622 | 17889622 | ||||
| 2 | Other Debenture | 94689364 | 94689364 | ||||
| 3 | Pre-lib Debenture | 20473603 | 20473603 | ||||
| 4 | Shares | 20665386 | 22985151 | ||||
| Total | 153717957 | 156037739 | |||||
Import Business:
For the very beginning the Bank has embarked on extensive foreign exchange business with a view to facilitating international trade transactions of the country. The Bank has provided BDT 84065.40 million loan as of December 31, 2007 and BDT 129413 million in 2008. Import mainly confined to consumer goods, capital machineries and industrial raw materials.
Export Business:
To boost export Janata Bank Ltd. has provided BDT 71855 million loan as of December 31, 2007 and BDT 85418 million in 2008.
Operating income:
| Year | Operating Profit (Tk. in million) |
| 2004 | 2120.9 |
| 2005 | 2312.9 |
| 2006 | 8340.84 |
| 2007 | 4656.00 |
| 2008 | 7003 |
The operating revenue of the bank stood to the BDT4656.0042December 2007 against 8340.84 million as 2006.y provision net profit stood at BDT 15.4764 million as of December 31,2007.
3.6 LOANS AND ADVANCES:
The main focus of Janata Bank Ltd. Credit Line/Program is financing business, trade and industrial activities through an effective delivery system. Janata Bank Ltd. offers credit to almost all sectors of commercial activities having productive purpose. The loan portfolio of the Bank encompasses a wide range of credit programs covering about 200 items. Credit is also offered to 15 (fifteen) thrust sectors, as earmarked by the govt., at a reduced interest rate to develop frontier industries. Credit facilities are offered to individuals, businessmen, small and big business houses, traders, manufactures, corporate bodies, etc.
Credit constitutes 50% of banks assets and this portfolio is the most important objective of the Bank of which 10.92% is classified.
The elaborated status of loans and advances is as follows:
(Figure in million TK)
| BL | DF | SS | SMA | Standard | Total |
| 11694 | 1293 | 1643 | 2636 | 126302 | 143568 |
(Taka in crore)
Sectorwise Loan break-up
| Sl | Name of sector | Total |
| 1 | Bangladesh PC | 1545.15 |
| 2 | BJMC | 727.02 |
| 3 | Steel & Engineering | 51.36 |
| 4 | Food & allied | 156.19 |
| 5 | Export credit | 2140 |
| 6 | Import credit | 1434 |
| 7 | Industrial credit | 1596 |
| 8 | Rural, ME & SP Financing | 983 |
| 9 | Staff loan | 843 |
| 10 | General cerdit | 6,720 |
| 11 | BCIC | 1020.66 |
Grand total 17216.38
Area wise loan break-up:
| Areas | Tk in million | |
| 1 | Dhaka | 101537 |
| 2 | Chittagong | 17750 |
| 3 | Khulna | 10516 |
| 4 | Rajshahi | 11531 |
| 5 | Sylhet | 944 |
| 6 | Barishal | 1290 |
| 7 | UAE | 1110 |
High Lights/ Key Indicators of JBL
2008 2007
Million in Taka Million in Taka
Authorised Capital 8,000.00 8,000.00
Paid-up capital 2,593.90 2,593.90
Required Capital (10% of RWA) 10,524.30 9,602.36
Capital Kept 10,120.05 6,300.00
Capital Surplus/(Shortfall) (404.25) (3,302.36)
Total assets 267,157.30 243,088.20
Total deposits 221,335. 121,204.45
Total Operating Profit 7,003.06 4,962.60
Total contingent liabilities (Off balance sheet item) 70,124.31 46,530.33
Total loans deposits ratio 65.37% 61.02%
Total classified loans to total loans & advances (including 10.92% 16.38%
Profit after provision and tax 3,145.38 1,094.44
Classified loans & advances during the year:
In Bangladesh 14,630.20 19,231.62
Outside Bangladesh 616.40 626.50
Total 15,246.60 19,858.12
Provision held against classified advances (including
general provision for unclassified loans and advances)
9,050.78 11,698.13
Cost of Deposit 4.53% 4.71%
Operating cost 2.31% 2.24%
Cost of fund 6.84% 6.95%
Performing assets/loans (including overseas) 129,431.60 101,346.33
Non performing assets/loans (including overseas) 15,246.60 19,858.12
Return on investment (ROI) 8.29% 6.76%
Return on assets on Net PRofit (ROA) 1.18% 0.45%
Earning cost ratio 0.70 0.72
Import 129,413.00 84,065.40
Export 85,417.80 71,855.50
Recovery of Classified Advances 9,239.20 3,794.60
Foreign Remittance 45,924.40 36,788.00
Non Interest Income 3,857.60 3,357.40
Earning per share 121.26 0.60
MEANING OF CREDIT POLICY
Policy entails projected course of action. Janata Bank Ltd. has its own policy granting credit although credit is always a matter of judgment applying common sense in the light of one’s experience.
A sound credit policy includes among other things safety of funds invested vis-à-vis profitability of the bank. Encouraging maximum number of small loans is better than concentration in a particular type of advances, which ensures sufficient liquidity with least incidence of bad debts.
It has to be borne in mind that a good loan allowed to a properly selected borrower is half collected. In order to make a good loan there should have a good loan policy.
OBJECTIVE OF CREDIT POLICY
There are some objectives behind a written credit policy of Janata Bank Ltd. that are as follows;
v To provide a guideline for giving loan.
v Prompt response to the customer need.
v Shorten the procedure of giving loan.
v Reduce the volume of work from top level management.
v Delegation of authority of work from top level of management.
v To check and balance the operational activities
FORMULATION OF CREDIT POLICY
One of questions that should arise in a discussion of credit is who should formulate the policy. Although the ultimate responsibilities lay at the highest level in the organization i.e. the board of directors. Yet the actual drafting shall have to be done by the senior lending office in consultations with the chief executive officer and with contribution from senior officers, associates and subordinates. Obviously the level of origin will vary with the size and structure of the organization. The matter then referred to the board for approval after careful examination consideration and discussion.
ESSENTIAL COMPONENTS OF A SOUND CREDIT POLICY:
There can be some variations based on the needs of a particular organization, but at least the following areas should be covered in any comprehensive statement of credit policy and JBL’s policy also covers these areas:
1. Legal consideration: The bank’s legal lending limit and other constraints should be set forth to avoid inadvertent violation of banking regulations.
2. Delegation of authority: Each individualauthorized to extend credit should know precisely how much and under what conditions he or she may commit the bank’s funds. These authorities should be approved, at least annually, by written resolution of the board of directors and kept current at all times.
3. Types of credit extension: One of the most substances parts of a loan is a delineation of which types of loans are acceptable and which type are not.
4. Pricing: In any profit motivated endeavor, the price to be charged for the goods or services rendered is of paramount without it, individuals have few guidelines for quoting retag or fees, and the variations resulting from human nature will be a source of customer dissatisfaction.
5. Market Area: Each bank should establish its proper market area, based upon, among other things, the size and sophistication of its organization its capital standpoint, defining one’s market area is probably more important in the lending function than in any other aspect of banking.
6. Loan Standard: This is a definition of the types of credit to be expended, wherein the qualitative standards for acceptable loans are set forth.
7. Credit Granting procedures: This subject may be covered in separate manual, and usually is in larger banks. At any rate, it should not be overlooked because proper procedures are essential in loan establishing policy and standards. Without proper procedure for granting credit and constant policing to ensure that these procedures are meticulous carried out, the best conceived loan policy will not function and inevitable, problems will develop.
LENDING GUIDELINES:
As the bank have a high rate of non-performing loans, its strategy should be invigorating loan processing steps including identifying , measuring , containing risks as well as maintaining a balance portfolio through minimizing loan concentration , encouraging loan diversification , expanding product range , streamlining security , insurance etc. as buffer again unexpected cash flow .
1 Industry and business segment focus
Industry segment focuses on Textile, Pharmaceuticals, Agro-based, Food and allied, Telecommunication, Power generation and distribution, Health care, Entertainment Services, Chemicals, Transport, Infrastructure development, Linkage industry, Information technology, Ceramics, Others as decided from time to time. And business segment focuses on Distribution, Brick field, Rice mill/ flour mill/ oil mill, Work order, Yarn trading, Cloth merchant, Industrial spares, Hardware, Electronic and electrical goods, Construction materials, Fish trading, Grocery, Wholesale/ retail, Others as dedicated from time to time
Types of credit facilities: Bank will go for
Ø Term financing for new project had BMRE of existing projects (large, medium, SME, SCI).
Ø Working capital for industries, trading services and others (large , medium, SME, SCI).
Ø Trade finance for import and export
Ø Lease finance
Ø Small loan for traders, micro enterprise and other productive small venture.
Ø Consumer finance
Ø Fee business
FUND INVESTED BY JANATA BANK LTD.
INTRODUCTION
The principal function of a bank is to lend. Lending is a dynamic activity. Through lending the banking industry promotes economic activities and yields earnings for the bank. It is lending alone that brings banking into a more meaningful and purposeful contract with public and, therefore, has the greatest impact upon them.
Proper utilization of fund is an essential pre-requisite of successful bank management. The procurements of funds supported by an efficient deployment of that procured fund lead a bank to the highest point of profitability. The bank under study has divergence in its investment portfolio, loan programs, advances and recovery rate etc.
ECONOMIC SECTOR WISE DISTRIBUTION OF FUND
Janata Bank Ltd. is engaged in extending long, medium and short term loans to various economic sectors in the country. As Janata Bank Ltd. extends its credit programs all over the economy such as agricultural credit program, industrial credit program and commercial financing, the bank tries to achieve significant profit from its operations and also to improve the economic conditions of the general public of the country.
Table: economic sector wise distribution of loans and advances during 1998-2008
| Economic sectors | Phase-1 | Phase-2 | ||||||||||
| 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||
| Jute industries | 718.52 | 719.41 | 747.87 | 778.28 | 870.36 | 837.10 | 8,997.50 | 8809.3 | ||||
| Jute trade | 23.69 | 19.18 | 16.30 | 1.32 | 12.36 | 12.50 | 75.40 | 100.3 | ||||
| Tannery | 419.38 | 509.03 | 423.96 | 444.65 | 439.60 | 361.60 | 4,150.60 | 4613.3 | ||||
| Textile | 349.01 | 367.51 | 372.76 | 369.95 | 351.66 | 360.10 | 4,725.00 | 6520 | ||||
| Transport | 32.27 | 29.17 | 30.27 | 24.54 | 24.04 | 36.00 | 40.20 | 30.8 | ||||
| Steel & engineering | 474.72 | 212.98 | 231.01 | 208.58 | 265.70 | 99.80 | 1,484.70 | 1515 | ||||
| Tea | 15.90 | 14.00 | 14.02 | 13.99 | 12.16 | 12.20 | 85.80 | 86.2 | ||||
| Sugar mills | 88.46 | 80.01 | 97.17 | 99.50 | 113.24 | 138.20 | 1,561.90 | 2559.6 | ||||
| House building | 379.34 | 428.82 | 522.59 | 584.09 | 659.82 | 736.40 | 1,264.90 | 1050 | ||||
| Rural credit | 556.28 | 602.81 | 667.28 | 778.50 | 658.12 | 831.30 | 9,825.30 | 11496 | ||||
| Bricks | .45.02 | 41.52 | 79.64 | 88.20 | 90.95 | 85.90 | 1439.9 | |||||
| Cold storage | 5.03 | 8.45 | 10.38 | 9.54 | 12.32 | 8.60 | 157.00 | 160 | ||||
| Food | 74.28 | 80.07 | 160.15 | 216.20 | 124.28 | 116.70 | 1,209.60 | 1257.1 | ||||
| Export credit | 751.30 | 856.38 | 1016.50 | 1019.20 | 1220.78 | 1295.00 | 14,835.90 | 15550 | ||||
| Import credit | 634.76 | 964.98 | 1273.06 | 1154.98 | 1507.85 | 1614.40 | 14,216.50 | 32510 | ||||
| Industrial credit | 782.62 | 894.72 | 1099.82 | 1146.35 | 1403.78 | 1381.90 | 15,963.90 | 17160 | ||||
| Others | 1990.42 | 2266.15 | 2566.61 | 3036.99 | 2379.17 | 2850.90 | 41,467.20 | 39820 | ||||
| Total | 7341.00 | 8095.29 | 9329.39 | 9974.87 | 10146.19 | 10778.50 | 121,204.40 | 144678.2 | ||||
NATURE WISE DISTRIBUTION OF LOANS AND ADVANCES
Sanctioning advances to customers and others is one of the principal services of a modern bank. Advances by the commercial banks are made in different forms:
· Loans
· Overdrafts
· CC
· LIM
· LTR
· Bills purchase and discounted
| Nature wise Loans and Advances during 2008 | |||
| Loans | 79446801361 | ||
| CC | 53051865919 | ||
| O/D | 4685972705 | ||
| BPD | 7493543405 | ||
Janata Bank Ltd. sanctions loans under the above mentioned category. It usually grants short term advances which are utilized to meet the working capital requirements of the borrowers. Only a small portion of the bank’s demand and time liability are advanced on long term basis where the banker usually insists on a regular repayment by the borrowers in installments. While lending fund, JBL follows a very cautious policy and conduct his business on the basis of well-known principles of sound lending in order to minimize the risk.
MATURITY GROUPING OF DISTRIBUTION LOANS AND ADVANCES
At the very beginning of taking decision for giving credit, Janata Bank Ltd. mainly concentrates on liquidity. As it is doing business by public deposits, it is bound to pay the money when people want. A sizable portion of bank advances are, therefore, granted to meet the working capital requirements of the borrowers rather than to meet the fixed capital requirement, i.e., construction of building or purchase of fixed deposits. A banker would be failing in his duty to safeguard the interest of his depositors and shareholders if his credit policy does not provide a method of gradual repayment and final recovery of the money advanced.
For liquidity reasons, Janata Bank Ltd.is giving credit on short period basis and against security. Short term loans ensure liquidity to a greater extent than long term loan. We can classify the bank loans and advances under the following maturity stage:
? Payable on demand
? Payable within 3 months
? Payable within 3 months to 12 months
? Payable within 1 year to 5 years
? Payable in more than 5 years
| Maturity Grouping of Loans and Advances | ||
| 2008 | 2007 | |
| On Demand | 30902325700 | 15527718073 |
| Within 3 months | 33203612500 | 24504045200 |
| Within 3-12 months | 35150215100 | 35602040300 |
| Within 1-5 years | 23951215300 | 26203420500 |
| More than 5 Years | 21470814788 | 19367230900 |
| Total | 1.44678E+11 | 1.21204E+11 |
Figure: maturity wise loans 1
SECURITIES IN CREDIT MANAGEMENT
One of the most important functions of a bank is to employ its fund by way of loans and advances to its customers and a bank’s strength depends considerably on the quality of its loans and advances. In older times, when the bankers knew the customers personally and intimately and had complete confidence in the integrity and honesty of a customer, they used to allow loans and advances without a security. The position is quite different today. Banks having a large number of officers over a wide area cannot allow loans and advances without retention of security in one form or the other.
Though the banks are now expected to lay greater emphasis on the purpose for which the borrower needs rather than security he can afford to give, security continues to be one of the most important factors which determines to a significant extent the banker’s willingness to lend money.
Security is an insurance against emergency. By taking security, bank acquires a claim upon the assets of the borrower if repayment is not made as planned. But what should be the significant securities of loans depends in the guidelines prescribed by the Bangladesh Bank through BCD circular no. 17/1977 and also the negotiation of the respective branch to its borrowers. The most significant categories of security lodged are as:
v Goods and commodities
v FDR
v Real estate
v Stock exchange securities
v Life insurance policies
v Gold and gold ornaments
v Documents of title of goods
v Supply bills
Janta Bank Ltd. keeps sufficient security before final sanctioning of loans and advances.
LOAN DISBURSEMENT PROCEDURE OF JANATA BANK LTD.
GETTING CREDIT INFORMATION
Janata Bank Ltd. collects credit information about the applicant to determine the credit worthiness of the borrower. The bank collects the information about the borrower from the following sources:
v Personal investigation.
v Confidential report from other bank Head Office/Branch/chamber of the commerce.
v CIB Report from Central Bank.
v Bazar Report.
v Other Banks.
v Financial Statements.
6.2 INFORMATION COLLECTION
The loans and advances department gets a form filled by the party seeking a lot of information. The information is listed below:
v Name and address of the borrower (present and permanent).
v Constitution or status of the business.
v Data of establishment and place of incorporation.
v Particulars of properties, partners and Directors.
v Background and business experience of the borrowers.
v Particulars of personal assets, name of subsidiaries, percentage of share holding and nature of business.
v Details of liabilities in name of borrowers, in the name of any directors.
v Financial Statement of the last three years.
v Nature and details of business/products.
v Details of securities offered.
v Proposed debt equity ratio.
v Other relevant information.
ANALYZING THESE INFORMATION
Janata Bank Ltd. then starts examination whether the loan applied for, is complying with its lending policy. If comply, then it examines the documents submitted and the credit worthiness. Credit worthiness analysis, i.e. analysis financial conditions of the loan applicant is very important. If loan amount is more than 50, 00,000, then bank goes for Lending Risk Analysis (LRA) and Spreadsheet Analysis (SA) which are recently introduced by Bangladesh Bank. According to Bangladesh Bank Rules, LRA and SA are a must for the loan exceeding Tk one crore.
If these two analyses reflect favorable condition and document submitted for the loan appeared to be satisfactory, then bank goes for further action.
6.4 LENDING RISK ANALYSIS (LRA)
LRA is a very important and vital analysis for deciding whether the loan proposal is potential or not. Many types of scientific, mathematical, statistical and managerial tools and devices are required to perform this analysis. Janata Bank Ltd. maintains a prescribed format for Lending Risk Analysis, which includes a spreadsheet to analyze a lot of things. It is not possible to discuss the entire LRA in this report.
Lending Risk Analysis (LRA)